The following is management's discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying unaudited condensed consolidated financial statements. OVERVIEWNano Magic develops, commercializes, and markets consumer and industrial products enabled by nanotechnology that solve everyday problems for customers in the optical, transportation, military, sports and safety industries. Our primary business is the formulation, marketing and sale of products enabled by nanotechnology including the ULTRA CLARITY brand eyeglass cleaner, CLARITY DEFOGIT brand defogging products and CLARITY ULTRASEAL nanocoating products for glass and ceramics. We also sell an environmentally friendly surface protector, fortifier, and cleaner. EffectiveMay 31, 2022 , we sold a majority interest in our subsidiary,Applied Nanotech, Inc. ("ANI"). ANI performs contract research services for the Company and for governmental and private customers and that work was previously reported as our Contract research segment. We retain a 30% interest in ANI that is now recorded as an equity investment. RESULTS OF OPERATIONS The following comparative analysis on results of operations was based primarily on the comparative condensed consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. The results discussed below are for the three and six months endedJune 30, 2022 and 2021.
Comparison of Results of Continuing Operations for the Three and Six Months
ended
Revenues:
For the three and six months ended
Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Total revenue$ 493,782 $ 1,056,653 $ 1,012,925 $ 3,127,748
For the three months endedJune 30, 2022 , sales from continuing operations decreased by$562,871 or 53% as compared to the three months endedJune 30, 2021 . For the six months endedJune 30, 2022 revenues decreased by$2,114,823 or 68%, as compared to the six months endedJune 30, 2021 . The decreases were due to the high sales of anti-fog products during the first half of 2021 when masks were required in many situations due to the COVID-19 pandemic. Cost of sales Cost of sales includes inventory costs, materials and supplies costs, internal labor and related benefits, subcontractor costs, depreciation, and overhead and shipping and handling costs incurred. Three Months ended June 30, Six Months ended June 30, 2022 2021 2022 2021 Cost of sales:$ 458,330 $ 474,466 $ 990,894 $ 1,583,538 For the three months endedJune 30, 2022 , cost of revenues decreased by$16,136 or 3% as compared to the three months endedJune 30, 2021 . For the six months endedJune 30, 2022 , cost of revenues decreased by$592,644 or 37% as compared to the six months endedJune 30, 2021 . Cost of sales decreased as sales volume dropped, but did not reduce proportionately because of overhead and other fixed production costs. We saw some price increases and shortages for some of our raw materials and packaging during the COVID-19 pandemic and the ongoing supply chain disruption, but thus far we have been able to obtain adequate supply.
4
Gross profit and gross margin
For the three months endedJune 30, 2022 , gross profit was$35,452 as compared to$582,187 for the prior year, a decrease of$546,735 or 94%. For the three months endedJune 30, 2022 gross margin was 7.2% as compared to 55.1% in 2021. For the six months endedJune 30, 2022 , gross profit was$22,031 as compared to$1,544,210 for the prior year, a decrease of$1,522,179 or 99%. For the six months endedJune 30, 2022 gross margin was 2.2% as compared to 49.4% in the prior year. For the three- and six-month periods the decreases were due to lower sales volumes as well as product mix. Operating expenses For the three months endedJune 30, 2022 , operating expenses decreased by$424,823 or 33% compared to the three months endedJune 30, 2021 . Similarly, for the six months period operating expenses decreased by$313,139 or 14% for the period endedJune 30, 2022 , as compared to the six months endedJune 30, 2021 . For the three and six months endedJune 30, 2022 and 2021, operating expenses consisted of the following: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021
Selling and marketing expenses
760,164 819,339 1,290,543 Research and development 3,211 7,437 10,700 9,313 Professional fees 188,794 202,934 442,773 408,900 General and administrative expenses 211,463 269,851
463,261 439,066 Total$ 855,887 $ 1,280,710 $ 1,911,903 $ 2,225,042
? For the three months ended
increased by$55,977 or 139% as compared to the three months endedJune 30, 2021 , due to increased marketing expenses, sales consultants and trade show expenses. For the six months endedJune 30, 2022 , selling and marketing expenses increased by$98,610 or 128% as compared to the six months endedJune 30, 2021 , due to the foregoing factors.
? For the three months ended
benefits decreased by
ended
wages and related benefits decreased by$471,204 or 37%, as compared to the six-months endedJune 30, 2021 . These decreases were due to lower bonus and equity compensation expenses, and reduced hiring in light of lower sales volumes. ? For the three months endedJune 30, 2022 , research and development costs
decreased by
2021. For the six months ended
costs increased by
30, 2021. The changes were due to the timing of expenses in the course of
ongoing work.
? For the three months ended
the six months ended
or 8%, as compared to the six months ended
due to ongoing legal expenses related to our challenge to the
suspension and additional trademark expenses in 2022.
? For the three months ended
expenses decreased by
For the six months ended
expenses increased by
June 30, 2021 . The changes were due to increased costs on recurring expenses. Loss (income) from operations As a result of the factors described above, for the three months endedJune 30, 2022 , loss from operations amounted to$820,435 as compared to a loss of$534,003 for the three months endedJune 30, 2021 , a change of$286,432 or 54%. For the six months endedJune 30, 2022 , loss from operations amounted to$1,889,872 as compared to a loss of$180,295 for the six months endedJune 30, 2021 , an increase of$1,709,577 or 948%. 5
Loss (income) on investment in subsidiary
As a result of the sale of a 70% interest in ANI , we now report our 30% share of ANI's income or loss as an investment in a subsidiary. For the three and six months endedJune 30, 2022 that was a loss of$3,161 . Interest expense For the three months endedJune 30, 2022 interest expense was$8,337 as compared to$4,588 , and for the six months endedJune 30, 2022 interest expense was$15,635 up from$9,995 in the prior year. The increases were due to increased interest expense for financing leases. Other income For the three months endedJune 30, 2022 , other income was$3,886 as compared to$10 for the three months endedJune 30, 2021 . For the six months endedJune 30, 2022 , other income was$2,625 as compared to$10 for the six months endedJune 30, 2021 .
Loss from continuing operations
As a result of the foregoing, we reported a loss from operations of$828,047 for the three-month period endedJune 30, 2022 and a loss of$538,581 for the three-month period in the prior year, an increase of$289,465 or 54%. For the six-month period endedJune 30, 2022 our loss from continuing operations was$1,906,043 as compared to$190,280 for the six-month period endedJune 30, 2021 , an increase of$1,715,763 or 902%.
Income (loss) from discontinued operations
EffectiveMay 31, 2022 , we sold a 70% interest in our subsidiary ANI to two of its officers and long-time employees in exchange for a promissory note in the face amount of$450,000 . We recognized a one-time gain on the sale from this operation of$1,148,255 in the period endedJune 30, 2022 . On a continuing basis, we recognized a loss on that investment of$13,045 for the three-month period endedJune 30, 2022 and on a comparative basis a gain of$64,984 for the three-month period endedJune 30, 2021 . For the six months endedJune 30, 2022 we had income from discontinued operations of$1,300 and income of$87,080 on a comparative basis for the three-month period endedJune 30, 2021 . Net loss (income) For the three months endedJune 30, 2022 , net income was$(307,133) as compared to a net loss of$473,597 for the three months endedJune 30, 2021 . For the six months endedJune 30, 2022 , net loss amounted to$756,518 as compared to a loss of$103,200 for the six months endedJune 30, 2021 . The difference was primarily attributed to the one-time gain of$1,148,225 recognized on the sale of ANI in the three and six months endedJune 30, 2022 , offset by higher losses from operations of$286,431 and$1,709,577 in the three and six-months endedJune 30, 2022 as compared to the three and six-months endedJune 30, 2021 .
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had working capital of$1,174,129 and$392,530 of unrestricted cash as ofJune 30, 2022 and working capital of$1,003,127 and$197,932 of unrestricted cash as ofDecember 31, 2021 .
The following table sets forth a summary of changes in our working capital from
December 31, 2021 to June 30, 2022 Change in Working Percentage June 30, 2022 December 31, 2021 Capital Change Working capital: Total current assets$ 2,178,007 $ 2,156,666$ 21,341 0.99 % Total current liabilities 1,003,878 1,153,539 (149,661 ) (12.97 )% Working capital:$ 1,174,129 $ 1,003,127$ 171,002 17.05 % 6 Current assets were essentially flat. The decrease in current liabilities was an increase in accounts payable offset by a decrease in advances from related parties and the elimination of the current liabilities of ANI as a result of the sale of a 70% interest in that subsidiary. Net cash used by operating activities was$(1,163,180) for the six months endedJune 30, 2022 as compared to net cash used by operating activities of$(42,736) for the six months endedJune 30, 2021 , a net change of$(1,205,916) or (2,822)%. Net cash used by operating activities for the six months endedJune 30, 2022 primarily resulted from net loss from continuing operations of$(1,906,043) offset by net income from discontinued operations of$1,149,525 adjusted for add-backs of$195,740 and changes in operating assets and liabilities of$618,068 . Net cash used by continuing investing activities was$(4,910) for the six months endedJune 30, 2022 , as compared to net cash used by continuing investing activities of$(62,640) for the same period in 2021. Net cash used by discontinued investing activities was$0 and$(243) for the six months endedJune 30, 2022 andJune 30, 2021 , respectively. Net cash provided by continuing financing activities was$1,298,146 for the six months endedJune 30, 2022 reflecting$1,385,000 in proceeds from sales of common stock, warrants and convertible notes, as compared to net cash provided by continuing financing activities of$1,435,527 for the same period in 2021. Net cash provided by discontinued financing activities was$20,000 and$76,305 for the six months endedJune 30, 2022 andJune 30, 2021 , respectively.
Future Liquidity and Capital Needs.
Our principal future uses of cash are for working capital requirements, including working capital to support increased product sales, sales and marketing expenses and reduction of accrued liabilities. Application of funds among these uses will depend on numerous factors including our sales and other revenues and our ability to control costs. Equipment Financing and Loans
See note 6 to our unaudited condensed consolidated financial statements regarding our equipment loan and financing leases.
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder's equity or that are not reflected in our consolidated unaudited financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
© Edgar Online, source