CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018
(Unaudited)
NOTE
1 -
NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of organization
On
April 25, 2018, C-Bond Systems, 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 has 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 C-Bond Systems, Inc., C-Bond
Systems, Inc., and its subsidiaries are herein referred to as “the Company”. Any reference to contractual agreements
throughout these footnotes may relate to C-Bond Systems Inc., or one of its subsidiaries.
Pursuant
to the Merger, the Company acquired all of the outstanding equity interests of C-Bond Systems, LLC. It is engaged in the implementation
of proprietary nanotechnology applications and processes to enhance properties of strength, functionality and sustainability within
brittle material systems with a strong focus in the glass industry. At the time a certificate of merger reflecting the Merger
was filed with the Secretary of State of Texas, or the Effective Time, all of the outstanding common units of C-Bond Systems,
LLC (“Common Units”) that were issued and outstanding immediately prior to the closing of the Merger were converted
into an aggregate of 63,505,783 shares of our common stock. As a result, each common unit of C-Bond Systems, LLC was converted
into approximately 3.233733 shares of our common stock (the “Conversion Ratio”). In addition, pursuant to the
Merger Agreement, each option to purchase Common Units, issued and outstanding immediately prior to the closing of the Merger
was assumed and converted into an option to purchase an equivalent number of shares of our common stock and the exercise price
of each such option was divided by the Conversion Ratio. As a result, a total of 14,494,213 options were issued.
The
Merger Agreement contained customary representations and warranties and pre- and post-closing covenants of each party and customary
closing conditions.
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 will
be 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 subsidiaries and
results of C-Bond Systems, Inc. (f.k.a. Westmountain Alternative Energy, Inc) from the merger date forward. The Merger was intended
to be treated as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.
On
June 7, 2018, a majority of the Company’s shareholders and its board approved the change of the Company’s name to C-Bond Systems,
Inc., approved an increase in the Company’s authorized number of common shares from 100,000,000 to 500,000,000 shares of common
stock, and authorized 1,000,000 shares of preferred stock to have such classes and preferences as the Board of Directors may determine
from time to time. These changes became effective on July 18, 2018.
All
share and per share data in the accompanying consolidated financial statements have been retroactively restated to reflect the
effect of the reverse merger and recapitalization.
Basis
of presentation and principles of consolidation
The
Company’s consolidated financial statements include the financial statements of its wholly-owned subsidiaries, C-Bond Systems,
LLC, C-Bond R&D Solutions, LLC, C-Bond Industrial Solutions, LLC, and C-Bond Security Solutions, LLC. All significant intercompany
accounts and transactions have been eliminated in consolidation.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
(Unaudited)
Management
acknowledges its responsibility for the preparation of the accompanying unaudited condensed consolidated financial statements
which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement
of its financial position and the results of its operations for the periods presented. The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
States of America (the “U.S. GAAP”) for interim financial information and with the instructions Article 8-03 of Regulation
S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year
as a whole. Certain information and note disclosure normally included in consolidated financial statements prepared in accordance
with U.S. GAAP has been condensed or omitted from these statements pursuant to such accounting principles and, accordingly, they
do not include all the information and notes necessary for comprehensive consolidated financial statements These unaudited condensed
consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes
to the consolidated financial statements for the years ended December 31, 2017 and 2016 of the Company which were included in
the Company’s report on Form 8-K as filed with the Securities and Exchange Commission on May 1, 2018.
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
condensed consolidated financial statements, the Company had a net loss of $7,586,901 for the nine months ended September 30,
2018. The net cash used in operations was $1,474,860 for the nine months ended September 30, 2018. Additionally, the Company
had an accumulated deficit, shareholders’ deficit, and working capital deficit of $30,441,457, $255,295 and $329,458, respectively,
at September 30, 2018. 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 and from the issuance of convertible 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 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 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, 2018 and 2017 include estimates for allowance for doubtful accounts on accounts receivable,
the estimates for obsolete inventory, the useful life of property and equipment, assumptions used in assessing impairment of long-term
assets, the fair 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. The Company
did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value in accordance
with Accounting Standards Codification (“ASC”) Topic 820. 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.
The
carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, accounts receivable, accounts payable,
accrued expenses, and accrued compensation approximate their fair market value based on the short-term maturity of these instruments.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
(Unaudited)
Cash
and cash equivalents
For
purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of
three months or less at the purchase date and money market accounts to be cash equivalents.
Accounts
receivable
The
Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries.
The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs,
as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated
with the allowance for doubtful accounts is recognized as general and administrative expense.
Inventory
Inventory,
consisting of raw materials and finished goods, are stated at the lower of cost and net realizable value utilizing the first-in,
first-out (FIFO) method. A reserve is established when management determines that certain inventories may not be saleable. If
inventory costs exceed expected net realizable value due to obsolescence or quantities in excess of expected demand, the Company
will record reserves for the difference between the cost and the net realizable value. These reserves are recorded based on estimates
and included in cost of sales.
Property
and equipment
Property
and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which range
from three to ten years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled
renewal terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and
accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of
disposition. The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances
reflect the fact that their recorded value may not be recoverable.
Impairment
of long-lived assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an
impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount
of impairment is measured as the difference between the asset’s estimated fair value and its book value.
Revenue
recognition
In May 2014, FASB issued an update Accounting
Standards Update (“ASU”) (“ASU 2014-09”) establishing Accounting Standards Codification (“ASC”)
Topic 606,
Revenue from Contracts with Customers
(“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on
the topic, 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. This standard, which is effective for interim and
annual reporting periods in fiscal years that begin after December 15, 2017, 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 also requires certain additional disclosures. The Company adopted this
standard in 2018 using the modified retrospective approach, which requires applying the new standard to all existing contracts
not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning
of the fiscal year of adoption. Based on an evaluation of the impact ASU 2014-09 will have on the Company’s sources of revenue,
the Company has concluded that ASU 2014-09 did not have a material impact on the process for, timing of, and presentation and
disclosure of revenue recognition from customers and there was no cumulative effect adjustment.
The
Company sells its products 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.
Cost
of sales
Cost
of sales includes inventory costs, packaging costs and warranty expenses.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
(Unaudited)
Shipping
and handling costs
Shipping
and handling costs incurred for product shipped to customers are included in general and administrative expenses and amounted
to $12,197 and $16,979 for the nine months ended September 30, 2018 and 2017, respectively. Shipping and handling costs charged
to customers are included in sales.
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 consolidated
balance sheets and amounted $21,366 and $21,935 at September 30, 2018 and December 31, 2017, respectively. For the nine months
ended September 30, 2018 and 2017, warranty expense amounted to $4,478 and $6,112, respectively, and is included in cost of sales
on the accompanying condensed consolidated statements of operations.
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, 2018 and 2017, research and development
costs incurred in the development of the Company’s products were $148,981 and $122,347, respectively, and are included in operating
expenses on the accompanying condensed consolidated statements of operations.
Advertising
costs
The
Company participates in various advertising programs. All costs related to advertising of the Company’s products are expensed
in the period incurred. For the nine months ended September 30, 2018 and 2017, advertising costs charged to operations were $10,082
and $37,107, respectively and are included in sales and marketing on the accompanying 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
Through
April 25, 2018, the Company’s subsidiaries operated as a limited liability company and passed all income and loss to each member
based on their proportionate interest in the Company. Effective April 26, 2018, 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, 2018 and December 31, 2017, 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, 2013. 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, 2018 and December 31, 2017.
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 and director services received in exchange for an award of equity instruments
over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting
period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based
on the grant-date fair value of the award. The Company utilizes the Black-Sholes option pricing model and uses the simplified
method to determine expected term because of lack of sufficient exercise history. Additionally, effective January 1, 2017, the
Company adopted the Accounting Standards Update No. 2016-09 (“ASU 2016-09
”), Improvements to Employee Share-Based
Payment Accounting
. ASU 2016-09 permits the election of an accounting policy for forfeitures of share-based payment awards,
either to recognize forfeitures as they occur or estimate forfeitures over the vesting period of the award. The Company has elected
to recognize forfeitures as they occur and the cumulative impact of this change did not have any effect on the Company’s
consolidated financial statements and related disclosures.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
(Unaudited)
Pursuant
to ASC 505-50 –
“Equity-Based Payments to Non-Employees”,
all share-based payments to non-employees, including
grants of stock options, are recognized in the consolidated financial statements as compensation expense over the service
period of the consulting arrangement or until performance conditions are expected to be met. Using a Black-Scholes valuation model,
the Company periodically reassessed the fair value of non-employee options until service conditions are met, which generally aligns
with the vesting period of the options, and the Company adjusted the expense recognized in the consolidated financial statements
accordingly.
Upon
exercise of the stock options by the holder using the exercise methods delineated in the option contract, the Company issues new
shares from its unissued authorized shares.
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 dilution. 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 (using the treasury stock method)
and shares issuable upon conversion of convertible notes payable (using the as-if converted method). These common share equivalents
may be dilutive in the future.
All
potentially dilutive common shares were excluded from the computation of diluted common shares outstanding as they would have
an anti-dilutive impact on the Company’s net losses and consisted of the following:
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
Convertible note
|
|
|
-
|
|
|
|
129,870
|
|
Stock options
|
|
|
13,164,213
|
|
|
|
10,894,213
|
|
Segment
reporting
During
the nine months ended September 30, 2018 and 2017, the Company operated in one business segment.
Recent
accounting pronouncements
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
new 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 new 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. The Company will continue
to evaluate the effect the adoption of ASU 2016-02 will have on the consolidated financial statements of the Company.
In June 2018, the FASB issued ASU 2018-07 which simplifies
the accounting for share-based payments granted to non-employees for services by aligning it with the accounting for share-based
payments to employees, with certain exceptions. The guidance is effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. We do not expect the adoption of this accounting guidance to have a material
impact on our condensed consolidated financial statements.
There
are no other recently issued accounting standards that apply to us or that are expected to have a material impact on our results
of operations, financial condition, or cash flows.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
(Unaudited)
NOTE
3 –
ACCOUNTS RECEIVABLE
At
September 30, 2018 and December 31, 2017, accounts receivable consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Accounts receivable
|
|
$
|
363
|
|
|
$
|
38,279
|
|
Less: allowance for doubtful accounts
|
|
|
-
|
|
|
|
(3,054
|
)
|
Accounts receivable, net
|
|
$
|
363
|
|
|
$
|
35,225
|
|
For
the nine months ended September 30, 2018 and 2017, bad debt (recovery) expense amounted to $(915) and $0, respectively.
NOTE
4 –
INVENTORY
At
September 30, 2018 and December 31, 2017, inventory consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Raw materials
|
|
$
|
736
|
|
|
$
|
7,269
|
|
Finished goods
|
|
|
8,287
|
|
|
|
3,224
|
|
Inventory
|
|
$
|
9,023
|
|
|
$
|
10,493
|
|
NOTE 5 -
PROPERTY AND EQUIPMENT
At
September 30, 2018 and December 31, 2017, property and equipment consisted of the following:
|
|
Useful Life
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
5 - 7 years
|
|
$
|
52,538
|
|
|
$
|
52,538
|
|
Furniture and office equipment
|
|
3 - 7 years
|
|
|
45,063
|
|
|
|
45,063
|
|
Vehicles
|
|
5 years
|
|
|
68,341
|
|
|
|
68,341
|
|
Leasehold improvements
|
|
3 years
|
|
|
16,701
|
|
|
|
16,701
|
|
|
|
|
|
|
182,643
|
|
|
|
182,643
|
|
Less: accumulated depreciation
|
|
|
|
|
(117,457
|
)
|
|
|
(91,520
|
)
|
Property and equipment, net
|
|
|
|
$
|
65,186
|
|
|
$
|
91,123
|
|
For
the nine months ended September 30, 2018 and 2017, depreciation and amortization expense is included in general and administrative
expenses and amounted to $25,937 and $28,372, respectively.
NOTE
6 –
CONVERTIBLE NOTES PAYABLE
On
June 1, 2017, the Company received $100,000 from a third party pursuant to the terms of a convertible promissory note (the “Convertible
Note”). The Convertible Note accrued interest at 7% per annum and all principal and interest is payable on the maturity date
of June 1, 2019. The holder of the Convertible Note could have, at any time, upon written notice, convert all amounts then outstanding
under this Convertible Note into a number of common shares of the Company equal to the amount then owed under this Note divided
by $0.77. Upon the maturity date, the principal and accrued interest under this note would have automatically be converted into
the number of common shares of the Company equal to the amount then owed under this Convertible Note divided by $0.77. The Company
evaluated the conversion feature of the Convertible Note and determined the Company’s common stock fair value exceeded the conversion
price as stated in the Convertible Note. Management determined that the favorable exercise price represented a beneficial conversion
feature. Using the intrinsic value method at the convertible promissory note date, a total discount of $10,000 was recognized
and was being amortized to interest expense over the term of the Convertible Note. In March 2018, the principal balance of $100,000
all accrued interest of $5,833 was converted into 136,894 common shares and the Convertible Note was terminated. As of December
31, 2017, the principal balance due under this Convertible Note was $100,000. As of September 30, 2018, this Convertible Note
is no longer outstanding.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
(Unaudited)
On January 22, 2018 (the “Issuance Date”),
the Company entered into a securities purchase agreement (the “SPA”) with Esousa Holdings, LLC (“Esousa”),
whereby Esousa agreed to invest up to $750,000 (the “Purchase Price”) in the Company in exchange for senior secured
the convertible notes and five-year warrants, upon the terms and subject to the conditions thereof. Pursuant to the SPA, the Company
issued (i) a senior secured convertible note to Esousa on January 22, 2018, in the original principal amount of $260,000, which
bears interest at 10% per annum (the “First Note”) and (ii) 293,123 five-year warrants to purchase common shares of
the Company at a purchase price of $0.87 per unit. On January 22, 2018, the Company received cash proceeds of $260,000 under this
convertible note. Each convertible note issued pursuant to the SPA was due and payable two years from the issuance date of the
respective convertible note, and any accrued and unpaid interest relating to each convertible note, was due and payable semi-annually.
The
Convertible Note was convertible into common shares at a conversion price of is $0.87 which was lower than the fair value of common
shares based on recent sales of common shares of the Company on the date of issue. Additionally, as warrants were issued
with the Convertible Note, the proceeds were allocated to the instruments based on relative fair value as the warrants did not
contain any features requiring liability treatment and therefore were classified as equity. The value allocated to the warrants
was $186,368 and $73,632 was allocated to the beneficial conversion feature. Since the intrinsic value of the beneficial conversion
feature and warrants was greater than the proceeds allocated to the convertible instrument, the amount of the discount assigned
to the beneficial conversion feature and warrants was limited to the amount of the proceeds allocated to the convertible instrument.
Accordingly,
the Company recorded as debt discount of $260,000 with the credit to additional paid in capital. The debt discount associated
was to be amortized to interest expense over the term of the Convertible Note.
On
April 26, 2018, the Company and Esousa entered into a Termination Agreement and General Release (“Termination Agreement”)
whereby the Company paid Esousa $270,000, and the SPA, Note, Warrant and Registration Rights Agreement and all rights and obligations
were terminated. In connection with the Termination Agreement, the Company recorded debt extinguishment expense of $229,696, including
the write-off of remaining debt discount of $226,392 and the payment of additional interest of $3,304.
For
the nine months ended September 30, 2018 and 2017, interest expense related to these Convertible Notes amounted to $49,003 and
$417, including amortization of debt discount charged to interest expense of $40,303 and $417, respectively.
At
September 30, 2018 and December 31, 2017, the Convertible Note consisted of the following:
|
|
September 30,
2018
|
|
|
December 31, 2017
|
|
Principal amount
|
|
$
|
-
|
|
|
$
|
100,000
|
|
Less: unamortized debt discount
|
|
|
-
|
|
|
|
(7,083
|
)
|
Convertible note payable, net
|
|
$
|
-
|
|
|
$
|
92,917
|
|
The
weighted average interest rate during the nine months ended September 30, 2018 was 8.7%.
NOTE
7 -
SHAREHOLDERS’ DEFICIT
Common
shares issued for debt conversion
On
January 2, 2018, the former CEO of the Company converted his accrued compensation and other amounts due to him totaling $392,558
into 12,694,893 common shares, or $0.031 per share based on the original employment agreement (See Note 8). Upon conversion, the
Company recorded stock-based compensation of $270,878 based on the August 2013 commitment date per share fair value of his conversion
option of $0.021 per share (see Note 8).
On
March 28, 2018, the Company issued 136,894 common shares upon conversion of convertible debt of $100,000 and accrued interest
of $5,833 (See Note 6).
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
(Unaudited)
Issuance
of common shares for services
On
March 7, 2018, the Company entered into a 90-day consulting agreement for business development and lobbying services related to
the Company’s ballistic resistant technologies. In connection with this consulting agreement, the Company issued 80,843
common shares to the consultant which were valued at $68,750, or $0.85 per common share, based on contemporaneous common share
sales, which was amortized over the term of the agreement. Additionally, on June 12, 2018, the Company entered into a six months
consulting agreement with this consultant. In connection with this consulting agreement, the Company issued 50,000 common shares
to the consultant which were valued at $20,000, or $0.40 per common share, based on contemporaneous common share sales, which
will be amortized over the term of the agreement. In connection with these consulting agreements, during the nine months ended
September 30, 2018, the Company recorded stock-based professional fees of $80,417, and prepaid expenses of $8,333 which will be
amortized over the remaining term.
In
April 2018, the Company issued 3,233,732 restricted common shares of the Company to employees for services rendered which were
valued at $2,750,000, or $0.85 per common share, based on contemporaneous common share sales. These share vest on May 1, 2019.
In connection with these shares, the Company shall record stock-based compensation over the one-year vesting period. In June 2018,
an employee resigned and his employment agreement was terminated. Accordingly, in June 2018, 485,060 non-vested shares were forfeited.
Accordingly upon termination, the Company reversed all stock-based compensation previously recognized on the non-vested shares.
For the nine months ended September 30, 2018, the Company recorded stock-based compensation expense of $973,957 related to these
shares. Total unrecognized compensation expense related to these unvested common shares at September 30, 2018 amounted to $1,363,742
which will be amortized over the remaining vesting period.
In
September 2018, the Company entered into a 90-day consulting agreement for marketing services. In connection with this consulting
agreement, the Company issued 25,000 restricted common shares of the Company to a consultant for marketing services to be rendered
for the term effective October 1, 2018. These shares were valued at $10,000, or $0.40 per common share, based on contemporaneous
common share sales, which was amortized over the term of the agreement. In connection with this consulting agreement, at September
30, 2018, the Company recorded prepaid expenses of $10,000 which will be amortized over the agreement term.
Common
shares issuable pursuant to employment agreement
On August 15, 2018
(the “Effective Date”), the Company entered into an employment agreement with its vice president of sale and distribution.
Pursuant to this employment agreement, the Company agreed to grant a restricted stock award of 500,000 common shares of the Company
which will vest on the first anniversary date of the employment agreement. 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 $200,000, or $0.40 per common share, based on contemporaneous
common share sales. These shares vest on August 15, 2019. In connection with these shares, the Company shall record stock-based
compensation over the one-year vesting period. For the nine months ended September 30, 2018, the Company recorded stock-based
compensation expense of $25,000 related to these shares. As of September 30, 2018, these shares had not been issued. Total unrecognized
compensation expense related to these unvested common shares at September 30, 2018 amounted to $175,000 which will be amortized
over the remaining vesting period.
Common
shares issued for exercise of stock options
During
the nine months ended September 30, 2018, the Company issued 2,488,895 common shares upon the exercise of 1,595,403 stock options.
In connection with these option exercises, the Company received proceeds of $110,000 and reduced accrued compensation by $20,575.
Common
shares issued for settlement
In
April 2018, the Company issued 315,957 common shares of the Company to a vendor to settle amounts owed to such vendor which were
valued at $268,694, or $0.85 per common share, based on contemporaneous common share sales. In connection with the settlement
agreement, the Company recorded settlement expense of $153,779 and reduced accounts payable and accrued expenses by $39,915 and
$75,000, respectively.
Prior to the Closing of the Merger, C-Bond
Systems LLC received a letter from counsel to Arnold Jay Boisdrenghein/Equity Capital Holding Group, Inc. claiming that such parties
were entitled to a finder’s fee in connection with the Merger of $25,000 and 1,000,000 post-Merger shares of common stock
of the Company. On August 20, 2018, pursuant to a settlement and release agreement, the Company issued 500,000 shares of common
stock to settle this claim. These shares were valued at $200,000, or $0.40 per common share, based on contemporaneous common share
sales. In connection with this settlement agreement, the Company recorded a settlement expense of $200,000.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
(Unaudited)
Sale
of common shares
In
April 2018, the Company issued 32,337 of its common shares to an investor for cash proceeds of $27,500, or $0.85 per common share.
Contemporaneously
with the closing of the Merger, pursuant to subscription agreements, the Company issued an aggregate of 3,100,000 shares of common
stock at a price of $0.40 per share for aggregate gross consideration of approximately $1,240,000 to six accredited investors.
The Company agreed to file a shelf registration statement registering all of the shares of Common Stock subscribed for hereby
(but no other shares owned by Subscriber) as soon as reasonably practicable after completion of the Merger and to use commercially
reasonable efforts to cause that registration statement to be declared effective as soon as reasonably practical.
Deemed
issuance pursuant to reverse recapitalization
On
April 25, 2018, in connection with merger with C-Bond Systems, LLC, the Company is deemed to have issued 9,106,250 of its common
shares for cash of $187,401. These shares represent the outstanding shares of C-Bond Systems, Inc. just prior to the Merger on
April 25, 2018.
Common
share exercise compensation
As
compensation for services commencing on February 1, 2016 and continuing through February 14, 2019, on December 27, 2016, the Company
granted a stock option exercise right to an employee of the Company, whereby the employee will received a credit of $5,000 per
month towards the cash required to exercise his 750,000 options at $0.31 per share. Accordingly, the employee can exercise options
on a cashless basis up to the amount he has been credited. As of September 30, 2018 and December 31, 2017, the employee was credited
$160,000 and $115,000 towards the options exercise, respectively. No cash disbursement will be required by the Company under
this provision. The Company recognized compensation expense of $45,000 and $45,000 during the nine months ended September 30,
2018 and 2017, respectively, with a corresponding increase to shareholders’ equity
Stock
options
For
the nine months ended September 30, 2018 and 2017, the Company recorded $3,786,484 and $2,066,620 of compensation and consulting
expense related to stock options, respectively. Total unrecognized compensation and consulting expense related to unvested stock
options at September 30, 2018 amounted to $3,125,104. The weighted average period over which stock-based compensation expense
related to these options will be recognized is approximately two years.
Stock
option activities for the nine months ended September 30, 2018 are summarized as follows:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term
(Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance Outstanding December 31, 2017
|
|
|
14,894,213
|
|
|
|
0.32
|
|
|
|
|
|
|
$
|
7,948,708
|
|
Exercised
|
|
|
(1,595,403
|
)
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(134,597
|
)
|
|
|
0.31
|
|
|
|
|
|
|
|
|
|
Balance Outstanding September 30, 2018
|
|
|
13,164,213
|
|
|
$
|
0.36
|
|
|
|
6.71
|
|
|
$
|
1,869,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2018
|
|
|
10,732,262
|
|
|
$
|
0.37
|
|
|
|
6.25
|
|
|
$
|
1,666,440
|
|
Warrants
On
January 22, 2018, in connection with the SPA with Esousa, the Company issued 293,123 five-year warrants to purchase shares of
Company common shares at a purchase price of $0.87 per unit. In April 2018, these warrants were cancelled under a Termination
Agreement (see Note 6).
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
(Unaudited)
Warrant
activities for the nine months ended September 30, 2018 are summarized as follows:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term
(Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance Outstanding December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
293,123
|
|
|
|
0.87
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(293,123
|
)
|
|
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
Balance Outstanding September 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercisable, September 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
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 that may be issued under the 2018 Plan is 50,000,000 shares. In addition, the
maximum aggregate 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.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
(Unaudited)
NOTE
8 –
COMMITMENTS AND CONTINGENCIES
Legal
matters
The
Company received demands from a vendor for non-payment of research and development fees in the amount of $268,695. The Company
believed that it was not liable for this amount and vigorously disputed such claim. As of September 30, 2018 and December 31,
2017, the Company reflected accounts payable and accrued expenses of $39,915 and $75,000, respectively, in connection with this
claim. In April 2018, the Company entered into a settlement agreement with this vendor (See Note 7).
Prior to the Closing of the Merger, C-Bond
Systems LLC received a letter from counsel to Arnold Jay Boisdrenghein/Equity Capital Holding Group, Inc. claiming that such parties
were entitled to a finder’s fee in connection with the Merger of $25,000 and 1,000,000 post-Merger shares of common stock
of the Company. On August 20, 2018, pursuant to a settlement and release agreement, the Company issued 500,000 shares of common
stock to settle this claim. These shares were valued at $200,000, or $0.40 per common share, based on contemporaneous common share
sales. In connection with this settlement agreement, the Company recorded settlement expense of $200,000.
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, 2018, other
than discussed above, the Company is not involved in any 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.
Employment agreements
On August 10, 2013 the Company entered
into an employment agreement with the Company’s former chief executive officer. Pursuant to this employment agreement, he
was to receive cash salary and a 5% commission on equity capital raised for the Company. He also obtained an option to elect to
convert all or any part of his future unpaid compensation and benefits into shares of the Company. The conversion price per share
(the “Exercise Price”) was equal to $0.031 per share. The Company determined that the commitment date of the option
was August 10, 2013, the date of the employment agreement but no expense was recognized until the contingency of exercise and
determination of quantity of options is resolved. Accordingly, in 2013, this option was valued on the commitment date using a
Black-Scholes option pricing model with the following assumptions; risk-free interest rate of 1.46%, expected dividend yield of
0%, expected option term of 5.75 years, and an expected volatility of 79% based on comparable volatility. The commitment date
per unit fair value amounted to $0.021 per share. On January 2, 2018, the former chief executive officer converted his unpaid
compensation into 12,694,893 common shares of the Company (see Note 7).
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.
|
|
|
|
|
●
|
When
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.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
(Unaudited)
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
October 12, 2015, the Company entered into an employment agreement with Mr. Vincent Pugliese, which was amended on February 11,
2016 and December 20, 2016. Pursuant to this amended employment agreement, he serves as the Chief Operating Officer of the Company
for an initial term until December 20, 2018. Upon consummation of the Merger, he also assumed the title of President and
interim Chief Financial Officer of the Company. Either party may terminate the employment by giving 30-days’ advance notice
of termination. As consideration for these services, the employment agreement provides Mr. Pugliese with the following compensation
and benefits:
|
●
|
An
annual base salary of $180,000.
|
|
|
|
|
●
|
Annual
cash performance bonus opportunity as determined by the Board.
|
|
|
|
|
●
|
Certain
other employee benefits and perquisites, including reimbursement of necessary and reasonable travel.
|
In
the event of a change of control (as defined in his employment agreement), and within one year thereafter termination of employment
for good “cause” (as defined in his employment agreement), by the Company or for “good reason” (as defined
in his employment agreement) by Mr. Pugliese, Mr. Pugliese will be entitled to receive, subject to a complete release of all claims,
a lump sum payment equal to his current annual base salary within 30 days after termination date. Further, in the event Mr. Pugliese’s
employment is terminated by the Company for a reason other than for cause then the Company shall continue to pay his regular base
salary for one year following the termination date. Pursuant to the employment agreement, Mr. Pugliese 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 August 15, 2018 (the “Effective Date”),
the Company entered into an employment agreement with its vice president of sale and distribution. The term of this agreement
shall begin as of the Effective Date and shall end on the time of the termination of this employee’s employment. Pursuant
to this employment agreement, this employee shall receive a 5% commission on sales generated by the employee of the Company’s
products. Additionally, the Company agreed to grant a restricted stock award of 500,000 common shares of the Company which will
vest on the first anniversary date of the employment agreement. 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 $200,000, or $0.40 per common share, based on contemporaneous common
share sales. These shares vest on August 15, 2019. In connection with these shares, the Company shall record stock-based compensation
over the one-year vesting period. For the nine months ended September 30, 2018, the Company recorded stock-based compensation
expense of $25,000 related to these shares. Total unrecognized compensation expense related to these unvested common shares at
September 30, 2018 amounted to $175,000 which will be amortized over the remaining vesting period.
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, 2018.
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.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
(Unaudited)
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.
In 2016, pursuant to a subscription agreement,
C-Bond Systems, LLC issued 1,175,902 common shares to an entity at $0.85 per common share. This agreement entitled this investor
to customary broad-based weighted average anti-dilution protection to the extent that after the date of this subscription agreement
C-Bond Systems, LLC issued any equity in a “down round” based upon a value of less than $0.85 per common share, including
the issuance of options with an exercise price per share of less than $0.85 to compensate employees or consultants (“Dilutive
Transaction”), subject to exclusions for issuances of common shares or options in connection with strategic partnerships,
equity kickers to lenders or vendors, mergers or acquisitions. The agreement obligated C-Bond Systems, LLC to give to this investor
written notice (an “Issuance Notice”) of any proposed issuance by C-Bond Systems, LLC of any C-Bond Systems, LLC common
units, or other form of equity interest (excluding issuances of C-Bond Systems, LLC options or other equity to compensate employees
or consultants and the issuance of shares in connection with strategic partnerships, equity kickers to lenders or vendors, mergers
or acquisitions) at least ten business days prior to the proposed issuance date. This contract entitled the investor to purchase
their pro rata portion of such shares or other equity interest of C-Bond Systems, LLC at the price and on the other terms and
conditions specified in the issuance notice.
NOTE
9 –
CONCENTRATIONS
Concentrations
of credit risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable
and cash deposits.
The
Company places its cash in banks at levels that, at times, may exceed federally insured limits. There were no balances in excess
of FDIC insured levels as of September 30, 2018 and December 31, 2017. The Company has not experienced any losses in such accounts
through September 30, 2018.
Geographic
concentrations of sales
For
the nine months ended September 30, 2018 and 2017, all sales were in the United States. No other geographical area accounting
for more than 10% of total sales during the nine months ended September 30, 2018 and 2017.
Customer
concentrations
For the nine months ended September 30, 2018,
one customer accounted for approximately 15.6% of total sales. For the nine months ended September 30, 2017, two customer accounted
for approximately 27.5% (10.9% and 16.6%, respectively) of total sales. 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 two 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.
16
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2018
(Unaudited)
NOTE 10 –
Revenue
Recognition
The revenue that the Company recognizes arises
from purchase requests the Company receives from its customers. The Company’s performance obligations under the purchase
orders correspond to each shipment of product that the Company makes to its customer under the purchase orders; as a result, each
purchase order generally contains more than one performance obligation based on the number of products ordered, the quantity of
product to be shipped and the mode of shipment requested by the customer. Control of the Company’s products transfers to
its customers when the customer is able to direct the use of, and obtain substantially all of the benefits from, the Company’s
products, which generally occurs at the later of when the customer obtains title to the product or when the customer assumes risk
of loss of the product. The transfer of control generally occurs at a point of shipment from the Company’s warehouse. Once
this occurs, the Company has satisfied its performance obligation and the Company recognizes revenue.
When the Company receives a purchase order
from a customer, the Company is obligated to provide the product during a mutually agreed upon time period. Depending on the terms
of the purchase order, either the Company or the customer arranges delivery of the product to the customer’s intended destination.
In situations where the Company has agreed to arrange delivery of the product to the customer’s intended destination and
control of the product transfers upon loading of the Company’s product onto transportation equipment, the Company has elected
to account for any freight income associated with the delivery of these products as freight revenue, since this activity fulfills
the Company’s obligation to transfer the product to the customer. For the nine months ended September 30, 2018,
the total amount of freight recognized as revenue was $6,104.
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, 2018. Any sales tax, value added tax, and
other tax the Company collects concurrently with its revenue-producing activities are excluded from revenue.
If the Company continued to apply legacy revenue
recognition guidance for the first nine months of 2018, the Company’s revenues, gross margin, and net loss would not have
changed The Company adopted the new revenue standard in 2018 using the modified retrospective approach, which requires applying
the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment
to retained earnings as of the beginning of the fiscal year of adoption. Based on an evaluation of the impact ASU 2014-09 will
have on the Company’s sources of revenue, the Company has concluded that ASU 2014-09 did not have a material impact on the
process for, timing of, and presentation and disclosure of revenue recognition from customers and there was no cumulative effect
adjustment (See Note 2—Revenue Recognition).
Revenue Disaggregation
The Company tracks its revenue by product. The following table
summarizes our revenue by product for the three and nine months ended September 30, 2018:
|
|
For the Three Months Ended September 30,
2018
|
|
|
For the Nine Months Ended September 30,
2018
|
|
C-Bond I multi-purpose glass protection system
|
|
$
|
27,483
|
|
|
$
|
31,947
|
|
C-Bond BRS ballistic resistant glass protection system
|
|
|
23,690
|
|
|
|
73,805
|
|
Solution and film sales - other
|
|
|
12,100
|
|
|
|
49,691
|
|
C-Bond Nanoshield solution sales
|
|
|
24,169
|
|
|
|
69,039
|
|
Freight and delivery
|
|
|
1,859
|
|
|
|
6,104
|
|
Total
|
|
$
|
89,301
|
|
|
$
|
230,586
|
|
NOTE 12 –
SUBSEQUENT EVENT
Common shares issuable to officers and employees
On
October 6, 2018, 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 2,750,000 common shares of the Company which will vest on the first anniversary date of the Restricted
Stock Award Agreements. 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. The Company is currently evaluating the fair
value of the shares issued and shall record stock-based compensation over the one-year vesting period.
These shares shall be considered outstanding
for legal purposes but shall be excluded from basic earnings per share until vesting occurs.