NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE
1 -
NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of organization
On
April 25, 2018, C-Bond Systems, Inc. (which was formerly known as WestMountain 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 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. 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
Going
concern
These
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated
financial statements, the Company had a net loss of $9,904,719 and $8,299,692 for the years ended December 31, 2018 and 2017,
respectively. The net cash used in operations was $1,967,782 and $1,084,508 for the years ended December 31, 2018 and 2017,
respectively. Additionally, the Company had an accumulated deficit, shareholders’ deficit, and working capital deficit of
$32,759,275, $815,123 and $881,505, respectively, at December 31, 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 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 years
ended December 31, 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 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.
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.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
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 on January 1, 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.
Shipping
and handling costs
Shipping
and handling costs incurred for product shipped to customers are included in general and administrative expenses and amounted
to $20,380 and $29,262 for the years ended December 31, 2018 and 2017, respectively. Shipping and handling costs charged to customers
are included in sales.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
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 $24,190 and $21,935 at December 31, 2018 and 2017, respectively. For the years ended December 31, 2018 and
2017, warranty expense amounted to $7,403 and $7,784, respectively, and is included in cost of sales on the accompanying consolidated
statements of operations. For the years ended December 31, 2018 and 2017, a roll forward of warranty liability is as follows:
|
|
|
For the Year Ended
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Balance at beginning of year
|
|
$
|
21,935
|
|
|
$
|
14,251
|
|
|
Increase in estimated warranty liability
|
|
|
7,403
|
|
|
|
7,784
|
|
|
Warranty expenses incurred
|
|
|
(5,148
|
)
|
|
|
(100
|
)
|
|
Balance at end of year
|
|
$
|
24,190
|
|
|
$
|
21,935
|
|
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 years ended December 31, 2018 and 2017, research and development
costs incurred in the development of the Company’s products were $258,294 and $214,112, respectively, and are included in
operating expenses on the accompanying 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 years ended December 31, 2018 and 2017, advertising costs charged to operations were $51,719 and
$41,555, respectively and are included in general and administrative expenses on the accompanying 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 December
31, 2018 and 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, 2014. 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 December 31, 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.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
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.
Through
September 30, 2018, pursuant to ASC 505-50 – “Equity-Based Payments to Non-Employees”, all share-based payments
to non-employees, including grants of stock options, were 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 adjusts the expense recognized in the
consolidated financial statements accordingly. In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based
Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions by expanding
the scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods
and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including
interim periods within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new
revenue recognition guidance in ASC 606. The Company early adopted ASU No. 2018-07 in the fourth quarter of 2018 and there was
no cumulative effect of adoption.
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 dilutive securities and non-vested forfeitable shares. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares
or resulted in the issuance of common shares that then shared in the earnings of the entity. Basic net loss per common share is
computed by dividing net loss available to members by the weighted average number of common shares outstanding during the period.
Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares, common share
equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common shares consist of
stock options and non-vested forfeitable shares (using the treasury stock method) and shares issuable upon conversion of convertible
notes payable (using the as-if converted method). These common share equivalents may be dilutive in the future.
All
potentially dilutive common shares were excluded from the computation of diluted common shares outstanding as they would have
an anti-dilutive impact on the Company’s net losses and consisted of the following:
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
Convertible note
|
|
-
|
|
|
129,349
|
|
|
Stock options
|
|
|
12,704,009
|
|
|
|
14,894,213
|
|
|
Non-vested, forfeitable common shares
|
|
|
4,498,672
|
|
|
|
-
|
|
Segment
reporting
During
the years ended December 31, 2018 and 2017, the Company operated in one business segment.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
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 adoption of ASU 2016-02
is not expected to have an impact on the Company’s consolidated financial position, results of operations and cash flows.
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 consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13 to modify the disclosure requirements on fair value measurements. The amendments are
effective beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures and delay
adoption of the additional disclosures until the effective date. Most amendments should be applied retrospectively, but certain
amendments will be applied prospectively. The Company is in the process of assessing the impact of the standard on the Company’s
fair value disclosures. However, the standard is not expected to have an impact on the Company’s consolidated financial position,
results of operations and cash flows.
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.
NOTE
3 –
ACCOUNTS RECEIVABLE
At
December 31, 2018 and 2017, accounts receivable consisted of the following:
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
Accounts receivable
|
|
$
|
91,319
|
|
|
$
|
38,279
|
|
|
Less: allowance for doubtful accounts
|
|
|
-
|
|
|
|
(3,054
|
)
|
|
Accounts receivable, net
|
|
$
|
91,319
|
|
|
$
|
35,225
|
|
For
the years ended December 31, 2018 and 2017, bad debt (recovery) expense amounted to $(552) and $16,894, respectively.
NOTE
4 –
INVENTORY
At
December 31, 2018 and 2017, inventory consisted of the following:
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
Raw materials
|
|
$
|
6,149
|
|
|
$
|
7,269
|
|
|
Finished goods
|
|
|
2,828
|
|
|
|
3,224
|
|
|
Inventory
|
|
$
|
8,977
|
|
|
$
|
10,493
|
|
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE
5 -
PROPERTY AND EQUIPMENT
At
December 31, 2018 and 2017, property and equipment consisted of the following:
|
|
|
Useful Life
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
5 - 7 years
|
|
$
|
52,184
|
|
|
$
|
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
|
|
|
|
|
|
|
|
182,289
|
|
|
|
182,643
|
|
|
Less: accumulated depreciation
|
|
|
|
|
(124,884
|
)
|
|
|
(91,520
|
)
|
|
Property and equipment, net
|
|
|
|
$
|
57,405
|
|
|
$
|
91,123
|
|
For
the years ended December 31, 2018 and 2017, depreciation and amortization expense is included in general and administrative expenses
and amounted to $33,718 and $38,295, 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 and 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 December 31, 2018, this Convertible Note is no
longer outstanding.
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.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
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 years ended December 31, 2018 and 2017, interest expense related to these Convertible Notes amounted to $49,003 and $5,092,
including amortization of debt discount charged to interest expense of $40,691 and $2,917, respectively.
At
December 31, 2018 and 2017, the Convertible Note consisted of the following:
|
|
|
December 31,
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 years ended December 31, 2018 and 2017 was 8.7% and 7.0%, respectively.
NOTE
7 –
NOTES PAYABLE – RELATED PARTY
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”), a beneficial shareholder of the Company. Subject to
and in accordance with the terms and conditions of the Loan Agreement and the Note, the Lender agrees 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. The Lender loaned an initial amount of $200,000 at closing and loaned an additional
$200,000 to the Company and may loan at any time and from time to time through November 14, 2020, up to an aggregate amount not
to exceed the Maximum Loan Amount. The Company must repay 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 bears 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 shall pay 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 December 31, 2018, the Company did not meet the Minimum Asset Amount
covenant as defined in the Loan Agreement and may have violated other default provisions. Accordingly, the note balance due of
$400,000 has been reflected as a current liability on the accompanying consolidated balance sheet.
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.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE
8 -
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 $392,577 into 12,694,893 common shares, or $0.031
per share based on the original employment agreement (See Note 9). Upon conversion, the Company reduced accrued compensation by
$392,577 and 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 9).
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).
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 year ended December
31, 2018, the Company recorded stock-based professional fees of $88,750.
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 year ended December 31, 2018, the Company recorded stock-based compensation expense of $1,558,333 related to these shares.
On
August 15, 2018 (the “Effective Date”), the Company entered into an employment agreement with its vice president of
sales 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 year ended December 31, 2018, the
Company recorded stock-based compensation expense of $75,000 related to these shares. As of December 31, 2018, these shares had
not been issued.
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, for the
year ended December 31, 2018, the Company recorded stock-based professional fees of $10,000.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
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 were valued at $1,100,000, or $0.40 per common share,
based on contemporaneous common share sales. These shares 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. For the year ended December 31, 2018, the Company
recorded stock-based compensation expense of $252,085 related to these shares. These shares shall be considered outstanding for
legal purposes but shall be excluded from basic earnings per share until vesting occurs.
On
November 14, 2018, the Company entered into a consulting agreement for marketing services. In connection with this consulting
agreement, the Company issued 50,000 restricted common shares of the Company to a consultant for marketing services to be rendered.
These shares were valued at $20,000, 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, for the year ended December 31, 2018, the Company
recorded stock-based professional fees of $20,000.
The
following table summarizes activity related to nonvested shares:
|
|
|
Number of
Non-vested Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Nonvested, December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
6,483,732
|
|
|
|
0.62
|
|
|
Forfeited
|
|
|
(485,060
|
)
|
|
|
0.85
|
|
|
Nonvested, December 31, 2018
|
|
|
5,998,672
|
|
|
$
|
0.61
|
|
Total
unrecognized compensation expense related to these unvested common shares at December 31, 2018 amounted to $1,752,082 which will
be amortized over the remaining vesting period.
Common
shares issued for exercise of stock options
During the year ended December 31, 2018,
the Company issued 2,650,525 common shares upon the exercise of 1,757,032 stock options. In connection with these option exercises,
the Company received proceeds of $195,000 and reduced accrued compensation by $20,575, and at December 31. 2018 had a subscription
receivable of $19,185 included in prepaid and other current assets on the accompanying consolidated balance sheet, which was collected
in January 2019.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
Sale
of common shares
During
2017, the Company issued 514,455 common shares for cash proceeds of $437,500, or $0.85 per common share.
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 five 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 December 31, 2018 and 2017, the employee was credited $175,000
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 $60,000 and $60,000 during the years ended December 31, 2018 and 2017,
respectively, with a corresponding increase to shareholders’ equity.
Stock
options
During the year ended December 31, 2017,
the Company granted options to purchase 4,000,000 common shares to two employees at exercise prices ranging from $0.03 to $0.31
per common share with vesting terms ranging from immediately vesting to 3 years. The options were valued at the grant date using
a Black-Scholes option pricing model with the following assumptions; risk-free interest rate of 2.15%, expected dividend yield
of 0%, expected option terms ranging from 5.75 to 6.50 years using the simplified method due to a lack of historical exercise
data, and an expected volatility of 79% based on comparable volatility. The aggregate grant date fair value of these awards amounted
to $9,583,020. The Company recognizes compensation cost for unvested stock-based option awards on a straight-line basis over the
requisite service period.
During the year ended December 31, 2017,
the Company granted options to purchase 330,000 common shares to certain non-employees at an exercise price of $0.85 per common
share with vesting terms ranging from immediately vesting to 5 years to these consultants. The options were valued at the grant
date and remeasurement date using a Black-Scholes option pricing model with the following assumptions; risk-free interest rate
of 2.20%, expected dividend yield of 0%, expected option term of 4.65 to 5.25 years using the simplified method due to a lack of
historical exercise data, and expected volatility of 79% based on comparable volatility. The value of the options granted to non-employees
which vested over time are remeasured at each reporting date until vesting occurs. The aggregate grant date fair value of these
awards, as adjusted to apply variable measurement date accounting for non-employee awards, amounted to $591,452 as of December
31, 2017. The Company recognizes compensation cost for unvested stock-based incentive awards on a straight-line basis over the
requisite service period.
On
December 18, 2017, the Company modified certain outstanding stock options that were previously granted in 2016 and 2015. The exercise
price of the modified options was adjusted to $0.31. As a result, the Company modified the exercise price of 2,005,998 stock options
that were granted in 2016 and 2015. This modification resulted in incremental stock compensation of $825,207 of which $276,310
and $532,248 was expensed in 2018 and 2017 for options that were vested at the modification date and as of December 31, 2018.
Additionally, incremental stock compensation expense related to options that were not yet vested at the modification date will
be recognized over the remaining vesting period.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
For
the years ended December 31, 2018 and 2017, the Company recorded $4,518,828 and $6,712,752 of compensation and consulting expense
related to stock options, respectively. Total unrecognized compensation and consulting expense related to unvested stock options
at December 31, 2018 amounted to $2,392,761. 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 years ended December 31, 2018 and 2017 are summarized as follows:
|
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
|
Balance Outstanding December 31, 2016
|
|
|
10,564,213
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,330,000
|
|
|
|
0.29
|
|
|
|
|
|
|
|
|
|
|
Balance Outstanding December 31, 2017
|
|
|
14,894,213
|
|
|
|
0.32
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,757,032
|
)
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,691,483
|
)
|
|
|
0.66
|
|
|
|
|
|
|
|
|
|
|
Balance Outstanding December 31, 2018
|
|
|
11,445,698
|
|
|
$
|
0.30
|
|
|
|
6.70
|
|
|
$
|
3,291,240
|
|
|
Exercisable, December 31, 2018
|
|
|
9,471,195
|
|
|
$
|
0.28
|
|
|
|
6.28
|
|
|
$
|
2,844,028
|
|
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).
There
was no warrant activity in 2017. Warrant activities for the year ended December 31, 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 December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
Exercisable, December 31, 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.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
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.
All shares underlying grants are expected to be issued from the Company’s unissued authorized shares available.
NOTE
9 –
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 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 8).
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.
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
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 December 31, 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 8).
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.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
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. As consideration for these services, the employment agreement provided 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 March
27, 2019 and effective March 1, 2019, the Company entered into a new employment agreement with Mr. Pugliese (see Note 13).
On
August 15, 2018 (the “Effective Date”), the Company entered into an employment agreement with its vice president of
sales 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 recent 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 year ended December 31, 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 December 31, 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 December 31, 2018.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
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.
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
10 –
INCOME TAXES
For
the year ended December 31, 2017 and for the period from January 1, 2018 to April 25, 2018, the Company’s subsidiaries operated
as limited liability companies and passed all income and loss to each member based on their proportionate interest in the Company.
Accordingly, no provision for federal and state income taxes has been made in these consolidated financial statements for these
periods. 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 deferred tax assets at December 31, 2018 consist only of net operating loss carryforwards. The net
deferred tax asset has been fully offset by a valuation allowance because of the uncertainty of the attainment of future taxable
income.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
The
items accounting for the difference between income taxes at the effective statutory rate and the provision for income taxes for
the year ended December 31, 2018 were as follows:
|
|
|
2018
|
|
|
Income tax expense (benefit) at U.S. statutory rate
|
|
$
|
(2,079,991
|
)
|
|
Income tax benefit on LLC losses prior to merger
|
|
|
555,608
|
|
|
Non-deductible expenses
|
|
|
1,125,358
|
|
|
Change in valuation allowance
|
|
|
399,025
|
|
|
Total provision for income tax
|
|
$
|
-
|
|
The
Company’s approximate net deferred tax asset as of December 31, 2018 was as follows:
|
Deferred Tax Asset:
|
|
December 31,
2018
|
|
|
Net operating loss carryforward
|
|
$
|
399,025
|
|
|
Total deferred tax asset before valuation allowance
|
|
|
399,025
|
|
|
Valuation allowance
|
|
|
(399,025
|
)
|
|
Net deferred tax asset
|
|
$
|
-
|
|
The
net operating loss carryforward was approximately $1,900,000 at December 31, 2018. The Company provided a valuation allowance
equal to the net deferred income tax asset as of December 31, 2018 because it was not known whether future taxable income will
be sufficient to utilize the loss carryforward. During the year ended December 31, 2018, the valuation allowance increased by
$399,025. Additionally, the future utilization of the net operating loss carryforward to offset future taxable income is subject
to an annual limitation as a result of ownership changes that may occur in the future. The potential tax benefit arising from
the loss carryforward may be carried forward indefinitely subject to usage limitations.
The
Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2018
Corporate Income Tax Returns are subject to Internal Revenue Service examination.
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 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 December 31, 2018 and 2017. The Company has not experienced any losses in such accounts through December
31, 2018.
Geographic
concentrations of sales
For
the years ended December 31, 2018 and 2017, all sales were in the United States. No other geographical area accounting for more
than 10% of total sales during the years ended December 31, 2018 and 2017.
Customer
concentrations
For
the year ended December 31, 2018, three customers accounted for approximately 43.3% of total sales (11.2%, 13.9% and 18.2%, respectively).
For the year ended December 31, 2017, one customer accounted for approximately 15% of total sales. At December 31, 2018, two customers
accounted for 82.4% of total accounts receivable (24.1% and 58.3%, respectively). 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.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
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.
NOTE
12 –
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 year
ended December 31, 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 year ended December 31, 2018 and 2017.
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 year 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 years ended December
31, 2018 and 2017:
|
|
|
For the Year Ended December 31,
2018
|
|
|
For the Year Ended December 31,
2017
|
|
|
C-Bond I multi-purpose glass protection system
|
|
$
|
37,288
|
|
|
$
|
173,250
|
|
|
C-Bond BRS ballistic resistant glass protection system
|
|
|
193,016
|
|
|
|
141,681
|
|
|
Solution and film sales - other
|
|
|
49,691
|
|
|
|
13,056
|
|
|
C-Bond Nanoshield solution sales
|
|
|
90,709
|
|
|
|
62,380
|
|
|
Freight and delivery
|
|
|
11,540
|
|
|
|
15,050
|
|
|
Total
|
|
$
|
382,244
|
|
|
$
|
405,417
|
|
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
NOTE
13 –
SUBSEQUENT EVENT
On February 13, 2019, the Company entered
into a Securities Purchase Agreement (“SPA”) with an Accredited Investor (“Investor”) for the purchase
of a Convertible Promissory Note in the aggregate principal amount of $66,000 (“Note”) and received net proceeds of
$52,000 net of original issue discount of $11,000 and net of origination fees of $3,000. The Note bears an interest rate
of 12% and is due and payable on February 13, 2020. The Note may be converted by the Investor after six months into shares
of Company’s common stock (as determined in the Note) at a price equal to 81% of the average of the lowest two closing bid
prices of the common stock as reported on the OTC Link ATS owned by OTC Markets Group for the 10 prior trading days. The Company
may prepay the Note at any time prior to the six-month anniversary. The Note also contains certain representations, warranties,
covenants and events of default, including if the Company is delinquent in its periodic report filings with the SEC, and increases
in the amount of the principal and interest rates under the Note in the event of such defaults. In the event of default, at the
option of the Investor and in the Investor’s sole discretion, the Investor may consider the Note immediately due and payable.
The Company has accounted for this convertible promissory note as stock settled debt under ASC 480 and recorded a debt premium
of $15,481 with a charge to interest expense.
On March 4, 2019, the Company entered into
a Securities Purchase Agreement (“SPA II”) with the Investor for the purchase of a Convertible Promissory Note in the
aggregate principal amount of $63,600 (“Note II”) and received net proceeds of $50,000 net of original issue discount
of $10,600 and net of origination fees of $3,000. The Note bears an interest rate of 5% and is due and payable on March 4, 2020.
The Note may be converted by the Investor after six months into shares of Company’s common stock (as determined in the Note)
at a price equal to 81% of the average of the lowest two closing bid prices of the common stock as reported on the OTC Link ATS
owned by OTC Markets Group for the 10 prior trading days. The Company may prepay the Note at any time prior to the six-month anniversary.
The Note also contains certain representations, warranties, covenants and events of default, including if the Company is delinquent
in its periodic report filings with the SEC, and increases in the amount of the principal and interest rates under the Note in
the event of such defaults. In the event of default, at the option of the Investor and in the Investor’s sole discretion,
the Investor may consider the Note immediately due and payable. The Company has accounted for this convertible promissory
note as stock settled debt under ASC 480 and recorded a debt premium of $14,919 with a charge to interest expense.
On March 12, 2019, the Company entered into
a consulting agreement for advisory services to be rendered that ends on June 30, 2019. In connection with this consulting agreement,
the Company issued 485,060 restricted common shares of the Company to a consultant for services to be rendered. These shares were
valued at $82,460, or $0.17 per common share, based on quoted closing price on the date of grant, which will be amortized over
the term of the agreement.
On March 27, 2019 and effective March 1, 2019,
the Company entered into an employment agreement with Mr. Vincent Pugliese. Pursuant to this employment agreement, he serves as
the President and Chief Operating Officer of the Company. The employment agreement shall terminate on the earliest of a) the third
anniversary or b) terminated pursuant to terms in the employment agreement. As consideration for these services, the employment
agreement provided Mr. Pugliese with the following compensation and benefits:
|
|
●
|
An
annual base salary of $240,000.
|
|
|
|
|
|
|
●
|
Annual
cash performance bonus opportunity as determined by the Board.
|
|
|
|
|
|
|
●
|
Annual
stock grant as determined by the Board.
|
|
|
|
|
|
|
●
|
Certain
other employee benefits and perquisites, including reimbursement of necessary and reasonable travel.
|
In
the event that the Company terminates the term of Mr. Pugliese’s employment hereunder without Cause or for “good reason”
(as defined in this employment agreement) by Mr. Pugliese,, then in such event:
|
|
(A)
|
Mr.
Pugliese will retain and vest immediately all stock options/grants previously granted
and will be exercisable over a ten year period;
|
|
|
(B)
|
the
Company shall pay any benefits but not limited to accrued and deferred base salary, commissions
and expense reimbursements then owed or accrued plus eighteen (18) months of the current
Base Salary, and any unreimbursed expenses incurred through the termination date, and
each of which shall be paid on the termination date (in cash and/or stock as mutually
agreed between the Parties)
|
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
In
the event of a change of control (as defined in this employment agreement), all unvested stock options/grants of Mr. Pugliese
shall vest in full, and Mr. Pugliese will be entitled to receive, subject to a complete release of all claims, a lump sum payment
equal to two times his current annual base salary upon closing of the change in control transaction, and then this employment agreement
shall terminate. 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. All unvested stock will expire
upon termination unless termination is with cause for incapacity for physical or mental illness, without cause or change of control
as defined in the employment agreement.
On March 14, 2019, the Company entered
into a letter agreement (“Letter Agreement”) with Dinosaur Financial Group, LLC (“Dinosaur”), to act as
the Company’s financial advisor and agent for raising investment capital through a private placement (or pursuant to an alternate
form of capital investment or capital transaction). For services rendered under the Letter Agreement, Dinosaur shall receive cash
fees of up to seven percent of funds raised and shall sell to Dinosaur, and Dinosaur shall purchase from the Company, for $0.001
per each share of common stock covered, warrants to purchase an equal proportion of warrants to the number of shares issued or
issuable to investors in the private placement. Additionally, per the terms of the Letter Agreement, upon signing of the agreement,
the Company shall sell to Dinosaur, and Dinosaur shall purchase from the Company for $0.001 per each share of common stock covered,
warrants (the “Warrants”) to purchase 1,000,000 shares of C-Bond Common Stock, granted in three successive tranches
as outlined below, with an exercise price of $0.18 or current market price at the time, whichever is lower, as set forth in the
Letter Agreement. Upon signing of the Letter Agreement, Dinosaur will receive Warrants to purchase 200,000 shares of C-Bond Common
Stock. On the three-month anniversary of the Letter Agreement, Dinosaur will receive Warrants to purchase 400,000 shares of C-Bond
Common Stock. On the six-month anniversary of the Letter Agreement, Dinosaur will receive Warrants to purchase 400,000 shares of
C-Bond Common Stock. The Warrants shall be exercisable over a five-year term and shall be assignable to others at Dinosaur’s
discretion. In the event either party terminates the Letter agreement before the three or six month anniversary, the Company has
no obligation to sell the Common Stock or related Warrants referenced herein.
On March 14, 2019, the Company entered into
an Advisory Board Agreement and a related Restricted Stock Award Agreement with an advisor (the “Advisor”) to act as
a member of the Company’s advisory board. The Advisory Board Agreement has a term of one year and will renew automatically
unless terminated by either party. In connection with this advisory agreement, the Company issued 200,000 restricted common shares
of the Company to the Advisor under its 2018 Long Term Incentive Plan. These shares will vest on the first anniversary date of
the Restricted Stock Award Agreement. If the Advisor’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. These shares were valued at $32,000, or $0.16 per common share, based on quoted closing price on the date
of grant, and will be as amortized over the one-year vesting period.
F-26