See accompanying notes to the unaudited condensed
consolidated financial statements.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,933,775
|
)
|
|
$
|
(2,619,752
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
33,878
|
|
|
|
11,141
|
|
Amortization of debt discount to interest expense
|
|
|
-
|
|
|
|
424,001
|
|
Accretion of preferred shares stated value to interest expense
|
|
|
-
|
|
|
|
52,400
|
|
Stock-based compensation
|
|
|
4,042,926
|
|
|
|
942,850
|
|
Stock-based professional fees
|
|
|
359,829
|
|
|
|
69,917
|
|
Bad debt expense
|
|
|
35,000
|
|
|
|
19,400
|
|
Interest expense related to put premium on convertible debt
|
|
|
-
|
|
|
|
47,405
|
|
Derivative expense
|
|
|
-
|
|
|
|
90,623
|
|
Non-cash gain on debt extinguishment
|
|
|
-
|
|
|
|
(877,823
|
)
|
Non-cash fees upon conversion
|
|
|
-
|
|
|
|
2,500
|
|
Lease costs
|
|
|
(444
|
)
|
|
|
401
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(234,445
|
)
|
|
|
60,079
|
|
Accounts receivable - related party
|
|
|
(1,200
|
)
|
|
|
-
|
|
Inventory
|
|
|
(24,814
|
)
|
|
|
(27,985
|
)
|
Prepaid expenses and other assets
|
|
|
(6,647
|
)
|
|
|
8,773
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
(2,456
|
)
|
|
|
-
|
|
Due from related party
|
|
|
(24,179
|
)
|
|
|
-
|
|
Accounts payable
|
|
|
155,241
|
|
|
|
55,721
|
|
Accrued expenses
|
|
|
83,231
|
|
|
|
88,771
|
|
Customer deposit
|
|
|
(110,000
|
)
|
|
|
-
|
|
Accrued compensation
|
|
|
317,001
|
|
|
|
518,736
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
22,179
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(1,288,675
|
)
|
|
|
(1,132,842
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash received from acquisition
|
|
|
288,902
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY INVESTING ACTIVITIES
|
|
|
288,902
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
-
|
|
|
|
721,000
|
|
Proceeds from sale of series A preferred stock
|
|
|
-
|
|
|
|
120,000
|
|
Redemption of Series A preferred stock
|
|
|
-
|
|
|
|
(104,762
|
)
|
Proceeds from sale of series C preferred stock
|
|
|
550,000
|
|
|
|
630,000
|
|
Proceeds from note payable
|
|
|
500,000
|
|
|
|
156,200
|
|
Repayment of notes payable
|
|
|
(5,297
|
)
|
|
|
-
|
|
Proceeds from convertible notes payable
|
|
|
-
|
|
|
|
100,000
|
|
Repayment of convertible note payable
|
|
|
-
|
|
|
|
(393,215
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
1,044,703
|
|
|
|
1,229,223
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH
|
|
|
44,930
|
|
|
|
96,381
|
|
|
|
|
|
|
|
|
|
|
CASH, beginning of period
|
|
|
323,407
|
|
|
|
77,211
|
|
|
|
|
|
|
|
|
|
|
CASH, end of period
|
|
$
|
368,337
|
|
|
$
|
173,592
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,648
|
|
|
$
|
130,303
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Common stock issued as prepaid for services
|
|
$
|
98,800
|
|
|
$
|
56,500
|
|
Common stock issued for accrued compensation
|
|
$
|
40,626
|
|
|
$
|
16,250
|
|
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
|
|
$
|
-
|
|
|
$
|
188,529
|
|
Reclassification of put premium to equity
|
|
$
|
-
|
|
|
$
|
49,543
|
|
Preferred stock dividend accrued
|
|
$
|
34,029
|
|
|
$
|
2,795
|
|
Deemed dividend related to beneficial conversion feature of Series C preferred shares
|
|
$
|
4,354,761
|
|
|
$
|
-
|
|
Increase in debt discount and derivative liability
|
|
$
|
-
|
|
|
$
|
85,502
|
|
Increase in debt discount and paid-in capital for warrants
|
|
$
|
-
|
|
|
$
|
14,498
|
|
|
|
|
|
|
|
|
|
|
ACQUISITION:
|
|
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
288,902
|
|
|
$
|
-
|
|
Accounts receivable, net
|
|
|
40,587
|
|
|
|
|
|
Inventory
|
|
|
68,019
|
|
|
|
-
|
|
Prepaid expenses
|
|
|
6,091
|
|
|
|
-
|
|
Property and equipment
|
|
|
140,210
|
|
|
|
-
|
|
Right of use assets
|
|
|
253,433
|
|
|
|
-
|
|
Total assets acquired
|
|
|
797,242
|
|
|
|
-
|
|
Less: liabilities assumed:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
65,728
|
|
|
|
-
|
|
Accrued expenses
|
|
|
92,914
|
|
|
|
-
|
|
Notes payable
|
|
|
95,013
|
|
|
|
-
|
|
Customer deposit
|
|
|
110,000
|
|
|
|
|
|
Lease liabilities
|
|
|
253,433
|
|
|
|
-
|
|
Noncontrolling interest
|
|
|
36,031
|
|
|
|
-
|
|
Total liabilities assumed
|
|
|
653,119
|
|
|
|
|
|
Net assets acquired
|
|
|
(144,123
|
)
|
|
|
|
|
Fair value of shares for acquisition
|
|
|
694,921
|
|
|
|
|
|
Increase in intangible assets - non-cash
|
|
$
|
550,798
|
|
|
$
|
-
|
|
See accompanying notes to the unaudited condensed
consolidated financial statements.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
NOTE
1 – NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Organization
C-Bond
Systems, Inc. and its subsidiaries (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
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 3). Mobile provides quality window tint solutions for auto, home, and business
owners across Texas, specializing in automotive window tinting, residential window film, and commercial window film that stop harmful
UV rays from passing through its window films for reduced glare, comfortable temperatures, and lower energy bills. Mobile also carry
products that offer forced-entry protection and films that protect glass from scratches, graffiti, other types of vandalism, and even
bullets, including C-Bond BRS and C-Bond Secure products. As part of the transaction, Mobile’s owner-operator, Michael Wanke, joined
the Company as President of its Safety Patriot Glass Solutions Group.
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.
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 and its 80% owned subsidiary,
Mobile Tint LLC since acquiring 80% of of Mobile Tint LLC on July 22, 2021. 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.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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.
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 $5,933,775 and $2,619,752 for the nine months ended September
30, 2021 and 2020, respectively. The net cash used in operations was $1,288,675 and $1,132,842 for the nine months ended September 30,
2021 and 2020, respectively. Additionally, the Company had an accumulated deficit, shareholders’ deficit, and working capital deficit
of $56,325,555, $3,851,082 and $1,387,394, respectively, on September 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
nine months ended September 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, estimated used in the calculation of percentage of completion on uncompleted jobs,
purchase price allocation of acquired businesses, 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 September 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.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
The
carrying amounts reported in the unaudited 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.
Segment
Reporting
During
the nine months ended September 30, 2020, the Company operated in one reportable business segment, which consisted of the manufacture
and sale of a windshield strengthening water repellent solution as well as a disinfection product, and the sale of multi-purpose glass
strengthening primer and window film mounting solutions, including ballistic-resistant film systems and a forced entry system. During
the nine months ended September 30, 2021, the Company operated in two reportable business segments which consisted of - (1) the manufacture
and sale of a windshield strengthening water repellent solution as well as a disinfection product, and the sale of multi-purpose glass
strengthening primer and window film mounting solutions, including ballistic-resistant film systems and a forced entry system, and (2)
the distribution and installation of window film solutions. The Company’s reportable segments were strategic business units that
offered different products. They were managed separately based on the fundamental differences in their operations and locations.
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 September 30,
2021 and December 31, 2020.
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.
Goodwill
and Intangible Assets
Goodwill
represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized.
Any goodwill arising from the Company’s acquisition is attributable to the value of the potential expanded market opportunity with
new customers. Intangible assets may have either an identifiable or indefinite useful life. Intangible assets with identifiable useful
lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter. The Company’s amortizable
intangible assets consist of customer relationships with a useful life of 5 years.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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.
Revenues
from fixed-price contracts for the distribution and installation of window film solutions are recognized on the percentage of completion
method, whereby revenues on long-term contracts are recorded on the basis of the Company’s estimates of the percentage of completion
of contracts based on the ratio of actual cost incurred to total estimated costs. This cost-to-cost method is used because management
considers it to be the best available measure of progress on these contacts. The asset, “cost and estimated earnings in excess
of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed and has been included in cost
and estimated earnings in excess of billings on uncompleted contracts on the accompanying unaudited condensed consolidated balance sheets.
The liability, “billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess
of revenues recognized.
Cost
of Sales
Cost
of product sales includes inventory costs, packaging costs and warranty expenses.
Cost
of revenues from fixed-price contracts for the distribution and installation of window film solutions include all direct material, sub-contractor,
labor and certain other direct costs, as well as those indirect costs related to contract performance, such as indirect labor and fringe
benefits. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes
in job performance, job conditions and estimated profitability may result in revisions to cost and income, which are recognized in the
period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions,
claims, change orders, and settlements, are accounted for as changes in estimates in the current period.
Shipping
and Handling Costs
Shipping
and handling costs incurred for product shipped to customers are included in general and administrative expenses and amounted to $11,946
and $29,752 for the nine months ended September 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 nine months ended September 30, 2021 and 2020, research and development
costs (recovery) incurred in the development of the Company’s products were $(2,404) and $14,597, 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 SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2021 and December
31, 2020, respectively. For the nine months ended September 30, 2021 and 2020, warranty costs amounted to $100, for both periods which
has been deducted from warrant liability. For the nine months ended September 30, 2021 and 2020, a roll forward of warranty liability
is as follows:
|
|
For
the Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Balance at beginning of period
|
|
$
|
26,833
|
|
|
$
|
26,933
|
|
Warranty costs incurred
|
|
|
(100
|
)
|
|
|
(100
|
)
|
Balance at end of period
|
|
$
|
26,733
|
|
|
$
|
26,833
|
|
Advertising
Costs
The Company may participate in various advertising programs. All costs
related to advertising of the Company’s products are expensed in the period incurred. For the nine months ended September 30, 2021
and 2020, advertising costs charged to operations were $33,306 and $30,900, 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 September 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 September
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.
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.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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:
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Stock options
|
|
|
8,445,698
|
|
|
|
8,445,698
|
|
Warrants
|
|
|
1,000,000
|
|
|
|
2,050,000
|
|
Series B preferred stock
|
|
|
114,598,413
|
|
|
|
17,142,857
|
|
Series C preferred stock
|
|
|
298,412,698
|
|
|
|
100,000,000
|
|
Non-vested, forfeitable common shares
|
|
|
14,270,120
|
|
|
|
23,851,926
|
|
|
|
|
436,726,929
|
|
|
|
151,490,481
|
|
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.
Noncontrolling
Interest
The
Company accounts for noncontrolling interest in accordance with ASC Topic 810-10-45, which requires the Company to present noncontrolling
interests as a separate component of total shareholders’ equity on the consolidated balance sheets and the consolidated net income/(loss)
attributable to its noncontrolling interest be clearly identified and presented on the face of the unaudited condensed consolidated statements
of operations.
Risk and Uncertainties
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 September 30, 2021 and
December 31, 2020, the Company recognized an allowance for losses on accounts receivable in an amount of $277,480 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.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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 - 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”).
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 his 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.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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:
|
|
|
|
Cash
|
|
$
|
288,902
|
|
Accounts receivable, net
|
|
|
40,587
|
|
Inventory
|
|
|
68,019
|
|
Prepaid expenses and other
|
|
|
6,091
|
|
Property and equipment
|
|
|
140,210
|
|
Right of use asset
|
|
|
253,433
|
|
Intangible assets
|
|
|
550,798
|
|
Total assets acquired at fair value
|
|
|
1,348,040
|
|
Less: total liabilities assumed:
|
|
|
|
|
Notes payable
|
|
|
95,013
|
|
Accounts payable
|
|
|
65,728
|
|
Accrued expenses
|
|
|
92,914
|
|
Customer deposit
|
|
|
110,000
|
|
Lease liability
|
|
|
253,433
|
|
Noncontrolling interest
|
|
|
36,031
|
|
Total liabilities assumed
|
|
|
653,119
|
|
Net assets 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:
|
|
Nine Months Ended
September 30,
2021
|
|
|
Nine Months Ended
September 30,
2020
|
|
Net Revenues
|
|
$
|
1,630,742
|
|
|
$
|
1,889,759
|
|
Net Loss
|
|
$
|
(5,868,878
|
)
|
|
$
|
(2,353,392
|
)
|
Net Loss per Share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
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.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
NOTE
4 – ACCOUNTS RECEIVABLE
On
September 30, 2021 and December 31, 2020, accounts receivable consisted of the following:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Accounts receivable
|
|
$
|
597,209
|
|
|
$
|
282,177
|
|
Less: allowance for doubtful accounts
|
|
|
(277,480
|
)
|
|
|
(202,480
|
)
|
Accounts receivable, net
|
|
$
|
319,729
|
|
|
$
|
79,697
|
|
For the nine months ended September 30, 2021 and 2020, bad debt expense
amounted to $35,000 and $19,400, respectively, which is included in general and administrative expenses on the accompanying unaudited
condensed consolidated statements of operations.
NOTE
5 – INVENTORY
On
September 30, 2021 and December 31, 2020, inventory consisted of the following:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Raw materials
|
|
$
|
18,199
|
|
|
$
|
24,477
|
|
Finished goods
|
|
|
151,834
|
|
|
|
52,723
|
|
Inventory
|
|
$
|
170,033
|
|
|
$
|
77,200
|
|
NOTE
6 – PROPERTY AND EQUIPMENT
On
September 30, 2021 and December 31, 2020, property and equipment consisted of the following:
|
|
Useful Life
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Machinery and equipment
|
|
5 - 7 years
|
|
$
|
124,133
|
|
|
$
|
50,722
|
|
Furniture and office equipment
|
|
3 - 7 years
|
|
|
32,305
|
|
|
|
30,245
|
|
Vehicles
|
|
1 - 5 years
|
|
|
92,085
|
|
|
|
55,941
|
|
Leasehold improvements
|
|
3 - 5 years
|
|
|
45,296
|
|
|
|
16,701
|
|
|
|
|
|
|
293,819
|
|
|
|
153,609
|
|
Less: accumulated depreciation
|
|
|
|
|
(148,149
|
)
|
|
|
(134,926
|
)
|
Property and equipment, net
|
|
|
|
$
|
145,670
|
|
|
$
|
18,683
|
|
For
the nine months ended September 30, 2021 and 2020, depreciation and amortization expense is included in general and administrative expenses
and amounted to $13,223 and $11,141, respectively.
NOTE
7 - INTANGIBLE ASSETS
On
September 30, 2021 and December 31, 2020, intangible asset consisted of the following:
|
|
Useful life
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Customer relations
|
|
5 years
|
|
$
|
550,798
|
|
|
|
-
|
|
Less: accumulated amortization
|
|
|
|
|
(20,655
|
)
|
|
|
-
|
|
|
|
|
|
$
|
530,143
|
|
|
$
|
-
|
|
For the nine months ended September 30, 2021 and
2020, amortization of intangible assets amounted to $20,655 and $0, respectively.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
Amortization
of intangible assets attributable to future periods is as follows:
Year
ending September 30:
|
|
Amount
|
|
2022
|
|
$
|
110,160
|
|
2023
|
|
|
110,160
|
|
2024
|
|
|
110,160
|
|
2025
|
|
|
110,160
|
|
2026
|
|
|
89,503
|
|
|
|
$
|
530,143
|
|
NOTE
8 – NOTES PAYABLE
On
September 30, 2021 and December 31, 2020, notes payable consisted of the following:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Notes payable
|
|
$
|
989,716
|
|
|
$
|
400,000
|
|
Note payable - PPP note
|
|
|
156,200
|
|
|
|
156,200
|
|
Total notes payable
|
|
|
1,145,916
|
|
|
|
556,200
|
|
Less: current portion of notes payable
|
|
|
(604,560
|
)
|
|
|
(521,138
|
)
|
Notes payable – long-term
|
|
$
|
541,356
|
|
|
$
|
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.
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 September 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. The note balance due of
$400,000 has been reflected as a current liability on the accompanying unaudited condensed 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 September 30, 2021 and December 31,
2020, principal amount due under this Note amounted to $400,000 and is considered to be in default. On September 30, 2021 and December
31, 2020, accrued interest payable under this Note amounted to $202,093 and $148,241, respectively, and is included in accrued expenses
on the accompanying unaudited condensed consolidated statement of operations.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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 September 30, 2021, accrued
interest payable under this Note amounted to $15,781 and is included in accrued expenses on the accompanying unaudited condensed consolidated
statement of operations. On September 30, 2021 and December 31, 2020, principal amount due under this Note amounted to $500,000 and $0,
respectively.
On July 22, 2021, in connection with the acquisition of Mobile Tint,
the Company assumed vehicle and equipment loans and a capital lease obligation in the amount of $95,013. These loans and capital lease
obligations bear interest at rates ranging from 6.79% to 8.24% and are payable monthly through April 2025. On September 30, 2021, notes
payable related to these vehicles and capital lease obligation amounted to $89,716.
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 September 30, 2021, accrued interest payable amounted to $2,230. For the nine months ended
September 30, 2021, interest expense related to this Note amounted to $1,168. On September 30, 2021 and December 31, 2020, the principal
amount due under the PPP Note amounted to $156,200 and $156,200, respectively. The Company applied for forgiveness of its PPP Loan, and
on November 4, 2021, the Company was notified that the Small Business Administration forgave $95,000 of the principal loan amount and
$1,451 of interest. The remaining principal balance of the loan is $61,200 and the remaining accrued interest balance is $935.
On September 30, 2021, future annual maturities
of notes payable are as follows:
September 30,
|
|
Amount
|
|
2022
|
|
$
|
604,560
|
|
2023
|
|
|
528,924
|
|
2024
|
|
|
8,533
|
|
2025
|
|
|
3,899
|
|
Total notes payable on September 30, 2021
|
|
$
|
1,145,916
|
|
NOTE
9 – 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.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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.
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 nine months ended September 30, 2021, the Company accrued a dividend payable of $10,525 which was included in preferred stock dividends
on the accompanying unaudited condensed consolidated statements of shareholders’ deficit.
As
of September 30, 2021, the net Series B Preferred Stock balance was $734,971 which includes stated liquidation value of $721,970 and
accrued dividends payable of $13,001. 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.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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.
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.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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 unaudited 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.
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.
On
August 25, 2021, the Company entered into a subscription agreement with an accredited investor whereby the investor agreed to purchase
3,000 shares of the Company’s Series C Convertible Preferred Stock for $300,000, 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 $1,509,523 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 nine months ended September 30, 2021, the Company accrued a dividend payable of $23,504 which was included in preferred stock dividends
on the accompanying unaudited condensed consolidated statement of shareholders’ deficit. As of September 30, 2021, the net Series
C Preferred Stock balance was $1,909,535 which includes stated liquidation value of $1,880,000 and accrued dividends payable of $29,535.
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.
In
connection with subscription agreements dated July 2, 2020, the Company received cash proceeds of $280,000 from investors for the purchase
of 21,538,462 shares of the Company’s common stock at $0.013 per share.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
Issuance
of Common Stock for Services
Issuance
of Common Stock 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 September 30, 2020, the Company recorded stock-based
professional fees of $50,000.
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 nine months ended September 30, 2020, accretion of stock-based consulting fees
amounted to $10,000 and the remaining stock-based consulting fees of $10,000 shall be accreted over the remaining vesting period.
On
July 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 500,000 restricted common shares of the Company to the consultant. These shares vest
immediately. These shares were valued at $6,500, or $0.013 per common share, based on contemporaneous common share sales by the Company.
In connection with this consulting agreement, as of September 30, 2020, the Company recorded stock-based professional fees of $3,250
and prepaid expenses of $3,250 which will be amortized over the remaining term of the agreement.
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.
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 nine months
ended September 30, 2021, the Company recorded stock-based professional fees of $41,600 and prepaid expenses of $13,000 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 September 30, 2021, the Company recorded stock-based professional
fees of $49,500.
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.
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 recorded stock-based professional fees of $72,500.
On
August 23, 2021, the Company issued 500,000 shares of its common stock for business development and consulting services rendered and
to be rendered. These shares were valued at $19,000, or $0.038 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 September 30, 2021, the Company recorded stock-based professional fees
of $1,979 and prepaid expenses of $17,021 which will be amortized into stock-based professional fees over the term of the agreement or
vesting period of 1.00 year.
During
the nine months ended September 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.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
Issuance
of Common Stock 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.
On
July 22, 2021, pursuant to the Share Exchange Agreement and Plan of Reorganization (See Note 3), the Company issued 976,500 shares of
its common stock to employees of Mobile Tint LLC as a bonus. These shares were valued at $24,413, 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 $24,413.
On September 17, 2021, the Company granted a restricted
stock award for 1,000,000 common shares of the Company to an employee for services to be rendered through May 1, 2022 which were valued
at $30,600, or $0.031 per common share, based on the quoted closing price of the Company’s common stock on the measurement date.
These shares will vest on May 1, 2022. In connection with these shares, the Company shall record stock-based compensation over the vesting
period.
During
the nine months ended September 30, 2021 and 2020, aggregate accretion of stock-based compensation expense on granted non-vested shares
amounted to $224,588 and $366,825, respectively. Total unrecognized compensation expense related to these unvested common shares on September
30, 2021 amounted to $92,262 which will be amortized over the remaining vesting period of approximately 0.75 years.
Issuance
of Common Stock 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
|
|
|
6,194,767
|
|
|
|
0.06
|
|
Forfeited
|
|
|
(700,000
|
)
|
|
|
(0.07
|
)
|
Shares vested
|
|
|
(15,051,573
|
)
|
|
|
(0.14
|
)
|
Non-vested, September 30, 2021
|
|
|
14,270,120
|
|
|
$
|
0.14
|
|
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
Issuance
of Common Stock Pursuant to Share Exchange Agreement
On
July 22, 2021, the Company closed the Exchange Agreement and acquired 80% of the Mobile Member Units (see Note 3). 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. These shares
were valued at $694,921, or $0.0248 based on the quoted closing price of the Company’s common stock on the measurement date.
Common
Stock 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 nine months ended September 30, 2020, the Company issued 37,171,800 shares of its common stock upon the conversion of convertible
notes with bifurcated embedded conversion option derivatives including principal of $152,285, accrued interest of $36,244, and fees of
$2,500. 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 $297,919 which is associated with the different
between the fair market value of the shares issued upon conversion of $450,204 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 Stock
During
the nine months ended September 30, 2020, the Company issued 16,132,701 shares its common stock upon the conversion of 211,200 shares
of Series A preferred with a stated redemption value of $211,200 and related accrued dividends payable of $4,224. The conversion price
was based on contractual terms of the related Series A preferred shares. Upon conversion, the Company reclassified put premium of $49,543
to paid-in capital.
Common
Stock 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.
Stock
Options
For
the nine months ended September 30, 2021 and 2020, the Company recorded $0 and $576,025 of compensation expense related to stock options,
respectively. Total unrecognized compensation expense related to unvested stock options on September 30, 2021 amounted to $0.
Stock
option activities for the nine months ended September 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, September 30, 2021
|
|
|
8,445,698
|
|
|
$
|
0.40
|
|
|
|
4.33
|
|
|
$
|
2,160
|
|
Exercisable, September 30, 2021
|
|
|
8,445,698
|
|
|
$
|
0.40
|
|
|
|
4.33
|
|
|
$
|
2,160
|
|
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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 nine months ended September 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 September 30, 2021
|
|
|
1,000,000
|
|
|
$
|
0.09
|
|
|
|
2.80
|
|
|
$
|
-
|
|
Exercisable, September 30, 2021
|
|
|
1,000,000
|
|
|
$
|
0.09
|
|
|
|
2.80
|
|
|
$
|
-
|
|
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.
|
|
●
|
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 29,451,070 shares of restricted stock have been issued as of September 30, 2021. All shares underlying grants are expected
to be issued from the Company’s unissued authorized shares available.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
NOTE
10 – 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 September 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.
|
|
●
|
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.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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.
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.
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 September 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.
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.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
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
11 – 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. There were no balances in excess of FDIC insured levels as of September 30, 2021 and December 31, 2020. The
Company has not experienced any losses in such accounts through September 30, 2021.
Geographic
Concentrations of Sales
For
the nine months ended September 30, 2021 and 2020, all sales were in the United States.
Customer
Concentrations
For
the nine months ended September 30, 2021, three customers accounted for approximately 47.4% of total sales (12.6%, 11.3%, and 23.5%,
respectively). For the nine months ended September 30, 2020, one customer accounted for approximately 24.0% of total sales.
On
September 30, 2021, two customers accounted for 57.3% (26.7% and 30.6%, 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 five 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.
NOTE
12 – SEGMENT REPORTING
During
the nine months ended September 30, 2020, the Company operated in one reportable business segment, which consisted of the manufacture
and sale of a windshield strengthening water repellent solution as well as a disinfection product, and the sale of multi-purpose glass
strengthening primer and window film mounting solutions, including ballistic-resistant film systems and a forced entry system (the “C-Bond
Segment”). During the nine months ended September 30, 2021, the Company operated in two reportable business segments - (1) the
manufacture and sale of a windshield strengthening water repellent solution as well as a disinfection product, and the sale of multi-purpose
glass strengthening primer and window film mounting solutions, including ballistic-resistant film systems and a forced entry system (the
“C-Bond Segment”), and (2) the distribution and installation of window film solutions (the “Mobile Tint Segment”).
The Company’s reportable segments were strategic business units that offered different products. They were managed separately based
on the fundamental differences in their operations and locations.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
Information with respect
to these reportable business segments for the three and nine months ended September 30, 2021 and 2020 was as follows:
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
C-Bond
|
|
$
|
80,878
|
|
|
$
|
252,940
|
|
|
$
|
370,198
|
|
|
$
|
356,770
|
|
Mobile Tint
|
|
|
593,640
|
|
|
|
-
|
|
|
|
593,640
|
|
|
|
-
|
|
|
|
|
674,518
|
|
|
|
252,940
|
|
|
|
963,838
|
|
|
|
356,770
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C-Bond
|
|
|
2,472
|
|
|
|
2,655
|
|
|
|
7,417
|
|
|
|
11,141
|
|
Mobile Tint
|
|
|
26,461
|
|
|
|
-
|
|
|
|
26,461
|
|
|
|
-
|
|
|
|
|
28,933
|
|
|
|
2,655
|
|
|
|
33,878
|
|
|
|
11,141
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C-Bond
|
|
|
-
|
|
|
|
34
|
|
|
|
1,372
|
|
|
|
307
|
|
Mobile Tint
|
|
|
1,253
|
|
|
|
-
|
|
|
|
1,253
|
|
|
|
-
|
|
Other (a)
|
|
|
28,647
|
|
|
|
274,932
|
|
|
|
70,824
|
|
|
|
732,240
|
|
|
|
|
29,900
|
|
|
|
274,966
|
|
|
|
73,449
|
|
|
|
732,547
|
|
Net (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C-Bond
|
|
|
(325,016
|
)
|
|
|
(478,924
|
)
|
|
|
(1,304,798
|
)
|
|
|
(1,846,709
|
|
Mobile Tint
|
|
|
170,753
|
|
|
|
-
|
|
|
|
170,753
|
|
|
|
-
|
|
Other (a)
|
|
|
(336,514
|
)
|
|
|
959,320
|
|
|
|
(4,799,730
|
)
|
|
|
(773,043
|
)
|
|
|
$
|
(490,777
|
)
|
|
$
|
480,396
|
|
|
$
|
(5,933,775
|
)
|
|
$
|
(2,619,752
|
)
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Identifiable long-lived tangible assets on September 30, 2021 and December 31, 2020 by segment
|
|
|
|
|
|
|
C-Bond
|
|
$
|
11,266
|
|
|
$
|
18,683
|
|
Mobile Tint
|
|
|
134,404
|
|
|
|
-
|
|
|
|
$
|
145,670
|
|
|
$
|
18,683
|
|
(a)
|
The
Company does not allocate any general and administrative expense of its holding company activities to its reportable segments, because
these activities are managed at the corporate level.
|
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
NOTE
13 – 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 nine months ended September 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.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
Revenue Disaggregation
The Company tracks its revenue by product and
service. The following table summarizes our revenue by product for the three and nine months ended September 30, 2021 and 2020:
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
C-Bond Secure multi-purpose and BRS ballistic resistant glass protection systems
|
|
$
|
24,553
|
|
|
$
|
54,205
|
|
|
$
|
184,845
|
|
|
$
|
116,388
|
|
C-Bond Nanoshield solution sales
|
|
|
52,645
|
|
|
|
73,699
|
|
|
|
159,017
|
|
|
|
90,028
|
|
Disinfection products
|
|
|
-
|
|
|
|
116,851
|
|
|
|
7,130
|
|
|
|
134,989
|
|
C-Bond installation and other services
|
|
|
-
|
|
|
|
3,515
|
|
|
|
12,143
|
|
|
|
4,892
|
|
Window tint installation and sales
|
|
|
593,640
|
|
|
|
-
|
|
|
|
593,640
|
|
|
|
-
|
|
Freight and delivery
|
|
|
3,680
|
|
|
|
4,670
|
|
|
|
7,063
|
|
|
|
10,473
|
|
Total
|
|
$
|
674,518
|
|
|
$
|
252,940
|
|
|
$
|
963,838
|
|
|
$
|
356,770
|
|
NOTE 14 – 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 was $4,444 and from December 1, 2020 to May 31, 2021, monthly
rent was $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 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 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.
During the nine months ended September 30, 2021 and
2020, in connection with its operating leases, the Company recorded rent expense of $79,429 and $69,260, respectively, which included
rent on a short-term lease for a corporate apartment and is expensed during the period and included in operating expenses on the accompanying
unaudited condensed consolidated statements of operations.
The significant assumption used to determine the present
value of the lease liability in October 2019 and July 2021 was a discount rate of 12% which was based on the Company’s estimated
incremental borrowing rate.
On September 30, 2021 and December 31, 2020, right-of-use
asset (“ROU”) is summarized as follows:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Office leases right of use assets
|
|
$
|
253,433
|
|
|
$
|
74,296
|
|
Less: accumulated amortization
|
|
|
(7,881
|
)
|
|
|
(52,524
|
)
|
Balance of ROU assets
|
|
$
|
245,552
|
|
|
$
|
21,772
|
|
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
On September 30, 2021 and December 31, 2020, operating
lease liabilities related to the ROU assets are summarized as follows:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Lease liabilities related to office leases right of use assets
|
|
$
|
245,552
|
|
|
$
|
22,216
|
|
Less: current portion of lease liabilities
|
|
|
(39,879
|
)
|
|
|
(22,216
|
)
|
Lease liabilities – long-term
|
|
$
|
205,673
|
|
|
$
|
-
|
|
On September 30, 2021, future minimum base lease payments
due under non-cancelable operating leases are as follows:
September 30,
|
|
Amount
|
|
2022
|
|
$
|
67,200
|
|
2023
|
|
|
67,200
|
|
2024
|
|
|
67,200
|
|
2025
|
|
|
67,200
|
|
2026
|
|
|
56,000
|
|
Total minimum non-cancelable operating lease payments
|
|
|
324,800
|
|
Less: discount to fair value
|
|
|
(79,248
|
)
|
Total lease liability on September 30, 2021
|
|
$
|
245,552
|
|
NOTE 15 – RELATED PARTY TRANSACTIONS
Due from Related Party
On September 30, 2021 and December 31, 2020, the Company
has an amount due from the Company’s chief executive officer of $29,705 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.
Sales and Accounts Receivable – Related Party
During the nine months ended September 30, 2021, the
Company recognized sales of $1,200 to a company partially owned by officers of the Company. On September 30, 2021, accounts receivable
from this related party company amounted to $1,200.
NOTE 16 – SUBSEQUENT EVENTS
Common stock issued for professional services
On October 1, 2021, the Company issued 6,000,000 shares
of its common stock for investor relations services to be rendered. These shares were valued at $207,600, or $0.0346 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 $107,600 over the six month agreement term.
Convertible note and warrants
On October 15, 2021, the Company entered into a Securities
Purchase Agreement (the “SPA”) with Mercer Street Global Opportunity Fund, LLC (the “Investor”), pursuant to which
the Company issued and sold to Investor a 10% Original Issue Discount Senior Convertible Promissory Note in the principal amount of $825,000
(the “Initial Note”) and five-year warrants to purchase up to 16,500,000 shares of the Company’s common stock at an
exercise price of $0.05 per share, an amount equal to 50% of the conversion shares to be issued (the “Initial Warrants”).
The Company received net proceeds of $680,000, which is net of original issue discounts of $75,000, placement fees of $60,000, and legal
fees of $10,000.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
The transactions contemplated under the SPA closed
on October 18, 2021. Pursuant to the SPA, the Investor has agreed to purchase an additional $825,000 10% Original Issue Discount Senior
Convertible Promissory Note (the “Second Note,” and together with the Initial Note, the “Notes”), and a five-year
warrant (the “Second Warrant,” and together with the Initial Warrant, the “Warrants”) to purchase, in the aggregate,
shares of the Company’s common stock at an exercise price of $0.05 per share from the Company in an amount equal to 50% of the conversion
shares to be issued upon the same terms as the Initial Note and Initial Warrant (subject to there being no event of default under the
Initial Note or other customary closing conditions), within three trading days of a registration statement registering the shares of the
Company’s common stock issuable under the Notes (the “Conversion Shares”) and upon exercise of the Warrants (the “Warrant
Shares”) being declared effective by the SEC.
The Notes mature 12 months after issuance, bear interest at a rate of 4%
per annum, and are initially convertible into the Company’s common stock at a fixed conversion price of $0.025 per share, subject
to adjustment for stock splits, stock combinations, dilutive issuances, and similar events, as described in the Notes. If the average
Closing Price during any 10 consecutive Trading Day period beginning and ending during the 60 Day Effectiveness Period (the “Average
Closing Price”) is below the Conversion Price than the conversion price shall be reduced to such Average Closing Price but in no
event less than $0.0175. The “60 Day Effectiveness Period” means the 60 calendar days beginning on the day the Registration
Statement filed in connection with the Registration Rights Agreement covering the respective Tranche is first declared effective by the
SEC.
The Notes may be prepaid at any time for the first 90 days at face value
plus accrued interest. From day 91 through day 180, the Notes may be prepaid in an amount equal to 110% of the principal amount plus accrued
interest. From day 181 through the day immediately preceding the maturity date, the Notes may be prepaid in an amount equal to 120% of
the principal amount plus accrued interest.
The Notes and Warrants contain conversion limitations providing that a
holder thereof may not convert the Notes or exercise the Warrants to the extent (but only to the extent) that, if after giving effect
to such conversion, the holder or any of its affiliates would beneficially own in excess of 4.99% of the outstanding shares of the Company’s
common stock immediately after giving effect to such conversion or exercise. A holder may increase or decrease its beneficial ownership
limitation upon notice to the Company provided that in no event such limitation exceeds 9.99%, and that any increase shall not be effective
until the 61st day after such notice.
In connection with the SPA, the Company entered into a Registration Rights
Agreement dated October 15, 2021 (the “Registration Rights Agreement”), with the Investor pursuant to which it is obligated
to file a registration statement with the SEC within 45 days after the date of the agreement to register the resale by the Investor of
the conversion shares and warrant shares, and use all commercially reasonable efforts to have the registration statement declared effective
by the SEC within 60 days after the registration statement is filed.
Upon the occurrence of an event of default under the Notes, the Investor
has the right to be prepaid at 125% of the outstanding principal balance and accrued interest, and interest accrues at 18% per annum.
The Company has also granted the Investor a 12-month (or until the Notes
are no longer outstanding) right to participate in specified future financings, up to a level of 30%.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(UNAUDITED)
In connection with the SPA, on October 18, 2021, the
Company issued 668,151 shares of its common stock to the placement agent as fee for the capital raise. The 668,151 shares of common stock
issued were recorded as a debt discount of $14,064 based on the relative fair value method to be amortized over the life of the note.
The 16,500,000 Initial Warrants were valued at $347,142 using the relative fair value method and recorded as a debt discount to be amortized
over the life of the note. The original issue discounts of $75,000, placement fees of $60,000, and legal fees of $10,000 have been recorded
as a debt discount to be amortized into interest expense over the twelve-month term of the note.
The Initial Note was convertible into common shares
at an initial conversion price of is $0.025 which was lower than the fair value of common shares based on the quoted closing price of
the Company’s common stock on the measurement date. Additionally, as warrants and common shares were issued with the Initial Note,
the proceeds were allocated to the instrument based on relative fair value. The Initial Warrants did not contain any features requiring
liability treatment and therefore were classified as equity. The value allocated to the Initial Warrants and common shares issued was
$347,142 and $14,064, respectively, and $318,794 was allocated to the beneficial conversion feature. Since the intrinsic value of the
beneficial conversion feature, warrants and common shares was greater than the proceeds allocated to the convertible instrument, the amount
of the discount assigned to the beneficial conversion feature, warrants and common shares issued was limited to the amount of the proceeds
allocated to the convertible instrument.
Accordingly, the Company recorded an aggregate non-cash
debt discount of $680,000 with the credit to additional paid in capital. The debt discount associated shall be amortized to interest expense
over the term of the Convertible Note.
The Company uses the Binomial Valuation Model to determine
the fair value of its stock warrants which requires the Company to make several key judgments including:
|
●
|
the value of the Company’s common stock;
|
|
|
|
|
●
|
the expected life of issued stock warrants;
|
|
|
|
|
●
|
the expected volatility of the Company’s stock price;
|
|
|
|
|
●
|
the expected dividend yield to be realized over the life of the stock warrants; and
|
|
|
|
|
●
|
the risk-free interest rate over the expected life of the stock warrants.
|
The Company’s computation of the expected life
of issued stock warrants was based on the simplified method as the Company does not have adequate exercise experience to determine the
expected term. The interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The computation of volatility
was based on the historical volatility of the Company’s common stock.
On October 18, 2021, the fair value of the stock warrants
was estimated at issuance using the Binomial Valuation Model with the following assumptions:
Dividend rate
|
|
|
—
|
%
|
Term (in years)
|
|
|
5 years
|
|
Volatility
|
|
|
348.5
|
%
|
Risk—free interest rate
|
|
|
1.16
|
%
|
PPP loan forgiveness
The Company applied for forgiveness of its PPP Loan,
and on November 4, 2021, the Company was notified that the Small Business Administration forgave $95,000 of the principal loan amount
and $1,451 of interest. The remaining principal balance of the loan is $61,200 and the remaining accrued interest balance is $935.