UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2020

 

[  ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

COMMISSION FILE NO. 1-11602

 

NANO MAGIC INC.

(Exact name of registrant as specified in its charter)

 

Delaware   47-1598792
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

750 Denison Court    
Bloomfield Hills, MI   48302
(Address of principal executive offices)   (Zip Code)

 

(844) 273-6462 

(Registrant’s telephone number, including area code)

 

Title of each class   Trading Symbol   Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value   NMGX   OTC Markets

 

Former name or former address, if changed since last report: 701 Brickell Ave, Suite 1550, Miami, FL 33131.

 

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 preceding 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 [X] 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). [X] 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 “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]   Accelerated filer [  ]
     
Non-accelerated filer [  ] (Do not check if a smaller reporting company)   Smaller reporting company [X]

 

Emerging growth company [  ]

 

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

 

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

 

As of September 30, 2020 the registrant had 7,998,456 shares of Common Stock issued and outstanding.

 

 

 

 

 

 

NANO MAGIC INC.

 

INDEX

 

    Page
Part I. Financial Information  
     
  Item 1. Financial Statements F-1
     
  Consolidated Balance Sheets—June 30, 2020 (unaudited) and December 31, 2019 (unaudited) F-1
     
  Consolidated Statements of Operations—Three and Six Months Ended June 30, 2020 and 2019 (unaudited) F-2
     
  Consolidated Statements of Changes in Stockholders’ Deficit for the Three Months Ended June 30, 2020 and 2019 (unaudited) F-3
     
  Consolidated Statements of Changes in Stockholders’ Deficit for the Six Months Ended June 30, 2020 and 2019 (unaudited) F-4
     
  Consolidated Statements of Cash Flows—Six Months Ended June 30, 2020 and 2019 (unaudited) F-5
     
  Condensed Notes to Unaudited Consolidated Financial Statements F-6
     
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 4
     
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 7
     
  Item 4. Controls and Procedures 8
     
Part II. Other Information  
     
  Item 1. Legal Proceedings 8
     
  Item 1A. Risk Factors 8
     
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 8
     
  Item 3. Defaults Upon Senior Securities 8
     
  Item 4. Mine Safety Disclosures 8
     
  Item 5. Other Information 8
     
  Item 6. Exhibits 9
     
Signatures 10

 

2

 

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-Q contains certain forward-looking statements that we believe are within the meaning of the federal securities laws. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements, including the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our strategy, future operations, future expectations or future estimates, financial position and objectives of management. Those statements in this Form 10-Q containing the words “believes,” “anticipates,” “plans,” “expects” and similar expressions constitute forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and are subject to a number of risks, uncertainties and assumptions relating to our operations, results of operations, competitive factors, shifts in market demand and other risks and uncertainties.

 

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate and actual results may differ from those indicated by the forward-looking statements included in this Form 10-Q. In light of the significant uncertainties inherent in the forward-looking statements included in this Form 10-Q, you should not consider the inclusion of such information as a representation by us or anyone else that we will achieve such results. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.

 

3

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

NANO MAGIC INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   June 30   December 31 
   2020   2019 
   (unaudited)   (unaudited) 
         
ASSETS          
           
CURRENT ASSETS:          
Cash  $223,739   $216,801 
Investments   10,473    10,236 
Accounts receivable, net   528,471    151,290 
Inventory   344,023    422,622 
Prepaid expenses and contract assets   186,796    34,160 
Total Current Assets   1,293,502    835,109 
Right-of-use assets, non-current   181,755    257,523 
Property, plant and equipment, net   218,099    221,565 
Other assets   317,608    5,890 
Total Assets  $2,010,964   $1,320,087 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
CURRENT LIABILITIES:          
Accounts payable  $1,029,995   $801,788 
Accounts payable - related parties   19,887    19,887 
Accrued expenses and other current liabilities   221,268    199,875 
Customer deposits   5,701    - 
Current portion of notes payable   95,005    52,641 
Advances from related parties   140,000    140,000 
Current portion of lease liabilities   74,449    131,835 
Contract liabilities   -    162,123 
Total Current Liabilities   1,586,305    1,508,149 
Notes payable, net of current portion   196,328    122,170 
Lease liabilities, net of current portion   118,320    136,624 
Total Liabilities   1,900,953    1,766,943 
           
Commitments and Contingencies (See Note 11)          
           
STOCKHOLDERS’ EQUITY (DEFICIT):          
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding   -    - 
Class A common stock: $0.0001 par value, 7,200,000 shares authorized; 7,199,942 and 6,222,881 issued and outstanding at June 30, 2020 and December 31, 2019, respectively   720    622 
Class B common stock: $0.0001 par value, 2,500,000 shares authorized; 0 shares issued and  outstanding at June 30, 2020 and December 31, 2019, respectively   -    - 
Class Z common stock: $0.0001 par value, 300,000 shares authorized; 0 shares  issued and outstanding at June 30, 2020 and December 31, 2019, respectively   -    - 
Additional paid-in capital   8,458,929    7,242,067 
Accumulated deficit   (8,349,638)   (7,689,545)
Total Stockholders’ Equity (Deficit)   110,011   (446,856)
Total Liabilities and Stockholders’ Equity  $2,010,964   $1,320,087 

 

See accompanying notes to consolidated financial statements.

 

F-1

 

 

NANO MAGIC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
   (unaudited)   (unaudited)   (unaudited)   (unaudited) 
                 
REVENUES:                    
Products  $908,062   $415,832   $1,149,779   $872,700 
Contract services   244,422    206,156    450,879    507,149 
                     
Total Revenues   1,152,484    621,988    1,600,658    1,379, 849 
                     
COST OF REVENUES:                    
Products   600,781    390,939    823,599    588,896 
Contract services   155,004    198,723    321,903    531,271 
                     
Total Cost of Revenues   755,785    589,6662    1,145,502    1,120,167 
                     
GROSS PROFIT (LOSS)   396,699    32,326    455,156    259,892 
                     
OPERATING EXPENSES:                    
Selling and marketing expenses   4,826    17,298    15,883    25,098 
Salaries, wages and related benefits   163,831    148,186    308,465    204,698 
Research and development   14,383    41,024    31,035    56,829 
Professional fees   359,420    72,920    484,172    152,354 
General and administrative expenses   136,234    140,855    273,304    280,515 
                     
Total Operating Expenses   678,694    420,283    1,112,859    719,494 
                     
LOSS FROM OPERATIONS   (281,995)   (387,957)   (657,703)   (459,812)
                     
OTHER (EXPENSE) INCOME:                    
Interest expense   (519)   (5,159)   (2,627)   (7,753)
Loss on settlement reserve   -    4,654    -    4,654 
Other income, net   237    (3,795)   237    415 
                     
Total Other (Expense) Income   (282)   (4,300)   (2,390)   (2,684)
                     
NET LOSS  $(282,277)  $(392,257)  $(660,093)  $(462,496)
                     
NET LOSS PER COMMON SHARE:                    
Basic  $(0.04)  $(0.09)  $(0.10)  $(0.11)
Diluted  $(0.04)  $(0.09)  $(0.10)  $(0.11)
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                    
Basic   7,199,942    4,472,389    6,850,643    4,312,554 
Diluted   7,199,942    4,472,389    6,850,643    4,312,554 

 

See accompanying notes to consolidated financial statements.

 

F-2

 

 

NANO MAGIC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND 2019

(unaudited)

 

                                   Total 
   Class A Common Stock   Class B Common Stock   Class Z Common Stock   Additional
Paid-in
   Accumulated   Stockholders’ Equity 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
                                     
Balance, March 31, 2020   7,199,942   $720    -   $-    -   $-   $8,118,444   $(8,067,361)  $51,803 
                                              
Stock-based compensation   -    -    -    -    -    -    28,767    -    28,767 
                                              
Warrants issued in connection with building lease   -    -    -    -    -    -    

311,718

    -    

311,718

 
                                              
Net loss   -    -    -    -    -    -    -    (282,277)   (282,277)
                                              
Balance, June 30, 2020   7,199,942   $720    -   $-    -   $-   $8,458,929   $(8,349,638)  $110,011
                                              
Balance, March 31, 2019   4,299,620   $429    -   $-    -   $-   $6,126,545   $(6,710,609)  $(583,635)
                                              
Common stock issued for cash, net of issuance costs   965,115    97    -    -    -    -    385,950    -    386,047 
                                              
Common stock issued for services   41,814    4    -    -    -    -    23,996    -    24,000 
                                              
Warrants , options, and warrant options on private placement   -    -    -    -    -    -    28,953    -    28,953 
                                              
Net loss   -    -    -    -    -    -    -    

(392,257

)   

(392,257

)
                                              
Balance, June 30, 2019   5,306,549   $530    -   $-    -   $-   $6,565,444   $

(7,102,866

)  $(539,892)

 

See accompanying notes to consolidated financial statements.

 

F-3

 

 

NANO MAGIC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(unaudited)

 

                                   Total 
   Class A Common Stock   Class B Common Stock   Class Z Common Stock   Additional   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Paid-in Capital   Deficit   Equity (Deficit) 
                                     
Balance, December 31, 2019   6,222,881   $622    -   $-    -   $-   $7,242,067   $(7,689,545)  $(446,856)
                                              
Common stock issued for cash, net of issuance costs   956,013    96    -    -    -    -    621,313    -    621,409 
                                              
Common stock issued for services   21,048    2    -    -    -    -    11,998    -    12,000 
                                              
Stock-based compensation   -    -    -    -    -    -    53,242    -    53,242 
                                              
Warrants , options, and warrant options on private placement   -    -    -    -    -    -    37,058    -    37,058 
                                              
Warrants issued in connection with building lease   -    -    -    -    -    -    

311,718

    -    

311,718

 
                                              
Stock subscription payable   -    -    -    -    -    -    181,533    -    181,533 
                                              
Net loss   -    -    -    -    -    -    -    (660,093)   (660,093)
                                              
Balance, June 30, 2020   7,199,942   $720    -   $-    -   $-   $8,458,929   $(8,349,638)  $110,011
                                              
Balance, December 31, 2018   3,741,481   $374    -   $-    -   $-   $5,886,600   $(6,640,370)  $(753,396)
                                              
Common stock issued for cash, net of issuance costs   1,523,254   152    -    -    -    -   609,150    -    609,302 
                                              
Common stock issued for services   41,814    4    -    -    -    -    23,996    -    24,000 
                                              
Warrants , options, and warrant options on private placement   -    -    -    -    -    -    45,698    -    45,698 
                                              
Net loss   -    -    -    -    -    -    -    

(462,496

)   (462,496)
                                              
Balance, June 30, 2019   5,306,549   $530    -   $-    -   $-   $6,565,444   $(7,102,866)  (536,892)

 

See accompanying notes to consolidated financial statements.

 

F-4

 

 

NANO MAGIC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the Six Months Ended 
   June 30, 
   2020   2019 
   (unaudited)   (unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(660,093)  $(462,496)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Change in inventory obsolescence reserve   86,121    17,527 
Depreciation and amortization expense   8,062    26,416 
Bad debt expense   4,000    - 
Stock-based compensation   65,242    19,853 
Change in operating assets and liabilities:          
Accounts receivable   (381,180)   185,393 
Accounts receivable - related party   -    - 
Inventory   (7,523)   84,991 
Prepaid expenses and contract assets   (152,636)   40,430 
Accounts payable   228,207    (131,816)
Operating lease liabilities   78    - 
Customer deposits   5,701    - 
Accrued expenses   21,393    (181,850)
Contract liabilities   (162,123)   (19,499)
           
NET CASH USED BY OPERATING ACTIVITIES   (944,751)   (382,053)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Net activity on certificate of deposit   (237)   - 

Capitalized lease costs

   

(311,718

)

   

-

 
Purchases of property, plant and equipment   (4,596)   (2,483)
           
NET CASH USED BY INVESTING ACTIVITIES   (316,551)   (2,483)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Repayment of bank lines of credit   -    (330,892)
Repayment of bank loans   (10,378)   818 
Proceeds from bank loans   130,900      
Proceeds from sale of common stock and warrants   1,151,718    678,844 
Repayment of notes payable   (4,000)   - 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   1,268,240    348,770 
           
NET INCREASE (DECREASE) IN CASH   6,938    (35,766)
           
CASH, beginning of year   216,801    306,502 
           
CASH, end of period  $223,739   $270,736 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid during the period for interest          
Interest  $2,627   $7,753 

 

See accompanying notes to consolidated financial statements.

 

F-5

 

 

NANO MAGIC INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

(UNAUDITED)

 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

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

 

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 directly to consumers and also to retailers and other institutional customers. 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

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Accordingly, they do not include all the information and disclosures required by US GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited consolidated financial statements of the Company as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the operating results for the full year ending December 31, 2020 or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures of the Company as of December 31, 2019 and for the year then ended, which were filed with the Securities and Exchange Commission on Form 10-K on May 13, 2020.

 

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 filed with our Form 10-K on May 13, 2020, the Company had losses from operations and net cash used by operations of $1,031,083 and $878,668, respectively, for the year ended December 31, 2019. Furthermore, at June 30, 2020, the Company had an accumulated deficit of $8,349,638, a stockholders’ deficit of $110,011 and a working capital deficit of $292,803. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital. During 2018 management took measures to reduce operating expenses. During 2019 and the first two quarters of 2020, management closely monitored costs. In addition, the Company raised equity capital in 2018, 2019 and 2020. These unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of 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 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 three and six months ended June 30, 2020 and 2019 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.

 

F-6

 

 

Fair Value of Financial Instruments and Fair Value Measurements

 

The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2-Inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, loans and lines of credit, accounts payable, accrued expenses, and other payables approximate their fair market value based on the short-term maturity of these instruments.

 

The Company analyzes all financial and non-financial instruments with features of both liabilities and equity under the Financial Accounting Standards Board (“FASB”) accounting standard for such instruments. Under this standard, financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company accounts for no instruments at fair value using level 3 valuation.

 

ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

 

Cash and Cash Equivalents

 

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.

 

Accounts Receivable

 

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowance when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balance, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. The Company only grants credit terms to established customers who are deemed to be financially responsible. 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 first-in, first-out (FIFO) 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.

 

F-7

 

 

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 income 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 three and six months ended June 30, 2020 and 2019.

 

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.

 

F-8

 

 

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 three and six months ended June 30, 2020, total sales in the United States represented approximately 70% and 74% of total consolidated revenues. For the same periods in 2019, sales in the United States represented approximately 95% and 91% of total consolidated revenues. Sales to Germany represented 22% and 16% of consolidated revenues in the three and six months ended June 30, 2020. No other geographical area accounted for more than 10% of total sales during the three and six months ended June 30, 2020 and 2019.

 

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. At June 30, 2020 and 2019, contract assets totaled $34,589 and $14,265, respectively.

 

F-9

 

 

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 June 30, 2020 and 2019, contract liabilities totaled $0 and $95,015, 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 three months ended June 30, 2020 and 2019 shipping and handling costs amounted to $13,416 and $29,507, respectively, and $51,027 and $46,028 for the six months ended June 30, 2020 and 2019, 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 three months ended June 30, 2020 and 2019 were $14,383 and $41,024, respectively, and were $31,035 and $56,829 for the six months ended June 30, 2020 and 2019, respectively, and are included in operating expenses on the accompanying unaudited 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 three months ended June 30, 2020 and 2019 were $0 and $1,834, respectively, and were $2,594 and $1,980 for the six months ended June 30, 2020 and 2019, respectively, and are included in sales and marketing on the unaudited consolidated accompanying statements of operations. These advertising expenses do not in 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 June 30, 2020, and December 31, 2019, 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, 2017. 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 June 30, 2020 or December 31, 2019.

 

F-10

 

 

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.

 

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. 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 losses and consisted of the following:

 

   June 30, 2020   December 31, 2019 
Stock options   554,719    455,502 
Stock warrants   4,462,715    2,817,463 
Total   5,017,434    3,272,965 

 

Net loss per share for each class of common stock is as follows:

 

Net (loss) income per common shares outstanding:  Three Months
ended
June 30, 2020
   Three Months
ended
June 30, 2019
   Six Months
ended
June 30, 2020
   Six Months
ended
June 30, 2019
 
Class A common stock  $(0.04)  $(0.09)  $(0.10)  $(0.11)
                     

Weighted average shares outstanding:

                    
Class A common stock   7,199,942    4,472,389    6,850,643    4,312,554 
Total weighted average shares outstanding   7,199,942    4,472,389    6,850,643    4, 312,554 

 

F-11

 

 

Segment Reporting

 

The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the President of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. The Company classified the reportable operating segments into (i) the development, manufacture and sale of consumer and institutional products using nanotechnology to deliver unique performance attributes at the surfaces of a wide variety of substrates (the “Product segment”) and (ii) nanotechnology design and development services for our future products and for government and private entities (the “Contract services segment”).

 

Leases

 

The Company adopted ASC 842 on January 1, 2019 using the modified retrospective basis and did not adjust comparative periods as permitted under Accounting Standards Update (“ASU”) 2018-11. ASC 842 supersedes nearly all existing lease accounting guidance under U.S. GAAP issued by the Financial Accounting Standards Board (“FASB”) including ASC Topic 840, Leases. ASC 842 requires that lessees recognize Right-of-Use (ROU) assets and lease liabilities calculated based on the present value of lease payments for all lease agreements with terms that are greater than twelve months. ASC 842 distinguishes leases as either a finance lease or an operating lease that affects how the leases are measured and presented in the statement of operations and statement of cash flows.

 

For operating leases, we calculated ROU assets and lease liabilities based on the present value of the remaining lease payments as of the date of adoption using the IBR as of that date. On the date of adoption, operating lease liabilities and right-of-use assets totaled $400,327. We do not have finance leases as per the definition of ASC 842 as of June 30, 2019.

 

The FASB issued practical expedients and accounting policy elections that the Company has applied as described below.

 

Practical Expedients

 

ASC 842 provides a package of three practical expedients that must be adopted together and applied to all lease agreements. The Company elected the package of practical expedients as follows for all leases:

 

Whether expired or existing contracts contain leases under the new definition of a lease.

 

Because the accounting for operating leases and service contracts was similar under ASC 840, there was no accounting reason to separate lease agreements from service contracts in order to account for them correctly. The Company reviewed existing service contracts to determine if the agreement contained an embedded lease to be accounted for on the balance sheet under ASC 842.

 

Lease classification for expired or existing leases.

 

Leases that were capital leases under ASC 840 are accounted for as financing leases under ASC 842 while leases that were operating leases under ASC 840 are accounted for as operating leases under ASC 842.

 

Whether previously capitalized initial direct costs would meet the definition of initial direct costs under the new standard guidance.

 

The definition of initial direct costs is more restrictive under ASC 842 than under ASC 840. Entities that do not elect the practical expedient are required to reassess capitalized initial direct costs under ASC 840 and record an equity adjustment for those that are not capitalizable under ASC 842.

 

F-12

 

 

Accounting Policy Elections

 

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 the following payments (as applicable) related to the use of the underlying asset during the lease term:

 

  Fixed payments, including in substance fixed payments, less any lease incentives paid or payable to the lessee
     
  Variable lease payments that depend on an index or a rate, such as the Consumer Price Index or a market interest rate, initially measured using the index or rate at the commencement date of January 1, 2019.
     
  The exercise price of an option to purchase the underlying asset if the lessee is reasonably certain to exercise that option.
     
  Payments for penalties for terminating the lease if the lease term reflects the lessee exercising an option to terminate the lease.
     
  Fees paid by the lessee to the owners of a special-purpose entity for structuring the transaction
     
  For a lessee only, amounts probable of being owed by the lessee under residual value guarantees

 

Incremental Borrowing Rate

 

The ROU asset and related lease liabilities recorded under ASC 842 are calculated based on the present value of the lease payments using (1) the rate implicit in the lease or (2) the lessee’s IBR, defined as 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.

 

Recently Issued Accounting Pronouncements

 

Financial Instruments — Credit Losses (Topic 326)

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard prescribes an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which is intended to result in the timely recognition of losses. Under the CECL model, entities will estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of the financial instrument.

 

Measurement of expected credit losses is to be based on relevant forecasts that affect collectability. The scope of financial assets within the CECL methodology is broad and includes trade receivables from certain revenue transactions and certain off-balance sheet credit exposures. Different components of the guidance require modified retrospective or prospective adoption. ASU 2016-13 is effective for the annual reporting period beginning on or after December 15, 2020. The Company adopted this standard January 1, 2020 and there was no material impact.

 

Except for our accounting policies for allowance for doubtful accounts as a result of adopting ASU 2016-13, there have been no changes to our significant accounting policies described in Note 2 to our Annual Report on Form 10-K for the year ended December 31, 2019, that have had a material impact on our Consolidated Financial Statements and related notes.

 

F-13

 

 

Reclassifications

 

Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statements.

 

NOTE 3 – CORRECTION OF IMMATERIAL ERRORS

 

During the fourth quarter of 2019, the Company identified errors in accounting for revenues and cost of revenues resulting in immaterial correction of errors in previously issued consolidated financial statements. Each of these errors affected periods beginning prior to 2018 through December 31, 2019. In accordance with Staff Accounting Bulletin (SAB) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, management evaluated the materiality of the errors from qualitative and quantitative perspectives, and concluded that while the errors did not, individually, or in the aggregate, result in a material misstatement of the previously issued consolidated financial statements, correcting these errors in the fourth quarter ended December 31, 2019 would have been material to that quarter.

 

The adjustments cumulatively impacted the following balances for the six months ended June 30, 2019:

 

    As Reported     Adjustment     As Corrected  

Product revenues

  $ 825,315      $ 47,385 a   $ 872,700  
Contract revenues    

584,185

     

(77,036

)b

   

507,149

 
Cost of product revenues     557,021        31,875 c     588,896  
Cost of contract revenues    

622,353

     

(91,082

)d

   

531,271

 
Gross profit     230,126       

29,556

e     259,682  
Operating expenses     677,797        41,697 f     719,494  
Other income (expense)     56,523        (59,207 )d     (2,684 ) 
Net (loss)   (391,148 )     (71,348 )g   (462,496 )

Net (loss) per common share

  $

(0.09

)   $ (0.02 )h   $ (0.11 )

 

References to above adjustments

 

a.This accounts for a reclassification of $47,385 in revenues from contract revenues to product revenues booked on the Company’s wholly-owned subsidiary, Applied Nanotech, Inc.,
b.With the proper recognition of contract services revenues with the adoption of ASC Topic 606, in-progress contract revenue was determined to be overstated in the second quarter of 2019 by $29,651. This, along with the reclassification in point (a) above, comprises the total adjustment of $77,036.
c.This accounts for the reclassification $31,875 from cost of contract revenues to cost of product revenues in line with the reclassification of segmented revenues in point (a) above.
d.This accounts for the reclassification of sublease income totaling $59,207 for the six months ending June 30, 2019 from other income to cost of contract revenues, plus $31,875 in cost of contact revenues reclassified to cost of product revenues as per point (c) above.
e.This accounts for the net impact of the reclassification of sublease income of $59,207 in point (d) above, offset by the overstatement of contract services revenues of $29,651 outlined in point (b) above.
f.The $41,697 adjustment represents $19,697 booked for compensation expense from options granted to an executive in the second quarter of 2019 plus $22,000 for the accrual of audit fees performed in the first quarter of 2019 not previously recorded in the period.
g.Net loss was understated by $71,348 for the six months ending June 30, 2019, due to $29,651 in overstated contract services revenues outlined in point (b) above plus $41,697 in understated expenses outlined in point (f) above.
h.Net (loss) per common share for the six months ended June 30, 2019 resulting from the adjustments as outlined above has been corrected to $0.11 per share from the previously reported number of $0.09 per share.

 

NOTE 4 – ACCOUNTS RECEIVABLE

 

At June 30, 2020 and December 31, 2019, accounts receivable consisted of the following:

 

   June 30, 2020   December 31, 2019 
Accounts receivable  $542,141   $164,960 
Less: allowance for doubtful accounts   (13,670)   (13,670)
Accounts receivable, net  $528,471   $151,290 

 

NOTE 5 – INVENTORY

 

At June 30, 2020 and December 31, 2019, inventory consisted of the following:

 

   June 30, 2020   December 31, 2019 
Raw materials  $666,175   $663,932 
Work-in-progress   -    - 
Finished goods   341,041    335,762 
  

$

1,007,216  

$

999,694 
Less: reserve for obsolescence   (663,193)   (577,072)
Inventory, net  $344,023   $422,622 

 

F-14

 

 

NOTE 6 - 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.

 

NOTE 7 – OPERATING LEASE RIGHT-OF-USE ASSETS

 

Leasing Transactions

 

The Company’s leased assets include offices, production and research and development facilities. Our current lease portfolio has remaining terms from less than one-year up to seven years. Many of these leases contain options under which we can extend the term for several years. Renewal options are excluded from our calculation of lease liabilities unless we are reasonably assured to exercise the renewal option. Our lease agreements do not contain residual value guarantees or material restrictive covenants.

 

On September 20, 2017, the Company entered into a three-year lease agreement for 26,063 square feet of office space in Brooklyn Heights, Ohio beginning September 20, 2017 and ending September 20, 2020. Monthly lease payments amount to $8,688.

 

On December 10, 2018, we entered into a five-year lease agreement for 3,742 square feet of space for the design facility in Austin, beginning January 2019 and ending February 29, 2024. Monthly lease payments start at $3,472 per month, increasing 3% each year.

 

On June 21, 2019, we leased approximately 1,200 square feet of office space in Bingham Farms, Michigan for nine months for a sales office. Monthly payments are $1,529 per month. The lease has been extended through December 31, 2020.

 

Effective May 31, 2020, we entered into a lease for a 29,220 square foot building in Madison Heights, Michigan. The occupancy date and rent commencement date is October 1, 2020. By that date, the landlord, Magic Research LLC, is required to have completed tenant improvements to accommodate our office and manufacturing needs. When we are established in the new facility, we expect to vacate our facility in Brooklyn Heights, Ohio as our lease there expires in September 2020. The new lease has a term of seven years with a renewal option at the end of the initial term for an additional 3-year term, and a second renewal option thereafter for an additional 5-year term. As the sole tenant, we are responsible for all taxes, ordinary maintenance, snow removal and other ordinary operating expenses. Rent is $6.50 per square foot, increasing by $0.25 per year. During the first three years we also have the right to buy up to a 49% interest in Magic Research LLC for a price equal to 49% of the contributions received from other members. See Note 10, Stockholders’ Equity, for a description of the warrants issued to the landlord in connection with this lease. The fair value of these warrants totaling $311,718 were recorded as initial direct costs of obtaining the lease and are included in other assets on the accompanying balance sheet. See Note 9, Related Party Transactions, for information about Tom J. Berman and Ronald J. Berman’s role in management and economic participation in the landlord.

 

Operating leases are reflected on our balance sheet within operating lease ROU assets and the related current and non-current operating lease liabilities. Leases with terms of less than twelve months have been classified as current ROU assets, whereas the lease with a remaining term of more than twelve months has been classified as a non-current ROU asset. 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, or the date on which the lessor makes the underlying asset available for 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.

 

F-15

 

 

Balance Sheet

 

Supplemental balance sheet information related to leases was as follows:

 

   June 30, 2020   December 31, 2019 
Operating Leases          
Total operating lease ROU assets  $181,755   $257,523 
           
Operating lease liabilities (current)   74,449    131,835 
Operating lease liabilities (noncurrent)   118,320    136,624 
Total operating lease liabilities  $192,769   $268,459 

 

The average remaining lease term in months is 18.7 months with an average discount rate of 8.5%.

 

Income Statement

 

Supplemental income statement information related to leases was as follows:

 

   June 30, 2020   June 30, 2019 
Operating Lease Costs          
Cost of product revenue  $62,282   $62,282 
Cost of contract services   23,170    23,170 
Variable lease costs   21,910    34,811 
Sublease income   (27,000)   (59,207)
Net operating lease cost  $80,363   $61,056 

 

NOTE 8 – NOTES PAYABLE

 

On February 10, 2015, Nano Magic LLC (then named Nanofilm) entered into a promissory note (the “Equipment Note”) with KeyBank, N.A. (the “Bank”) to borrow up to $373,000. Nanofilm may obtain one or more advances not to exceed $373,000. The unpaid principal balance of this Equipment Note is payable in 60 equal monthly installments payments of principal and interest through June 10, 2020. The Equipment Note is secured by certain equipment, as defined in the Equipment Note, and bears interest computed at a rate of interest of 4.35% per annum based on a year of 360 days. At December 31, 2019, the principal amount due under the Equipment Note amounted to $115,926. Due to the slowdown caused by the COVID-19 pandemic, KeyBank agreed in April 2020 that we would not be required to make scheduled payments in April, May and June. The amount that would have been paid will be added to the final scheduled loan payment. As of June 30, 2020, $44,333 and $61,218, represent the current and non-current portion due under this note.

 

In June and November 2015, in connection with a severance package offered to four employees, the Company entered into four promissory note agreements with the four employees which obligate the Company to pay these employees accrued and unpaid deferred salary in an aggregate amount of $51,808. The principal amounts due under these notes shall bear interest at the minimum rate of interest applicable under the internal revenue code (approximately 3.0% at December 31, 2019). As of June 30, 2020, principal and interest payable under three of these notes aggregating $37,458 are due in 2025 and are included in non-current notes payable.

 

January 2017, the Company issued a promissory note in the principal amount of $17,425 to a departing employee representing the amount of his accrued and unpaid salary. The note does not bear interest and is due in January 2027, and is included in non-current notes payable.

 

F-16

 

 

On May 8, 2020, we obtained a loan from Fifth Third Bank for $130,900 under the Small Business Administration Paycheck Protection Program. The loan bears interest at 1.00% and is payable in monthly installments of principal and interest in the amount of $7,330 beginning in December, 2020.

 

NOTE 9 – RELATED PARTY TRANSACTIONS

 

Apart from Board fees paid to all of our directors, we paid the following amounts as compensation to our directors:

 

   Three Months ended June 30,   Six Months ended June 30, 
   2020   2019   2020   2019 
Ronald J. Berman  $47,700    22,625    139,700    35,385 
Tom J. Berman  $45,000*   22,500    92,000*   120,964+
Jeanne M Rickert  $3,000    3,000*   6,000    6,000*
Scott E. Rickert  $3,000    3,000*   6,000    6,000*

 

*Indicates amount paid as salary

+ $57,177 of this total was paid as salary starting in April, 2019.

 

Ron Berman and Tom Berman each have a 2.08% ownership interest in Magic Research LLC, the landlord for the facility we leased in Michigan effective May 31, 2020. The manager of Magic Research LLC is Magic Research Management LLC; Ron Berman and Tom Berman are two of its three co-managers. Compensation from Magic Research LLC to Magic Research Management LLC is $10,000 per year to oversee the recordkeeping, tax return preparation, oversight of tenant improvements and other operating costs for the landlord.

 

Ron Berman and Tom Berman share ownership of PEN Comeback Management, LLC that is the sole voting member of PEN Comeback, LLC, PEN Comeback 2, LLC and Magic Growth, LLC.

 

NOTE 10 - STOCKHOLDERS’ EQUITY

 

Description of Preferred and Common Stock

 

On December 11, 2015, the Board of Directors of the Company approved a reverse stock split of the issued and outstanding shares of the Company’s common stock at the ratio of 1-for-180 (the “Reverse Stock Split”) and authorized an amendment of the Company’s Amended and Restated Certificate of Incorporation, as amended, to effect the Reverse Stock Split, to reduce the number of authorized shares of common stock, and to set a par value of $0.0001 per share after the Reverse Stock Split. On January 26, 2016, each one hundred eighty (180) shares of the Company’s (i) Class A Common Stock (“Class A common stock”), (iii) Class B Common Stock and (iii) Class Z Common Stock, then issued and outstanding were automatically combined into one (1) validly issued, fully paid and non-assessable share of Class A Common Stock, Class B Common Stock and Class Z Common Stock, respectively, without any further action by the Company or the holder. Additionally, the authorized number of shares of common stock were reduced to 10,000,000 comprised of 7,200,000 shares of Class A Common Stock, 2,500,000 shares of Class B Common Stock (“Class B common stock”), and 300,000 shares of Class Z Common Stock (“Class Z common stock”). The par value of each class of common stock remained the same at $0.0001 per common share. All share and per share data in the accompanying unaudited consolidated financial statements have been retroactively restated to reflect the effect of the Reverse Stock Split and authorized shares. The Company is also authorized to issue 20,000,000 shares of Preferred Stock, par value $0.0001 per share (“preferred stock”).

 

F-17

 

 

The Company has accepted subscriptions and has received payment for 279,283 shares of Class A common stock that have not been issued because the Company lacks sufficient authorized shares to issue the shares and status of shareholder approval to increase the authorized shares of common stock. The same constraint affects outstanding options and warrants; the Company does not have authorized and reserved shares sufficient to issue shares if options or warrants were to be exercised. See Note 15, Subsequent Events, for a description of changes that occurred on July 2, 2020 with respect to the Company’s common stock.

 

Preferred Stock

 

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

 

Common Stock – General

 

The rights of each share of Class A common stock, each share of Class B common stock and each share of Class Z common stock are the same with respect to dividends, distributions and rights upon liquidation.

 

Class A Common Stock

 

Holders of the Class A common stock are entitled to one vote per share in the election of directors and other matters submitted to a vote of the stockholders.

 

Class B Common Stock

 

Conversion Rights. Shares of Class B common stock can be converted, one-for-one, into shares of Class A common stock at any time at the option of the holder. Shares of Class B common stock will automatically be converted into shares of Class A common stock if the shares of Class B common stock are not owned by the Company’s chief executive officer, his spouse, or their descendants and their spouses, or by entities or trusts wholly-owned by them.

 

Voting Rights Holders of Nano Magic Class B common stock are entitled to 100 votes per share in the election of directors and other matters submitted to a vote of the stockholders.

 

Class Z Common Stock

 

Conversion Rights. Shares of Class Z common stock can be converted, one-for-one, into shares of Class A common stock at any time at the option of the holder. Shares of Class Z common stock will automatically be converted into shares of Class A common stock if the shares of Class Z common stock are not owned by Zeiss or an entity wholly owned by the ultimate parent of Zeiss.

 

Voting Rights. Holders of Nano Magic Class Z common stock do not vote in the election of directors or otherwise, but they do have the right to designate a director to the Nano Magic Board, have anti-dilution rights described below and have consent rights with respect to certain amendments to Nano Magic’s certificate of incorporation.

 

Other Rights. The Class Z common stock has anti-dilutive rights that, subject to limited exceptions, permit holders of Class Z common stock to purchase additional shares or equity rights issued by Nano Magic (on the same terms as made available to third parties by Nano Magic) to maintain their economic ownership percentage. The holders of Class Z common stock are also entitled to receive a copy of any notice sent to the holders of Class A common stock or Class B common stock, as and when the notice is sent to such holders.

 

F-18

 

 

Issuances of Common Stock

 

Sales of Common Stock and Derivative Equity Securities

 

On January 22, 2020, we sold 198,530 shares of Class A 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 24, 2020, we sold 205,883 shares of Class A 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 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 $6,176.

 

On March 24, 2020, in a private placement to PEN Comeback 2, we sold 551,600 shares of Class A common stock and committed to issue an additional 242,518 shares when we have additional authorized shares. If the additional shares have not been issued by March 24, 2021, we must refund the purchase price (without interest). 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. If the shares have not been issued by March 26, 2021, we must refund the purchase price (without interest). At the same time 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 total for the three and six months ended June 30, 2020, 956,013 shares of Class A common stock were sold and issued for $621,409. Additionally, 1,235,252 warrants were sold for $37,058, and 279,283 shares of Class A common stock were sold for $181,533 but not yet issued and therefore recorded as a subscription payable at June 30, 2020.

 

Common Stock Issued for Services

 

On February 12, 2020, we issued an aggregate of 21,048 shares of Class A 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.

 

Warrants issued to Landlord

 

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 Class A 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 were recorded as prepaid, initial direct costs associated with the lease.

 

F-19

 

 

Stock Options

 

Stock options outstanding are to purchase Class A common stock. Stock options outstanding at June 30, 2020 are 554,859, reflecting a grant of 100,000 under the 2015 Equity Incentive Plan made in the first six months of 2020, and the expiration of 643 options during the same period. No options were exercised during the period.

 

    Number of
Options
    Weighted
Average
Exercise
Price
    Weighted
Average
Remaining
Contractual
Term
(Years)
    Aggregate
Intrinsic
Value
 
Balance Outstanding December 31, 2019     455,502     $ 1.24       4.22     $ 585,000  
Granted     100,000       0.65       3.60       120,000  
Expired     (643)       0.51                  
Balance Outstanding June 30, 2020     554,859     $ 1.06       3.71     $ 705,000  
                                 
Exercisable, June 30, 2020     129,859     $ 2.67       3.66     $ 162,500  

 

Warrants

 

As of June 30, 2020, there were outstanding and exercisable warrants to purchase 4,462,715 shares of common stock with a weighted average exercise price of $1.50 per share and a weighted average remaining contractual term of 38.19 months. As of June 30, 2020, there was no intrinsic value for exercisable warrants.

 

Conversion of Class Z Common Stock

 

On May 23, 2017, Zeiss converted 262,631 shares of Class Z common stock into 262,631 shares of Class A common stock. Immediately thereafter, Zeiss sold 262,631 shares of Class A common stock to certain buyers which included the Company’s Chief Executive Officer for an aggregate of $100,000. In addition, pursuant to the certificate of incorporation, Zeiss’ Board representation automatically terminated and, as a result, Zeiss ceased to be a related party as of May 23, 2017.

 

Conversion of Class B Common Stock

 

On or about October 15, 2019 as part of the terms for the stock sale to PEN Comeback, Scott and Jeanne Rickert and their family partnership exercised the right to convert Class B shares into Class A shares on a 1:1 basis resulting in the issuance of 1,436,052 shares of Class A common stock.

 

2015 Equity Incentive Plan

 

On November 30, 2015, the Board of Directors authorized the 2015 Equity Incentive Plan (the “Plan”), which reserved 111,111 shares of common stock. If any share of common stock that has been granted pursuant to a stock option ceases to be subject to a stock option, or if any forfeiture or termination affects shares of common stock that are the subject to any other stock-based award, the shares are again available for future grants and awards under the Plan. The Plan’s purpose is to enable the Company to offer its employees, officers, directors and consultants an opportunity to acquire a proprietary interest in the Company for their contributions. On December 31, 2019, we issued an aggregate of 102,500 shares to employees in settlement of accrued salaries totaling $66,615. On January 31, 2020 we granted an option to purchase 100,000 shares to a senior member of the sales team with vesting tied directly to 2020 sales goals.

 

NOTE 11 - COMMITMENTS AND CONTINGENCIES

 

Stock Appreciation Rights

 

If the Company completes an IPO, the value of stock appreciation rights calculated based on the IPO formula may cause a material increase in the value of the liability (See Note 13).

 

Litigation

 

The Company may be, from time to time, subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. We are not currently a defendant in any proceedings. Our policy is to accrue costs for contingent liabilities, including legal proceedings or unasserted claims that may result in legal proceedings, when a liability is probable and the amount can be reasonably estimated. As of June 30, 2020, the Company has not accrued any amount for litigation contingencies.

 

F-20

 

 

NOTE 12 – CONCENTRATIONS

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable and cash deposits and investments in cash equivalent instruments.

 

Customer Concentrations

 

For the six months ended June 30, 2020 and 2019, two customers represented 35% and one different customer represented 15% of product revenues respectively. For the contract revenues segment, three customers accounted for 88% of revenues for the six months ended June 30, 2020 and those same customers accounted for 63% of revenues for the six months ending June 30, 2019.

 

These customers did not have material accounts receivable balances at June 30, 2020 or 2019. A reduction in sales from or loss of such customers would have a material adverse effect on our results of operations and financial condition.

 

Geographic Concentrations of Sales

 

For the three and six months ended June 30, 2020, total sales in the United States represented approximately 70% and 74% of total consolidated revenues. For the same periods in 2019, sales in the United States represented approximately 95% and 91% of total consolidated revenues. Sales to Germany represented 22% and 16% of consolidated revenues in the three and six months ended June 30, 2020. No other geographical area accounted for more than 10% of total sales during the three and six months ended June 30, 2020 and 2019.

 

Vendor Concentrations

 

For the six months ended June 30, 2020, two vendors represented 51% of inventory purchases. One of those same vendors represented 49% of inventory purchases for the six months ended June 30, 2019.

 

NOTE 13 – STOCK APPRECIATION PLAN

 

From June 1, 1988, until December 31, 1997, when the plan was terminated, Nano Magic LLC had in place a Stock Appreciation Rights Plan A (the “Plan”), intended to provide employees, directors, members of a technical advisory board and certain independent contractors selected by the Board with equity-like participation in the growth of Nano Magic LLC. The maximum number of stock appreciation rights that could be granted by the Board was 1,000,000.

 

There were 235,782 fully vested stock appreciation rights (“SARS”) outstanding under the terms of the Plan at June 30, 2020 and December 31, 2019. The SARS unit value is based on the book value of the Company as of the last fiscal year end multiplied by a SARS multiplier stipulated in the SARS plan. However, in the event of an initial public offering (“IPO”) of Nano Magic LLC, the SARS are redeemable based on a value equal to offering price of the stock in an IPO times the total outstanding shares of the Company just subsequent to the completion of the IPO, multiplied by the SARS multiplier. The SARS multiplier is to be adjusted, as the Board determines, to reflect changes in the capitalization of Nano Magic LLC. Generally, the SARS are redeemable in cash, at their then fair value as computed pursuant to the Plan, in the event of termination of employment or business relationship, death, permanent and total disability, or sale of Nano Magic Brands (as defined). Upon an IPO, SARS are to be redeemed by applying 70% of the redemption value to purchase common shares, with the remaining 30% being distributed in cash to the participant.

 

The business combination completed in August 2014 did not qualify as an IPO under the Plan; however, a future underwritten registered offering may qualify.

 

The accrued redemption value associated with the stock appreciation rights amounted to $42,823, at June 30, 2020 and December 31, 2019. If the Company completes an IPO, the value of SARS calculated based on the IPO formula may cause a material increase in the value of the liability.

 

F-21

 

 

NOTE 14– SEGMENT REPORTING

 

The Company’s principal operating segments coincide with the types of products to be sold. The products from which revenues are derived are consistent with the reporting structure of the Company’s internal organization. The Company’s two reportable segments for the three and six months ended June 30, 2020 and 2019 were the Product segment and ii) the Contract services segment (formerly the research and development segment). The Company’s chief operating decision-maker has been identified as the Chairman and CEO, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon the Company’s management organization structure as of June 30, 2020 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to the reportable segments disclosed. There are no inter-segment revenue transactions and, therefore, revenues are only to external customers. As the Company primarily generates its revenues from customers in the United States, no geographical segments are presented.

 

Segment operating profit is determined based upon internal performance measures used by the chief operating decision-maker. The Company derives the segment results from its internal management reporting system. The accounting policies the Company uses to derive reportable segment results are the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics, including net revenues, gross profit and operating loss. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments. The Company manages certain operating expenses separately at the corporate level and does not allocate such expenses to the segments. Segment income from operations excludes interest income/expense and other income or expenses and income taxes according to how a particular reportable segment’s management is measured. Management does not consider impairment charges, and unallocated costs in measuring the performance of the reportable segments.

 

Segment information available with respect to these reportable business segments for the three and six months ended June 30, 2020 and 2019 was as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2020   2019   2020   2019 
Revenues:                
Product segment  $908,062   $

415,832

   $1,149,779   $

872,700

 
Contract services segment   244,422    

206,156

    450,879    

507,149

 
Total segment and consolidated revenues  $1,152,484   $

621,988

   $1,600,658   $

1,379,849

 
Cost of revenues:                    
Products  $600,781   $

390,939

   $823,599   $

588,896

 
Contract services segment   155,004    

198,723

    321,903    

531,271

 
Total segment and consolidated cost of revenues  $755,785   $

589,662

   $1,145,502   $

1,120,167

 
                     
Gross profit (loss):                    
Product segment  $307,281   $24,893  $326,180   $

283,804

 
Contract services segment   89,418    7,433   128,976    

(24,122

)
Total segment and consolidated gross profit  $396,699   $

32,326

  $455,156   $

259,682

 
Gross margin:                    
Product segment   33.8%   6.0%   28.4%   32.5%
Contract services segment   36.6%   3.6%   28.6%   -4.8%
Total gross margin   34.4%   5.2%   28.4%   18.8%
Segment operating expenses:                    
Product segment  $432,723   $

262,758

   $674,963   $

417,948

 
Contract services segment   32,124    

49,607

    78,104    

114,637

 
Total segment operating expenses  $464,847   $

312,365

   $753,067   $

532,586

 
                     
Income (loss) from operations:                    
Product segment  $(125,442)  $(237,866)  $(348,783)  $(134,144)
Contract services segment   57,294    (42,174)   50,872    

(138,759

)
Total segment (loss)   (68,148)   

(280,039

)   (297,911)   

(272,904

)
Unallocated costs   (213,847)   (107,917)   (359,792)   (186,908)
Total consolidated (loss) from operations  $(281,995)  $(387,957)  $(657,703)  $

(459,812

)
                     
Depreciation and amortization:                    
Product segment  $12,488   $

13,972

   $7,228   $

26,416

 
Contract services segment   415         834      
Total segment depreciation and amortization   12,903         8,062      
Unallocated depreciation   -         -      
Total consolidated depreciation and amortization  $12,903   $

13,972

   $8,062   $

26,416

 
                     
Capital additions:                    
Product segment  $3,121   $-   $4,596   $- 
Contract services segment   -    -    -    - 
Total segment capital additions   3,121    -    4,596    - 
Unallocated capital additions   -    -    -    - 
Total consolidated capital additions  $3,121   $-   $4,596   $- 

 

   June 30, 2020   June 30, 2019 
Segment total assets:          
Product segment  $1,464,088   $849,432 
Contract services segment   218,789    163,827 
Corporate   16,369    198,086 
Total consolidated total assets  $1,699,246   $1,211,345 

 

F-22

 

 

NOTE 15 - SUBSEQUENT EVENTS

 

COVID-19 Pandemic

 

Restrictions imposed by Federal, state and local governments as a result of the COVID-19 pandemic continue to impact our operations, but to date our sources of supply have been adequate for our needs and we have been able to fulfill orders on a timely basis. We have seen a strong increase in demand for anti-fog products. At the same time, there has been a slow-down in our lens cleaning and other business activity as a result of the COVID-19 pandemic, and the severity of the disruption and the length of the slow-down and timing of recovery are unknown.

 

As noted last quarter, some of the raw materials and bottles used to produce our liquid products, are used to produce hand sanitizer and other cleaning products that are in high demand and some of our raw materials and packaging have become harder to find due to the COVID-19 pandemic. Price increases for raw materials can be expected to adversely impact our profit margin.

 

We have financed the furniture and some of the equipment we will be using in the new space in Michigan, and we have arranged financing for receivables from one of our larger customers. We also have pending another application for a PPE loan. This enables us to use more of our cash to keep up with increased demand for our anti-fog product as well as to build inventory as we prepare for the move from Brooklyn Heights to the new Michigan space.

 

Amended and Restated Certificate of Incorporation

 

In June, we mailed to our stockholders the definitive information statement on Schedule 14C (the “Information Statement”). Effective July 2, 2020, the Company amended and restated its Certificate of Incorporation to implement the changes described in the Information Statement which (i) eliminated the Company’s Class B common stock and Class Z common stock and related provisions, renamed as “common stock” the Company’s Class A common stock, and (ii) increased the number of authorized shares of common stock from 7,200,000 to 30,000,000.

 

Sales of Common Stock and Derivate Equity Securities

 

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 461,539 shares of common stock for proceeds of $576,924 and warrants to purchase up to 461,525 shares of common stock for proceeds of $23,076. 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.

 

Equipment Financing and Financing of Accounts

 

On August 10, 2020, we entered into a lease for new bottling equipment that requires monthly payments of $2,135 for 48 months. At the end of the lease term we have the right to buy the equipment for $1.00.

 

On August 11, 2020 we entered into a financing lease for furniture that will be used in the new Michigan facility. We financed $60,684 over a period of 36 months and are required to make monthly payments of $1,972 during that time.

 

On August 24, 2020, we entered an agreement to finance the purchase of equipment for the new Michigan facility. This financing for a new bottling line will require twelve quarterly payments of $17,906.

 

On September 1, 2020, we entered an agreement with NOWaccount Network Corporation for the sale of accounts receivable due from a specific customer of ours. Subject to certain limits, we will receive a payment equal to 95% of the amount of the invoice upon shipment of the product and sale of the account.

 

F-23

 

 

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying unaudited consolidated financial statements.

 

OVERVIEW

 

Nano Magic develops, commercializes and markets consumer and industrial products enabled by nanotechnology that solve everyday problems for customers in many markets, including the optical, transportation, military, sports and safety industries. Our primary business is the formulation, marketing and sale of products enabled by nanotechnology. We are in the process of rebranding Nano Magic products, including what were formerly known as ULTRA CLARITY brand eyeglass cleaner, DEFOGIT brand defogging products. Our “Forcefield” products will include the CLARITY ULTRASEAL nanocoating products for glass and ceramics. We also plan to increase our focus on our environmentally friendly surface protector, fortifier, and cleaner. Our design center conducts development services for us and for government and private customers and develops and sells printable inks and pastes, thermal management materials, and graphene foils and windows.

 

Our principal operating segments coincide with our different business activities and types of products sold. This is consistent with our internal reporting structure. Our two reportable segments for the three and six months ended June 30, 2020 were (i) the Product Segment and (ii) the Contract services Segment. For the three and six months ended June 30, 2019, the Company operated the same two segments.

 

RESULTS OF OPERATIONS

 

The following comparative analysis on results of operations was based primarily on the comparative consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the unaudited consolidated financial statements and the notes to those statements that are included elsewhere in this report. The results discussed below are for the three and six months ended June 30, 2020 and 2019.

 

Comparison of Results of Operations for the Three and Six Months ended June 30, 2020 and 2019

 

Revenues:

 

For the three and six months ended June 30, 2020, revenues were up $471,029 or 108%, and $255,878 or 29%, as compared to the three and six months ended June 30, 2019, respectively.

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2020   2019   2020   2019 
Revenue:                    
Product segment  $908,062   $415,832   $1,149,779   $872,700 
Contract services segment   244,422    206,156    450,879    507,149 
Total consolidated revenue  $1,152,484   $621,988   $1,600,658   $1,379,849 

 

For the three months ended June 30, 2020, sales from the Product segment increased by $492,230 or 118% as compared to the three months ended June 30, 2019. For the six months ended June 30, 2020 revenue from the Product segment increased by $277,079 or 32%, as compared to the six months ended June 30, 2019. Increased use of facemasks and shields during the COVID-19 pandemic has resulted in increased demand for our anti-fog product that is reflected in the increased sales for the quarter ended June 30, 2020.

 

For the three months ended June 30, 2020, sales from the Contract services segment increased by $38,266 or 19% as compared to the three months ended June 30, 2019 which was primarily attributable to a new contract award and work started under that contract. For the six months ended June 30, 2020 revenue from the Contract services segment decreased by $56,270 or 11%, as compared to the six months ended June 30, 2019.

 

Cost of revenues

 

Cost of revenues includes inventory costs, materials and supplies costs, internal labor and related benefits, subcontractor costs, depreciation, overhead and shipping and handling costs incurred and costs related to government and private research contracts in our Contract services segment.

 

4

 

 

For the three months ended June 30, 2020, cost of revenues increased by $166,123 or 28% as compared to the three months ended June 30, 2019. For the six months ended June 30, 2020, cost of revenues increased by $25,335 or 2% as compared to the same period in 2019. These changes are reflected in the chart that follows. We have seen some price increases and shortages for some of our raw materials and packaging as a result of the COVID-19 pandemic, but thus far we have been able to obtain adequate supply.

 

   Three Months ended June 30,   Six Months ended June 30, 
   2020   2019   2020   2019 
Cost of revenues:                    
Product segment  $600,781   $390,939   $823,599   $588,896 
Contract services segment   155,004    198,723    321,903    531,271 
Total segment and consolidated cost of revenues  $755,785   $589,662   $1,145,502   $1,120,167 

 

Gross profit and gross margin

 

For the three months ended June 30, 2020, gross profit increased by $364,373 or 1127%. For the six months ended June 30, 2020, gross profit increased by$195,474 or 75%.

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2020   %   2019   %   2020   %   2019   % 
Gross profit:                                        
Product segment *  $307,281    33.8%   24,893   6.0%  $326,180    28.4%   

283,804

    32.5%
Contract services segment *  $89,418    36.6%   

7,433

   3.6%  $128,976    28.6%   

(24,122

)

   (4.8)%
Total gross profit   $396,699    34.4%   

32,326

   5.2%   455,156    28.4%   

259,682

    18.8%

 

* Gross margin % based on respective segments revenues.

 

Operating expenses

 

For the three months ended June 30, 2020, operating expenses increased by $333,091 or 96% compared to the three months ended June 30, 2019. Similarly, for the six months period operating expenses increased by $468,044 or 73% for the period ended June 30, 2020, as compared to the six months ended June 30, 2019. For the three and six months ended June 30, 2020 and 2019, operating expenses consisted of the following:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2020   2019   2020   2019 
Selling and marketing expenses  $4,826   $17,298   $15,883   $25,098 
Salaries, wages and related benefits   163,831    148,186    308,464    204,698 
Research and development   14,383    41,024    31,035    56,829 
Professional fees   359,420    72,920    484,172    152,354 
General and administrative expenses   136,234    140,855    273,304    280,515 
Total  $678,694   $420,283   $1,122,859   $719,494 

 

For the three months ended June 30, 2020, selling and marketing expenses decreased by $12,482 or 72% as compared to the three months ended June 30, 2019 due to general decreases in marketing spend. For the six months ended June 30, 2020, sales and marketing expenses decreased by $9,215 or 37% as compared to the six months ended June 30, 2019, for same reasons.

   
For the three months ended June 30, 2020, salaries, wages and related benefits increased by $15,645 or 11%, as compared to the three months ended June 30, 2019. For the six months ended June 30, 2020, salaries, wages and contract services increased by $103,767, or 51%, as compared to the six months ended June 30, 2019. For the three and six months ended June 30, 2020, these increases were due to salary increases and additional personnel related to our ongoing efforts to build our team and increase sales and productivity.
   

For the three months ended June 30, 2020, research and development costs decreased by $26,641 or 65%, as compared to the three months ended June 30, 2019. For the six months ended June 30, 2020, research and development costs decreased by $25,794 or 45%, as compared to the six months ended June 30, 2019. For both periods the decreases reflect a general spend decrease in R&D supplies.

   
For the three and six months ended June 30, 2020, professional and other fees increased by $286,500 or 393%, and $331,818 or 218%, as compared to the three and six months ended June 30, 2019, respectively. These increases are primarily attributable to increased audit fees and other third-party professional expenses to support the business.
   
For the three months ended June 30, 2020, general and administrative expenses decreased by $4,621 or 3% as compared to the three months ended June 30, 2019. For the six months ended June 30, 2020, general and administrative expenses decreased by approximately $7,210 or 3% as compared to the six months ended June 30, 2019.

 

5

 

 

Loss from operations

 

As a result of the factors described above, for the three months ended June 30, 2020, loss from operations amounted to $281,995 as compared to loss from operations of $387,957 for the three months ended June 30, 2019, a decrease of $105,962 or 27%. For the six months ended June 30, 2020, loss from operations amounted to $657,703 as compared to a loss from operations of $459,812 for the six months ended June 30, 2019, an increased loss of $197,891 or 43%.

 

Other expense (income)

 

For the three months ended June 30, 2020, other expense was $282 as compared to other expense of $5,159 for the three months ended June 30, 2019, a decrease of income of $4,690 or 90%. There was a decrease in interest expense as a result of deferral of principal and interest on the equipment loan, and a reduction in other income. For the six months ended June 30, 2020 other expense was $2,390, as compared to other expense of $2,684, for the six months ended 2019, a decrease of $294, or 11% due to the same factors.

 

Net loss

 

As a result of the foregoing, for the three and six months ended June 30, 2020, net loss amounted to $282,277 and $660,093 as compared to net loss of $392,257 and $462,496 for the three and six months ended June 30, 2019. The decrease in net loss for the 3-month period was $109,980 or 28%. For the six-month period there was an increased net loss of $197,597 or 43%.

 

For the three months ended June 30, 2020 and 2019, net loss amounted to $0.04 per common share (basic and diluted), and $0.09 per common share (basic and diluted), respectively. For the six months ended June 30, 2020 and 2019, net loss amounted to $0.10 per common share (basic and diluted) and $0.11 per common share (basic and diluted), respectively.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had working capital deficit of $292,803 and $223,739 of unrestricted cash as of June 30, 2020 and working capital deficit of $673,040 and $216,801 of cash as of December 31, 2019.

 

The following table sets forth a summary of changes in our working capital from December 31, 2019 to June 30, 2020:

 

           December 31, 2019 to June 30, 2020 
   June 30, 2020   December 31, 2019   Change in
working capital
   Percentage
Change
 
Working capital:                    
Total current assets  $1,293,502   $835,109   $458,393    54.89%
Total current liabilities   1,586,305    1,508,149    78,156    5.18%
Working capital deficit:  $(292,803)  $(673,040)  $380,237    (56.50)%

 

The increase in current assets was attributable primarily to increased accounts receivable and pre-paid expenses. The increase in current liabilities reflects an increase in accounts payable and the new loan under the paycheck protection program.

 

Net cash used in operating activities was $944,752 for the six months ended June 30, 2020 as compared to $382,053 for the six months ended June 30, 2019, a change of $562,698 or 147%. Net cash used in operating activities for the six months ended June 30, 2020 primarily reflected a net loss of ($660,093) adjusted for add-backs of $163,425 and changes in operating assets of ($448,083).

 

6

 

 

Net cash flow used in investing activities was $316,551 for the six months ended June 30, 2020 and $2,483 for the six months ended June 30, 2019.

 

Net cash provided by financing activities of $1,268,240 for the six months ended June 30, 2020 as compared to $348,770 in the same period in 2019. During the six months ended June 30, 2020, we sold additional common stock and warrants.

 

Future Liquidity and Capital Needs.

 

Our principal future uses of cash are for working capital requirements, including adding new personnel to support the growth of our business as well as inventory purchases. Funds required for inventory are higher in part for increased prices and longer lead time for some items affected by the COVID-19 pandemic, in part because of higher volume purchases as we prepare for the full-scale launch of Nano Magic branded products and, in part, for inventory build to avoid disruption when the Brooklyn Heights manufacturing moves to the new space in Michigan during the fourth quarter. Application of funds will depend on numerous factors including our sales and other revenues and our ability to control costs.

 

Equipment Financing

 

On February 10, 2015, Nano Magic LLC entered a $373,000 promissory note (the “Equipment Note”) with KeyBank, N.A. (the “Bank”). The unpaid principal balance of this Equipment Note is payable in 60 equal monthly installments payments of principal and interest through September 10, 2020. The Equipment Note is secured by certain equipment, as defined in the Equipment Note, and bears interest computed at a rate of interest of 4.35% per annum based on a year of 360 days. At June 30, 2020, the principal amount due under the Equipment Note amounted to $105,551.

 

On June 18, 2019, Nano Magic LLC entered into an Amendment to the Equipment Note with the Bank. By the amendment, the maturity date of the note was extended until April 10, 2022, the interest rate was raised to 6.29% per year, and the monthly payments were reduced to $4,052 per month.

 

Paycheck Protection Loan

 

On May 8, 2020, we obtained a loan from Fifth Third Bank for $130,900 under the Small Business Administration Paycheck Protection Program. The loan bears interest at 1.00% and is payable in monthly installments of principal and interest in the amount of $7,330 beginning in December, 2020.

 

Off-balance Sheet Arrangements

 

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated unaudited financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

ITEM 3. Quantitative and Qualitative disclosures about market risk

 

Not applicable to smaller reporting companies.

 

7

 

 

ITEM 4. Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report (the “Evaluation Date”). Based upon this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission (“SEC”) reports was recorded, but we lacked the staff or cash to purchase outside resources to process, summarize, and report within the time periods specified in SEC rules and forms.

 

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

 

Changes in Internal Control

 

During the three months ended June 30, 2020, the Nano Magic LLC subsidiary experienced staffing changes that resulted in a short-term lack of oversight on the part creation and sales booking processes such that errors resulted in the booking of sales and cost of sales in the company’s ERP system. The errors have since been corrected in the ledger and subledgers and additional controls have been put in place to address this issue. There were no additional changes identified in connection with our internal control over financial reporting during the three months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

Not required of smaller reporting companies

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

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 Class A 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.

 

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 461,539 shares of common stock for proceeds of $576,924 and warrants to purchase up to 461,525 shares of common stock for proceeds of $23,076. 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.

 

The sales and the issuances of stock and derivative securities were exempt from registration under Section 4(2). Proceeds were used for general corporate purposes.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None

 

8

 

 

ITEM 6. EXHIBITS

 

Exhibit No.   Description
     

10.1*

 

 

Lease Agreement, dated August 10, 2020, by and between Nano Magic LLC and Team Financial Group, Inc.

 

10.2*  

Pierce Capital Investing Agreement, dated August 11, 2020, by and between Pierce Capital Investing, LLC and Nano Magic LLC.

 

10.3*  

Equipment Finance Agreement, dated August 24, 2020, by and between Regents Capital Corporation and Nano Magic LLC.

 

10.4*  

NOWAccount Merchant Services Agreement dated September 1, 2020, by and between Nano Magic LLC and NOWaccount Network Corporation

 

31.1*   Rule 13a-14(a)/15d-14(a) Certificate of Principal Executive Officer
     
31.2*   Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer
     
32.1*   Section 1350 Certificate of Principal Executive Officer and Chief Financial Officer
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation
     
101.DEF   XBRL Taxonomy Extension Definition
     
101.LAB   XBRL Taxonomy Extension Labels
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase
     
*   Filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

NANO MAGIC INC.

(Registrant)

   
Date: October 5, 2020 /s/ Tom J. Berman
  Tom J. Berman
  President
   
Date: October 5, 2020 /s/ Leandro Vera
  Leandro Vera
  Chief Financial Officer

 

10

 

 

Exhibit 10.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 10.2

 

PIERCE CAPITAL INVESTING AGREEMENT

 

LESSOR: LESSEE:
Pierce Capital Investing, LLC NANO Magic LLC
9885 Milford Rd             Full Legal Name 31601 Research Park DR.
Holly, Ml 48442 Billing Address

734-502-8342 Madison Heights M1 49071
  City State Zip
  Jacque Soptick Accounting@nanomagic.com
  Send invoice to attention of
  (800) 883 - 6266
  Telephone

 

EQUIPMENT INFORMATION: SEE ATTACHED EXHIBIT A

 

EQUIPMENT LOCATION:

 

NUMBER & AMOUNT OF LEASE PAYMENTS:

 

36   Monthly   36   $1.972.31
Term of Lease in Months   Payment Frequency   Number of Lease Payments   Lease Payment

 

1. LEASE. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Equipment described above and on any attached schedule (herein with all replacement parts, repairs, additions and accessories called “Equipment”) on the terms and conditions set forth in this Lease and on any schedule hereto.

 

2. TERM AND RENT. The term of this Lease shall commence at the time of Lessor’s acceptance of the Lease in writing. The term shall thereafter continue until all obligations of the Lessee under the Lease shall have been fully performed. The first Lease Payment will be applied on the date the Lease is accepted by Lessor or any later date designated by Lessor (“Lease Commencement Date”). The second Lease Payment shall be due on the date designated in writing by the Lessor (not later than 60 days from the Lease Commencement Date) and subsequent payments shall be due on the same day of each successive month (or other time period as designated above) thereafter until the balance of the Lease Payments and any additional Lease Payments or expenses chargeable to Lessee under this Lease shall have been paid in full. Lessee’s obligation to pay such Lease Payments shall be absolute and unconditional and is not subject to any abatement, set-off, defense or counterclaim for any reason whatsoever. All payments hereunder shall be made to Lessor at its address specified above or such other place as Lessor, in writing, directs. If the term is extended, the word “term” as used herein shall be deemed to refer to all extended terms. All provisions of this Lease shall apply during any extended term except as may be otherwise specifically provided in this Lease, in a Schedule to this Lease, or in any subsequent written agreement of the parties. The Lessee is obligated to pay to the Lessor any applicable sales tax on the lease payments as required by state and local laws.

 

3. TITLE, PERSONAL PROPERTY, TAXES AND LOCATION. The Furniture is, and shall at all times be and remain the sole and exclusive property of Lessor, and Lessee, notwithstanding any trade-in or down payment made by Lessee or on its behalf and with respect to the Equipment, shall have no right, title or interest therein or thereto, except as to the use thereof subject to the terms and conditions of this Lease. The Equipment is, and at all times shall remain, personal property notwithstanding that the Equipment or any item thereof may now be, or hereafter become in any manner affixed or attached to, or imbedded in, or permanently resting upon real property or any improvement thereof or attached in any, manner to what is permanent. If requested by Lessor prior to or at any time during the term hereof with respect to any item of Equipment, Lessee will obtain and deliver to Lessor waivers of interest or liens in recordable form, satisfactory to Lessor, from all persons claiming any interest in the real property on which such Equipment is installed or located. The Equipment shall be kept at the address designated in the Lease and shall not be removed therefrom without the prior written consent of the Lessor. The Lessor shall withhold written consent to move the equipment greater than seventy-five (75) miles from an existing Lessor’s office, due to the service commitments listed in this agreement. The Lessee is required to reimburse the Lessor any Personal Property Taxes assessed to the Lessor on the Equipment leased by the Lessee.

 

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4. ASSIGNMENT. This Lease or the rights hereunder shall not be assigned, nor shall the Lessee sublease or lend the Equipment or submit it to be used by anyone other than Lessee’s employees without the prior written consent of Lessor. Lessor may at any time assign all or part of any interest in this Lease and in each item of Equipment and monies to become due to Lessor hereunder; and, Lessor may grant security interest in the Equipment, subject to the Lessee’s rights therein. In such events, all the provisions of this Lease for the benefit of Lessor shall insure to the benefit of and be exercised by or on behalf of such assignee, but the assignee shall not be liable for or be required to perform any of Lessor’s obligations to Lessee. The Lessor may direct that all Lease Payments due and to become due under this Lease and assigned by Lessor shall be paid directly to assignee, upon notice of such assignment to Lessee. The right of the assignee to the payment of assigned Lease Payments and performance of all Lessee’s obligations, and, to exercise any other of Lessor’s rights hereunder shall not be subject to any defense, counterclaim or setoff which the Lessee may have assert against the Lessor, and the Lessee hereby agrees that it will not assert any such defenses, set-offs, counterclaims and claims against the assignee.

 

5. OWNERSHIP OF EQUIPMENT. Upon expiration of the Lease Term, assuming all payments due under the lease have been made, the equipment listed on Exhibit A becomes the sole property of Nano Magic LLC.

 

6. LOSS OR DAMAGE. Lessee hereby assumes and shall bear the entire risk of loss (including theft and requisition of use) or destruction of or damage to the Equipment from any and every cause whatsoever, whether or not insured, until the Equipment is returned to Lessor. NO such loss or damage shall relieve Lessee from any Obligation under this Lease, which shall continue in fill force and effect. In event of damage to or loss or destruction of the Equipment (or any item thereon, Lessee shall promptly notify Lessor in writing of such fact and shall, at the option of Lessor, (a) place the same in good repair, condition and working order, (b) replace the Equipment with like equipment in good repair, condition and working order, acceptable to Lessor and transfer clear title to such replacement equipment to Lessor, whereupon such equipment shall be subject to this Lease and be deemed the Equipment for purposes hereof, or (c) pay to Lessor the total of all unpaid Lease Payments for the entire Lease Term plus the estimated fair market value of the Equipment at the end of the originally scheduled Lease Term, whereupon this Lease shall terminate with respect thereto. All proceeds of insurance received by Lessor as a result of such loss or damage shall, where applicable, be applied toward the replacement or repair of the Equipment or the payment of the obligations of Lessee hereunder.

 

7. INSURANCE. Lessee shall obtain, maintain and keep the Equipment insured against all risks of loss or damage from every cause whatsoever in an amount not less than the actual cash value of the Equipment without deductible and without co-insurance. Lessor, its successors or assigns, shall be the sole named loss payee with respect to insurance for damage to or loss of the Equipment and shall be named as an additional insured on Lessee’s public liability insurance. Lessee shall pay all premiums for such insurance and shall deliver to Lessor certificate of insurance or other evidence satisfactory to Lessor evidencing the insurance required thereby, along, with proof satisfactory to Lessor, of the payment of the premium therefore, provided, however, that Lessor shall be under no duty to ascertain the existence of or to examine such insurance policy or to advise Lessee in the event such insurance coverage shall not comply with the requirement hereof. All insurance shall provide at least sixty (60) days advance written notice to Lessor before any cancellation or material modification thereof. Lessee hereby irrevocably appoints Lessor as Lessee’s attorney-at-fact to make claim for, receive payment of, and execute and endorse all documents, checks or drafts received in payment for loss or damage under any such insurance policy. Unless Lessee is in default, Lessee may with the prior written approval of Lessor, settle and adjust all such claims. Lessee agrees if Lessee shall fail to procure, maintain, and pay for such insurance, Lessor shall have the right, but not the obligation to obtain such insurance on behalf of and at the expense of Lessee. In the event Lessor does obtain such insurance, Lessee agrees to pay all costs thereof with the next Lease Payment.

 

8. INDEMNITY. Lessee shall hold Lessor harmless from, and defend Lessor against any and all claims, actions, suits, proceedings costs, expenses, damages, and liabilities, including attorney’s fees, arising out of, connected with, or resulting from the Equipment or the Lease, including without limitation, the manufacture, selection, delivery, possession, use, operation or return of the Equipment.

 

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9. DEFAULT AND REMEDIES. Ifa petition in bankruptcy, arrangement, insolvency, or reorganization is filed by or against Lessee or any guarantor of Lessee’s obligations hereunder, or if Lessee or any guarantor of Lessee’s obligations makes an assignment for the benefit of creditors or if Lessee defaults in payment required under this Lease or under any other Lease agreement between Lessor and Lessee, Lessee agrees Lessor may exercise any one or more of the following remedies: (a) To declare the entire unpaid balance of Lease Payments for the unexpired term of the Lease immediately due and payable and to similarly accelerate the balances due under any other Leases between Lessor and Lessee with notice of demand. (b) To sue for and recover all Lease Payments and other monies due and to become due under the Lease, plus the estimated fair market value of the Equipment at the end of the originally scheduled Lease Term, all of which shall be discounted to the date of default at six (6%) percent per annum, but only to the extent permitted by law. _(c) To require Lessee to assemble all Equipment at Lessee’s expense, at a place reasonably designated by Lessor. (d) To remove any physical obstructions for removal of the Equipment from the place where the Equipment is located and take possession of any or all items of Equipment, without demand of notice, wherever same may be located, disconnecting and separating all such Equipment from any other property, with or without any court order or pre-taking hearing or other process of law, it being understood that facility of repossession in the event of default is a basis for the financial accommodation reflected by this Lease. Lessee hereby waives any and all damages occasioned by such retaking. Lessee shall also be liable for and shall pay to Lessor (i) all expense incurred by Lessor in connection with the enforcement of any Lessor’s remedies, including all expenses of repossessing, storing, shipping, repairing and selling the Equipment, and (ii) Lessor’s reasonable attorneys’ fees. Lessee acknowledges that Lessor incurs substantial expense in training and retaining qualified personnel and maintaining sufficient inventory or access to such in order to provide the level of service required hereunder for the continued maintenance of the Equipment leased hereunder. Lessee further acknowledges that the Equipment leased hereunder rapidly becomes obsolete due to the constant changing of such technology. Lessor and Lessee both acknowledge the difficulty in establishing a value for the leased Equipment for any unexpired lease term should Lessee default under this Lease and owning to such difficulty both Lessor and Lessee mutually agree and assent that the provisions of this paragraph represent an agreed measure of damages and such agreed measure of damages for default are not to be deemed forfeiture or penalty.

 

Whenever any payment or any other amounts due under this Lease which are not paid when due hereunder by Lessee such amounts not paid shall bear interest at the lower of (i) two percent (2%) per month, or (ii) the highest interest rate allowed by law. Such amount shall be payable in addition to all amounts payable by Lessee as a result of exercise of any of the remedies herein provided.

 

All remedies of Lessor hereunder are cumulative, are in addition to any other remedies provided for by law, and may, to the extent permitted by law, be exercised concurrently or separately. The exercise of any one remedy shall not be deemed to be an election of such remedy or to preclude the exercise of any other remedy. No failure on the part of the Lessor to exercise and no delay in exercising any right or remedy shall operate as a waiver thereof or modify the terms of this Lease. A waiver of default shall not be a waiver of any other or subsequent default. Lessor’s recovery hereunder shall in no event exceed the maximum recovery permitted by law.

 

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10. UCC FILINGS. Lessee authorizes Lessor to file a financing statement with respect to the Equipment signed only by the Lessor where permitted by the Uniform Commercial Code. Lessee hereby appoints Lessor as Lessee’s attorney-in-fact to execute such financing statement on Lessee’s behalf and to do all acts or things which Lessor may deem necessary to protect Lessor’s title and interest hereunder. Lessor and Lessee further agree that a carbon, photographic or other reproduction of this Lease may be filed as a financing statement and shall be sufficient as a financing statement under the Uniform Commercial Code. It is the intent of the parties that this is a true Lease, and the filing of a financing statement under the Uniform Commercial Code shall not be construed as evidence that any security interest was intended to be created, but only to give public notice of Lessor’s ownership of the Equipment. If this Lease shall be deemed at any time to be one intended as security then Lessee hereby grants Lessor a security interest in the Equipment and the proceeds from the sale, lease or other disposition of the Equipment.

 

11. WARRANTY OF BUSINESS PURPOSE. Lessee hereby warrants and represents that the Equipment will be used for business purposes and not for personal, family or household purposes. Lessee acknowledges that Lessor has relied upon this representation in entering into this Lease.

 

12. AUTHORIZATION. Lessee represents and warrants to Lessor that Lessee has complete and unrestricted power to enter into this Lease; that the persons executing this Lease have been duly authorized to execute the same on behalf of Lessee and that all information supplied to Lessor by Lessee is true and correct.

 

13. MISCELLANEOUS. All obligations of the Lessee, of more than one, shall be joint and several. All paragraph headings are inserted for reference purposes only and shall not affect the interpretation or meaning of this Lease.

 

14. NOTICF„ Written notices to be given hereunder shall be deemed to have been given when delivered personally or deposited in the United States mails, postage prepaid addressed to such party at its address set forth above or at such other address as such party may have subsequently provided in writing.

 

15. CHOICE OF LAW. This Lease shall be binding and effective when accepted by Lessor at its corporate office in Livonia, Michigan, shall be deemed to have been made in Livonia, Michigan, and, except for local filing requirements, shall be governed by and construed in accordance with the laws of the state of Michigan. Lessee hereby consents to and agrees that personal jurisdiction over Lessee and subject matter jurisdiction over the Equipment shall be with the courts of the state of Michigan or the Federal District Court for Southeastern Michigan, solely at Lessor’s option, with respect to any provision of this Lease. Lessee also agrees to waive its right to a trial by jury.

 

16. ENTIRE AGREEMENT; NON-WAIVER; SEVERABILITY. This Lease contains the entire agreement and understanding between Lessee and Lessor relating to the subject matter hereof. No agreements or understanding shall be binding on the parties hereto unless set forth in writing and signed by the parties. Time is of the essence in this Lease. No waiver by Lessor of any breach or default shall constitute a waiver of any additional or subsequent breach or default by Lessor nor shall it be a waiver of any of Lessor’s rights. Any provision of this Lease which for any reason may be held unenforceable in any jurisdiction shall, as to such jurisdiction be ineffective to the extent of such unenforceability without invalidating the remaining provisions of this Lease, and any such unenforceability in any jurisdiction shall not render unenforceable such provisions in any other jurisdiction.

 

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Facsimile Signatures: You agree that a facsimile copy of this agreement bearing authorized signatures may be treated as an original.

 

Executed this L day of August 20 29

 

LESSOR: LESSEE:
   
  Nano Magic LLC
Pierce Capital Investing, LLC Legal Name of Lesseee
   
  Tom J. Berman, CEO
  Name of Authorized Singer and Title (Print)
   
By:         By: /s/ Tom J. Berman
      Name of Authorized Singer and Title (Signature)

 

LESSOR: Pierce Capital Investing, LLC 9885

  Milford Rd
  Holly, Ml 48442

 

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NON-APPROPRIATION OF FUNDS ADDENDUM

 

(For School and Government Funded Agencies)

 

This Addendum will becqm part of that certain Equipment Rental Agreement #__________dated as of 8/11/20 (“Agreement”) between Lessor and Nano Magic LLC (“Lessee”). All capitalized terms used in this Addendum w Ich are not defined herein shall have the meanings given to such terms in the Agreement.

 

You hereby represent and warrant to Us that as of the date of the Agreement, and throughout the Agreement Term: (a) the individual who executed the Agreement had at the time of execution of the Agreement full power and authority to execute the Agreement; and that all required procedures necessary to make the Agreement a legal and binding obligation of the Lessee have been followed; (b) the Equipment is essential to the immediate performance of a governmental or proprietary function by You within the scope of Your authority and shall be used during the Agreement Term only by You and only to perform such function; (c) that all payments due and payable for the fiscal year are within the current budget and are within an available, unexhausted and unencumbered appropriation.

 

In the event You are not granted funds in future fiscal years for the Equipment and subject to the Agreement or for equipment which is functionally similar to the Equipment and operating funds are not otherwise available to You to pay the Rent and other payments due under the Agreement, and there is no other legal procedure or available funds by or with which payments can by made to Us, and the appropriation did not result from an act or omission by You, You shall have the right to return the Equipment in accordance with the section in the Agreement titled, Return of Equipment and terminate the Agreement on the last day of the fiscal period for which appropriations were received. At least thirty (30) days prior to the end of Your fiscal year, Your legal counsel shall certify in writing that (a) funds have not been appropriated for the fiscal period; (b) such non-appropriation did not result from any act or failure to act by You; and (c) You have exhausted all funds legally available for payment of Rent. If you terminate this Agreement because of non-appropriation of funds, You may not purchase, lease or rent, during such fiscal period, equipment performing functions similar to those performed by the Equipment for a period of twelve (12) months.

 

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Facsimile Signatures: You agree that a facsimile copy of this agreement bearing authorized signatures may be treated as an original.

 

LESSOR:   LESSEE:
         
By:     By: /s/ Tom J. Berman (on behalf of Nano Magic LLC)
Printed Name:     Printed Name: Tom J. Berman
Title:     Title: CEO
         
Date     Date 8/11/20

 

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Exhibit 10.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 10.4

 

CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT IN ACCORDANCE WITH REGULATION S-K ITEM 601(a)(6) BECAUSE IT WOULD CONSTITUTE A CLEARLY UNWARRANTED INVASION OF PERSONAL PRIVACY. [*] INDICATES THAT INFORMATION HAS BEEN REDACTED.”;

 

 

NOWaccount Network Corporation

2300 Peachtree Road NW Suite C-102 Atlanta, GA 30309

 

www.nowaccount.com

 

Instructions for Completing the

NOWaccount® Merchant Services Agreement and

Client Information Form

 

1. Please read the details of the NOWaccount Merchant Services Agreement (“MSA”) contained in Exhibit A that follows the Cover Page and the Client Information Form.
   
2. Sign the MSA Cover Page.
   
3. Complete the Client Information Form.
   
4. A copy of the signed Agreement will be emailed to you.

 

If there are any questions, please call

the NOWaccount Membership Team at:

 

855-9-NOWHELP (855-966-9435), Extension 3

 

or email us at membership@nowaccount.com.

 

 
 

 

NOWACCOUNT MERCHANT SERVICES AGREEMENT

 

Version 2.2f (March 1, 2019)

 

(Cover Page)

 

By its signature below, the undersigned (“Client” or “we” or “us”) hereby adopts and agrees to be bound by and agrees to all of the terms and conditions set forth in the NOWaccount Merchant Services Agreement, Version 2.2f. rev (August 19, 2020) , attached hereto as Exhibit A (the “MSA”), which terms and conditions are incorporated herein by reference. Each capitalized term used herein and not otherwise defined herein has the meaning given to it in the MSA.

 

We request that payments of the Purchase Price and other payments to be credited or debited to our account accordance with the MSA be credited or debited to the bank deposit account listed Bank ACH Deposit Directions form, attached hereto.

 

The MSA shall not become effective until accepted by NOW in Atlanta, Georgia, notice of which acceptance is hereby waived by us.

 

IN WITNESS WHEREOF, the undersigned has caused the MSA to be signed, sealed and delivered on the date specified below.

 

  Authorized Signatory:
   
Date: _____9-1-20________ ___, 20___ /s/ Tom J. Berman
     
Legal Name of Business: Nano Magic LLC    
     
  Title: President & CEO
  [Seal]

 

   
   
Company EIN: _[*]__  

 

Accepted in Atlanta, Georgia, as of the date specified above:
     
NOWaccount Network Corporation  
     
By: /s/ Earl Camp  
Name: Earl Camp  

 

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Client Information Form and ACH Deposit Directions

 

What do you expect your total revenue (sales) to be for the next 12 months? $___[*]__________. (We need this information to estimate how much capital and customer credit to allocate for your businesses.)

 

Please provide the information on the bank deposit account where the funds from

 

NOWaccount will be deposited via ACH or wire, if you request a wire. Please note that some banks have ACH and wire deposit bank numbers that are different from the routing numbers on the face of a check. (We will debit the amount of the Annual NOW Network Membership Fee from this account to verify. Please let us know the exact date of the debit to complete this process.)

 

Either:

 

  Email to start@nowaccount.com a voided copy (picture is fine) of your check for the deposit account, or
     
  Provide the information below:

 

Deposit Account in Name of _____[*]__________________________________________

 

(This is usually the business legal name)

 

Bank Deposit Account Number: [*] __________________________

 

ACH Routing Number (9 digits): [*]__________________ (See directions below) *Wire Routing Number (Verify with your bank): _____________________(See asterisk below)

 

(Please see next page for example of Deposit Account Number and Routing Code)

 

Name of Financial Institution: _____[*]_______

_____________________________________________________________________

 

Address of Financial Institution:

* Bank wire routing numbers may be different from ACH routing numbers.

 

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Finding Routing Numbers and Account Numbers

 

The following example shows where to find the Account Number and the 9 digit ACH Routing Number on most checks. The ACH Routing Number is the one usually found on checks, but NOT the one found on deposit slips.

 

Note that some financial institutions have a separate routing number for ACH deposits and Wire Transfers. NOWaccount will make deposits to your account via ACH unless you request a Wire Transfer. (A fee applies for each Wire Transfer – See Schedule 1 for Fees.). We may ask you to contact your bank to obtain the correct routing numbers before we can transfer funds.

 

You may also send a copy (picture is fine) of a voided check for us to double check the routing and account numbers. If you send the voided check, please also complete the form above.

 

 

Please email: start@nowaccount.com if help is needed!

 

Exhibit A

NOWaccount® Merchant Services Agreement

Version 2.2f. rev (August 19, 2020)

 

1. DEFINITIONS. Capitalized terms not herein defined shall have the meaning set forth in the Uniform Commercial Code as adopted and in force in the State of Georgia (the “UCC”). The terms “you” and “your” and “Seller” mean the organization executing this Agreement; and the terms “us” and “we” and “NOW” mean NOWaccount Network Corporation, a Delaware business corporation with its principal place of business in Atlanta, Georgia. In addition, the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural, and vice versa):

 

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“Account Related Property” means, with respect to any Purchased Account owed by a Buyer, all of your rights, interests, securities, guaranties and Liens with respect to such Account, including (a) all unpaid seller’s rights (including rights of rescission, replevin, reclamation, and stoppage in transit), (b) all claims of Lien filed or held by you on any property of the Buyer or any other Person, (c) all rights and interests in the Inventory sold to the extent returned by or repossessed from the Buyer, (d) all rights, remedies and benefits under all instruments or agreements between you and the Buyer, (e) all Documents, Instruments, Chattel Paper (including Electronic Chattel Paper), General Intangibles (including Payment Intangibles) that are given to evidence the terms or amount of payment or the terms of sale in respect of such Account, and (f) without duplication, all Supporting Obligations and Letter-of-Credit Rights related to or assuring payment of such Account.

 

“Applicable Law” means any law, rule, or regulation (whether state, federal or foreign) that may be applicable to the agreement, conduct, transaction, proceeding, other matter in question.

 

“Application” means the application made by you to us for the establishment of a NOWaccount.

 

“Books and Records” has the meaning given to it in Section 22 hereof.

 

“Buyer” means a Person to whom you sell Inventory or render services in the ordinary course of your business (each such Buyer being an “account debtor” as defined in the UCC) identified on Schedule 3 as amended from time to time by agreement of the parties.

 

“Buyer Claims” has the meaning given to it in Section 9 hereof.

 

“Buyer Credit Line” means, with respect to any Buyer, a credit line authorized by our credit department with respect to such Buyer.

 

“ Collateral “ has the meaning given to it in Section 19 hereof.

 

“Contract Year” means period beginning on the acceptance of this Agreement by NOW and ending twelve (12) months thereafter.

 

“Cover Page of this Agreement” means a page to which this Agreement is attached that references and incorporates the terms and conditions set forth herein (whether that page exists in physical form or electronic form) and is executed between you and us, such execution witnessed by physical signatures, electronic signatures pursuant to the Uniform Electronic Transaction Act, or otherwise.

 

“Credit Approval” means, with respect to any Buyer, a credit approval by our Credit Department of the Buyer, your terms of sale to such Buyer, and the amount and duration of a Buyer Credit Line for such Buyer.

 

“Event of Default” has the meaning given to it in Section 26 hereof.

 

“Funding Source” has the meaning given to it in Section 25 hereof.

 

“Immediate Payment” has the meaning given to it in Sections 3 and 14 hereof.

 

“Insolvency Proceeding” means a case or proceeding that is filed by or against a Person under any Applicable Law: (i) to obtain the appointment of a receiver, custodian, trustee or conservator for such Person or any such Person’s assets; (ii) as an assignment or trust mortgage for the benefit of creditors of such Person; or (iii) for an order for relief under the Bankruptcy Code or any other insolvency law.

 

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“Lien” means a security interest, mortgage, or statutory lien or other encumbrance, whether arising by contract or under Applicable Law.

 

“NOW Risk Account” has the meaning given to it in Section 5 hereof.

 

“NOWaccount” means the services provided to the Seller under this Agreement.

 

“Obligations” means all indebtedness, liabilities and other obligations owed by you to us at any time or times, whether due or to become due, absolute or conditional, direct or indirect, secured or unsecured and whether arising or incurred under this Agreement, any other agreement or otherwise, including all fees and charges set forth in Section 23 hereof and charge-backs under Section 16 hereof.

 

“Online System” has the meaning given to it in Section 4 hereof.

 

“Other Funding Source” has the meaning given to it in Section 25 hereof.

 

“Payment Admin Account” has the meaning given to it in Section 3.

 

“Person” means any individual or entity, including a corporation, partnership, limited liability company, trust or state, federal or foreign government or any agency, department or subdivision thereof.

 

“Purchased Account” has the meaning given to it in Section 3 hereof.

 

“Purchase Price” has the meaning given to it in Section 11 hereof.

 

“SBCC” has the meaning given to it in Section 25 hereof.

 

“Seller Credit Line” has the meaning given to it in Section 21 hereof.

 

“Statement of Account” has the meaning given to it in Section 18 hereof.

 

2. TERM; TERMINATION. This Agreement shall remain effective for a term of two (2) years, unless sooner terminated as provided herein. At least thirty (30) days prior to the expiration of the term of this Agreement, we will review your status with us and notify you if we will not be able to renew this Agreement. You may terminate this Agreement at any time by giving us at least fifteen (15) days prior written notice, provided that on or before the effective date of such termination you have paid all Obligations in full and all NOW Risk Accounts are paid in full. Any notice of termination is ineffective and shall not be recognized as long as there are Obligations and NOW Risk Accounts outstanding. We may terminate this Agreement immediately, without prior notice to you, upon or after the occurrence of an Event of Default. All Obligations shall become immediately due and payable upon any termination of this Agreement without further notice to or demand upon you. Upon termination of this Agreement, we will not purchase from you any new Accounts. Upon payment in full of all Obligations, we shall record any terminations or satisfactions of any Lien we hold in your property (other than Purchased Accounts and Account Related Property in respect of Purchased Accounts). All of our rights, remedies and Liens hereunder shall continue in full force and effect after any termination of this Agreement. No termination of this Agreement shall diminish, release or otherwise affect any of our rights, remedies, Liens, powers, or privileges hereunder, or any of your covenants, duties or Obligations hereunder, until indefeasible payment in full of all of the Obligations.

 

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3. SALE OF ACCOUNTS. You agree to sell and assign to us, and, subject to all of the terms and conditions hereof, we agree to purchase as absolute owner, all Accounts at any time due from each Buyer identified on Schedule 3, to the extent that such Accounts qualify as Immediate Payment Accounts (also called PaymentNOW accounts) and arise from your sales of Inventory or your rendition of services to that Buyer in the ordinary course of your business, including any sales made by you under any trade names (including any trade names listed on Cover Page of this Agreement), through any divisions and through any selling agent (such Accounts purchased by us are referred to as the “Purchased Accounts” and individually as a “Purchased Account”). Other accounts owed to you from those Buyers will be Payment Admin Accounts under this Agreement (Payment Admin Accounts). You agree to deliver to each Buyer under a Purchased Account, and concurrently deliver a copy of us, no later than thirty (30) days after delivery of the goods or completion of the services for which the Purchased Account arises an invoice or other request for payment, in a form acceptable to us and you agree to give us copies of invoices for all Payment Admin Accounts..
   
  Each such sale, assignment, and transfer automatically shall become effective upon the creation of the respective Purchased Account, and is intended to be unconditional, absolute, and remain effective in accordance with the terms of this Agreement even if a bankruptcy case is filed by or against you or you otherwise become insolvent. You irrevocably authorize us to file financing statements, and all amendments and continuations with respect thereto, to perfect our ownership of the Purchased Accounts. You will notify us of the existence of each Purchased Account by sending us copies of the invoice and files as specified in Sections 4 and 22. Each Purchased Account will be for a Buyer who is credit approved as provided in Section 4 hereof so that it is “Immediate Payment and a NOW Risk Account as provided in Section 5. Other accounts due from that Buyer will not be purchased accounts, but will be Payment Admin Accounts under this Agreement.
   
4. CREDIT APPROVAL. Requests for Credit Approval for any Buyer to be added to Schedule 3 must be submitted to our Credit Department via our Online System URL specified on the Cover Page of this Agreement or such other URL as we may direct (“Online System”). All credit decisions by our Credit Department (including approvals, declines, or holds) will be sent to you via the Online System by a Credit Decision Report, which constitutes the official record of our credit decision. Credit Approvals will be effective only for Accounts that represent sales of Inventory or services to Buyers whose principal place of business, primary assets and jurisdiction of organization is in the United States of America, Canada, or a country listed in the Country List published on the Online System as updated from time to time (excluding private individuals not carrying out a commercial activity). We may in our discretion at any time withdraw Credit Approval of any Buyer or terms of sale to such Buyer and reflect the change on the Online System. Withdrawal of Credit Approval of a Buyer will not change the terms applicable to a NOW Risk Account in existence immediately prior to such withdrawal being reflected on the Online System.
   
5. CREDIT RISK. Subject to our rights of charge-back under Section 16 hereof, we assume the Credit Risk on all Immediate Payment Accounts for each Buyer that is credit approved at the time the Accounts are purchased as and to the extent stated in the Credit Decision Report. “Credit Risk” means, with respect to any Purchased Account, the Buyer’s failure to pay the Purchased Account when due by its longest maturity date solely because of the Buyer’s financial inability to pay. A Purchased Account on which we bear the Credit Risk is a “NOW Risk Account” and all Purchased Accounts hereunder will be NOW Risk Accounts. If there is any change in the amount, terms, shipping date, or delivery date for any shipment of Inventory or rendition of services (other than accepting returns and granting allowances as provided in this Agreement), you must submit a change of terms notice to us in writing. If any NOW Risk Account is not paid for any reason other than Credit Risk (including as a result of any Buyer Claims), you will promptly notify us and we will on discovery charge your account accordingly, and we shall have the rights provided for in this Agreement with respect to such NOW Risk Account, including, but not limited to, charge-back rights as provided in Section 16.

 

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6. NO LIABILITY; NO FIDUCIARY DUTIES. We will have no liability to you or to any other Person for declining, withholding, or withdrawing Credit Approval of any Buyer, or declining to approve or reducing the amount of any requested Buyer Credit Line. If we decline to approve credit on a Buyer and furnish to you any information regarding the credit standing of that Buyer, such information is confidential, and you agree not to reveal same to any Person other than the Buyer or your sales agent. You agree that we have no obligation to perform, in any respect, any of your contracts or obligations relating to any Accounts, whether or not the same are Purchased Accounts. You acknowledge and agree that we have no fiduciary duties to you, and any sums that we may be required to pay or turn over to you at any time shall be owed solely pursuant to a debtor/creditor relationship.
   
7. BUYER NON-APPROVAL. We will not grant Credit Approval (and any Credit Approval that is granted by us shall be deemed to have been withdrawn without notice to you) for any Buyer if at the time such Buyer is submitted to us for such Credit Approval: (a) payment of any Account that is proposed for purchase by us is overdue, (b) any other Account owing by such Buyer to you is ninety (90) days or more overdue, (c) the due date of any Account owing by such Buyer to you that is proposed for purchase is more than ninety (90) days from invoice date. In addition, we will not grant Credit Approval for a Buyer if when submitted for Credit Approval if (d) the amount of the Account would increase our exposure to the Buyer beyond the Buyer Credit Line for such Buyer, or (e) any of the following apply with respect to such Buyer: (i) an Insolvency Proceeding is filed by or against such Buyer; (ii) there is outstanding against such Buyer or any of its assets an unsatisfied order or judgment of a court or award of an arbitrator; (iii) the Buyer has made an offer of settlement or compromise to its creditors generally (or a majority thereof), whether or not such offer of settlement or compromise has become final and binding; (iv) if such Buyer is an individual (whether or not operating a business under a trade name or as a sole proprietor), such Buyer absconds, is adjudicated mentally incompetent by a court or law, or dies; (v) all or a material part of the assets of such Buyer are subject to a local, state, federal or foreign Lien for unpaid taxes that are not being actively contested in good faith and by appropriate proceedings; (vi) such Buyer sells, assigns or otherwise transfers, in bulk, all or a substantial part of such Buyer’s stock in trade or proposes to do so; (vii) such Buyer has been indicted or convicted of a crime that is punishable as a felony under the laws of the applicable jurisdiction; (viii) an event has occurred elsewhere than in the United States of America, which is, in our sole opinion, substantially equivalent in effect under Applicable Law to any of the events listed above; or (ix) such situations or events occur or are threatened which, in our sole opinion, impair the credit, trustworthiness, or integrity of such Buyer or any of its principals.

 

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8. INVOICING; STATEMENTS; NOTICES. You agree to place a conspicuous notice (in form and content acceptable to us and as initially specified on Schedule 1 of this Agreement and as we may specify from time to time on the Online System) on each invoice (including invoices transmitted to your Buyers electronically), or other request for payment, that the Purchased Account and any Payment Admin Account is payable only at the address and in the manner specified on Schedule 1 of this Agreement or as otherwise specified by us, and, at our election, that such Purchased Account is sold and assigned to us (or a party we designate); and you agree to take all steps necessary to instruct Buyers to make all payments and remittances to us, including at our sole discretion and at our sole expense the use of third-party notification or remittance security services. We may, in our sole discretion, change at any time the notice specified herein and the remittance address. Unless we otherwise direct, all invoices for Buyers will be promptly mailed or otherwise transmitted by you to us after delivery to your Buyers. You will provide us, within five (5) business days after our request therefor, with paper or electronic copies of all confirmation of the sale of the Purchased Accounts to us, proof of shipment, proof of delivery, proof of rendering service, and other documents relating to the sale or services, all as we may request. If you fail to provide us with copies of such invoices or other requests for payment, or such proof or documents as we request, on a timely basis after requested by us, the Purchased Accounts of those Buyers will be subject to our charge-back rights under Section 16. At our sole discretion, we may send to Buyer a statement of account of their Accounts on a monthly or other basis; and such statements may bear your name as the Seller and our remittance addresses and telephone numbers. You agree that we can disclose to Buyer, and send to any Buyer notices of, the sale and assignment of any Purchased Account at any time or times, and we will be free to inform any Buyer of the sale of such Accounts upon inquiry by Buyer.
   
9. ACCOUNT REPRESENTATIONS AND WARRANTIES. You represent and warrant to us that (a) each of your Accounts with a Buyer arises from a bona fide sale and delivery of Inventory or rendition of services made by you in the ordinary course of your business, and no such sale and delivery of Inventory or rendition of services is unlawful or illegal; (b) any Inventory being sold by you to a Buyer and each Purchased Account created and Purchased Account Related Property are your exclusive property and are not, and will not be, subject to any Lien or consignment arrangement other than Liens in favor of us and Liens otherwise disclosed to us in writing prior to your entering into this Agreement; (c) all amounts in respect of your Accounts with Buyers are due and payable in U.S. dollars; (d) all original invoices with respect to Purchased Accounts conform to the notice requirements of Section 8; (e) any taxes or fees relating to your Accounts or Inventory are solely your responsibility; (f) none of the Purchased Accounts represents a sale to any subsidiary, affiliate, or parent company of Seller; (g) you have absolute and indefeasible ownership in, and title to, all of your Accounts with Buyers, with full right and power to assign, transfer, and sell them to us (and, upon your sale of such Accounts to us, they shall be), free and clear of all Liens other than Liens disclosed to us in writing prior to your entering into this Agreement; and (h) if you have disclosed a Lien pursuant to Section 9(b) other than a Lien in favor of us, your sale of Accounts to us that are subject to any such Lien and our receipt and retention of the proceeds of such Purchased Account does not violate the terms of any agreement that you have with the holder of such Lien. You also warrant and represent that with respect to all Accounts with Buyers: your Buyers have accepted the goods or services and owe and are obligated to pay the full amounts stated in the invoices according to their terms, without dispute, claim, offset, defense, deduction, rejection, recoupment, counterclaim, or contra account, other than as to returns and allowances as provided in this Agreement (the foregoing being referred to as “Buyer Claims”).

 

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10. SELLER REPRESENTATIONS AND WARRANTIES; INFORMATION COVENANTS. In addition to all other representations and warranties that you have made to us in writing or by electronic means, you further represent and warrant that (a) your legal name is exactly as set forth on Cover Page; (b) you are a duly organized and validly existing business organization incorporated, registered, or otherwise lawfully organized in the state set forth on the Cover Page or in the Application, and are qualified to do business in all states where required; (c) all information provided in the Application or any other document submitted to us is true and complete and accurately and properly reflects your business, financial condition, and principal partners, owners, and officers; (d) each Person signing this Agreement on your behalf has the authority to execute and perform this Agreement and the power to bind you to all provisions of this Agreement; (e) your signature and performance of this Agreement will not violate any Applicable Law or conflict with any other agreement to which you are subject; (f) there is no action, suit, or proceeding pending or, to your knowledge, threatened against you or any of your property which if decided adversely would impair your ability to carry on your business as presently conducted or adversely affect your financial condition or operations; and (g) the most recent financial statements provided by you to us from time to time accurately reflect your financial condition as of that date and there has been no material adverse change in your financial condition since the date of those financial statements. You shall furnish us, via our Online System where possible, with such information concerning your business affairs, financial condition, and the Collateral as we may reasonably request from time to time, including quarterly financial statements in an electronic form and final annual financial statements as of the end of each of your fiscal years. You shall promptly notify us of any changes in or to the following: your name, state of organization, location of and contact information for your chief executive office, place(s) of business, and legal or business structure and of any change in control of the ownership of your business organization, any material adverse change in your business, and of lawsuits, proceedings, or other legal claims asserted against you or any of your assets.
   
11. PURCHASE PRICE FOR ACCOUNTS. The purchase price for each Purchased Account shall be the gross amount of the invoice less (a) discounts (calculated on the shortest terms), credits, allowances, present or future taxes, levies, imposts, duties, fees, assessments, deductions, retainage, offsets, withholdings or similar charges, or other discounts available to or taken by a Buyer, and (b) our fees and other charges pursuant to Section 23 hereof (the “Purchase Price”). Our purchase of the Purchased Accounts will be reflected on the Statement of Account (defined in Section 18 below), which we shall render to you via our Online System. You will promptly update the Online System to reflect all credits and discounts made available to your Buyers.
   
12. [Reserved.]
   
13. PAYMENT OF OBLIGATIONS; RECOUPMENT AND SET-OFF. All Obligations and any other amounts you owe us, including any debit balance in your Seller Position Account (described in Section 18 below), are payable upon termination of this Agreement whether or not demand for payment thereof has ever been made. All Obligations shall be deemed to be and shall be treated as loans or other extensions of credit by us to you. We have the right of recoupment and set-off, which means that we may offset any outstanding Obligations against any amounts we would otherwise be obligated to pay you, under this Agreement, provided that prior to termination of this Agreement or default, offset will be limited as stated in Section 16. Our rights in this Section are not intended to be exclusive of each other or of any of our other rights and remedies in this Agreement, at law or in equity; rather, each of our rights under this Agreement, at law or in equity, is concurrent with and in addition to every other right.

 

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14. TIMING AND REMITTANCE OF ACCOUNT PAYMENTS. We will pay you the Purchase Price of such Purchased Account by remittance to you or to the bank account you designate on the Cover Sheet or otherwise in writing to us, provided that, if we receive notice of the existence of any Lien in respect of any Purchased Account, we may, in our discretion, remit such payment to the holder of such Lien and, if the amount of such payment exceeds the amount secured by such Lien, we shall have no liability to you and you shall address and resolve any claim for such excess solely and directly with such holder. We will remit to you for Immediate Payment, the Purchase Price, within five (5) business day after we purchase an Account. Notwithstanding the foregoing, if the aggregate amount of Immediate Payment Purchased Accounts owed by a Buyer on any date exceeds the Buyer Credit Line for such Buyer in effect on that date, we may defer payment of the Purchase Price on Immediate Payment Purchased Accounts owed by such Buyer until such time as the aggregate amount of Immediate Purchased Accounts owed by such Buyer is equal to or less than the Buyer Credit Line for such Buyer and, until that time, the Account will be a Payment Admin Account. Subject to charge-backs under Section 16, we will remit to you promptly, and in any even within five (5) business days after receipt, Payments we receive from Buyers with respect to Payment Admin Accounts.
   
15.

BUYER CLAIMS AND CREDIT MEMOS. You shall notify us promptly of any matter affecting the validity, enforceability, or collectability of any Purchased Account, including all Buyer Claims. You shall promptly issue credit memoranda or otherwise adjust each Purchased Account upon accepting returns or granting allowances with respect thereto. We shall cooperate with you