C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,442,998
|
)
|
|
$
|
(3,100,148
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
4,944
|
|
|
|
8,487
|
|
Amortization of debt discount to interest expense
|
|
|
-
|
|
|
|
305,438
|
|
Accretion of preferred shares stated value to interest expense
|
|
|
-
|
|
|
|
40,217
|
|
Stock-based compensation
|
|
|
3,953,672
|
|
|
|
670,202
|
|
Stock-based professional fees
|
|
|
261,467
|
|
|
|
45,000
|
|
Bad debt expense
|
|
|
35,000
|
|
|
|
-
|
|
Interest expense related to put premium on convertible debt
|
|
|
-
|
|
|
|
47,870
|
|
Derivative expense
|
|
|
-
|
|
|
|
744,028
|
|
Non-cash gain on debt extinguishment
|
|
|
-
|
|
|
|
(110,408
|
)
|
Non-cash fees upon conversion
|
|
|
-
|
|
|
|
1,750
|
|
Lease costs
|
|
|
(444
|
)
|
|
|
267
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(23,729
|
)
|
|
|
122,966
|
|
Inventory
|
|
|
3,128
|
|
|
|
(160,108
|
)
|
Prepaid expenses and other assets
|
|
|
7,724
|
|
|
|
6,972
|
|
Due from related party
|
|
|
(7,041
|
)
|
|
|
-
|
|
Accounts payable
|
|
|
70,436
|
|
|
|
211,741
|
|
Accrued expenses
|
|
|
36,378
|
|
|
|
78,045
|
|
Deferred revenue
|
|
|
-
|
|
|
|
2,275
|
|
Accrued compensation
|
|
|
309,500
|
|
|
|
434,260
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(791,963
|
)
|
|
|
(651,146
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
-
|
|
|
|
441,000
|
|
Proceeds from sale of series A preferred stock
|
|
|
-
|
|
|
|
120,000
|
|
Proceeds from sale of series C preferred stock
|
|
|
250,000
|
|
|
|
-
|
|
Proceeds from note payable
|
|
|
500,000
|
|
|
|
156,200
|
|
Proceeds from convertible notes payable
|
|
|
-
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
750,000
|
|
|
|
817,200
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH
|
|
|
(41,963
|
)
|
|
|
166,054
|
|
|
|
|
|
|
|
|
|
|
CASH, beginning of period
|
|
|
323,407
|
|
|
|
77,211
|
|
|
|
|
|
|
|
|
|
|
CASH, end of period
|
|
$
|
281,444
|
|
|
$
|
243,265
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,371
|
|
|
$
|
273
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Common stock issued as prepaid for services
|
|
$
|
79,800
|
|
|
$
|
50,000
|
|
Common stock issued for accrued compensation
|
|
$
|
40,626
|
|
|
$
|
-
|
|
Series B preferred stock issued for accrued compensation
|
|
$
|
295,000
|
|
|
$
|
-
|
|
Common stock issued for accounts payable
|
|
$
|
117,838
|
|
|
$
|
6,058
|
|
Common stock issued for debt and accrued interest
|
|
$
|
-
|
|
|
$
|
102,335
|
|
Common stock issued for conversion of Series A preferred shares and related dividends
|
|
$
|
-
|
|
|
$
|
162,792
|
|
Reclassification of put premium to equity
|
|
$
|
-
|
|
|
$
|
37,438
|
|
Preferred stock dividend accrued
|
|
$
|
21,816
|
|
|
$
|
-
|
|
Deemed dividend related to beneficial conversion feature of Series C preferred shares
|
|
$
|
2,845,238
|
|
|
$
|
-
|
|
Increase in debt discount and derivative liability
|
|
$
|
-
|
|
|
$
|
85,502
|
|
Increase in debt discount and paid-in capital for warrants
|
|
$
|
-
|
|
|
$
|
14,498
|
|
See
accompanying notes to the unaudited condensed consolidated financial statements.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
NOTE 1 – NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Organization
C-Bond Systems, Inc.
and its subsidiary (the “Company”) is a materials development company and sole owner, developer, and manufacturer of the patented
C-Bond technology. The Company is engaged in the implementation of proprietary nanotechnology applications and processes to enhance properties
of strength, functionality, and sustainability of brittle material systems. The Company’s present primary focus is in the multi-billion-dollar
glass and window film industry with target markets in the United States and internationally. Additionally, the Company has expanded its
product line to include disinfection products. The Company operates in two divisions: C-Bond Transportation Solutions, which sells a windshield
strengthening water repellent solution as well as a disinfection product, and Patriot Glass Solutions, which sells multi-purpose glass
strengthening primer and window film mounting solutions, including ballistic-resistant film systems and a forced entry system.
On April 25, 2018, the
Company (which was formerly known as West Mountain Alternative Energy, Inc.) and its subsidiary, WETM Acquisition Corp. (“Acquisition
Sub”) entered into an Agreement and Plan of Merger and Reorganization, or the Merger Agreement with C-Bond Systems, LLC which was
organized as a limited liability company in Texas and started business on August 7, 2013 and had three subsidiaries. Pursuant to the terms
of the Merger Agreement, on April 25, 2018, referred to as the Closing Date, the Acquisition Sub merged with and into C-Bond Systems,
LLC, which was the surviving corporation. Accordingly, C-Bond Systems, LLC became a wholly owned subsidiary of the Company. Any reference
to contractual agreements throughout these footnotes may relate to C-Bond Systems Inc., or its subsidiary.
The Merger was treated
as a reverse merger and recapitalization of C-Bond Systems, LLC for financial reporting purposes since the C-Bond Systems LLC members
retained an approximate 87% controlling interest in the post-merger consolidated entity. C-Bond Systems, LLC is considered the acquirer
for accounting purposes, and the Company’s historical financial statements before the Merger have been replaced with the historical
financial statements of C-Bond Systems, LLC and Subsidiaries before the Merger in future filings with the SEC. The balance sheets at their
historical cost basis of both entities are combined at the merger date and the results of operations from the merger date forward will
include the historical results of C-Bond Systems, LLC and its subsidiary and results of C-Bond Systems, Inc. from the merger date forward.
The Merger was intended to be treated as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.
On June 30, 2021, the Company entered into a Share
Exchange Agreement and Plan of Reorganization (the “Exchange Agreement”) with (i) Mobile Tint LLC, a Texas limited liability
company doing business as A1 Glass Coating (“Mobile”), (ii) the sole member of Mobile (the “Mobile Shareholder”),
and (iii) Michael Wanke as the Representative of the Mobile Shareholder. Pursuant to the Exchange Agreement, C-Bond agreed to acquire
80% of Mobile’s units, representing 80% of Mobile’s issued and outstanding capital stock (the “Mobile Shares”).
On July 22, 2021, the Company closed the Exchange Agreement and acquired 80% of the Mobile Shares. The Mobile Shares were exchanged for
28,021,016 restricted shares of the Company’s common stock in an amount equal to $800,000, divided by the average of the closing
prices of the Company’s common stock during the 30-day period immediately prior to the closing as defined in the Exchange Agreement.
Two years after closing, the Company has the option to acquire the remaining 20% of Mobile’s issued and outstanding membership interests
in exchange for a number of shares of the Company’s common stock equal to 300% of Mobile’s average EBIT value, divided by
the price of the Company’s common stock as defined in the Exchange Agreement (the “Additional Closing”). (See Note 13).
Mobile, a premier distributor and expert installer of window film solutions including C-Bond BRS and C-Bond Secure, has been in business
for more than 30 years and produced annual revenue (unaudited) of approximately $2 million in both 2019 and 2020. As part of the transaction,
Mobile’s owner-operator, Michael Wanke, has agreed to join us as President of our Safety Patriot Glass Solutions Group.
Basis of Presentation and Principles of Consolidation
The Company’s unaudited condensed consolidated
financial statements include the financial statements of its wholly owned subsidiary, C-Bond Systems, LLC. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Management acknowledges its responsibility for
the preparation of the accompanying unaudited condensed consolidated financial statements which reflect all adjustments, consisting of
normal recurring adjustments, considered necessary in its opinion for a fair statement of its financial position and the results of its
operations for the periods presented. The accompanying unaudited condensed consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) for
interim financial information and with the instructions Article 8-03 of Regulation S-X. Operating results for interim periods are not
necessarily indicative of results that may be expected for the fiscal year as a whole. Certain information and note disclosure normally
included in consolidated financial statements prepared in accordance with U.S. GAAP has been condensed or omitted from these statements
pursuant to such accounting principles and, accordingly, they do not include all the information and notes necessary for comprehensive
consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the
summary of significant accounting policies and notes to the consolidated financial statements for the year ended December 31, 2020 of
the Company which were included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission
on April 14, 2021.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
Going Concern
These unaudited condensed 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 accompanying unaudited condensed consolidated financial statements,
the Company had a net loss of $5,442,998 for the six months ended June 30, 2021. The net cash used in operations was $791,963 for the
six months ended June 30, 2021. Additionally, the Company had an accumulated deficit, shareholders’ deficit, and working capital
deficit of $54,278,891, $4,259,799 and $1,448,376, respectively, on June 30, 2021. These factors raise substantial doubt about the Company’s
ability to continue as a going concern for a period of twelve months from the issuance date of this report. 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. The Company is seeking to raise capital through additional debt and/or equity financings to fund its operations in the
future. Although the Company has historically raised capital from sales of common shares, preferred shares and from the issuance of convertible
and other promissory notes, there is no assurance that it will be able to continue to do so. If the Company is unable to raise additional
capital or secure additional lending in the near future, management expects that the Company will need to curtail its operations. These
unaudited condensed 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 unaudited condensed consolidated
financial statements in conformity with accounting principles generally accepted in the United States 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 unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates during the six months ended June 30, 2021 and year ended
December 31, 2020 estimates for allowance for doubtful accounts on accounts receivable, the estimates for obsolete or slow moving inventory,
the useful life of property and equipment, assumptions used in assessing impairment of long-term assets, the estimate of the fair value
of the right of use asset and lease liability, the valuation of redeemable and mandatorily redeemable preferred stock, the fair value
of derivative liabilities, the value of beneficial conversion features, and the fair value of non-cash equity transactions.
Fair Value of Financial Instruments and Fair Value Measurements
The Company analyzes all financial instruments
with features of both liabilities and equity under the Financial Accounting Standard Board’s (the “FASB”) accounting
standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement. Disclosures about the fair value of financial instruments are based
on pertinent information available to the Company on June 30, 2021. Accordingly, the estimates presented in these consolidated financial
statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. FASB ASC
820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and
the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are 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 unadjusted
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 condensed
consolidated balance sheets for cash, accounts receivable, notes payable, accounts payable, accrued expenses, accrued compensation, and
lease liability approximate their fair market value based on the short-term maturity of these instruments.
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. The Company has no cash equivalents as of June 30, 2021 and December 31, 2020.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
Accounts Receivable
The Company recognizes an allowance for losses
on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of
historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable
customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized as
general and administrative expense.
Inventory
Inventory, consisting of raw materials and finished
goods, are stated at the lower of cost and net realizable value utilizing the first-in, first-out (FIFO) method. A reserve is established
when management determines that certain inventories may not be saleable. If inventory costs exceed expected net realizable value due to
obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the
net realizable value. These reserves are recorded based on estimates and included in cost of sales.
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.
Revenue Recognition
The Company follows Accounting Standards Codification
(“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). This standard establishes a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing
revenue recognition guidance. ASC 606 requires an entity to recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
and requires certain additional disclosures.
The Company sells its products which include standard
warranties primarily to distributors and authorized dealers. Product sales are recognized when the product is shipped to the customer
and title is transferred and are recorded net of any discounts or allowances. The warranty does not represent a separate performance obligation.
Cost of Sales
Cost of sales includes inventory costs, packaging
costs and warranty expenses.
Shipping and Handling Costs
Shipping and handling costs incurred for product
shipped to customers are included in general and administrative expenses and amounted to $6,896 and $14,498 for the six months ended June
30, 2021 and 2020, respectively. Shipping and handling costs charged to customers are included in sales.
Research and Development
Research and development costs incurred in the
development of the Company’s products are expensed as incurred and includes costs such as labor, materials, and other allocated
costs incurred. For the six months ended June 30, 2021 and 2020, research and development costs (recovery) incurred in the development
of the Company’s products were $(2,404) and $4,729, respectively, and are included in operating expenses on the accompanying unaudited
condensed consolidated statements of operations. In April 2021, the Company received a refund of research of development costs of $3,250.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
Warranty Liability
The Company provides limited warranties on its
products for product defects for periods ranging from 12 months to the life of the product. Warranty costs may include the cost of product
replacement, refunds, labor costs and other costs. Allowances for estimated warranty costs are recorded during the period of sale. The
determination of such allowances requires the Company to make estimates of product warranty claim rates and expected costs to repair or
to replace the products under warranty. The Company currently establishes warranty reserves based on historical warranty costs for each
product line combined with liability estimates based on the prior 12 months’ sales activities. If actual return rates and/or repair
and replacement costs differ significantly from the Company’s estimates, adjustments to recognize additional cost of sales may be
required in future periods. Historically the warranty accrual and the expense amounts have been immaterial. The warranty liability is
included in accrued expenses on the accompanying unaudited condensed consolidated balance sheets and amounted $26,733 and $26,833 on June
30, 2021 and December 31, 2020, respectively. For the six months ended June 30, 2021 and 2020, warranty expense amounted to $0, for both
period and is included in cost of sales on the accompanying unaudited condensed consolidated statements of operations. For the six months
ended June 30, 2021 and 2020, a roll forward of warranty liability is as follows:
|
|
For the Six Months Ended
June
30,
|
|
|
|
2021
|
|
|
2020
|
|
Balance at beginning of period
|
|
$
|
26,833
|
|
|
$
|
26,933
|
|
Warranty expenses incurred
|
|
|
(100
|
)
|
|
|
(100
|
)
|
Balance at end of period
|
|
$
|
26,733
|
|
|
$
|
26,833
|
|
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. For the six months ended
June 30, 2021 and 2020, advertising costs charged to operations were $21,296 and $19,789, respectively and are included in general and
administrative expenses on the accompanying unaudited condensed consolidated statements of operations. These advertising expenses do not
include cooperative advertising and sales incentives which have been deducted from sales.
Federal and State Income Taxes
The Company accounts for income tax using the
liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in
effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax
assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets
will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes
the enactment date.
The Company follows the accounting guidance for
uncertainty in income taxes using the provisions of Accounting Standards Codification (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, 2021 and December 31, 2020, 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, 2016. 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, 2021 and December 31, 2020.
Stock-Based Compensation
Stock-based compensation is accounted for based
on the requirements of ASC 718 – “Compensation – Stock Compensation”, which requires recognition in the
financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments
over the period the employee, director, or non-employee 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, director, and non-employee services received in exchange
for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted
under ASU 2016-09 Improvements to Employee Share-Based Payment.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
Loss Per Common Share
ASC 260 “Earnings Per Share”, requires
dual presentation of basic and diluted earnings per common 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 dilutive securities and
non-vested forfeitable shares. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue
common shares were exercised or converted into common shares or resulted in the issuance of common shares that then shared in the earnings
of the entity. Basic net loss per common share is computed by dividing net loss available to members by the weighted average number 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 common shares, common share equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive
common shares consist of stock options and non-vested forfeitable shares (using the treasury stock method) and shares issuable upon conversion
of convertible notes payable (using the as-if converted method). These common share equivalents may be dilutive in the future. All potentially
dilutive common shares were excluded from the computation of diluted common shares outstanding as they would have an anti-dilutive impact
on the Company’s net losses and consisted of the following:
|
|
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Convertible notes
|
|
|
-
|
|
|
|
149,603,175
|
|
Stock options
|
|
|
8,445,698
|
|
|
|
8,445,698
|
|
Warrants
|
|
|
1,000,000
|
|
|
|
2,338,750
|
|
Series B preferred stock
|
|
|
114,598,413
|
|
|
|
25,481,481
|
|
Series C preferred stock
|
|
|
250,793,651
|
|
|
|
15,428,571
|
|
Non-vested, forfeitable common shares
|
|
|
13,270,120
|
|
|
|
23,851,926
|
|
|
|
|
388,107,882
|
|
|
|
225,149,601
|
|
Leases
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842)”. ASU 2016-02 sets out the principles for the recognition, measurement, presentation, and disclosure
of leases for both parties to a contract (i.e., lessees and lessors). The standard requires lessees to apply a dual approach, classifying
leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by
the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line
basis over the term of the lease. A lessee is also required to recognize a right-of-use asset and a lease liability for all leases with
a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar
to existing guidance for operating leases today. The standard requires lessors to account for leases using an approach that is substantially
equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The pronouncement requires a modified
retrospective method of adoption and is effective on January 1, 2019, with early adoption permitted. For the Company’s administrative
office lease, the Company analyzed the lease and concluded that it would be required to record a lease liability and a right of use asset
on its consolidated balance sheets at fair value upon adoption of ASU 2016-02. The Company has elected not to recognize right-of-use assets
and lease liabilities for short-term leases that have a term of 12 months or less.
Operating lease ROU assets represents the right
to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum
lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental
borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense
for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses
in the unaudited condensed consolidated statements of operations.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
Segment Reporting
During the six months ended June 30, 2021 and
2020, the Company operated in one business segment.
Risk Factors
In March 2020, the World Health Organization declared
COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. The Company is monitoring this closely. The
Company has been materially affected by the COVID-19 outbreak to date and the ultimate duration and severity of the outbreak and its impact
on the economic environment and our business is uncertain. The Company has seen a material decrease in sales from its international customers
as a result of the unprecedented public health crisis from the COVID-19 pandemic and a decrease in domestic sales due to a decrease in
business spending on discretionary items. As a result, the Company’s international customers have delayed the ordering of products
and have delayed payment of balances due to the Company. As of June 30, 2021 and December 31, 2020, the Company recognized an allowance
for losses on accounts receivable in an amount of $237,480 and $202,480, respectively, which is primarily based on the Company’s
assessment of specific identifiable overdue customer accounts located in India and the Philippines. The lack of collection of these accounts
receivable balances, which the Company believes was attributable to COVID-19, had a material impact on the cash flows of the Company.
The Company cannot estimate the duration of the pandemic and the future impact on its business. A severe or prolonged economic downturn
could result in a variety of risks to the Company’s business, including weakened demand for its products and a decreased ability
to raise additional capital when needed on acceptable terms, if at all. Currently, the Company is unable to estimate the impact of this
event on its operations.
Recent Accounting Pronouncements
In December 2019, the FASB issued Accounting Standards
Update No. 2019-12 – Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity
in the accounting standards. The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation,
the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.
ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. The amendments in ASU 2019-12 will become
effective for us as of the beginning of our 2022 fiscal year. Early adoption is permitted, including adoption in any interim period. We
are currently evaluating the impact that this guidance will have upon our financial position and results of operations, if any.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt
with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40)—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies accounting for
convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments
will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain
settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity
contracts to qualify for the exception. The ASU also simplifies the diluted net income per share calculation in certain areas. The new
guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early
adoption is permitted for fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of the adoption
of the standard on the consolidated financial statements.
Other accounting standards that have been issued
or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial
statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated
to its financial condition, results of operations, cash flows or disclosures.
NOTE 3 – ACCOUNTS RECEIVABLE
On June 30, 2021 and December 31, 2020, accounts
receivable consisted of the following:
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Accounts receivable
|
|
$
|
305,906
|
|
|
$
|
282,177
|
|
Less: allowance for doubtful accounts
|
|
|
(237,480
|
)
|
|
|
(202,480
|
)
|
Accounts receivable, net
|
|
$
|
68,426
|
|
|
$
|
79,697
|
|
For the six months ended June 30, 2021 and 2020,
bad debt expense amounted to $35,000 and $0, respectively.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
NOTE 4 – INVENTORY
On June 30, 2021 and December 31, 2020, inventory
consisted of the following:
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Raw materials
|
|
$
|
19,667
|
|
|
$
|
24,477
|
|
Finished goods
|
|
|
54,405
|
|
|
|
52,723
|
|
Inventory
|
|
$
|
74,072
|
|
|
$
|
77,200
|
|
NOTE 5 – PROPERTY AND EQUIPMENT
On June 30, 2021 and December 31, 2020, property
and equipment consisted of the following:
|
|
Useful Life
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Machinery and equipment
|
|
5 - 7 years
|
|
$
|
50,722
|
|
|
$
|
50,722
|
|
Furniture and office equipment
|
|
3 - 7 years
|
|
|
30,245
|
|
|
|
30,245
|
|
Vehicles
|
|
5 years
|
|
|
55,941
|
|
|
|
55,941
|
|
Leasehold improvements
|
|
3 years
|
|
|
16,701
|
|
|
|
16,701
|
|
|
|
|
|
|
153,609
|
|
|
|
153,609
|
|
Less: accumulated depreciation
|
|
|
|
|
(139,870
|
)
|
|
|
(134,926
|
)
|
Property and equipment, net
|
|
|
|
$
|
13,739
|
|
|
$
|
18,683
|
|
For the six months ended June 30, 2021 and 2020,
depreciation and amortization expense is included in general and administrative expenses and amounted to $4,944 and $8,487, respectively.
NOTE 6 – NOTES PAYABLE
On June 30, 2021 and December 31, 2020, notes
payable consisted of the following:
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Notes payable
|
|
|
900,000
|
|
|
|
400,000
|
|
Note payable - PPP note
|
|
|
156,200
|
|
|
|
156,200
|
|
Total notes payable
|
|
|
1,056,200
|
|
|
|
556,200
|
|
Less: current portion of notes payable
|
|
|
(556,200
|
)
|
|
|
(521,138
|
)
|
Notes payable – long-term
|
|
$
|
500,000
|
|
|
$
|
35,062
|
|
Notes Payable
On November 14, 2018, the Company entered into
a Revolving Credit Facility Loan and Security Agreement (“Loan Agreement”) and a Secured Promissory Note (the “Note”)
with BOCO Investments, LLC (the “Lender”). Subject to and in accordance with the terms and conditions of the Loan Agreement
and the Note, the Lender agreed to lend to the Company up to $400,000 (the “Maximum Loan Amount”) against the issuance and
delivery by the Company of the Note for use as working capital and to assist in inventory acquisition. In 2018, the Lender loaned $400,000
to the Company, the Maximum Loan Amount. The Company should have repaid all principal, interest and other amounts outstanding on or before
November 14, 2020. The Company’s obligations under the Loan Agreement and the Note are secured by a first-priority security interest
in substantially all of the Company’s assets (the “Collateral”). The outstanding principal advanced to Company pursuant
to the Loan Agreement initially bore interest at the rate of 12% per annum, compounded annually.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
Upon the occurrence of an Event of Default under
the Loan Agreement and Note, all amounts then outstanding (including principal and interest) shall bear interest at the rate of 18% per
annum, compounded annually until the Event of Default is cured. Additionally, at or prior to December 31, 2018, the Company should have
achieved an accounts receivable balance plus inventory equal to the unpaid principal balance of the Note (the “Minimum Asset Amount”).
In the event that the Company’s accounts
receivable balance plus inventory balance is less than paid principal balance of the Note as of December 31, 2018, the Company
shall have 45 days (through and until February 15, 2019) to cure such violation and an establish accounts receivable plus inventory equal
to the unpaid principal balance of the Note. Commencing March 31, 2019 and at all times thereafter through the remainder of the commitment
period and for so long thereafter as there is any amount still due and owing under the Note, the Company must maintain an accounts receivable
balances plus inventory such that the outstanding principal borrowed by Company under the Loan Agreement and Note is less than or equal
to eighty five percent (85%) of accounts receivable plus fifty percent (50%) of inventory, all as measured at the same point in time.
Commencing on January 10, 2019 and on or before
the l0th day of each month thereafter, the Company should have paid Lender all interest accrued on outstanding principal under the Loan
Agreement and Notes as of the end of the month then concluded. Upon the occurrence of any Event of Default and at any time thereafter,
Lender may, at its option, declare any and all obligations immediately due and payable without demand or notice. As of June 30, 2021 and
December 31, 2020, the Company did not meet the Minimum Asset Amount covenant as defined in the Loan Agreement, failed to timely pay interest
payments due, and has violated other default provisions. Accordingly, the note balance due of $400,000 has been reflected as a current
liability on the accompanying consolidated balance sheet and interest shall accrue at 18% per annum.
The Loan Agreement and Note contain customary
representations, warranties, and covenants, including certain restrictions on the Company’s ability to incur additional debt or
create liens on its property. The Loan Agreement and the Note also provide for certain events of default, including, among other things,
payment defaults, breaches of representations and warranties, breach of covenants, and bankruptcy or insolvency proceedings, the occurrence
of which, after any applicable cure period, would permit Lender, among other things, to accelerate payment of all amounts outstanding
under the Loan Agreement and the Note, as applicable, and to exercise its remedies with respect to the Collateral, including the sale
of the Collateral.
On June 30, 2021 and December 31, 2020, principal
amount due under this Note amounted to $400,000 and is considered to be in default.
On May 10, 2021, the Company entered into a Loan
and Security Agreement (the “Loan Agreement”) and a Secured Promissory Note (the “Note”) in the amount of $500,000
with a lender. The Note shall accrue interest at 8% per annum, compounded annually, and all outstanding principal and accrued interest
is due and payable of May 10, 2023. The Company’s obligations under the Loan Agreement and the Note are secured by a second priority
security interest in substantially all of the Company’s assets (the “Collateral”). The Loan Agreement and Note contain
customary representations, warranties, and covenants, including certain restrictions on the Company’s ability to incur additional
debt or create liens on its property. The Loan Agreement and the Note also provide for certain events of default, including, among other
things, payment defaults, breaches of representations and warranties and bankruptcy or insolvency proceedings, the occurrence of which,
after any applicable cure period, would permit Lender, among other things, to accelerate payment of all amounts outstanding under the
Loan Agreement and the Note, as applicable, and to exercise its remedies with respect to the Collateral. Upon the occurrence of an Event
of Default under the Loan Agreement and Note, all amounts then outstanding (including principal and interest) shall bear interest at the
rate of 18% per annum, compounded annually until the Event of Default is cured. On June 30, 2021 and December 31, 2020, principal amount
due under this Note amounted to $500,000 and $0, respectively.
PPP Loan
On April 28, 2020, the Company entered into a
Paycheck Protection Program Promissory Note (the “PPP Note”) with respect to a loan of $156,200 (the “PPP Loan”)
from Comerica Bank. The PPP Loan was obtained pursuant to the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid,
Relief, and Economic Security Act (the “CARES act”) administered by the U.S. Small Business Administration (“SBA”).
The PPP Loan matures on April 28, 2022 and bears interest at a rate of 1.00% per annum. The PPP Loan is payable in 18 equal monthly payments
of approximately $8,900 commencing November 1, 2020. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties.
The Company may apply to have the loan forgiven pursuant to the terms of the PPP if certain criteria are met. As of June 30, 2021, accrued
interest payable amounted to $1,836. For the six months ended June 30, 2021, interest expense related to this Note amounted to $775. On
June 30, 2021 and December 31,2020, principal amount due under the PPP Note amounted to $156,200 and $156,200, respectively.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
NOTE 7 – SHAREHOLDERS’ DEFICIT
Preferred Stock
Series B Preferred Stock
On December 12, 2019, the Company filed an Amendment
to its Articles of Incorporation to designate a series of preferred stock, the Series B Convertible Preferred Stock (the “Series
B”), with the Secretary of State of the State of Colorado. The Certificate of Designations established 100,000 shares of the Series
B, par value $0.10, having such designations, preferences, and rights as determined by the Company’s Board of Directors in its sole
discretion, in accordance with the Company’s Articles of Incorporation and Amended and Restated Bylaws. The Certificate of Designations
became effective with the State of Colorado upon filing.
The Series B ranks senior with respect to dividends
and right of liquidation with the Company’s common stock and junior to all existing and future indebtedness of the Company. The
Series B has a stated value per share of $1,000, subject to adjustment as provided in the Certificate of Designations (the “Stated
Value”), and a dividend rate of 2% per annum of the Stated Value.
The Series B is subject to redemption (at Stated
Value, plus any accrued, but unpaid dividends (the “Liquidation Value”)) by the Company no later than three years after a
Deemed Liquidation Event and at the Company’s option after one year from the issuance date of the Series B, subject to a ten-day
notice (to allow holder conversion). A “Deemed Liquidation Event” will mean: (a) a merger or consolidation in which the Company
is a constituent party or a subsidiary of the Company is a constituent party and the Company issues shares of its capital stock pursuant
to such merger or consolidation, except any such merger or consolidation involving the Company or a subsidiary in which the shares of
capital stock of the Company outstanding immediately prior to such merger or consolidation continue to represent, or are converted into
or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, at least a majority, by voting
power, of the capital stock of the surviving or resulting corporation or, if the surviving or resulting corporation is a wholly-owned
subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting
corporation; or (b) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions,
by the Company or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries taken as a
whole, or the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Company if substantially all of
the assets of the Company and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease,
transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Company.
The Series B is convertible into common stock
at the option of a holder or if the closing price of the common stock exceeds 400% of the Conversion Price for a period of twenty consecutive
trading days, at the option of the Company. Conversion Price means a price per share of the common stock equal to 100% of the lowest daily
volume weighted average price of the common stock during the two years preceding or subsequent two years following the Issuance Date,
subject to adjustment as otherwise provided in the Certificate of Designations (the “Conversion Price”).
In the event of a conversion of any Series B,
the Company shall issue to the holder a number of shares of common stock equal to the sum of the Stated Value plus accrued but unpaid
dividends multiplied by the number of shares of Series B Preferred Stock being converted divided by the Conversion Price.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
Upon liquidation of the Company after payment
or provision for payment of liabilities of the Company and after payment or provision for any liquidation preference payable to the holders
of any preferred stock ranking senior to the Series B but prior to any distribution to the holders of Common Stock or preferred stock
ranking junior upon liquidation to the Series B, the holders of Series B will be entitled to be paid out of the assets of the Company
available for distribution to its stockholders an amount with respect to each share of Series B equal to the Liquidation Value.
The Series B has voting rights per Series B Share
equal to the Liquidation Value per share, divided by the Conversion Price, multiplied by fifty (50). Subject to applicable Colorado law,
the holders of Series B will have functional voting control in situations requiring shareholder vote.
The Series B Preferred Stock vests on May 1, 2022.
These Series B preferred share issuances with
redemption provisions that permit the issuer to settle in either cash or common stock, at the option of the issuer, were evaluated to
determine whether temporary or permanent equity classification on the consolidated balance sheet was appropriate. As per the terms of
the Series B preferred stock agreements, Series B preferred stock is redeemable for cash and other assets on the occurrence of a deemed
liquidation event. A deemed liquidation event includes a change of control which is not in the Company’s control. As such, since
Series B preferred stock is redeemable upon the occurrence of an event that is not within the Company’s control, the Series B preferred
stock is classified as temporary equity.
The Company concluded that the Series B Preferred
Stock represented an equity host and, therefore, the redemption feature of the Series B Preferred Stock was not considered to be clearly
and closely related to the associated equity host instrument. However, the redemption features did not meet the net settlement criteria
of a derivative and, therefore, were not considered embedded derivatives that required bifurcation. The Company also concluded that the
conversion rights under the Series B Preferred Stock were clearly and closely related to the equity host instrument. Accordingly, the
conversion rights feature on the Series B Preferred Stock were not considered an embedded derivative that required bifurcation. The conversion
feature of the Series B Preferred Stock at the time of issuance was determined to be beneficial on the commitment date.
On January 18, 2021, the Board of Directors of
the Company agreed to satisfy $295,000 of accrued compensation owed to its executive officers and former executive officer (collectively,
the “Management”) through a Liability Reduction Plan (the “Plan”). Under this Plan, Management agreed to accept
295 shares of the Company’s Series B convertible preferred stock in settlement of accrued compensation. The conversion feature of
the Series B Preferred Stock at the time of issuance was determined to be beneficial on the commitment date. Because the Series B Preferred
Stock was perpetual with no stated maturity date, and the conversions could occur any time from the date of issuance, the Company immediately
recorded non-cash stock-based compensation of $3,778,810 related to the beneficial conversion feature arising from the issuance of Series
B Preferred Stock.
During the six months ended June 30, 2021, the
Company accrued a dividend payable of $6,885 which was included in preferred stock dividends on the accompanying condensed consolidated
statement of shareholders’ deficit.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
As of June 30, 2021, the net Series B Preferred
Stock balance was $731,332 which includes stated liquidation value of $721,970 and accrued dividends payable of $9,362. As of December
31, 2020, the net Series B Preferred Stock balance was $429,446 which includes stated liquidation value of $426,970 and accrued dividends
payable of $2,476.
Series C Preferred Stock
On August 20, 2020, the Company filed an Amendment
to its Articles of Incorporation to designate a series of preferred stock, the Series C Convertible Preferred Stock (the “Series
C”), with the Secretary of State of the State of Colorado. The Certificate of Designations established 100,000 shares of the Series
C, par value $0.10, having such designations, preferences, and rights as determined by the Company’s Board of Directors in its sole
discretion, in accordance with the Company’s Articles of Incorporation and Amended and Restated Bylaws. The Certificate of Designations
became effective with the State of Colorado upon filing.
The Series C ranks senior with respect to dividends
and right of liquidation with the Company’s common stock and junior to all existing and future indebtedness of the Company. The
Series C has a stated value per share of $100, subject to adjustment as provided in the Certificate of Designations (the “Stated
Value”), and a dividend rate of 2% per annum of the Stated Value.
The Company has no option to redeem the Series
C Preferred Stock. If the Company determines to liquidate, dissolve or wind-up its business and affairs, or effect any Deemed Liquidation
Event as defined below, each of which has been approved by the holders of a majority of the shares of Series C Preferred Stock then outstanding,
the Company will redeem all of the shares of Series C Preferred Stock outstanding immediately prior to such mandatory redemption event
at a price per share of Series C Preferred Stock equal to the aggregate Series C Liquidation Value, which is 150% of the sum of the Stated
Value plus accrued and unpaid dividends, for the shares of Series C Preferred Stock being redeemed.
The Company will deliver ten-day advance written
notice prior to the consummation of any mandatory redemption event via email or overnight courier (“Notice of Mandatory Redemption”)
to each Holder whose shares are to be redeemed. The Series C is subject to redemption at liquidation Value noted above by the Company.
Upon receipt by any Holder of a Notice of Mandatory Redemption, if Holder does not choose to convert, such Holder will promptly submit
to the Company such Holder’s Series C Preferred Stock certificates on the Redemption Payment Date. Upon receipt of such Holder’s
Series C Preferred Stock certificates, the Company will pay the applicable redemption price to such Holder in cash. A “Deemed Liquidation
Event” will mean: (a) a merger or consolidation in which the Company is a constituent party or a subsidiary of the Company is a
constituent party and the Company issues shares of its capital stock pursuant to such merger or consolidation, except any such merger
or consolidation involving the Company or a subsidiary in which the shares of capital stock of the Company outstanding immediately prior
to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent,
immediately following such merger or consolidation, at least a majority, by voting power, of the capital stock of the surviving or resulting
corporation or, if the surviving or resulting corporation is a wholly-owned subsidiary of another corporation immediately following such
merger or consolidation, the parent corporation of such surviving or resulting corporation; or (b) the sale, lease, transfer, exclusive
license or other disposition, in a single transaction or series of related transactions, by the Company or any subsidiary of the Company
of all or substantially all the assets of the Company and its subsidiaries taken as a whole, or the sale or disposition (whether by merger
or otherwise) of one or more subsidiaries of the Company if substantially all of the assets of the Company and its subsidiaries taken
as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition
is to a wholly owned subsidiary of the Company. Since the Company has determined that a deemed liquidation event is not probable, the
Series C is stated at the Stated Value plus accrued and unpaid dividends rather than redemption value, which is liquidation value.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
The Series C is convertible at the option of a
holder at any time following the issuance date. In the event of a conversion of any Series C Preferred Stock, the Company shall issue
to such Holder a number of Conversion Shares equal to (x) the sum of (1) the Stated Value per share of Series C Preferred Stock plus (2)
any accrued but unpaid dividends thereon multiplied by (y) the number of shares of Series C Preferred Stock held by such Holder and subject
to the Holder Conversion Notice, divided by (z) the Conversion Price with respect to such Series C Preferred Stock. Conversion Price means
a price per share of the common stock equal to the lowest daily volume weighted average price of the common stock for any trading day
during the two years preceding the date of delivery of the conversion notice, subject to adjustment as otherwise provided in the Series
C Certificate of Designation.
Upon liquidation of the Company after payment
or provision for payment of liabilities of the Company and after payment or provision for any liquidation preference payable to the holders
of any preferred stock ranking senior to the Series C but prior to any distribution to the holders of Common Stock or preferred stock
ranking junior upon liquidation to the Series C, the holders of Series C will be entitled to be paid out of the assets of the Company
available for distribution to its stockholders an amount with respect to each share of Series C equal to the Liquidation Value.
On April 28, 2021, the Company filed an Amended
and Restated Certificate of Designations of Preferences, Rights, and Limitations of Series C Convertible Preferred Stock (the “Amended
Certificate”). The Amended Certificate changes the voting rights of the Series C Preferred Stock on any matters requiring shareholder
approval or any matters on which the common shareholders are permitted to vote. Series C Preferred Stock shall have no right to vote on
any matters requiring shareholder approval or any matters on which the common shareholders (or other preferred stock of the Company which
may vote with the common shareholders) are permitted to vote. With respect to any voting rights of the Series C Preferred Stock set forth
herein, the Series C Preferred Stock shall vote as a class, each share of Series C Preferred Stock shall have one vote on any such matter,
and any such approval may be given via a written consent in lieu of a meeting of the Holders of the Series C Preferred Stock. Any reference
herein to a determination, decision or election being made by the “Majority Holders” shall mean the determination, decision
or election as made by Holders holding a majority of the issued and outstanding shares of Series C Preferred Stock at such time. It also
adjusts the conversion feature of the Series C Preferred Stock so that any Holder of Series C Preferred Stock cannot convert any portion
of the Series C in excess of that number of Series C Preferred Stock that upon conversion would result in beneficial ownership by the
Holder of more than 4.99% of the outstanding shares of common stock of the Company.
These Series C preferred stock issuances with
redemption provisions that permit the issuer to settle in either cash or common stock, at the option of the holder, were evaluated to
determine whether temporary or permanent equity classification on the condensed consolidated balance sheet was appropriate. As per the
terms of the Series C preferred stock agreements, Series C preferred stock is redeemable for cash and other assets on the occurrence of
a deemed liquidation event. A deemed liquidation event includes a change of control which is not in the Company’s control. As such,
since Series C preferred stock is redeemable upon the occurrence of an event that is not within the Company’s control, the Series
C preferred stock is classified as temporary equity.
The Company concluded that the Series C Preferred
Stock represented an equity host and, therefore, the redemption feature of the Series C Preferred Stock was not considered to be clearly
and closely related to the associated equity host instrument. However, the redemption features did not meet the net settlement criteria
of a derivative and, therefore, were not considered embedded derivatives that required bifurcation. The Company also concluded that the
conversion rights under the Series C Preferred Stock were clearly and closely related to the equity host instrument. Accordingly, the
conversion rights feature on the Series C Preferred Stock were not considered an embedded derivative that required bifurcation.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
On February 24, 2021, the Company entered into
a subscription agreement with an accredited investor whereby the investor agreed to purchase 2,500 shares of the Company’s Series
C Convertible Preferred Stock for $250,000, or $100.00 per share, the stated value, which was used for working capital purposes. The conversion
feature of the Series C Preferred Stock at the time of issuance was determined to be beneficial on the commitment date. Because the Series
C Preferred Stock was perpetual with no stated maturity date, and the conversions could occur any time from the date of issuance, the
Company immediately recorded a non-cash deemed dividend of $2,845,238 related to the beneficial conversion feature arising from the issuance
of Series C Preferred Stock. This non-cash deemed dividend increased the Company’s net loss attributable to common stockholders
and net loss per share.
During the six months ended June 30, 2021, the
Company accrued a dividend payable of $14,931 which was included in preferred stock dividends on the accompanying condensed consolidated
statement of shareholders’ deficit. As of June 30, 2021, the net Series C Preferred Stock balance was $1,600,962 which includes
stated liquidation value of $1,580,000 and accrued dividends payable of $20,962. As of December 31, 2020, the net Series C Preferred Stock
balance was $1,336,031 which includes stated value of $1,330,000 and accrued dividends payable of $6,031.
Common Stock
Sale of Common Stock
In connection with subscription agreements dated
January 13, 2020 and February 18, 2020, the Company received cash proceeds of $280,000 from an investor for the purchase of 7,000,000
shares of the Company’s common stock at $0.04 per share.
In connection with subscription agreements dated
May 8, 2020, the Company received cash proceeds of $161,000 from an investor for the purchase of 7,000,000 shares of the Company’s
common stock at $0.023 per share.
Issuance of Common Shares for Services
Issuance of common shares for professional fees
On February 20, 2020 and effective March 1, 2020,
the Company entered into a six-month consulting agreement with an entity for investor relations services. In connection with this consulting
agreement, the Company issued 1,250,000 restricted common shares of the Company to the consultant. These shares vest immediately. These
shares were valued at $50,000, or $0.04 per common share, based on contemporaneous common share sales by the Company. In connection with
this consulting agreement, as of June 30, 2020, the Company recorded stock-based professional fees of $33,333 and prepaid expenses of
$16,667 which will be amortized over the remaining term of the agreement.
On March 31, 2020 and effective April 1, 2020,
the Company entered into two one-year advisory board agreements with two individuals for services to be rendered on the Company’s
medical advisory board. In connection with these advisory board agreements, the Company issued an aggregate of 500,000 restricted common
shares of the Company to these advisory board members. These shares vest on April 1, 2021. These shares were valued at $20,000, or $0.04
per common share, based on contemporaneous common share sales by the Company. In connection with this consulting agreement, during the
six months ended June 30, 2020, accretion of stock-based consulting fees amounted to $5,000 and the remaining stock-based consulting fees
of $15,000 shall be accreted over the remaining vesting period.
On January 6, 2021, the Company issued 100,000
shares of its common stock for business development services rendered. These shares were valued at $10,000, or $0.10 per common share,
based on the quoted closing price of the Company’s common stock on the measurement date. In connection with the issuance of these
shares, the Company recorded stock-based professional fees of $10,000.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
On February 1, 2021, the Company issued an aggregate
of 700,000 shares of its common stock for business development, advisory and consulting services rendered and to be rendered. These shares
were valued at $54,600, or $0.078 per common share, based on the quoted closing price of the Company’s common stock on the measurement
date and will be amortized into stock-based consulting fees over the term of the agreement or vesting period ranging from immediately
to one year. In connection with the issuance of these shares, during the six months ended June 30, 2021, the Company recorded stock-based
professional fees of $30,550 and prepaid expenses of $24,050 which will be amortized into stock-based professional fees over the term
of the agreement or vesting period of 0.75 years.
On March 8, 2021, the Company issued an aggregate
of 750,000 shares of its common stock for business development and consulting services rendered and to be rendered. These shares were
valued at $49,500, or $0.066 per common share, based on the quoted closing price of the Company’s common stock on the measurement
date, and will be amortized into stock-based consulting fees over the term of the agreement or vesting period. In connection with the
issuance of these shares, as of June 30, 2021, the Company recorded stock-based professional fees of $36,667 and prepaid expenses of $12,833
which will be amortized into stock-based professional fees over the term of the agreement or vesting period of 0.75 years.
On April 7, 2021, the Company issued 2,500,000
shares of its common stock for investor relations services to be rendered. These shares were valued at $135,000, or $0.054 per common
share, based on the quoted closing price of the Company’s common stock on the measurement date. In connection with these shares,
the Company recorded stock-based professional fees of $135,000.
On June 3, 2021, the Company issued 200,000 shares
of its common stock for technology services rendered. These shares were valued at $6,000, or $0.03 per common share, based on the quoted
closing price of the Company’s common stock on the measurement date. In connection with the issuance of these shares, the Company
recorded stock-based professional fees of $6,000.
During the six months ended June 30, 2021, the
Company recorded stock-based professional fees of $43,250 in connection with the amortization to prepaid expenses of $38,250 and accretion
of stock-based professional fees of $5,000 related to common shares previously issued.
Issuance of common shares for stock-based compensation
On April 1, 2020, the Company entered into an
employment agreement with an accounting manager. Pursuant to this employment agreement, the Company agreed to grant a restricted stock
award of 200,000 common shares of the Company which will vest on May 1, 2021. If the employee’s employment is terminated without
cause or for good reason (both as defined in the employment agreement), or a change of control event (as defined in the employment agreement)
occurs, these shares will immediately vest. For any other termination of employment, unvested restricted stock shall immediately terminate.
These shares were valued on the date of grant at $8,000, or $0.04 per common share, based on contemporaneous common share sales. In connection
with these shares, the Company shall record stock-based compensation over the vesting period.
On April 28, 2020, the Company entered into restricted
stock award agreements (the “Restricted Stock Award Agreements”) with executive officers and employees. Pursuant to the Restricted
Stock Award Agreements, the Company agreed to grant restricted stock awards for an aggregate of 6,750,000 common shares of the Company
which were valued at $270,000, or $0.04 per common share, based on contemporaneous common share sales. These shares will vest on May 1,
2021. If the employee’s employment is terminated for any reason, these shares will immediately be forfeited. In the event of a change
of control, the employee shall be 100% vested in all shares of restricted shares subject to these Agreements. Each executive officer and
employee shall have the right to vote the restricted shares awarded to them and to receive and retain all regular dividends paid in cash
or property (other than retained distributions), and to exercise all other rights, powers and privileges of a holder of shares of the
stock, with respect to such restricted shares, with the exception that (a) the employee shall not be entitled to delivery of the stock
certificate or certificates or electronic book entries representing such restricted shares until the shares are vested, (b) the Company
shall retain custody of all retained distributions made or declared with respect to the restricted shares until such time, if ever, as
the restricted shares have become vested, and (c) the employee may not sell, assign, transfer, pledge, exchange, encumber, or dispose
of the restricted shares. In connection with these shares, the Company shall record stock-based compensation over the vesting period.
On February 1, 2021, the Company issued 200,000
shares of its common stock to an individual who agreed to act as the Company’s national sales manager for services to be rendered.
These shares were valued at $15,600, or $0.078 per common share, based on the quoted closing price of the Company’s common stock
on the measurement date. These shares were to vest on May 1, 2022. On May 17,2021, this individual resigned and these shares have been
forfeited.
On March 8, 2021, the Company granted restricted
stock awards for an aggregate of 2,500,000 common shares of the Company to an employee and an officer of the Company for services to
be rendered. which were valued at $165,000, or $0.066 per common share, based on the quoted closing price of the Company’s common
stock on the measurement date. These shares were to vest on May 1, 2022. On May 17,2021, this individual resigned and these shares have
been forfeited.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
During the six months ended June 30, 2021 and
2020, aggregate accretion of stock-based compensation expense on granted non-vested shares amounted to $159,746 and $287,587, respectively.
Total unrecognized compensation expense related to these unvested common shares on June 30, 2021 amounted to $126,504 which will be amortized
over the remaining vesting period of 0.75 years.
Issuance of Common Shares for Accrued Compensation
On March 19, 2021, the Company issued 944,767
shares of its common stock pursuant to the terms of a Notice of Separation and General Release Agreement. These shares were valued at
$55,741, or $0.059 per common share, based on the quoted closing price of the Company’s common stock on the measurement date. In
connection with the issuance of these shares, the Company reduced accrued compensation by $40,625 and recorded stock-based compensation
of $15,116.
The following table summarizes activity related
to non-vested shares:
|
|
Number of
Non-vested
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested, December 31, 2020
|
|
|
23,826,926
|
|
|
$
|
0.16
|
|
Granted
|
|
|
5,194,767
|
|
|
|
0.07
|
|
Forfeited
|
|
|
(700,000
|
)
|
|
|
(0.07
|
)
|
Shares vested
|
|
|
(15,051,573
|
)
|
|
|
(0.15
|
)
|
Non-vested, June 30, 2021
|
|
|
13,270,120
|
|
|
$
|
0.14
|
|
Shares Issued for Accounts Payable
On January 13, 2020, the Company issued 151,456
common shares upon conversion of accounts payable of $6,058, or $0.04 per common share, based on contemporaneous common share sales by
the Company.
On May 4, 2021, the Company issued 3,801,224 common
shares upon conversion of accounts payable of $117,838, or $0.031 per common share, based on the quoted closing price of the Company’s
common stock on the measurement date.
Common Stock Issued for Debt Conversion
During the six months ended June 30, 2020, the
Company issued 13,275,000 shares of its common stock upon the conversion of convertible notes with bifurcated embedded conversion option
derivatives including principal of $74,250, accrued interest of $28,085, and fees of $1,750. The conversion price was based on contractual
terms of the related debt. The Company accounted for the partial conversion of these convertible notes pursuant to the guidance of ASC
470-20, Debt with Conversion and Other Options. Under ASC 470-20, the Company recognized an aggregate loss on debt extinguishment
upon conversion in the amount of $123,455 which is associated with the different between the fair market value of the shares issued upon
conversion and the conversion price and is equal to the fair value of the additional shares of common stock transferred upon conversion.
Common stock issued for conversion of series
A preferred shares
During the six months ended June 30, 2020, the
Company issued 9,982,616 shares its common stock upon the conversion of 159,600 shares of Series A preferred with a stated redemption
value of $159,600 and related accrued dividends payable of $3,192. The conversion price was based on contractual terms of the related
Series A preferred shares. Upon conversion, the Company reclassified put premium of $37,438 to paid-in capital.
Common shares issued for deferred compensation
On April 17, 2020, the Company issued 203,125
common shares upon conversion of an accrued deferred compensation liability of $16,250.
Common Stock Issued Upon Warrant Exercise
On January 7, 2021, the Company issued 1,008,000
shares of its common stock in connection with the cashless exercise of 1,050,000 warrants. The exercise price was based on contractual
terms of the related warrant.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
Stock Options
For the six months ended June 30, 2021 and 2020,
the Company recorded $0 and $382,615 of compensation expense related to stock options, respectively. Total unrecognized compensation expense
related to unvested stock options on June 30, 2021 amounted to $0. The weighted average period over which stock-based compensation expense
related to these options will be recognized is approximately one month.
Stock option activities for the six months ended
June 30, 2021 are summarized as follows:
|
|
Number of Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Balance Outstanding, December 31, 2020
|
|
|
8,445,698
|
|
|
$
|
0.40
|
|
|
|
5.10
|
|
|
$
|
48,000
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance Outstanding, June 30, 2021
|
|
|
8,445,698
|
|
|
$
|
0.40
|
|
|
|
4.63
|
|
|
$
|
-
|
|
Exercisable, June 30, 2021
|
|
|
8,445,698
|
|
|
$
|
0.40
|
|
|
|
4.63
|
|
|
$
|
-
|
|
Warrants
On January 7, 2021, the Company issued 1,008,000
shares of its common stock in connection with the cashless exercise of 1,050,000 warrants. The exercise price was based on contractual
terms of the related warrant.
Warrant activities for the six months ended June
30, 2021 are summarized as follows:
|
|
Number of Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Balance Outstanding December 31, 2020
|
|
|
2,050,000
|
|
|
$
|
0.05
|
|
|
|
3.66
|
|
|
$
|
137,000
|
|
Exercised
|
|
|
(1,050,000
|
)
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance Outstanding June 30, 2021
|
|
|
1,000,000
|
|
|
$
|
0.09
|
|
|
|
3.06
|
|
|
$
|
0
|
|
Exercisable, June 30, 2021
|
|
|
1,000,000
|
|
|
$
|
0.09
|
|
|
|
3.06
|
|
|
$
|
0
|
|
2018 Long-Term Incentive Plan
On June 7, 2018, a majority of the Company’s
shareholders and its board approved the adoption of a 2018 Long-Term Incentive Plan (the “2018 Plan”). The purpose of the
2018 Plan is to advance the interests of the Company, its affiliates and its stockholders and promote the long-term growth of the Company
by providing employees, non-employee directors and third-party service providers with incentives to maximize stockholder value and to
otherwise contribute to the success of the Company and its affiliates, thereby aligning the interests of such individuals with the interests
of the Company’s stockholders and providing them additional incentives to continue in their employment or affiliation with the Company.
The Plan was adopted on June 7, 2018 and effective on August 2, 2018. Under the 2018 Plan, the Plan Administrator may grant:
|
●
|
options
to acquire the Company’s common stock, both incentive stock options that are intended to satisfy the requirements of Section 422
of the Internal Revenue Code and nonqualified stock options which are not intended to satisfy such requirements. The exercise price of
options granted under our 2018 Plan must at least be equal to the fair market value of the Company’s common stock on the date of
grant and the term of an option may not exceed ten years, except that with respect to an incentive stock option granted to any employee
who owns more than 10% of the voting power of all classes of the Company’s outstanding stock as of the grant date the term must
not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date.
|
|
●
|
stock appreciation rights, or SARs, which allow the recipient to receive the appreciation in the fair market value of the Company’s common stock between the date of grant and the exercise date. The amount payable under the stock appreciation right may be paid in cash or with shares of the Company’s common stock, or a combination thereof, as determined by the Administrator.
|
|
|
|
|
●
|
restricted stock awards, which are awards of the Company’s shares of common stock that vest in accordance with terms and conditions established by the Administrator.
|
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
|
●
|
restricted stock units, which are awards that are based on the value of the Company’s common stock and may be paid in cash or in shares of the Company’s common stock.
|
|
●
|
other types of stock-based or stock-related awards not otherwise described by the terms and provision of the 2018 Plan, including the grant or offer for sale of unrestricted shares of the Company’s common stock, and which may involve the transfer of actual shares of the Company’s common stock or payment in cash or otherwise of amounts based on the value of shares of the Company’s common stock and may be designed to comply with or take advantage of the applicable local laws of jurisdictions other than the United States.
|
|
|
|
|
●
|
other cash-based awards to eligible persons in such amounts and upon such terms as the Administrator shall determine.
|
An award granted under the 2018 Plan must include
a minimum vesting period of at least one year, provided, however, that an award may provide that the award will vest before the completion
of such one-year period upon the death or qualifying disability of the grantee of the award or a change of control of the Company and
awards covering, in the aggregate, 25,000,000 shares of our Common Stock may be issued without any minimum vesting period.
The aggregate number of shares of common stock
and number of shares of the Company’s common stock that may be subject to incentive stock options granted under the 2018 Plan is
50,000,000 shares, of which 11,445,698 shares have been issued or granted under incentive stock options and 28,451,070 shares of restricted
stock have been issued as of June 30, 2021. All shares underlying grants are expected to be issued from the Company’s unissued authorized
shares available.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, the Company may be involved
in litigation related to claims arising out of its operations in the normal course of business. As of June 30, 2021, other than discussed
below, the Company is not involved in any other pending or threatened legal proceedings that it believes could reasonably be expected
to have a material adverse effect on its financial condition, results of operations, or cash flows.
On March 8, 2021, a former officer of the Company
resigned. Both parties alleged certain claims against the other, including certain compensation claims, and are in discussion regarding
resolution. Neither party has filed litigation. The Company intends to vigorously defend itself against any possible claims and assert
any relevant claims against the former executive and believes it will prevail.
Accrued Compensation
During the early stages of the pandemic, the
Company and certain employees/contractors agreed to a 20-30% deferral of their base compensation. At a later date, the Company offered
to convert this deferred amount to equity of the Company. For those that rejected this offer, there were no assurances that the 20-30%
temporary reduction would be paid in cash.
Employment Agreements
On October 18, 2017, the Company entered into
an employment agreement with Mr. Scott Silverman, pursuant to which he serves as the Chief Executive Officer of the Company for an initial
term of three years that extends for successive one-year renewal terms unless either party gives 30-days’ advance notice of non-renewal.
As consideration for these services, the employment agreement provides Mr. Silverman with the following compensation and benefits:
|
●
|
An annual base salary of $300,000, with a 10% increase on each anniversary date contingent upon achieving certain performance objectives as set by the Board. Until the Company raises $1,000,000 in debt or equity financing after entering into this agreement, Mr. Silverman will receive ½ of the base salary on a monthly basis with the other ½ being deferred. Upon the financing being raised, Mr. Silverman will receive the deferred portion of his compensation and his base salary will be paid in full moving forward.
|
|
●
|
After the first $500,000 of equity investments is raised by the Company, after entering into this employment agreement, Mr. Silverman will receive a capital raise success bonus of 5% of all equity capital raised from investors/lenders introduced by him to the Company.
|
|
|
|
|
●
|
Annual cash performance bonus opportunity as determined by the Board.
|
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
|
●
|
An option to acquire 3,000,000 common shares of the Company, with a strike price of $0.31 per unit. These options will vest pro rata on a monthly basis for the term of the employment agreement. On each anniversary, Mr. Silverman will be eligible to be granted a minimum of 500,000 stock options of the Company at a strike price of $0.85 per common unit contingent upon the achievement of certain performance objectives.
|
|
|
|
|
●
|
Certain other employee benefits and perquisites, including reimbursement of necessary and reasonable travel and participation in retirement and welfare benefits.
|
The April 25, 2018 financing received of $1,240,000
triggered the right of the employee to receive the deferred salary and the 5% bonus provision disclosed above.
Mr. Silverman’s employment agreement provides
that, in the event that his employment is terminated by the Company without “cause” (as defined in his employment agreement),
or if Mr. Silverman resigned for “good reasons” (as defined in his new employment agreement), subject to a complete release
of claims, he will be entitled to (i) retain all stock options previously granted; and (ii) receive any benefits then owed or accrued
along with one year of base salary and any unreimbursed expenses incurred by him. All amounts shall be paid on the termination date. In
the event that Mr. Silverman’s employment is terminated by the Company for “cause” (as defined in his employment agreement),
or if Mr. Silverman resigned without “good reasons” (as defined in his employment agreement), subject to a complete release
of claims, he will be entitled to receive any unpaid base salary and benefits then owed or accrued and any unreimbursed expenses incurred
by him. Additionally, if a change of control (as defined in his employment agreement) occurs during the term of this agreement, all unvested
stock options will vest in full and if the valuation of the Company in the change of control transaction is greater than $0.85 per common
share, then Mr. Silverman shall be paid a bonus equal to two times his minimum base salary and minimum target bonus. Pursuant to the employment
agreement, Mr. Silverman will be subject to a confidentiality covenant, a two-year post-termination non-competition covenant and a two-year
post-termination non-solicitation covenant. On June 30, 2020, the Company amended the employment agreement of Mr. Silverman to provide
for successive one-year extensions until either the executive or the Board of Directors of the Company gives notice to terminate the employment
agreement per its terms. This employment agreement amendment also includes an allowance of up to $10,000 per year to cover uncovered medical/dental
expenses for Mr. Silverman and his family.
On January 18, 2021, the Company’s board
of directors approved a bonus to officers and an employee of the Company in the aggregate amount of $330,000 which shall be initially
deferred and was recorded as an accrued compensation on the bonus approval date.
Licensing agreement
Pursuant to an agreement dated April 8, 2016,
between the Company and Rice University, Rice University has granted a non-exclusive license to the Company, in nanotube-based surface
treatment for strengthening glass and related materials under Rice’s intellectual property rights, to use, make, distribute, offer,
and sell the licensed products specified in the agreement. In consideration for which, the Company had to pay a one-time non-refundable
license fee of $10,000 and royalty payments of 5% of net sales of the licensed products during the term of the agreement and a sell-off
period of 180 days from termination, In addition, the Company is required to pay for the maintenance of the patents, This agreement will
continue until the expiration of the last to expire of the licensed property rights, unless terminated earlier in accordance with the
terms of the agreement. There have been no royalty payments paid or due through June 30, 2021.
Anti-dilution rights related to C-Bond Systems,
LLC
Prior to the Merger, C-Bond Systems, LLC entered
into certain contracts, described below, which provided certain anti-dilution protection to the counterparties to those contracts. The
Company believes that these contracts do not apply to any future issuances of equity by C-Bond Systems, Inc.
In 2013, pursuant to a subscription agreement,
the Company’s subsidiary. C-Bond Systems, LLC issued 2,425,300 common shares. To the extent that during the term of the agreement
C-Bond Systems, LLC issues any “down-round” or subsequent investments based upon an enterprise value of less than $2,000,000
(“Dilutive Transaction”) (other than an issuance pursuant to an option agreement with an employee or otherwise to compensate
an employee, or incident to an acquisition of assets by C-Bond Systems, LLC in which common units were issued to the seller of such assets)
contemporaneously with the Dilutive Transaction, the contract obligated C-Bond Systems, LLC to issue the investor additional common units
in C-Bond Systems, LLC in an amount which would provide them with the ownership percentage interest which they would have held in C-Bond
Systems, LLC represented by the common units purchased by them on this date.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
In 2015, pursuant to a subscription agreement,
C-Bond Systems, LLC issued 3,880,480 common shares to an entity at $0.77 per common share. This agreement entitled the subscriber to anti-dilution
protection to the extent that C-Bond Systems, LLC issued any equity in a “down-round” based upon a value of less than $0.77
per common unit of C-Bond Systems, LLC (other than an issuance pursuant to an option agreement with an employee or consultant or otherwise
to compensate an employee or consultant, or incident to an acquisition of assets by C-Bond Systems, LLC in which common units are issued
to the seller of such assets (“Dilutive Transaction”)). Contemporaneously with the Dilutive Transaction the contract obligated
C-Bond Systems, LLC to issue the Subscriber additional common units in C-Bond Systems, LLC in an amount which would provide the investor
with the ownership percentage interest in C-Bond Systems, LLC on a fully diluted basis which Subscriber held immediately prior to the
Dilutive Transaction.
In 2016, pursuant to a subscription agreement,
C-Bond Systems, LLC issued 1,175,902 common shares to an entity at $0.85 per common share. This agreement entitled this investor to customary
broad-based weighted average anti-dilution protection to the extent that after the date of this subscription agreement C-Bond Systems,
LLC issued any equity in a “down round” based upon a value of less than $0.85 per common share, including the issuance of
options with an exercise price per share of less than $0.85 to compensate employees or consultants (“Dilutive Transaction”),
subject to exclusions for issuances of common shares or options in connection with strategic partnerships, equity kickers to lenders or
vendors, mergers or acquisitions. The agreement obligated C-Bond Systems, LLC to give to this investor written notice (an “Issuance
Notice”) of any proposed issuance by C-Bond Systems, LLC of any C-Bond Systems, LLC common units, or other form of equity interest
(excluding issuances of C-Bond Systems, LLC options or other equity to compensate employees or consultants and the issuance of shares
in connection with strategic partnerships, equity kickers to lenders or vendors, mergers or acquisitions) at least ten business days prior
to the proposed issuance date. This contract entitled the investor to purchase their pro rata portion of such shares or other equity interest
of C-Bond Systems, LLC at the price and on the other terms and conditions specified in the issuance notice.
NOTE 9 – 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. The Company’s cash
is held at major commercial banks, which may at times exceed the Federal Deposit Insurance Corporation (“FDIC”) limit. On
June 30, 2021, the Company had approximately $34,000 of cash in excess of FDIC limits of $250,000. There were no balances in excess of
FDIC insured levels as of December 31, 2020. The Company has not experienced any losses in such accounts through June 30, 2021.
Geographic Concentrations of Sales
For the six months ended June 30, 2021 and 2020,
all sales were in the United States.
Customer Concentrations
For the six months ended June 30, 2021, three
customers accounted for approximately 54.4% of total sales (10.1%, 17.1%, and 27.2%, respectively). For the six months ended June 30,
2020, four customers accounted for approximately 51.5% of total sales (10.2%, 13.3%, 15.0% and 13.0%, respectively). On June 30, 2021,
three customers accounted for 39.8% (13.4%, 13.3% and 13.1%, respectively) of the net accounts receivable balance. A reduction in sales
from or loss of such customers would have a material adverse effect on the Company’s consolidated results of operations and financial
condition.
Vendor Concentrations
Generally, the Company purchases substantially
all of its inventory from three suppliers. The loss of these suppliers may have a material adverse effect on the Company’s consolidated
results of operations and financial condition. However, the Company believes that, if necessary, alternate vendors could supply similar
products in adequate quantities to avoid material disruptions to operations.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
NOTE 10 – REVENUE RECOGNITION
The revenue that the Company recognizes arises
from purchase requests the Company receives from its customers. The Company’s performance obligations under the purchase orders
correspond to each shipment of product that the Company makes to its customer under the purchase orders; as a result, each purchase order
generally contains more than one performance obligation based on the number of products ordered, the quantity of product to be shipped
and the mode of shipment requested by the customer. Control of the Company’s products transfers to its customers when the customer
is able to direct the use of, and obtain substantially all of the benefits from, the Company’s products, which generally occurs
at the later of when the customer obtains title to the product or when the customer assumes risk of loss of the product. The transfer
of control generally occurs at a point of shipment from the Company’s warehouse. Once this occurs, the Company has satisfied its
performance obligation and the Company recognizes revenue.
When the Company receives a purchase order from
a customer, the Company is obligated to provide the product during a mutually agreed upon time period. Depending on the terms of the purchase
order, either the Company or the customer arranges delivery of the product to the customer’s intended destination. In situations
where the Company has agreed to arrange delivery of the product to the customer’s intended destination and control of the product
transfers upon loading of the Company’s product onto transportation equipment, the Company has elected to account for any freight
income associated with the delivery of these products as freight revenue, since this activity fulfills the Company’s obligation
to transfer the product to the customer.
Transaction Price
The Company agrees with its customers on the selling
price of each transaction. This transaction price is generally based on the product, market conditions, including supply and demand balances
and freight. In the Company’s contracts with customers, the Company allocates the entire transaction price to the sale of product
to the customer, which is the basis for the determination of the relative standalone selling price allocated to each performance obligation.
Returns of the Company’s product by its customers are permitted only when the product is not to specification and were not material
for the six months ended June 30, 2021 and 2020. Any sales tax, value added tax, and other tax the Company collects concurrently with
its revenue-producing activities are excluded from revenue.
Revenue Disaggregation
The Company tracks its revenue by product. The
following table summarizes our revenue by product for the six months ended June 30, 2021 and 2020:
|
|
For the Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
C-Bond Secure multi-purpose and BRS ballistic resistant glass protection systems
|
|
$
|
160,292
|
|
|
$
|
62,183
|
|
C-Bond nanoShield solution sales
|
|
|
106,372
|
|
|
|
16,329
|
|
Disinfection products
|
|
|
7,130
|
|
|
|
18,138
|
|
Installation and other services
|
|
|
12,143
|
|
|
|
1,377
|
|
Freight and delivery
|
|
|
3,383
|
|
|
|
5,803
|
|
Total
|
|
$
|
289,320
|
|
|
$
|
103,830
|
|
NOTE 11 – OPERATING LEASE RIGHT-OF-USE
(“ROU”) ASSETS AND OPERATING LEASE LIABILITIES
In October 2019, the Company entered into an 18-month
lease agreement for the lease of office and warehouse space under a non-cancelable operating lease through May 31, 2021. From the lease
commencement date of December 1, 2019 until November 30, 2020, monthly rent shall be $4,444 and from December 1, 2020 to May 31, 2021,
monthly rent shall be $4,577 per month. On May 12, 2021 and effective June 1, 2021, the Company entered into an amendment to the lease
which extended the lease for one year until May 31, 2022 at a monthly base rent of $5,283.
In adopting ASC Topic 842, Leases (Topic 842)
on January 1, 2019, the Company had elected the ‘package of practical expedients’, which permitted it not to reassess under
the new standard its prior conclusions about lease identification, lease classification and initial direct costs (see Note 2). In addition,
the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less. Since the terms of the Company’s
operating lease for its office space prior to October 2019 was 12 months or less on the date of adoption, pursuant to ASC 842, the Company
determined that the lease met the definition of a short-term lease, and the Company did not recognize the right-of use asset and lease
liability arising from this lease. Upon renewal of the lease in October 2019, the Company analyzed the new lease and determined it is
required to record a lease liability and a right of use asset on its consolidated balance sheet, at fair value.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
During the six months ended June 30, 2021 and
2020, in connection with its operating leases, the Company recorded rent expense of $46.191 and $51,602, respectively, which includes
rent on a short-term lease for a corporate apartment and is expensed during the period and included in operating expenses on the accompanying
condensed consolidated statements of operations.
The significant assumption used to determine the
present value of the lease liability in October 2019 was a discount rate of 12% which was based on the Company’s estimated incremental
borrowing rate.
On June 30, 2021 and December 31, 2020, right-of-use
asset (“ROU”) is summarized as follows:
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Office leases right of use assets
|
|
$
|
74,296
|
|
|
$
|
74,296
|
|
Less: accumulated amortization
|
|
|
(74,296
|
)
|
|
|
(52,524
|
)
|
Balance of ROU assets
|
|
$
|
-
|
|
|
$
|
21,772
|
|
On June 30, 2021 and December 31, 2020, operating
lease liabilities related to the ROU assets are summarized as follows:
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Lease liabilities related to office leases right of use assets
|
|
$
|
-
|
|
|
$
|
22,216
|
|
Less: current portion of lease liabilities
|
|
|
-
|
|
|
|
(22,216
|
)
|
Lease liabilities – long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE 12 – RELATED PARTY TRANSACTIONS
Due from Related Party
On June 30, 2021 and December 31, 2020, the Company
has an amount due from the Company’s chief executive officer of $12,567 and $5,526, respectively, related to the overpayment of
accrued compensation. The balance due is included in due from related party on the accompanying condensed consolidated balance sheets.
NOTE 13 – SUBSEQUENT EVENTS
Shares issued for services
On July 7, 2021, the Company issued 2,500,000
shares of its common stock for investor relations services to be rendered. These shares were valued at $72,500, or $0.029 per common share,
based on the quoted closing price of the Company’s common stock on the measurement date. In connection with these shares, the Company
shall record stock-based professional fees of $72,500 over the 3 month term.
On July 22, 2021, pursuant to the Share Exchange
Agreement and Plan of Reorganization discussed below, the Company issued 976,500 shares of its common stock to employees of Mobile Tint
LLC as a bonus. These shares were valued at $24,412, or $0.025 per common share, based on the quoted closing price of the Company’s
common stock on the measurement date. In connection with these shares, the Company recorded stock-based compensation of $24,412.
Acquisition of Mobile Tint LLC
On June 30, 2021, the Company entered into a
Share Exchange Agreement and Plan of Reorganization (the “Exchange Agreement”) with (i) Mobile Tint LLC, a Texas limited
liability company doing business as A1 Glass Coating (“Mobile”), (ii) the sole member of Mobile (the “Mobile
Member”), and (iii) Michael Wanke as the Representative of the Mobile Member. Pursuant to the Exchange Agreement, the Company
agreed to acquire 80% of Mobile’s member units, representing 80% of Mobile’s issued and outstanding membership units
(the “Mobile Member Units”).
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
On July 22, 2021, the Company closed the Exchange
Agreement and acquired 80% of the Mobile Member Units. The Mobile Member Units were exchanged for restricted shares of the Company’s
common stock, in an amount equal to $800,000, divided by the average of the closing prices of the Company’s common stock during
the 30-day period immediately prior to the closing as defined in the Exchange Agreement. In connection with the Exchange Agreement, the
Company issued 28,021,016 shares of its common stock. Two years after closing, the Company has the option to acquire the remaining 20%
of Mobile’s issued and outstanding membership interests in exchange for a number of shares of the Company’s common stock equal
to 300% of Mobile’s average EBIT value, divided by the price of the Company’s common stock as defined in the Exchange Agreement
(the “Additional Closing”).
The Company also entered into an Amendment to
the Exchange Agreement, dated July 21, 2021, which, among other things, stipulates that for U.S. federal income tax purposes the Exchange
and the Additional Closing (if exercised) are intended to qualify as a “reorganization” within the meaning of Section 368(a)
of the Code and the Treasury Regulations, and the definition of “Total EBIT Value” shall mean Mobile’s net income, before
income tax expense and interest expense have been deducted, for the period beginning on July 1, 2021 and ending on June 30, 2023, plus
fifty percent (50%) of the Mobile Member’s Base Salary, as defined in the Executive Employment Agreement dated July 21, 2021, between
the Mobile Member and the Company (the “Employment Agreement”), as described below.
The Exchange Agreement transaction documents include
the Operating Agreement of Mobile (the “Operating Agreement”) which, among other things, appoints Mr. Wanke, Scott R. Silverman,
and Allison Tomek as the Managers of Mobile, and governs the operations of Mobile as outlined therein. Under the terms of the Operating
Agreement, the Managers shall not have the authority to perform or approve the following actions, among other things, unless such action
is also approved by a unanimous vote: to terminate the existing lease between Company and MDW Management, LLC, an entity owned by Michael
Wanke and is spouse; to borrow money for the Company from banks, other lending institutions, the Manager, Members, or affiliates of the
Manager or Members; to establish lines of credit in the name of the Company with financial institutions such as banks or other lending
institutions; to determine and declare distributions to Members of Mobile.
In connection with the Exchange Agreement, the
Company entered into a Piggy-Back Registration Rights Agreement dated July 20, 2021 (the “Registration Rights Agreement”)
with Mobile, the Mobile Member, and Mr. Wanke, pursuant to which if at any time on or after the date of the closing, the Company proposes
to file any Registration Statement (a “Registration Statement”) with respect to any offering of equity securities by the Company
for its own account or for shareholders of the Company, other than a Form S-8 Registration Statement, a dividend reinvestment plan, or
in connection with a merger or acquisition, then the Company shall (x) give written notice of such proposed filing to the holders of registrable
securities no less than ten (10) days before the anticipated filing date of the Registration Statement, and (y) offer to the holders of
registrable securities the opportunity to register the sale of either (i) an amount of registrable securities equal to the total number
of shares of the Company’s common stock being registered in such Registration Statement that are being offered solely for the Company’s
account excluding the registrable securities; or (ii) an amount of registrable securities equal to the total number of shares of the Company’s
common stock being registered for resale by shareholders of the Company excluding the registrable securities.
On July 21, 2021, the Company entered into the
Employment Agreement with Mr. Wanke, the President of Mobile, to serve as the President of C-Bond’s Safety Solutions Group. Under
the three-year Employment Agreement, Mr. Wanke will receive a base salary of $240,000 per year, which may be increased from time to time
with the approval of the board of directors. In addition, Mr. Wanke may receive an annual bonus as determined by the board of directors.
It is understood that although Mr. Wanke’s base salary will be paid by Mobile, 50% of the base salary will be allocated to the expenses
of Mobile, and the other 50% of the base salary will be allocated to the expenses of the Company. The term of this Agreement (the “Initial
Term”) shall begin as of July 21, 2021 (the “Effective Date”) and shall end on the earlier of (i) the third anniversary
of the Effective Date and (ii) the time of the termination of the Executive’s employment in accordance with the Employment Agreement.
This Initial Term and any Renewal Term (as defined below) shall automatically be extended for one or more additional terms of one (1)
year each (each a “Renewal Term” and together with the Initial Term, the “Term”), unless either the Company or
Executive provide notice to the other Party of their desire to not so renew the Initial Term or Renewal Term (as applicable) at least
thirty (30) days prior to the expiration of the then-current Initial Term or Renewal Term, as applicable. All unvested shares of stock
and stock options shall expire upon such termination, if any. The Executive shall be eligible for an annual bonus payment in an amount
to be determined by the Board of Directors of the Company (the “Bonus”). The Bonus shall be determined and payable based on
the achievement of certain performance objectives of the Company as established by the Board and communicated to and agreed to by the
Executive in writing as soon as practicable after commencement of the year in respect of which the Bonus is paid. The Bonus, if earned,
is payable in cash and/or restricted stock at the discretion of the Board. It is understood between the Parties that the target bonus
for each year shall be up to 50% of the Base Salary.
C-BOND SYSTEMS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)
In connection with the Exchange Agreement, the
Company was named as guarantor (“Guarantor”) of a Commercial Lease Agreement dated July 21, 2021, by and between landlord
MDW Management, LLC,, a company owned by Michael Wanke and his wife and tenant Mobile Tint, LLC d/b/a A-1 Glass (the “Lease”).
The term of the Lease is 60 months, at a minimum monthly rent of $5,600 (not including tax), with two five-year options for the tenant
to renew. The Company’s obligation as Guarantor of the Lease will terminate upon the occurrence of earlier of the following: (i)
the date of Guarantor’s acquisition of 100% of the ownership interests of Mobile; (ii) the date that Guarantor beneficially owns
less than an eighty percent (80%) ownership interest in Mobile; or (iii) two (2) years from and after the effective date of the guaranty.
In connection with the Exchange Agreement, the
assets acquired and liabilities assumed shall be recorded at their estimated fair values on the acquisition date, subject to adjustment
during the measurement period with subsequent changes recognized in earnings or loss. These estimates are inherently uncertain and are
subject to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to value
the assets acquired and liabilities assumed as of the business acquisition date. As a result, during the purchase price measurement period,
which may be up to one year from the business acquisition date, the Company may record adjustments to the assets acquired and liabilities
assumed based on completion of valuations, with the corresponding offset to goodwill. After the purchase price measurement period, the
Company will record any adjustments to assets acquired or liabilities assumed in operating expenses in the period in which the adjustments
may have been determined. Based upon the purchase price allocation, the following table summarizes the preliminary estimated fair value
of the assets acquired and liabilities assumed at the date of the respective acquisition:
|
|
Total
|
|
Assets acquired:
|
|
|
|
Tangible assets
|
|
$
|
561,985
|
|
Intangible assets and goodwill
|
|
|
376,499
|
|
Total assets acquired at fair value
|
|
|
938,484
|
|
Less: total liabilities assumed
|
|
|
(243,563
|
)
|
Net asset acquired
|
|
$
|
694,921
|
|
|
|
|
|
|
Purchase consideration paid:
|
|
|
|
|
Fair value of common shares issued
|
|
$
|
694,921
|
|
Total purchase consideration paid
|
|
$
|
694,921
|
|
The following unaudited pro forma consolidated
results of operations have been prepared as if the acquisition of Mobile Tint LLC had occurred as of the beginning of the following periods:
|
|
Six Months Ended
June 30,
2021
|
|
|
Six Months Ended
June 30,
2020
|
|
Net Revenues
|
|
$
|
1,051,657
|
|
|
$
|
1,195,328
|
|
Net Loss
|
|
$
|
(5,106,305
|
)
|
|
$
|
(2,877,630
|
)
|
Net Loss per Share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
Pro forma data does not purport to be indicative
of the results that would have been obtained had these events actually occurred at the beginning of the periods presented and is not intended
to be a projection of future results.