☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Indicate by check mark if the registrant is a
well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☒ No ☐
Indicate by check mark whether registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions
of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting
common equity held by non-affiliates based upon the closing price of $0.012 per share of common stock as of June 30, 2020 (the last business
day of the registrant’s then-most recently completed second fiscal quarter), was $1,317,490. The aggregate market value of the voting
and non-voting common equity held by non-affiliates based upon the closing price of $0.012 per share of common stock as of June 30, 2021
(the last business day of the registrant’s most recently completed second fiscal quarter) was $2,726,881.
Indicate the number of shares outstanding of each
of the registrant’s classes of common stock, as of the latest practicable date: 285,174,171 shares of common stock are issued and
outstanding as of April 13, 2022.
This Amendment No. 1 to the Annual
Report on Form 10-K (the “Amendment”) of C-Bond Systems, Inc. (the “Company”) amends the Annual Report of C-Bond
Systems, Inc. on Form 10-K for the fiscal year ended December 31, 2020 (the “Form 10-K”), as filed with the Securities and
Exchange Commission (the “Commission”) on April 14, 2021, and is being filed to amend and restate the Company’s consolidated
statement of operations and consolidated statement of cash flows, and certain notes to the consolidated financials, and other sections
in the Form 10-K, including certain risk factors, and Item 7 Management’s Discussion and Analysis of Financial Condition and Results
of Operations. The restatement had the cumulative effect of decreasing the Company's reported revenue for fiscal 2020 by $102,569 and
decreasing the Company’s bad debt expense for the same period by $102,569. The restatement did not effect the Company’s balance
sheet, net loss, or cash used in operations.
PART I
ITEM 1. BUSINESS
The following discussion should
be read in conjunction with our consolidated financial statements and the related notes to the consolidated financial statements that
appear elsewhere in this Report.
As used in this Report and
unless otherwise indicated, the terms “C-Bond Systems, Inc.,” “Company,” “we,” “us,” or
“our” refer to C-Bond Systems, Inc. and 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, as the context may require.
Overview
We are a nanotechnology company
and the sole owner, developer and manufacturer of the patented C-Bond technology. We are engaged in the implementation of proprietary
nanotechnology applications and processes to enhance properties of strength, functionality and sustainability of brittle material systems.
Our present primary focus is in the multi-billion-dollar glass and window film industry with target markets in the United States and internationally.
We operate in two divisions: C-Bond Transportation Solutions, which sells a windshield strengthening water repellent solution as well
as a disinfection product, and C-Bond Safety Solutions, which sells multi-purpose glass strengthening primer and window film mounting
solutions (“C-Bond Secure”), ballistic-resistant film systems (“C-Bond BRS”) and disinfection products.
The C-Bond technology enables
ordinary glass to dissipate energy by permeating the glass surface and detecting microscopic flaws and defects that are randomly distributed
all over the glass surface. C-Bond’s unique qualities then work to locate and repair the identified surface imperfections that weaken
the glass composite structure and ultimately act as failure initiators. The C-Bond formula is engineered to maintain original glass design
integrity while increasing the mechanical performance properties of the glass unit. As a result of the COVID-19 pandemic we created partnerships
to distribute disinfection related products, which we began to sell in the second quarter of 2020.
Our Business
Product and Service Offerings
C-Bond’s current products
are patented, low-cost technologies that significantly increase the mechanical performance of glass. We have implemented the following
product structure integrating a “new strategic product platform” that has enhanced performance capabilities and market reach
with a “legacy product platform” that is still generating incremental revenue and earnings.
New Strategic Product Platforms
C-Bond Transportation Windshield Performance Solution
C-Bond nanoShield™ is
a patented, nanotechnology, windshield glass strengthening and hydrophobic (water repellent) all-in-one performance system. It is designed
to improve windshield safety and performance by increasing windshield chip and crack resistance and improving windshield visibility in
wet weather conditions to provide extended driver reaction time. We believe that C-Bond nanoShield is unique in the market and that
the product has no direct competitors. With C-Bond nanoShield, we intend to create new markets and channels in the aftermarket
automotive windshield segment, including fleets, automotive dealers, and service providers.
Disinfectant Products
On May 20, 2020, we entered
into a two-year Distributor Agreement with an entity where we were appointed as a distributor to exclusively sell MB-10 Disinfectant Tablets
for use in certain markets. MB-10 Disinfectant Tablets are the most convenient way yet to deliver the benefits of chlorine dioxide to
hygiene or biosafety programs. MB-10 disinfectant tablets have one of the broadest, most complete EPA registration labels on the market.
It is a safe, easy and effective way to disinfect a vehicle’s interior using an EPA registered disinfectant (Reg No.70060-19-46269)
included on List N for use against human coronavirus SARS-CoV-2. It is proven effective against emerging viral pathogens, including enveloped
and large and small non-enveloped viruses. MB-10 Tablets provide fast-acting virus and bacteria protection that is safe for all vehicle
surfaces including LED screens and electronics without leaving a residue or odor. We were appointed as a distributor to exclusively sell
MB-10 Disinfectant Tablets for use in the following markets:
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Automotive, Trucking, RV, rental agencies (auto and truck), service vehicles (taxi, Uber, Lyft), mass transit (train, buses), golf carts, aviation, train, marine (potential future growth) |
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School facilities and buses |
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Dealerships |
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Global Distribution |
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Service Providers |
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Transportation Detailing. |
Legacy Product Platform
C-Bond Secure Strengthening Primer and Window Film Mounting Solution
C-Bond Secure (formerly known
as C-Bond I) is a patented, non-toxic, water-based nanotechnology solution designed to significantly increase the strength of glass and
improve the performance properties of window film-to-glass products. C-Bond Secure improves the performance of window film-to-glass products
by reducing glass breakage from impact and stress environments, and fills the capillary voids on the glass surface preventing the trapping
of moisture and impurities that impede cure time and adhesion between the glass and any succeeding window film product. This is important
because when glass does break, this nanotechnology improves the chances that no large shards/pieces will escape the immediate area of
the glass surface and result in serious laceration or personal injury. C-Bond Secure has been tested against untreated glass by
third-party laboratories and shown to outperform untreated glass in this capacity. C-Bond Secure faces market competition from basic
soap and water products (such as baby shampoo and dishwashing soap) as the recognized industry standard window film application solution,
which we believe provide no structural benefits and are designed to wash hair and dishes, respectively. C-Bond Secure increases overall
glass strength, improves window film product performance, and can be used in conjunction with any manufacturer’s film product.
C-Bond BRS (Ballistic Resistant Film System)
C-Bond BRS is a patented,
nanotechnology Ballistic-Resistant Film System that increases the structural integrity of glass and provides National Institute of Justice
(NIJ) Level I, Level II and Underwriter Laboratories (UL) 752 ballistic-resistant protection. C-Bond BRS includes a specified glass thickness
and glass type, the C-Bond window film mounting solution to improve the glass mechanical strength, and the C-Bond window film product.
This product is targeted to police, fire, emergency services, media outlets, schools, airports, and mass transit government buildings
due to the utility of ballistic-resistant glass protection in their respective fields. The C-Bond BRS system seeks to combine simplicity
and affordability with a one-way capability (the ability to shoot-out but prevent shooting in) ballistic protection compared to other
costlier ballistic resistant material (polycarbonate and glass laminate) products.
Commercial Market Strategy
We utilize a distributor model
to reach potential customers. This approach takes advantage of existing resources and facilitates relationships between us and our
enterprise partners in order to leverage their collective strengths. We require industry partners to generate economic growth, support
commercialization activities, provide more developed business networks, knowledge of and access to supply and demand channels, and supplement
limited financial resources. We and our industrial partners work together to determine scalability, adaptability, affordability, usability
and intellectual property. From a business perspective, the long-term scope and strategic benefits of our plug and play business strategy
is to be able to carry out business on a global basis at a lower cost and becoming better informed and more adaptive to changing market
conditions, which is dependent on securing these relationships.
C-Bond Authorized Distributor Network
On April 1, 2016, we officially launched our Authorized Distributor
Program focused on channeling distribution agreements with industry specific business-to-business and original equipment manufacturing
customers to develop a global distribution network. This program aims to partner with high quality distributors that can grow revenues
and margins. Our present distribution channels span the United States from Florida to Hawaii and consist of 56 distribution channels,
including international sales in Mexico, United Kingdom, the Philippines, India, and the UAE. For the year ended December 31, 2020, two
customers accounted for approximately 40.1% of total sales (18.6% and 21.5%, respectively). For the year ended December 31, 2019, two
customers accounted for approximately 25.9% of total sales (13.9% and 12.0%, respectively). For the year ended December 31, 2020, approximately
59.9% of all sales were in the United States, 21.5% of sales were from one customer based in India and 18.6% of sales were from one customer
based in the Philippines. For the year ended December 31, 2019, approximately 80% of all sales were in the United States. No other geographical
area accounting for more than 10% of total sales during the year ended December 31, 2020 and 2019. 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.
Suppliers
Currently, we rely on one
main supplier, Madico, Inc., for our window film; one main supplier, Gelest, Inc., for our chemicals; and two suppliers for disinfectant
products. However, we believe that, if necessary, alternate suppliers could be found without material disruption to our business.
Intellectual Property
To date, we have filed, licensed
and/or acquired a total of 22 individual patents and patent applications spanning core and strategic nano-technology applications and
processes. We intend to continue to expand our patent coverage. Our focus remains on building a patent portfolio that protects our core
intellectual property and delivers shareholder value.
We own five provisional
United States patents and licenses, five United States patents, and 12 foreign patents on a non-exclusive basis from William Marsh Rice
University (“Rice University”) with claims directed toward various aspects of our current products and products under development
including the use of nanotechnology for glass strengthening and the processes and composition of our products.
Pursuant to an agreement dated
April 8, 2016, between us and Rice University, Rice University has granted a non-exclusive license to us, 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, we 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, we are 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. To date, no royalties
have been due under this agreement.
The “C-Bond™”
and “C-Bond nanoShield™” names and logos are registered trademarks issued by the U.S. Patent and Trademark Office.
Research and Development
During the years ended December
31, 2020 and 2019, we incurred research and development costs of $16,627 and $31,057, respectively. These costs were incurred to
continue to upgrade C-Bond products.
Competition
C-Bond nanoshield Windshield Performance System
We believe we have no direct
competition in the windshield glass strengthening space.
C-Bond nanoShield also provides
a complementary hydrophobic or water repellent quality. There are competitors in this space, including Rain-X, AquaPel, and Diamon-Fusion.
We believe these products do not provide chip or crack resistance and have hydrophobic properties that degrade sooner than C-Bond nanoShield.
Accordingly, management believes there is no product that is truly comparable to C-Bond nanoShield currently on the market. We had
the performance of C-Bond nanoShield verified at our request, based on a modified chip test for paint on metal parts, SAEJ 400, to provide
windshield glass chip protection when compared to untreated glass.
C-Bond Secure Glass Strengthening Primer and
Window Film Mounting Solution
C-Bond Secure faces competition
from alternative window film mounting products in the market; however, all these products have similar ingredients to a soap and water
mix, which we believe provides no structural benefit. These solutions are used to provide a window film installer the ability to
slip or move the film on the surface to which it is applied. The industry standard solution most commonly used to apply window film
products to glass is a mixture containing commonly available baby shampoo or dishwashing soap and water that we believe has the following
negative attributes: provides no structural benefits, often bubbles or yellows and scatters light, can only be applied within a limited
temperature range, and may require 30 to 120 days of “dry” time to set completely depending on the film thickness. C-Bond
Secure provides the same slip properties while also strengthening the glass and improving film adhesion.
C-Bond BRS
C-Bond BRS faces competition
from alternative bulletproof or bullet-resistant glass products in the market. Alternative bulletproof solutions use a polycarbonate or
glass laminate materials that are expensive, thick, heavy, often require reframing and retrofit of existing structure and revised building
codes, and yellow and discolor over time. These alternative solutions are often cost prohibitive to cost sensitive customers such
as educational and municipal facilities. C-Bond BRS allows for increased safety and security at an affordable cost. Most importantly,
it provides a deterrent to an intruder and valuable time to secure the facility.
Employees
As of December 31, 2020, we had two full-time
employees, and multiple full and part-time employees, including our chief executive officer, who operate as independent contractors of
the Company. We have established an extensive network of external partners, contractors, and consultants to outsource to in an effort
to minimize administrative overhead and maximize efficiency.
General Company Information
C-Bond Systems, Inc., formerly
WestMountain Alternative Energy, Inc. (“WestMountain”), was incorporated in the state of Colorado on November 13, 2007. C-Bond
Systems, LLC is a Texas-based limited liability company that was formed in 2013, headquartered in Houston, Texas. On April 25, 2018, WestMountain
Energy, WestMountain’s wholly-owned subsidiary, WETM Acquisition Corp., a corporation formed in the State of Colorado on April 18,
2018, (the “Acquisition Sub”), and C-Bond Systems, LLC, entered into an Agreement and Plan of Merger and Reorganization (“Merger
Agreement”). 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 and became a wholly-owned subsidiary of WestMountain
(the “Merger”). The Merger was effective as of April 26, 2018, upon the filing of a Certificate of Merger with the Secretary
of State of the State of Texas. On July 18, 2018, we changed our name to C-Bond Systems, Inc. Our common stock is currently quoted
on the OTC Pink marketplace on a limited basis under the trading symbol “CBNT”. Our principal executive offices are located
at 6035 South Loop East, Houston, Texas, 77033. Our website address is http://cbondsystems.com/, and our telephone number is (832)
649-5658. The content of any website of ours is not a part of, or incorporated by reference in, this Report. The Company’s Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections
13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the Securities and
Exchange Commission (the “SEC”). These reports and any other information filed by the Company with the SEC are available free
of charge on our website. The SEC maintains an internet site that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC at www.sec.gov.
ITEM 1A. RISK FACTORS
Investing in our common
stock involves a high degree of risk. You should not invest in our stock unless you are able to bear the complete loss of your investment.
You should carefully consider the risks described below, as well as other information provided to you in this annual report on Form 10-K,
including information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
“Cautionary Note Regarding Forward-Looking Information” before making an investment decision. The risks and uncertainties
described below are not the only ones facing C-Bond Systems. Additional risks and uncertainties not presently known to us or that we currently
believe are immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected, the value of our common stock could decline, and you may lose
all or part of your investment.
We have incurred substantial losses to date,
may continue to incur losses in the future, and we may never achieve or sustain profitability.
We have incurred substantial
net losses since our inception, including net losses of $4,434,443 and $7,240,740 for the years ended December 31, 2020 and 2019,
respectively, and these losses may continue. The net cash used in operations was $1,783,027 and $1,313,711 for the years ended December
31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit, shareholders’ deficit, and working capital
deficit of $45,968,839, $3,167,220 and $1,414,268, respectively. 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.
Our ability to continue as a going concern
will require us to obtain additional financing to fund our current operations, which may be unavailable on attractive terms, if at all.
As of December 31, 2020, our
recurring operating losses, cash used in operations and our current operating plans raise substantial doubt about our ability to continue
as a going concern for a period of twelve months from the issuance date of this report. Our ability to continue as a going concern will
require us to obtain additional financing to fund our current operating plans. We believe that our existing cash and cash equivalents
will not be sufficient to fund our current operating plans. We have based these estimates, however, on assumptions that may prove to be
wrong, and we could spend our available financial resources much faster than we currently expect and need to raise additional funds sooner
than we anticipate. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate
our research and development efforts and commercialization efforts.
Unfavorable global economic, business or
political conditions could adversely affect our business, financial condition or results of operations.
Our results of operations
could be adversely affected by general conditions in the global economy and in the global financial markets, including conditions that
are outside of our control, including the impact of health and safety concerns, such as those relating to the current COVID-19 outbreak.
The most recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged
economic downturn could result in a variety of risks to our business, including weakened demand for our products and our ability to raise
additional capital when needed on acceptable terms, if at all. A weak or declining economy could strain our domestic and international
customers, possibly resulting in delays in customer payments. Any of the foregoing could harm our business and we cannot anticipate all
the ways in which the current economic climate and financial market conditions could adversely impact our business.
Our future revenues are very difficult to
predict with any accuracy.
We are an early-stage company.
That makes predicting the timing or the amount of revenues that we will receive from the sale, or license, of our products very difficult.
Any delay in the development and acceptance of one or more of our products, could result in significant delays in the realization of revenues,
the need to raise additional capital through the issuance of additional equity or debt securities sooner than we intend, and may allow
competitors to reach certain of such markets with products before we do. In view of the emerging nature of the technology involved in
certain of these markets, and the attendant uncertainty as to whether our products will achieve meaningful commercial acceptance, if at
all, there can be no assurance that we will realize revenues sufficient to achieve profitability.
Our intellectual property is subject to
patents and exclusive license agreements that may expire or change.
We rely on U.S. patents to
protect our propriety products that form the core of our revenue potential. These patents are subject to standard patent expiration terms.
Upon expiration of our patents we will no longer be able to prevent our competitors from developing similar products to ours. Additionally,
we rely on exclusive license agreements to use certain technologies. The terms of the exclusive license agreements may change upon expiration
of their current terms. We may not be able to renew or extend our current licenses, or they may become non-exclusive licensees. The inability
to maintain our exclusive licenses agreements would have a significant impact on our potential future revenues.
If we are unable to adequately protect our
intellectual property, our competitive position and results of operations may be adversely impacted.
Protecting our intellectual
property is critical to our innovation efforts. We own patents, trade secrets, copyrights, trademarks and/or other intellectual property
rights related to many of our products, and also have exclusive and non-exclusive license rights under intellectual property owned by
others. Our intellectual property rights may be challenged or infringed upon by third parties, particularly in countries where property
rights are not highly developed or protected, or we may be unable to maintain, renew or enter into new license agreements with third-party
owners of intellectual property on reasonable terms. Unauthorized use of our intellectual property rights or inability to preserve existing
intellectual property rights could adversely impact our competitive position and results of operations.
We are dependent on key personnel, and our
ability to grow and compete in our industry will be harmed if we do not retain the continued services of our key personnel, or we fail
to identify, hire, and retain additional qualified personnel.
Our success depends on the
efforts of our senior management team and other key personnel. The loss of services of members of our senior management team could have
an adverse effect on our business. In addition, if we expect to grow our operations, it will be necessary for us to attract and retain
additional qualified personnel. If we are unable to attract or retain qualified personnel as needed, the growth of our operations could
be slowed or hampered.
Potential adverse outcomes in legal proceedings
may adversely affect results.
Our business exposes us to
product liability claims that are inherent in the design, manufacture and sale of our products and the products of suppliers. We may not
be able to obtain insurance on acceptable terms or our insurance may not provide adequate protection against actual losses. In addition,
we are subject to the risk that one or more of our insurers may become insolvent and become unable to pay claims that may be made in the
future. Even if we maintain adequate insurance, claims could have a material adverse effect on our financial condition, liquidity and
results of operations and on our ability to obtain suitable, adequate or cost-effective insurance in the future.
If we are unable to successfully introduce
new products, our future growth may be adversely affected.
Our ability or failure to
develop new products based on innovation can affect our competitive position and requires the investment of significant time and resources.
Difficulties or delays in research, development, production or commercialization of new products and services may reduce future revenues
and adversely affect our competitive position. If we are unable to create sustainable product differentiation, our organic growth may
be adversely affected.
Research and development for continued growth
of our IP portfolio and product offerings is expensive, and we may not have sufficient funds to continue research and develop activities
and may not be able to acquire additional funding.
Our ability to continue our
research and development activities to improve and expand our products and service offerings requires extensive amounts of funding. We
may not be able to obtain the necessary funding on attractive terms and in a timely basis to continue our research and development activities,
which would cause our research and development activities to be delayed, reduced or terminated. Delaying, reducing or terminating our
research activities would impede our estimated growth and results of operations.
We rely heavily on collaborative partners such as distributors,
manufacturers and vendors and our relationships with such parties may restrict or limit our business operations.
We are currently working with
several third-party entities with respect to the validation, optimization, and distribution of our products. Our current and future collaborations
and joint ventures are important as they allow greater access to funds, to research, development and testing resources, validation, and
to manufacturing, sales and distribution resources that we would otherwise not have. We intend to continue to significantly rely on such
collaborative and joint venture arrangements. Some of the risks and uncertainties related to the reliance on such collaborations and joint
ventures include the fact that such relationships could actually serve to limit or restrict us, while our partners are free to pursue
other products either on their own or with others. Further, our partners may terminate a collaborative technology relationship and such
termination may require us to seek other partners or expend substantial resources to pursue these activities independently.
We rely primarily on a third-party distribution
model for our products and the number and quality of distributors can vary and may impact our revenues.
We rely on numerous third-party
distributors for the distribution of our products. While we believe that alternative distributors could be located if required, our product
sales could be affected if any of these distributors do not continue to distribute our products in required quantities or at all, or with
the required levels of quality. In addition, difficulties encountered by these distributors, such as fire, accident, natural disasters,
or political unrest, could halt or disrupt distributions, resulting in delay or cancellation of orders. Any of these events could result
in delayed deliveries by us of our products, causing reduced sales and harm to our reputation and brand name.
We only have one manufacturing facility.
We manufacture all of our
products at our Houston, Texas facility. In the event of a fire, flood, tornado, hurricane or other form of a catastrophic event, we may
be unable to fulfill any then-existing demand for our products, possibly for a prolonged period, depending upon the severity of the event.
As a result, should a catastrophic event occur, our financial condition and results of operation would be materially adversely affected.
Additionally, our lease on
our Houston, Texas facility expired in November 2019 and was extended to May 31, 2021. There is no guarantee that we will be able to negotiate
a favorable lease renewal or extension. If we are not able to renew or extend our lease on the Houston, Texas facility, we may have to
move our corporate headquarters and manufacturing facility. Doing so could cause us to incur significant expenses and could delay or reduce
our ability to manufacture our products for some time. Our financial condition and results of operation could be materially adversely
affected by any such move.
The requirements of being a public company
may strain our resources, divert management’s attention and affect our ability to attract and retain qualified members of the board
of directors.
As a public company, we are
subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act,
the Dodd-Frank Act, the listing requirements of the OTC and other applicable securities rules and regulations. Compliance with these rules
and regulations requires significant legal and financial compliance costs, makes some activities more difficult, time-consuming or costly
and increases demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current
reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective
disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure
controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight
may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business
and operating results. We may need to hire more employees in the future to comply with these regulatory requirements, which will increase
our costs and expenses.
In addition, changing laws,
regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing
legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject
to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve
over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance
matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply
with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion
of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new
laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice,
regulatory authorities may initiate legal proceedings against us and our business may be harmed.
We also expect that being
a public company with these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance,
and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make
it more difficult for us to attract and retain qualified members for our board of directors, particularly to serve any committees, and
qualified executive officers.
As a result of disclosure
of information in filings required of a public company, our business and financial condition will become more visible, which we believe
may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business
and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims,
and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating
results.
We may not reach sufficient size to justify our
public reporting status. If we are forced to become a private company, then our stockholders may lose their ability to sell their shares
and there would be substantial costs associated with becoming a private company.
We may not be able to fulfill our obligation
to develop and maintain proper and effective internal controls over financial reporting.
We are required, pursuant
to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal
control over financial reporting annually. This assessment needs to include disclosure of any material weaknesses identified by our management
in our internal control over financial reporting. Management concluded that our internal controls and procedures as of December 31, 2020
were not effective, see “We have identified material weaknesses in our internal control over financial reporting which could,
if not remediated, result in a material misstatement in our financial statement.” below. In the future, we may not be able to
complete our evaluation, testing and any required remediation in a timely fashion. Failure to comply, or any adverse results from such
evaluation, could result in a loss of investor confidence in our financial reports and have an adverse effect on the trading price of
our equity securities. Achieving continued compliance with Section 404 may require us to incur significant costs and expend significant
time and management resources. We cannot assure you that we will be able to fully comply with Section 404 or that we will be able to conclude
that our internal control over financial reporting is effective at fiscal year-end. As a result, investors could lose confidence in our
reported financial information, which could have an adverse effect on the trading price of our securities.
Risks Related to the Glass Strengthening
and Water Repellent Industries
We face competition from companies that
have substantially greater capital resources, research and development, manufacturing and marketing resources.
While we believe that we have
significant competitive benefits offered by our proprietary products, there are competitors with much longer operating histories, greater
name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we have. As we grow
and become successful with our products, we expect these competitors to increase the resources they dedicate to our market. Such competition
could materially adversely affect our business, operating results or financial condition.
We may face increased pricing pressures
from current and future competitors and, accordingly, there can be no assurance that competitive pressures will not require us to reduce
our prices.
It is likely that we will
experience significant competitive pressure over time. Accordingly, the use and pricing of our products may decline as the market becomes
more competitive. Any material reduction in the price of our products will negatively affect our gross margin and results of operations.
We may have difficulty developing brand
awareness for our products.
We believe that a developed
market for glass strengthening products currently does not exist. Generation of the brand and market communications are essential to the
Company’s long-term success. Funding constraints will limit the Company’s ability to build product awareness through marketing
and advertising. Without clear market communication the risk of having the product confused with other applications such as a stand-alone
hydrophobic product is possible. If we are unable to develop such a market or create demand for our products, it would adversely impact
our business and operating results.
Risks Related to our Common Stock
Our common stock is quoted on the OTC Pink,
which may limit the liquidity and price of our common stock more than if our common stock were listed on the Nasdaq Stock Market or another
national exchange.
Our securities are currently
quoted on the Over-the-Counter Markets, specifically the OTC Pink (the “OTC Pink”), an inter-dealer automated quotation system
for equity securities. Quotation of our securities on the OTC Pink may limit the liquidity and price of our securities more than if our
securities were listed on the Nasdaq Stock Market or another national exchange. As an OTC Pink company, we do not attract the extensive
analyst coverage that accompanies companies listed on national securities exchanges. Further, institutional and other investors may have
investment guidelines that restrict or prohibit investing in securities traded on the OTC Pink. These factors may have an adverse impact
on the trading and price of our common stock.
The trading price of our common stock may
decrease due to factors beyond our control.
The stock market from time
to time has experienced extreme price and volume fluctuations, which have particularly affected the market prices for smaller reporting
companies and which often have been unrelated to the operating performance of the companies. These broad market fluctuations may adversely
affect the market price of our common stock. If our shareholders sell substantial amounts of their common stock in the public market,
the price of our common stock could fall. These sales also might make it more difficult for us to sell equity, or equity-related securities,
in the future at a price we deem appropriate.
The market price of our common
stock may also fluctuate significantly in response to the following factors, most of which are beyond our control:
| |
● |
variations in our quarterly operating results, |
| |
● |
changes in general economic conditions and in our industry, |
| |
● |
changes in market valuations of similar companies, |
| |
● |
announcements by us or our competitors of significant new contracts, acquisitions, strategic partnerships or joint ventures, or capital commitments, |
| |
● |
loss of a major customer, partner or joint venture participant and |
| |
● |
the addition or loss of key managerial and collaborative personnel. |
Any such fluctuations may
adversely affect the market price of our common stock, regardless of our actual operating performance. As a result, stockholders may be
unable to sell their shares, or may be forced to sell them at a loss.
The market price for our common shares is
particularly volatile given our status as a relatively unknown company with a small and thinly traded public float, limited operating
history and lack of profits which could lead to wide fluctuations in our share price. You may be unable to sell your common shares at
or above your purchase price, which may result in substantial losses to you.
The market for our common
shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue
to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of
factors. First, as noted above, our common shares are sporadically and thinly traded. As a consequence of this lack of liquidity, the
trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either
direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are
sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse
impact on its share price. Secondly, we are a speculative or “risky” investment due to our limited operating history and lack
of profits to date. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at
greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease
the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what
the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current
market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the
prevailing market price.
Penny stock regulations may impose certain
restrictions on marketability of our securities.
Our common stock is subject
to penny stock rules, which may discourage broker-dealers from effecting transactions in our common stock or affect their ability to sell
our securities. As a result, purchasers and current holders of our securities could find it more difficult to sell their securities. Trading
volume of OTC Pink stocks have been historically lower and more volatile then stocks traded on an exchange or the Nasdaq Stock Market.
In addition, we may be subject to rules of the SEC that impose additional requirements on broker-dealers when selling penny stocks to
persons other than established customers and accredited investors. In general, an accredited investor is a person with net worth in excess
of $1,000,000 or annual income exceeding $200,000 individually, or $300,000 together with his or her spouse. The relevant SEC regulations
generally define penny stocks to include any equity security not traded on an exchange or the Nasdaq Stock Market with a market price
(as defined in the regulations) of less than $5 per share. Under the penny stock regulations, a broker-dealer must make a special suitability
determination as to the purchaser and must have the purchaser’s prior written consent to the transaction. Prior to any transaction
in a penny stock covered by these rules, a broker-dealer must deliver a disclosure schedule about the penny stock market prepared by the
SEC. Broker-dealers must also make disclosure concerning commissions payable to both the broker-dealer and any registered representative
and provide current quotations for the securities. Finally, broker-dealers are required to send monthly statements disclosing recent price
information for the penny stock held in an account and information on the limited market in penny stocks.
You may find it difficult to sell our common
stock.
As mentioned above, there
has been a limited trading market in our common stock. We cannot assure you that an active trading market for our common stock will develop
or be sustained. Regardless of whether an active and liquid public market exists, negative fluctuations in our actual or anticipated operating
results will likely cause the market price of our common stock to fall, making it more difficult for you to sell our common stock at a
favorable price, or at all.
We intend to issue additional equity and
stock options to employees and consultants as compensation in the future, which will result in dilution to existing and new investors.
We provide and intend to continue
to provide additional equity-based compensation to our employees, officers, directors, consultants and independent contractors through
an equity incentive plan. Our equity incentive plan permits the award of options to purchase shares of common stock and the issuance of
restricted shares of our common stock. Because stock options granted under the plan will generally only be exercised when the exercise
price for such option is below the then market value of the common stock, the exercise of such options or the issuance of shares will
cause dilution to the book value per share of our common stock and to existing and new investors.
Sales of a substantial number of shares
of our common stock in the public market by our existing stockholders could cause our stock price to fall.
We have not entered into lock-up
agreements with many of our existing stockholders. As a result, sales of a substantial number of shares of our common stock in the public
market could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional
equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.
Our stock price is likely to be volatile.
There is generally significant
volatility in the market prices and limited liquidity of securities of companies at our stage. Contributing to this volatility are various
events that can affect our stock price in a positive or negative manner. These events include, but are not limited to: governmental regulations
or actions; market acceptance and sales growth of our products; litigation involving our industry; developments or disputes concerning
our patents or other proprietary rights; departure of key personnel; future sales of our securities; fluctuations in our financial results
or those of companies that are perceived to be similar to us; investors’ general perception of us; announcements by us of significant
contracts, acquisitions, strategic partnerships, joint ventures or capital commitments, and general economic, industry and market conditions.
If any of these events occur, it could cause our stock price to fall.
The price of our common stock may be adversely
affected by the future issuance and sale of shares of our common stock or other equity securities.
We cannot predict the size
of future issuances or sales of our common stock or other equity securities future acquisitions or capital raising activities, or the
effect, if any, that such issuances or sales may have on the market price of our common stock. The issuance and sale of substantial amounts
of common stock or other equity securities or announcement that such issuances and sales may occur, could adversely affect the market
price of our common stock. Any decline in the price of our common stock may encourage short sales, which could place further downward
pressure on the price of our common stock and may impair our ability to raise additional capital through the sale of equity securities.
Our reduced stock price may adversely affect
our liquidity.
Our common stock has limited
trading history. Many market makers are reluctant to make a market in stock with a trading price of less than $5.00 per share, as well
as shares quoted on the OTC Pink. To the extent that we have fewer market makers for our common stock, our volume and liquidity will likely
decline, which could further depress our stock price.
We have never paid dividends on our common
stock and cannot guarantee that we will pay dividends to our stockholders in the future.
We have never paid dividends
on our common stock. For the foreseeable future, we intend to retain our future earnings, if any, in order to reinvest in the development
and growth of our business and, therefore, do not intend to pay dividends on our common stock. However, in the future, our board of directors
may declare dividends on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors
and will depend on our financial condition, results of operations, capital requirements, and such other factors as our board of directors
deems relevant. Accordingly, investors may need to sell their shares of our common stock to realize a return on their investment, and
they may not be able to sell such shares at or above the price paid for them. We cannot guarantee that we will pay dividends to our stockholders
in the future.
Colorado law and our Articles of Incorporation
protect our directors from certain types of lawsuits, which could make it difficult for us to recover damages from them in the event of
a lawsuit.
Colorado law provides that
our directors will not be liable to our company or to our stockholders for monetary damages for all but certain types of conduct as directors.
Our Articles of Incorporation require us to indemnify our directors and officers against all damages incurred in connection with our business
to the fullest extent provided or allowed by law. The exculpation provisions may have the effect of preventing stockholders from recovering
damages against our directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require
our company to use our assets to defend our directors and officers against claims, including claims arising out of their negligence, poor
judgment or other circumstances.
Additional risks may exist since we became
public through a “reverse merger.”
Because our business became
public by means of a “reverse merger,” we may not be able to attract the attention of major brokerage firms. Securities analysts
of major brokerage firms may not provide coverage of us since there is little incentive to brokerage firms to recommend the purchase of
our common stock. We cannot assure you that brokerage firms will want to conduct any secondary offerings on our behalf in the future.
We have identified material weaknesses in
our internal control over financial reporting which could, if not remediated, result in a material misstatement in our financial statements.
We are subject to the reporting
and other obligations under the Securities Exchange Act of 1934 (“Exchange Act”), including the requirements of Section 404
of the Sarbanes-Oxley Act of 2002, which require annual management assessments of the effectiveness of our internal control over financial
reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As further
described in Item 9A, “Controls and Procedures,” our management has concluded that, as of December 31, 2020, our internal
control over financial reporting was not effective due to material weaknesses. As of the end of our fiscal year, management had identified
the following material weaknesses:
| |
● |
we had not fully implemented comprehensive entity-level internal controls; and |
| |
● |
we did not have sufficient segregation of duties. |
While the management has undertaken,
and will continue to undertake steps to improve our internal control over financial reporting to address and remediate the material weaknesses,
there can be no assurance that we will be able to successfully remediate the identified material weaknesses, or that we will not identify
additional control deficiencies or material weaknesses in the future. If we are unable to successfully remediate our existing or any future
material weaknesses in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely
affected, we may be unable to maintain compliance with securities laws regarding the timely filing of periodic reports, investors may
lose confidence in our financial reporting and the price of our ordinary shares may decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our corporate headquarters
and manufacturing facility is located in an 8,385 square foot facility in Houston, Texas at 6035 South Loop East, Houston. The lease on
the Houston facility expires on May 31, 2021.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may
become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject
to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm business.
We are currently not aware
of any other pending legal proceedings to which we are a party or of which any of our property is the subject, nor are we aware of any
such proceedings that are contemplated by any governmental authority.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
See accompanying notes to consolidated financial
statements.
See accompanying notes to consolidated financial
statements.
See accompanying notes to consolidated financial
statements.
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
NOTE 1 - NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of organization
C-Bond Systems, Inc.
and its subsidiaries (the “Company”) is a materials development company and sole owner, developer and manufacturer of the
patented C-Bond technology. The Company is engaged in the implementation of proprietary nanotechnology applications and processes to enhance
properties of strength, functionality and sustainability of brittle material systems. The Company’s present primary focus is in
the multi-billion-dollar glass and window film industry with target markets in the United States and internationally. Additionally, the
Company has expanded its product line to include disinfection products. The Company operates in two divisions: C-Bond Transportation Solutions,
which sells a windshield strengthening water repellent solution as well as a disinfection product, and C-Bond Safety Solutions, which
sells multi-purpose glass strengthening primer and window film mounting solutions, ballistic-resistant film systems and disinfection products.
On April 25, 2018, the
Company (which was formerly known as West Mountain Alternative Energy, Inc.) and its subsidiary, WETM Acquisition Corp. (“Acquisition
Sub”) entered into an Agreement and Plan of Merger and Reorganization, or the Merger Agreement with C-Bond Systems, LLC which was
organized as a limited liability company in Texas and started business on August 7, 2013 and had three subsidiaries. Pursuant to the terms
of the Merger Agreement, on April 25, 2018, referred to as the Closing Date, the Acquisition Sub merged with and into C-Bond Systems,
LLC, which was the surviving corporation. Accordingly, C-Bond Systems, LLC became a wholly-owned subsidiary of the Company. Any reference
to contractual agreements throughout these footnotes may relate to C-Bond Systems Inc., or one of its subsidiaries.
The Merger was treated
as a reverse merger and recapitalization of C-Bond Systems, LLC for financial reporting purposes since the C-Bond Systems LLC members
retained an approximate 87% controlling interest in the post-merger consolidated entity. C-Bond Systems, LLC is considered the acquirer
for accounting purposes, and the Company’s historical financial statements before the Merger have been replaced with the historical
financial statements of C-Bond Systems, LLC and Subsidiaries before the Merger in future filings with the SEC. The balance sheets at their
historical cost basis of both entities are combined at the merger date and the results of operations from the merger date forward will
include the historical results of C-Bond Systems, LLC and its 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.
Basis of presentation
and principles of consolidation
The Company’s consolidated
financial statements include the financial statements of its wholly-owned subsidiary, C-Bond Systems, LLC. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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 $4,434,443
and $7,240,740 for the years ended December 31, 2020 and 2019, respectively. The net cash used in operations was $1,783,027 and $1,313,711
for the years ended December 31, 2020 and 2019, respectively. Additionally, the Company had an accumulated deficit, shareholders’
deficit, and working capital deficit of $45,968,839, $3,167,220 and $1,414,268, respectively, on December 31, 2020. 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.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
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, 2020 and 2019 include estimates for allowance for doubtful accounts
on accounts receivable, the estimates for obsolete or slow moving inventory, the useful life of property and equipment, assumptions used
in assessing impairment of long-term assets, the estimate of the fair value of the right of use asset and lease liability, the valuation
of redeemable and mandatorily redeemable preferred stock, the fair value of derivative liabilities, the value of beneficial conversion
features, and the fair value of non-cash equity transactions.
Fair value of financial instruments and fair value measurements
The Company analyzes all financial instruments
with features of both liabilities and equity under the Financial Accounting Standard Board’s (the “FASB”) accounting
standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement. Disclosures about the fair value of financial instruments are based
on pertinent information available to the Company on December 31, 2020. Accordingly, the estimates presented in these consolidated financial
statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. FASB ASC
820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and
the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
| Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. |
| |
| Level 2—Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. |
| |
| Level 3—Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. |
The carrying amounts reported in the consolidated
balance sheets for cash, accounts receivable, notes payable – related party, convertible note payable, accounts payable, accrued
expenses, accrued compensation, and lease liability approximate their fair market value based on the short-term maturity of these instruments.
Assets and liabilities measured at fair value
on a recurring basis on December 31, 2020 and 2019 is as follows:
| | |
On December 31, 2020 | | |
On December 31, 2019 | |
| Description | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Derivative liabilities | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 890,410 | |
A roll forward of the level 3 valuation financial instruments is as
follows:
| |
|
For the Year Ended
December 31, |
|
| |
|
2020 |
|
|
2019 |
|
| Balance at beginning of period |
|
$ |
890,410 |
|
|
$ |
- |
|
| Initial valuation of derivative liabilities included in debt discount |
|
|
85,502 |
|
|
|
320,351 |
|
| Initial valuation of derivative liabilities included in derivative expense |
|
|
160,416 |
|
|
|
516,634 |
|
| Gain on extinguishment of debt related to repayment/conversion of debt |
|
|
(1,066,535 |
) |
|
|
- |
|
| Change in fair value included in derivative expense |
|
|
(69,793 |
) |
|
|
53,425 |
|
| Balance at end of period |
|
$ |
- |
|
|
$ |
890,410 |
|
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
ASC 825-10 “Financial Instruments”,
allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair
value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value
option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent
reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
Cash and cash equivalents
For purposes of the consolidated statements of
cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money
market accounts to be cash equivalents. The Company has no cash equivalents as of December 31, 2020 and 2019.
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.
Derivative financial instruments
The Company has certain financial instruments
that are embedded derivatives. The Company evaluates all its financial instruments to determine if those contracts or any potential embedded
components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-10-05-4, Derivatives
and Hedging and 815-40, Contracts in Entity’s Own Equity. This accounting treatment requires that the carrying amount
of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event that the
fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period is recorded as
either other income or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at
the conversion, repayment or exercise date and then the related fair value amount is reclassified to other income or expense as part of
gain or loss on extinguishment.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
In July 2017, FASB issued ASU No. 2017-11, Earnings
Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part
I) Accounting for Certain Financial Instruments with Down Round Features. These amendments simplify the accounting for certain
financial instruments with down-round features. The amendments require companies to disregard the down-round feature when assessing whether
the instrument is indexed to its own stock, for purposes of determining liability or equity classification. The guidance was adopted as
of January 1, 2019 and the Company elected to record the effect of this adoption, if any, retrospectively to outstanding financial instruments
with a down round feature by means of a cumulative-effect adjustment to the consolidated balance sheet as of the beginning of 2019, the
period which the amendment is effective. The adoption of ASU No. 2017-11 had no effect on the Company’s financial position or results
of operations and there was no cumulative effect adjustment.
Revenue recognition
The Company follows Accounting Standards Codification
(“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). This standard establishes a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing
revenue recognition guidance. ASC 606 requires an entity to recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
and also requires certain additional disclosures.
The Company sells its products which include standard
warranties primarily to distributors and authorized dealers. Product sales are recognized when the product is shipped to the customer
and title is transferred and are recorded net of any discounts or allowances. The warranty does not represent a separate performance obligation.
Cost of sales
Cost of sales includes inventory costs, packaging
costs and warranty expenses.
Shipping and handling costs
Shipping and handling costs incurred for product
shipped to customers are included in general and administrative expenses and amounted to $49,515 and $33,151 for the year ended December
31, 2020 and 2019, 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 $26,833 and $26,933 at December 31, 2020 and
2019, respectively. For the year ended December 31, 2020 and 2019, warranty expense amounted to $0 and $4,650, respectively, and is included
in cost of sales on the accompanying consolidated statements of operations. For the year ended December 31, 2020 and 2019, a roll forward
of warranty liability is as follows:
| | |
For the Year Ended
December 31, | |
| | |
2020 | | |
2019 | |
| Balance at beginning of period | |
$ | 26,933 | | |
$ | 24,190 | |
| Increase in estimated warranty liability | |
| - | | |
| 4,650 | |
| Warranty expenses incurred | |
| (100 | ) | |
| (1,907 | ) |
| Balance at end of period | |
$ | 26,833 | | |
$ | 26,933 | |
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
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 year ended December 31, 2020 and 2019, research and development costs incurred in the development of the Company’s
products were $16,627 and $31,057, 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 year ended December
31, 2020 and 2019, advertising costs charged to operations were $46,276 and $36,238, 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
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, 2020 and 2019, the Company had no uncertain tax positions
that qualify for either recognition or disclosure in the financial statements. Tax years that remain subject to examination are the years
ending on and after December 31, 2016. The Company recognizes interest and penalties related to uncertain income tax positions in other
expense. However, no such interest and penalties were recorded as of December 31, 2020 and 2019.
Stock-based compensation
Stock-based compensation is accounted for based
on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the
financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments
over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively,
the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange
for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted
under ASU 2016-09 Improvements to Employee Share-Based Payment.
Loss per common share
ASC 260 “Earnings Per Share”, requires
dual presentation of basic and diluted earnings per common share (“EPS”) with a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilutive securities and
non-vested forfeitable shares. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue
common shares were exercised or converted into common shares or resulted in the issuance of common shares that then shared in the earnings
of the entity. Basic net loss per common share is computed by dividing net loss available to members by the weighted average number of
common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average
number of common shares, common share equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive
common shares consist of stock options and non-vested forfeitable shares (using the treasury stock method) and shares issuable upon conversion
of preferred shares and convertible notes payable (using the as-if converted method). These common share equivalents may be dilutive in
the future.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
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,
2020 | | |
December 31,
2019 | |
| Convertible notes | |
| - | | |
| 14,333,333 | |
| Stock options | |
| 8,445,698 | | |
| 8,445,698 | |
| Warrants | |
| 2,050,000 | | |
| 2,050,000 | |
| Series A preferred stock | |
| - | | |
| 3,283,951 | |
| Series B preferred stock | |
| 68,166,032 | | |
| 3,600,000 | |
| Series C preferred stock | |
| 211,111,111 | | |
| - | |
| Non-vested, forfeitable common shares | |
| 23,826,926 | | |
| 17,475,299 | |
Segment reporting
During the year ended December 31, 2020 and 2019,
the Company operated in one business segment.
Leases
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842)”. ASU 2016-02 sets out the principles for the recognition, measurement, presentation and disclosure
of leases for both parties to a contract (i.e., lessees and lessors). The 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. For the Company’s administrative
office lease, the Company analyzed if it would be required to record a lease liability and a right of use asset on its consolidated balance
sheets at fair value upon adoption of ASU 2016-02. The Company has elected not to recognize right-of-use assets and lease liabilities
for short-term leases that have a term of 12 months or less.
Operating lease ROU assets represents the right
to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum
lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental
borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense
for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses
in the consolidated statements of operations.
Risk factors
The Company’s results of operations could
be adversely affected by general conditions in the global economy and in the global financial markets, including conditions that are outside
of its control, including the impact of health and safety concerns, such as those relating to the current COVID-19 outbreak. The most
recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic
downturn could result in a variety of risks to our business, including weakened demand for the company’s products and its ability
to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could strain the Company’s domestic
and international customers, possibly resulting in delays in customer payments. Any of the foregoing could harm the Company’s business
and it cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact the
Company’s business.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
Recent accounting pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair
Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which
modifies certain disclosure requirements related to fair value measurements including (i) requiring disclosures on changes in unrealized
gains and losses in other comprehensive income for recurring Level 3 fair value measurements; and (ii) a requirement to disclose the range
and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 was effective for
fiscal years beginning after December 15, 2019, including interim periods within those years. The adoption of this standard on January
1, 2020 did not have a material impact on our fair value measurement disclosures.
In December 2019, the FASB issued Accounting Standards
Update No. 2019-12 – Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity
in the accounting standards. The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation,
the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.
ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. The amendments in ASU 2019-12 will become
effective for us as of the beginning of our 2022 fiscal year. Early adoption is permitted, including adoption in any interim period. We
are currently evaluating the impact that this guidance will have upon our financial position and results of operations, if any.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt
with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40)—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies accounting for
convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments
will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain
settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity
contracts to qualify for the exception. The ASU also simplifies the diluted net income per share calculation in certain areas. The new
guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early
adoption is permitted for fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of the adoption
of the standard on the consolidated financial statements.
Other accounting standards that have been issued
or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial
statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated
to its financial condition, results of operations, cash flows or disclosures.
NOTE 3 – ACCOUNTS RECEIVABLE
On December 31, 2020 and 2019, accounts receivable
consisted of the following:
| | |
December 31,
2020 | | |
December 31,
2019 | |
| | |
(As Restated) | | |
| |
| Accounts receivable | |
$ | 179,608 | | |
$ | 151,989 | |
| Less: allowance for doubtful accounts | |
| (99,911 | ) | |
| - | |
| Accounts receivable, net | |
$ | 79,697 | (a) | |
$ | 151,989 | |
For the years ended December 31, 2020 and 2019, bad debt expense amounted
to $99,911 and $992, respectively.
| (a) | See Note 16 – Restatement. |
NOTE 4 – INVENTORY
On December 31, 2020 and 2019, inventory consisted
of the following:
| | |
December 31,
2020 | | |
December 31,
2019 | |
| Raw materials | |
$ | 24,477 | | |
$ | 12,250 | |
| Finished goods | |
| 52,723 | | |
| 2,570 | |
| Inventory | |
$ | 77,200 | | |
$ | 14,820 | |
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
NOTE 5 – PROPERTY AND EQUIPMENT
On December 31, 2020 and 2019, property and equipment
consisted of the following:
| | |
Useful Life | | |
2020 | | |
2019 | |
| | |
| | |
| | |
| |
| Machinery and equipment | |
| 5 - 7 years | | |
$ | 50,722 | | |
$ | 52,184 | |
| Furniture and office equipment | |
| 3 - 7 years | | |
| 30,245 | | |
| 45,063 | |
| Vehicles | |
| 5 years | | |
| 55,941 | | |
| 68,341 | |
| Leasehold improvements | |
| 3 years | | |
| 16,701 | | |
| 16,701 | |
| | |
| | | |
| 153,609 | | |
| 182,289 | |
| Less: accumulated depreciation | |
| | | |
| (134,926 | ) | |
| (149,513 | ) |
| Property and equipment, net | |
| | | |
$ | 18,683 | | |
$ | 32,776 | |
For the years ended December 31, 2020 and 2019,
depreciation and amortization expense is included in general and administrative expenses and amounted to $14,093 and $24,629, respectively.
NOTE 6 – CONVERTIBLE NOTES PAYABLE
2019
From February 13, 2019 to May 15, 2019, the Company
entered into four Securities Purchase Agreements (the “SPAs”) with an Accredited Investor (“Investor”) for the
purchase of a Convertible Promissory Notes in the aggregate principal amount of $244,800 and received net proceeds of $192,000, net of
original issue discount of $40,800 and net of origination fees of $12,000. These Notes bore interest rate ranging from 4% per annum
to 12% per annum and were due and payable through May 2020. The Notes were convertible by the Investor after six months from each
respective Note date into shares of the Company’s common stock 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 Notes at any time prior to the six-month anniversary, subject to pre-payment charges as detailed in the Notes. The SPAs and
Notes contained customary representations, warranties and covenants, including certain restrictions on the Company’s ability to
sell, lease or otherwise dispose of any significant portion of its assets. Investor also had the right of first refusal with respect to
any future equity (or debt with an equity component) offerings of less than $100,000 conducted by the Company until the six-month anniversary
of the Note. During 2019, the Company accounted for these convertible promissory notes as stock settled debt under ASC 480 and recorded
an aggregate debt premium of $57,423 with a charge to interest expense. On August 15, 2019, the Company issued 295,567 shares of its common
stock upon conversion of principal balance of $12,000. On September 6, 2019, the Company satisfied in full all remaining convertible promissory
note obligations with this accredited investor including all Notes in the amount of $232,800 and accrued interest of $7,624 for a cash
payment of $238,080. Additionally, in connection with this debt extinguishment, in 2019, the Company reversed all put premiums recorded
of $57,423 and remaining debt discounts of $28,758 and recorded a gain on debt extinguishment of $31,009.
On September 6, 2019 and on December 9, 2019,
the Company closed on Securities Purchase Agreements (the “September and December 2019 SPAs”) with an accredited investor.
Pursuant to the terms of the September 6, 2019 and December 9, 2019 SPAs, the Company issued and sold to this investor convertible promissory
notes in the aggregate principal amount of $430,000 and warrants to purchase up to 1,050,000 shares of the Company’s common stock.
The Company received net proceeds of $382,250, net of original issue discount of $45,000 and origination fees of $2,750. These Notes bore
interest at 12% per annum. The September 6, 2019 Note was due and payable on June 6, 2020 and the December 9, 2019 Note was due and payable
on September 9, 2020. The September 6, 2019 Note and the December 9, 2019 Note were repaid in full on September 11, 2020.
2020
On March 30, 2020, the Company closed on a Securities
Purchase Agreement (the “March 2020 SPA”) with an accredited investor. Pursuant to the terms of the March 2020 SPA, the Company
issued and sold to this investor a convertible promissory note in the aggregate principal amount of $57,750 and a warrant to purchase
up to 144,375 shares of the Company’s common stock. The Company received net proceeds of $50,000, net of original issue discount
of $5,000 and origination fees of $2,750. The Note bore interest at 12% per annum and was due and payable on December 30, 2020. The March
30, 2020 Note was repaid in full on August 24, 2020 and the 144,375 warrants were cancelled.
On April 23, 2020, the Company closed on a Securities
Purchase Agreement (the “April 2020 SPA”) with an accredited investor. Pursuant to the terms of the April 2020 SPA, the Company
issued and sold to this investor a convertible promissory note in the aggregate principal amount of $57,750 and a warrant to purchase
up to 144,375 shares of the Company’s common stock. The Company received net proceeds of $50,000, net of original issue discount
of $5,000 and origination fees of $2,750. The Note bore interest at 12% per annum and was due and payable on January 23, 2021. The April
23, 2020 Note was repaid in full on August 24, 2020 and the 144,375 warrants were cancelled.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
In accordance with the September and December
2019 SPAs, the March 2020 SPA, the April 2020 SPA and the related convertible promissory Notes, subject to the adjustments as defined
in the respective SPA and Note, the conversion price (the “Conversion Price”) equaled the lesser of: (i) the lowest Trading
Price (as defined below) during the previous twenty-five Trading Day period ending on the latest complete Trading Day prior to the date
of this Note, and (ii) the Variable Conversion Price (as defined below) (subject to equitable adjustments for stock splits, stock dividends
or rights offerings by the Company). The “Variable Conversion Price” meant 60% multiplied by the Market Price (as defined
herein) (representing a discount rate of 40%). “Market Price” meant the lowest Trading Price (as defined below) for the Company’s
common stock during the twenty-five Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading
Price” meant, for any security as of any date, the lesser of: (i) the lowest trade price on the applicable trading market as reported
by a reliable reporting service (“Reporting Service”) designated by the Holder or (ii) the closing bid price on the applicable
trading market as reported by a Reporting Service designated by the Holder. The Company had the option to prepay the Note at any time
prior to its six-month anniversary, subject to pre-payment charges as detailed in the Note, which it did on August 24, 2020.
The September and December 2019 SPAs, the March
2020 SPA, the April 2020 SPA and the related Notes contained customary representations, warranties and covenants, including certain restrictions
on the Company’s ability to sell, lease or otherwise dispose of any significant portion of its assets. The Investor also had the
right of first refusal with respect to any future equity offerings (or debt with an equity component) conducted by the Company until the
12-month anniversary of the Closing. The September and December 2019 SPAs, the March 2020 SPA, the April 2020 SPA and the related Notes
also provided for certain events of default, including, among other things, payment defaults, breaches of representations and warranties,
bankruptcy or insolvency proceedings, delinquency in periodic report filings with the Securities and Exchange Commission, and cross default
with other agreements. Upon the occurrence of an event of default, this investor could declare the outstanding obligations due and payable
at significant applicable default rates and take such other actions as set forth in the Notes.
The Warrants are exercisable at any time on or
after the date of the issuance and entitles this investor to purchase shares of the Company’s common stock for a period of five
years from the initial date the warrants become exercisable. Under the terms of the Warrants, the holder is entitled to exercise Warrants
to purchase up to an aggregate of 1,050,000 shares of the Company’s common stock at a fixed exercise price of $0.01. On January
7, 2021, the Company issued 1,008,000 shares of its common stock in connection with the cashless exercise of the 1,050,000 warrants. The
exercise price was based on contractual terms of the related warrant.
These Notes and related Warrants included a down-round
provision under which the Notes conversion price and warrant exercise price could have been affected by future equity offerings undertaken
by the Company.
In connection with the issuance of the September
and December 2019 Notes, the March 2020 Note and the April 2020 Note, the Company determined that the terms of the Note contain terms
that are not fixed monetary amounts at inception. Accordingly, under the provisions of ASC 815-40 - Derivatives and Hedging –
Contracts in an Entity’s Own Stock, the embedded conversion options contained in the convertible instruments were bifurcated
and accounted for as derivative liability at the date of issuance and shall be adjusted to fair value through earnings at each reporting
date. The fair value of the embedded conversion option derivatives was determined using the Binomial valuation model. At the end of each
period and on the date that debt is converted into common shares, the Company revalues the embedded conversion option derivative liabilities.
In connection with the issuance of the September
and December 2019 Notes, during the year ended December 31, 2019, on the initial measurement date, the fair values of the embedded conversion
option derivative of $836,985 was recorded as derivative liabilities and was allocated as a debt discount up to the net proceeds of the
Note of $320,351, with the remainder of $516,634 charged to current period operations as initial derivative expense. At the end of the
period, the Company revalued the embedded conversion option derivative liabilities and recorded a derivative expense of $53,425, In connection
with the revaluation and the initial derivative expense, the Company recorded an aggregate derivative expense of $570,059 during the year
ended December 31, 2019.
In connection with the issuance of the March 30,
2020 and April 23, 2020 Notes, in March and April 2020, on the initial measurement dates, the fair values of the embedded conversion option
derivatives of $245,918 was recorded as a derivative liability and was allocated as a debt discount up to the net proceeds of the Notes
of $85,502, with the remainder of $160,416 charged to current period operations as initial derivative expense. During the year ended December
31, 2020, at the end of each period and upon conversion or repayment, the Company revalued the embedded conversion option derivative liabilities
and recorded a derivative gain of $69,793. In connection with the revaluation and the initial derivative expense, the Company recorded
an aggregate derivative expense of $90,623 during the year ended December 31, 2020.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
In connection with the warrants issued in connection
with the September and December 2019 SPAs, the March 2020 SPA, the April 2020 SPA, the Company determined that the terms of the warrants
contain terms that are fixed monetary amounts at inception and, accordingly, the warrants were not considered derivatives. The fair value
of the warrants was determined using the Binomial valuation model. In connection with the issuance of the 2019 warrants, on the initial
measurement date, the relative fair value of the warrants of $61,899 was recorded as a debt discount and an increase in paid-in capital.
In connection with the issuance of the March 2020 and April 2020 warrants, on the initial measurement date, the relative fair value of
the warrants of $14,498 was recorded as a debt discount and an increase in paid-in capital.
During the years ended December 31, 2020 and 2019,
the fair value of the derivative liabilities and warrants was estimated using the Binomial valuation model with the following assumptions:
| |
|
2020 |
|
|
2019 |
|
| Dividend rate |
|
— |
|
|
|
— |
% |
| Term (in years) |
|
0.25 to 5.00 years |
|
|
|
0.69 to 5.00 years |
|
| Volatility |
|
293.4% to 345.7 |
% |
|
|
275.8 to 317.5 |
% |
| Risk—free interest rate |
|
0.12% to 0.39 |
% |
|
|
1.56% to 1.75 |
% |
During the year ended December 31, 2020, the Company
issued 37,171,800 shares of its common stock upon the conversion of principal of $152,285, accrued interest of $36,244 and fees of $2,500.
Additionally, the Company repaid principal of $393,215 and accrued interest of $15,917. Upon conversion, exercise or repayment, the respective
derivative liabilities were marked to fair value at the conversion, repayment or exercise date and then the related fair value amount
of $1,066,535 was reclassified to other income as part of gain or loss on extinguishment. Additionally, upon repayment, the Company and
Investor agreed to cancel 288,750 warrants and agreed to modify the exercise price of the remaining warrants to $0.01 per share (see Note
8 - warrants). Since the fair value of the warrants using the new exercise price was less than the initial fair value amount, no additional
expense was recorded (see Note 8 – warrants).
As of December 31, 2020, all of these convertible
notes were either converted or repaid off resulting in a zero balance.
For the year ended December 31, 2020 and 2019,
interest expense related to convertible notes and warrants amounted to $551,100 and $237,445, including amortization of debt discount
and debt premium charged to interest expense of $409,668 and $217,298, respectively.
The weighted average interest rate on the above
notes and notes payable – related party (see note 7) during the years ended December 31, 2020 and 2019 was 13.2% and 14.9%, respectively.
On December 31, 2020 and 2019, convertible notes
consisted of the following:
| | |
December 31,
2020 | | |
December 31,
2019 | |
| Principal amount | |
$ | - | | |
$ | 430,000 | |
| Less: unamortized debt discount | |
| - | | |
| (294,167 | ) |
| Convertible notes payable, net | |
$ | - | | |
$ | 135,833 | |
NOTE 7 – NOTES PAYABLE
On November 14, 2018, the Company entered into
a Revolving Credit Facility Loan and Security Agreement (“Loan Agreement”) and a Secured Promissory Note (the “Note”)
with BOCO Investments, LLC (the “Lender”), who was a beneficial shareholder of the Company through December 31, 2019. 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 for use as working capital and to assist in inventory acquisition. The Lender loaned the Company $400,000 in 2018. The Company
should have repaid all principal, interest and other amounts outstanding on or before November 14, 2020. The Company’s obligations
under the Loan Agreement and the Note are secured by a first-priority security interest in substantially all of the Company’s assets
(the “Collateral”). The outstanding principal advanced to Company pursuant to the Loan Agreement bore interest at the rate
of 12% per annum, compounded annually through the default date.
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”).
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
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, 2020 and 2019,
the Company did not meet the Minimum Asset Amount covenant as defined in the Loan Agreement, failed to timely pay interest payments due,
and has violated other default provisions. Accordingly, the note balance due of $400,000 has been reflected as a current liability on
the accompanying consolidated balance sheets. As of December 31, 2019, this note payable was included in note payable – related
party on the accompanying consolidated balance sheet, As of December 31, 2020, this note payable was reclassified to notes payable 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.
For the years ended December 31, 2020 and 2019,
interest expense related to this Note amounted to $72,198 and $72,000, respectively.
On April 26, 2019, the Company entered into a
Promissory Note (“Promissory Note”) with an accredited investor in the aggregate principal amount of $25,000 and received
net proceeds of $25,000. The Promissory Note bears interest at 4% per annum and is due and payable on April 26, 2020 (the “Maturity
Date”). At the time the Promissory Note reaches its Maturity Date, the holder and the Company will discuss and mutually agree on
potential conversion rights of the holder, including pricing, method of conversion, etc. At any time during which the Promissory Note
is outstanding, the Company may prepay the Note in full, without penalty. The Promissory Note provides for certain events of default,
including, among other things, payment defaults, bankruptcy, liquidation, and cessation of operations. In the event of default, the holder
shall be entitled to an injunction or injunctions restraining, preventing or curing any breach of this Promissory Note and to enforce
specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being
required. In September 2019, the Company repaid $12,500 this note and in October 2019, the remaining balance of $12,500 was repaid.
On April 28, 2020, the Company entered into a
Paycheck Protection Program Promissory Note (the “PPP Note”) with respect to a loan of $156,200 (the “PPP Loan”)
from Comerica Bank. The PPP Loan was obtained pursuant to the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid,
Relief, and Economic Security Act (the “CARES act”) administered by the U.S. Small Business Administration (“SBA”).
The PPP Loan matures on April 28, 2022 and bears interest at a rate of 1.00% per annum. The PPP Loan is payable in 18 equal monthly payments
of approximately $8,900 commencing November 1, 2020. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties.
The Company may apply to have the loan forgiven pursuant to the terms of the PPP if certain criteria are met. For the year ended December
31, 2020, interest expense related to this Note amounted to $1,061.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
On December 31, 2020 and 2019, notes payable consisted
of the following:
| | |
December 31,
2020 | | |
December 31,
2019 | |
| Note payable – related party | |
$ | - | | |
$ | 400,000 | |
| Note payable | |
| 400,000 | | |
| - | |
| Note payable _ PPP note | |
| 156,200 | | |
| - | |
| Total notes payable | |
| 556,200 | | |
| 400.000 | |
| Less: current portion of notes payable | |
| (521,138 | ) | |
| (400,000 | ) |
| Notes payable – long-term | |
$ | 35,062 | | |
$ | - | |
NOTE 8 - SHAREHOLDERS’ DEFICIT
Preferred Stock
Series A Preferred stock
On October 16, 2019, the Company filed an Amendment
to its Articles of Incorporation to designate a series of preferred stock, the Series A Convertible Preferred Stock, with the Secretary
of State of the State of Colorado. The Certificate of Designation established 800,000 shares of the Series A Preferred Stock, par value
$0.10, having such designations, preferences, and rights as determined by the Company’s Board of Directors in its sole discretion,
in accordance with the Company’s Articles of Incorporation and Amended and Restated Bylaws. The Certificate of Designations, Preferences,
Rights, and Limitations of Series A Convertible Preferred Stock (“Certificate of Designations”) provides that the Series A
Convertible Preferred Stock shall have no right to vote on any matters on which the common shareholders are permitted to vote. The Series
A Convertible Preferred Stock ranks senior with respect to dividends and right of liquidation to the Company’s common stock and
junior with respect to dividends and right of liquidation to all existing and future indebtedness of the Company and existing and outstanding
preferred stock of the Company. Each share of Series A Preferred Stock shall have a stated value of $1.00 (the “Stated Value”).
Each share of Series A Preferred Stock carried
an annual dividend in the amount of 4% of the Stated Value (the “Dividend Rate”), which shall be cumulative and compounded
daily, payable solely upon redemption, liquidation or conversion. Upon the occurrence of an Event of Default, the Dividend Rate shall
automatically increase to 22%.
At any time during the periods set forth on the
table immediately following this paragraph (the “Redemption Periods”) provided that an Event of Default has not occurred,
the Company had the right, at the Company’s option, to redeem all or any portion of the shares of Series A Preferred Stock for an
amount equal to (i) the total number of Series A Preferred Stock held by the applicable Holder multiplied by (ii) the Stated Value plus
the Adjustment Amount, (the “Optional Redemption Amount”). The Adjustment Amount shall equal to any accrued but unpaid dividends,
the default adjustment amounts, as defined in the Certificate of Designation, if applicable, failure to deliver fees, if any, and any
other fees as set forth in the Certificate of Designation. After the expiration of 180 days following the Issuance Date of the applicable
shares of Series A Preferred Stock, the Company had no right of redemption.
| Redemption
Period |
|
Redemption
Percentage |
| 1. The period beginning on the date of the issuance of shares of Series A Preferred Stock and ending on the date which is sixty days following the Issuance Date. |
|
|
100% |
| 2. The period beginning on the date that is sixty-one days from the Issuance Date and ending ninety days following the Issuance Date. |
|
|
107% |
| 3. The period beginning on the date that is ninety-one days from the Issuance Date and ending one hundred twenty days following the Issuance Date. |
|
|
112% |
| 4. The period beginning on the date that is one hundred twenty-one days from the Issuance Date and ending one hundred fifty days following the Issuance Date. |
|
|
117% |
| 5. The period beginning on the date that is one hundred fifty-one days from the Issuance Date and ending one hundred eighty days following the Issuance Date. |
|
|
120% |
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
On the earlier to occur of (i) the date which
is eighteen months following the Issuance Date and (ii) the occurrence of an Event of Default (the “Mandatory Redemption Date”),
the Company shall redeem all of the shares of Series A Preferred Stock of the Holders (which have not been previously redeemed or converted).
Within five days of the Mandatory Redemption Date, the Company shall make payment to each Holder of an amount in cash equal to (i) the
total number of Series A Preferred Stock held by such Holder multiplied by (ii) the Stated Value plus the Adjustment Amount.
The Holder of Series A Preferred stock had the
right from time to time, and at any time during the period beginning on the date which is 180 days following the issuance date, to convert
all or any part of the outstanding Series A Preferred Stock into the Company’s common stock. The conversion price (the “Conversion
Price”) shall equal the Variable Conversion Price (as defined below) (subject to equitable adjustments by the Company relating to
the Company’s securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications,
extraordinary distributions and similar events). The “Variable Conversion Price” shall mean 81% multiplied by the Market Price
(as defined below) (representing a discount rate of 19%). “Market Price” means the average of the two lowest Trading Prices
for the common stock during the ten Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading
Price” means, for any security as of any date, the closing bid price on the applicable trading market as reported by a reliable
reporting service designated by the Holder. “Trading Day” shall mean any day on which the Common Stock is tradable for any
period on the OTC, or on the principal securities exchange or other securities market on which the common stock is then being traded.
The Company accounted for the Series A Preferred
Stock as stock settled debt under ASC 480 due to mandatory redemption and during the year ended December 31, 2020 and 2019, the Company
recorded an aggregate debt premium of $42,553 and $31,197 with a charge to interest expense, respectively.
During October and November 2019, the Company
entered into a Series A Preferred Stock Purchase Agreements with accredited investors whereby the investors agreed to purchase an aggregate
of 159,600 unregistered shares of the Company’s Series A Preferred stock, par value $0.10 for $133,000, or $0.833 per share. During
October and November 2019, the Company received the cash proceeds of $127,000, net of fees of $6,000. This discount of $6,000 was recognized
and was amortized to interest expense over the redemption terms of the Series A preferred shares or the date that the debt is convertible
into common shares, whichever is shorter.
During the year ended December 31, 2020, the Company
entered into Series A Preferred Stock Purchase Agreements with an accredited investor whereby the investor agreed to purchase an aggregate
of 154,800 unregistered shares of the Company’s Series A Preferred stock, par value $0.10 for $129,000, or $0.833 per share. During
the year ended December 31, 2020, the Company received cash proceeds of $120,000, net of fees of $9,000. This discount of $9,000 was recognized
and was amortized to interest expense over the redemption terms of the Series A preferred shares or the date that the debt is convertible
into common shares, whichever is shorter.
For the year ended December 31, 2020 and 2019,
amortization of discount charged to interest expense amounted to $14,333 and $667, respectively. On December 31, 2019, the Company has
accrued $934 of interest on these liabilities which is included in mandatorily redeemable convertible Series A preferred stock liability
on the accompanying consolidated balance sheet. During the year ended December 31, 2020, the Company accrued a dividend payable of $4,852
which was included in interest expense on the accompanying consolidated statement of operations. As of December 31, 2020, the Company
had paid or converted into common stock all accrued dividends due.
During the year ended December 31, 2020, the Company
issued 16,132,701 shares its common stock upon the conversion of 211,200 shares of Series A preferred with a stated redemption value of
$211,200 and related accrued dividends payable of $4,224. The conversion price was based on contractual terms of the related Series A
preferred shares. Upon conversion, the Company reclassified put premium of $49,543 to paid-in capital. Additionally, on August 24, 2020,
the Company settled with the investor and redeemed the remaining 103,200 Series A preferred shares for a cash payment of $117,047 which
included the redemption of stated value of $103,200, accrued dividends of $1,562, and a redemption penalty of $12,285 which was included
in interest expense on the accompanying consolidated statement of operations. Additionally, upon repayment, the Company wrote off the
remaining put premium balance of $24,207 and recorded a gain on extinguishment of $24,207.
On August 24, 2020, the Company filed a Certificate of Elimination
with the State of Colorado to eliminate the Series A preferred stock.
The Company classified the Series A Preferred
Stock as a liability in accordance with ASC Topic No. 480, “Distinguishing Liabilities from Equity,” which states
that mandatorily redeemable financial instruments should be classified as liabilities and therefore the related dividend payments were
treated as a component of interest expense in the accompanying consolidated statements of operations.
The mandatorily redeemable Series A preferred
stock was recorded at the liquidation preference, less unamortized discounts plus the debt premium and accrued dividends due, on the Company’s
accompanying consolidated balance sheet as of December 31, 2019 which in total exceeded the redemption value. As of December 31, 2020,
the net Series A Preferred Stock balance was $0 and fully redeemed. The Company recognized interest expense on the Series A Preferred
Stock of $126,423 for the year ended December 31, 2020, which includes accretion expense, put premium on stock-settled debt, accrued dividends,
amortization of offering costs and redemption penalties paid.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
Series B Convertible Preferred Stock
On December 12, 2019, the Company filed an Amendment
to its Articles of Incorporation to designate a series of preferred stock, the Series B Convertible Preferred Stock (the “Series
B”), with the Secretary of State of the State of Colorado. The Certificate of Designations established 100,000 shares of the Series
B, par value $0.10, having such designations, preferences, and rights as determined by the Company’s Board of Directors in its sole
discretion, in accordance with the Company’s Articles of Incorporation and Amended and Restated Bylaws. The Certificate of Designations
became effective with the State of Colorado upon filing.
The Series B ranks senior with respect to dividends
and right of liquidation with the Company’s common stock and junior to all existing and future indebtedness of the Company. The
Series B has a stated value per share of $1,000, subject to adjustment as provided in the Certificate of Designations (the “Stated
Value”), and a dividend rate of 2% per annum of the Stated Value.
The Series B is subject to redemption (at Stated
Value, plus any accrued, but unpaid dividends (the “Liquidation Value”)) by the Company no later than three years after a
Deemed Liquidation Event and at the Company’s option after one year from the issuance date of the Series B, subject to a ten-day
notice (to allow holder conversion). A “Deemed Liquidation Event” will mean: (a) a merger or consolidation in which the Company
is a constituent party or a subsidiary of the Company is a constituent party and the Company issues shares of its capital stock pursuant
to such merger or consolidation, except any such merger or consolidation involving the Company or a subsidiary in which the shares of
capital stock of the Company outstanding immediately prior to such merger or consolidation continue to represent, or are converted into
or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, at least a majority, by voting
power, of the capital stock of the surviving or resulting corporation or, if the surviving or resulting corporation is a wholly-owned
subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting
corporation; or (b) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions,
by the Company or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries taken as a
whole, or the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Company if substantially all of
the assets of the Company and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease,
transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Company.
The Series B is convertible into common stock
at the option of a holder or if the closing price of the common stock exceeds 400% of the Conversion Price for a period of twenty consecutive
trading days, at the option of the Company. Conversion Price means a price per share of the common stock equal to 100% of the lowest daily
volume weighted average price of the common stock during the two years preceding or subsequent two years following the Issuance Date,
subject to adjustment as otherwise provided in the Certificate of Designations (the “Conversion Price”).
In the event of a conversion of any Series B,
the Company shall issue to the holder a number of shares of common stock equal to the sum of the Stated Value plus accrued but unpaid
dividends multiplied by the number of shares of Series B Preferred Stock being converted divided by the Conversion Price.
Upon liquidation of the Company after payment
or provision for payment of liabilities of the Company and after payment or provision for any liquidation preference payable to the holders
of any preferred stock ranking senior to the Series B but prior to any distribution to the holders of Common Stock or preferred stock
ranking junior upon liquidation to the Series B, the holders of Series B will be entitled to be paid out of the assets of the Company
available for distribution to its stockholders an amount with respect to each share of Series B equal to the Liquidation Value.
The Series B has voting rights per Series B Share
equal to the Liquidation Value per share, divided by the Conversion Price, multiplied by fifty (50). Subject to applicable Colorado law,
the holders of Series B will have functional voting control in situations requiring shareholder vote.
The Series B Preferred Stock will vest on May 1, 2021, subject to acceleration
in the event of conversion or redemption.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
On December 12, 2019, the Board of Directors of
the Company agreed to satisfy $108,000 of accrued compensation owed to its directors and executive officers (collectively, the “Management”)
through a Liability Reduction Plan (the “Plan”). Under this Plan, Management agreed to accept 108 shares of the Company’s
Series B convertible preferred stock in settlement of accrued compensation.
On December 21, 2020, the Board of Directors of
the Company agreed to satisfy $318,970 of accrued compensation owed to its directors and executive officers (collectively, the “Management”)
through a Liability Reduction Plan (the “Plan”). Under this Plan, Management agreed to accept 319 shares of the Company’s
Series B convertible preferred stock in settlement of accrued compensation.
These Series B preferred share issuances with
redemption provisions that permit the issuer to settle in either cash or common stock, at the option of the issuer, were evaluated to
determine whether temporary or permanent equity classification on the consolidated balance sheet was appropriate. As per the terms of
the Series B preferred stock agreements, Series B preferred stock is redeemable for cash and other assets on the occurrence of a deemed
liquidation event. A deemed liquidation event includes a change of control which is not in the Company’s control. As such, since
Series B preferred stock is redeemable upon the occurrence of an event that is not within the Company’s control, the Series B preferred
stock is classified as temporary equity.
The Company concluded that the Series B Preferred
Stock represented an equity host and, therefore, the redemption feature of the Series B Preferred Stock was not considered to be clearly
and closely related to the associated equity host instrument. However, the redemption features did not meet the net settlement criteria
of a derivative and, therefore, were not considered embedded derivatives that required bifurcation. The Company also concluded that the
conversion rights under the Series B Preferred Stock were clearly and closely related to the equity host instrument. Accordingly, the
conversion rights feature on the Series B Preferred Stock were not considered an embedded derivative that required bifurcation. The conversion
feature of the Series B Preferred Stock at the time of issuance was determined to be beneficial on the commitment date. Because the Series
B Preferred Stock was perpetual with no stated maturity date, and the conversions could occur any time from the date of issuance, during
the year ended December 31, 2020, the Company immediately recorded non-cash stock-based compensation of $1,048,143 related to the beneficial
conversion feature arising from the issuance of Series B Preferred Stock. This non-cash stock-based compensation increased the Company’s
net loss attributable to common stockholders and net loss per share.
During the year ended December 31, 2020, the Company
accrued a dividend payable of $2,476 which was included in preferred stock dividends on the accompanying consolidated statement of shareholders’
deficit. As of December 31, 2020, the net Series B Preferred Stock balance was $429,446 which includes stated liquidation value of $426,970
and accrued dividends payable of $2,476. As of December 31, 2019, the net Series B Preferred Stock balance was $108,000 which includes
stated liquidation value of $108,000.
Series C Convertible Preferred Stock
On August 20, 2020, the Company filed an Amendment
to its Articles of Incorporation to designate a series of preferred stock, the Series C Convertible Preferred Stock (the “Series
C”), with the Secretary of State of the State of Colorado. The Certificate of Designations established 100,000 shares of the Series
C, par value $0.10, having such designations, preferences, and rights as determined by the Company’s Board of Directors in its sole
discretion, in accordance with the Company’s Articles of Incorporation and Amended and Restated Bylaws. The Certificate of Designations
became effective with the State of Colorado upon filing.
The Series C ranks senior with respect to dividends
and right of liquidation with the Company’s common stock and junior to all existing and future indebtedness of the Company. The
Series C has a stated value per share of $100, subject to adjustment as provided in the Certificate of Designations (the “Stated
Value”), and a dividend rate of 2% per annum of the Stated Value.
The Company has no option to redeem the Series
C Preferred Stock. If the Company determines to liquidate, dissolve or wind-up its business and affairs, or effect any Deemed Liquidation
Event as defined below, each of which has been approved by the holders of a majority of the shares of Series C Preferred Stock then outstanding,
the Company will redeem all of the shares of Series C Preferred Stock outstanding immediately prior to such mandatory redemption event
at a price per share of Series C Preferred Stock equal to the aggregate Series C Liquidation Value, which is 150% of the sum of the Stated
Value plus accrued and unpaid dividends, for the shares of Series C Preferred Stock being redeemed.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
The Company will deliver ten-day advance written
notice prior to the consummation of any mandatory redemption event via email or overnight courier (“Notice of Mandatory Redemption”)
to each Holder whose shares are to be redeemed. The Series C is subject to redemption at liquidation Value noted above by the Company.
Upon receipt by any Holder of a Notice of Mandatory Redemption, if Holder does not choose to convert, such Holder will promptly submit
to the Company such Holder’s Series C Preferred Stock certificates on the Redemption Payment Date. Upon receipt of such Holder’s
Series C Preferred Stock certificates, the Company will pay the applicable redemption price to such Holder in cash. A “Deemed Liquidation
Event” will mean: (a) a merger or consolidation in which the Company is a constituent party or a subsidiary of the Company is a
constituent party and the Company issues shares of its capital stock pursuant to such merger or consolidation, except any such merger
or consolidation involving the Company or a subsidiary in which the shares of capital stock of the Company outstanding immediately prior
to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent,
immediately following such merger or consolidation, at least a majority, by voting power, of the capital stock of the surviving or resulting
corporation or, if the surviving or resulting corporation is a wholly-owned subsidiary of another corporation immediately following such
merger or consolidation, the parent corporation of such surviving or resulting corporation; or (b) the sale, lease, transfer, exclusive
license or other disposition, in a single transaction or series of related transactions, by the Company or any subsidiary of the Company
of all or substantially all the assets of the Company and its subsidiaries taken as a whole, or the sale or disposition (whether by merger
or otherwise) of one or more subsidiaries of the Company if substantially all of the assets of the Company and its subsidiaries taken
as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition
is to a wholly owned subsidiary of the Company. Since the Company has determined that a deemed liquidation event is not probable, the
Series C is stated at the Stated Value plus accrued and unpaid dividends rather than redemption value, which is liquidation value.
The Series C is convertible at the option of a
holder at any time following the issuance date. In the event of a conversion of any Series C Preferred Stock, the Company shall issue
to such Holder a number of Conversion Shares equal to (x) the sum of (1) the Stated Value per share of Series C Preferred Stock plus (2)
any accrued but unpaid dividends thereon multiplied by (y) the number of shares of Series C Preferred Stock held by such Holder and subject
to the Holder Conversion Notice, divided by (z) the Conversion Price with respect to such Series C Preferred Stock. Conversion Price means
a price per share of the common stock equal to the lowest daily volume weighted average price of the common stock for any trading day
during the two years preceding the date of delivery of the conversion notice, subject to adjustment as otherwise provided in the Series
C Certificate of Designation.
Upon liquidation of the Company after payment
or provision for payment of liabilities of the Company and after payment or provision for any liquidation preference payable to the holders
of any preferred stock ranking senior to the Series C but prior to any distribution to the holders of Common Stock or preferred stock
ranking junior upon liquidation to the Series C, the holders of Series C will be entitled to be paid out of the assets of the Company
available for distribution to its stockholders an amount with respect to each share of Series C equal to the Liquidation Value.
Each share of Series C Preferred Stock shall be entitled to vote on
all matters requiring shareholder vote. Each share of Series C Preferred Stock will be entitled to the number of votes per share based
on the calculation of the number of conversion shares of Series C Preferred Stock is then convertible.
During August and September 2020, the Company
entered into subscription agreements with an accredited investor whereby the investor agreed to purchase an aggregate of purchase 6,300
shares of the Company’s Series C Convertible Preferred Stock for $630,000, or $100.00 per share (the “Stated Value”),
which were used to pay off various discounted convertible instruments and redeem Series A preferred stock.
During the three months ended December 31, 2020,
the Company entered into subscription agreements with an accredited investor whereby the investor agreed to purchase an aggregate of purchase
7,000 shares of the Company’s Series C Convertible Preferred Stock for $700,000, or $100.00 per share (the “Stated Value”),
which were used from working capital purposes.
These Series C preferred share issuances with
redemption provisions that permit the issuer to settle in either cash or common stock, at the option of the holder, were evaluated to
determine whether temporary or permanent equity classification on the consolidated balance sheet was appropriate. As per the terms of
the Series C preferred stock agreements, Series C preferred stock is redeemable for cash and other assets on the occurrence of a deemed
liquidation event. A deemed liquidation event includes a change of control which is not in the Company’s control. As such, since
Series C preferred stock is redeemable upon the occurrence of an event that is not within the Company’s control, the Series C preferred
stock is classified as temporary equity.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
The Company concluded that the Series C Preferred
Stock represented an equity host and, therefore, the redemption feature of the Series C Preferred Stock was not considered to be clearly
and closely related to the associated equity host instrument. However, the redemption features did not meet the net settlement criteria
of a derivative and, therefore, were not considered embedded derivatives that required bifurcation. The Company also concluded that the
conversion rights under the Series C Preferred Stock were clearly and closely related to the equity host instrument. Accordingly, the
conversion rights feature on the Series C Preferred Stock were not considered an embedded derivative that required bifurcation. The conversion
feature of the Series C Preferred Stock at the time of issuance was determined to be beneficial on the commitment date. Because the Series
C Preferred Stock was perpetual with no stated maturity date, and the conversions could occur any time from the date of issuance, during
the year ended December 31, 2020, the Company immediately recorded a non-cash deemed dividend of $1,525,873 related to the beneficial
conversion feature arising from the issuance of Series C Preferred Stock. This non-cash deemed dividend increased the Company’s
net loss attributable to common stockholders and net loss per share.
During the year ended December 31, 2020, the Company
accrued a dividend payable of $6,031 which was included in preferred stock dividends on the accompanying consolidated statement of shareholders’
deficit. As of December 31, 2020, the net Series C Preferred Stock balance was $1,336,031 which includes stated value of $1,330,000 and
accrued dividends payable of $6,031.
Common Stock
Sale of common stock
In connection with a subscription agreement dated
April 23, 2019, during the year ended December 31, 2019, the Company received cash proceeds of $300,000 from an investor for the purchase
of 2,000,000 shares of the Company’s common stock at $0.15 per share.
In connection with subscription agreements, during
the year ended December 31, 2019, the Company received cash proceeds of $480,000 from investors for the purchase of 10,750,000 shares
of the Company’s common stock at prices ranging from $0.04 to $0.05 per share.
In connection with subscription agreements dated
January 13, 2020 and February 18, 2020, the Company received cash proceeds of $280,000 from an investor for the purchase of 7,000,000
shares of the Company’s common stock at $0.04 per share.
In connection with subscription agreements dated
May 8, 2020, the Company received cash proceeds of $161,000 from an investor for the purchase of 7,000,000 shares of the Company’s
common stock at $0.023 per share.
In connection with subscription agreements dated
July 2, 2020, the Company received cash proceeds of $280,000 from investors for the purchase of 21,538,462 shares of the Company’s
common stock at $0.013 per share.
In connection with a subscription agreement dated
December 31, 2020, the Company received cash proceeds of $100,000 from an investor for the purchase of 1,851,852 shares of the Company’s
common stock at $0.054 per share.
Issuance of common shares for professional fees
On March 12, 2019, the Company entered into a
consulting agreement for advisory services to be rendered. In connection with this consulting agreement, the Company issued 485,060 restricted
vested 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. In connection with this consulting agreement, during the year ended December
31, 2019, the Company recorded stock-based professional fees of $82,460.
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. In connection with this Advisory Board Agreement,
during the years ended December 31, 2020 and 2019, the Company recorded stock-based professional fees of $6,667 and $25,333, respectively.
On May 20, 2019, the Company entered into a six-month
consulting agreement with an individual for business development services. In connection with this consulting agreement, the Company issued
500,000 restricted common shares of the Company to the consultant. These shares vest immediately. These shares were valued at $47,000,
or $0.094 per common share, based on quoted closing price on the date of grant. In connection with this consulting agreement, the Company
recorded stock-based professional fees of $47,000.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
On October 1, 2019, the Company entered into a
one-month Digital Marketing and Social Media Exposure Agreement (the “Marketing Agreement”) with a third-party entity. Pursuant
to the Marketing Agreement, the Company issued 350,000 common shares of the Company which were valued at $15,400, or $0.044 per common
share, based on contemporaneous common share sales on the agreement date. In connection with this agreement, the Company recorded professional
fees of $15,400.
On November 19, 2019, the Company issued 510,000
common shares of the Company for consulting services rendered. These shares were valued at $25,500, or $0.05 per common share, based on
contemporaneous common share sales on the agreement date. In connection with this agreement, the Company recorded professional fees of
$25,500.
On February 20, 2020 and effective March 1, 2020,
the Company entered into a six-month consulting agreement with an entity for investor relations services. In connection with this consulting
agreement, the Company issued 1,250,000 restricted common shares of the Company to the consultant. These shares vest immediately. These
shares were valued at $50,000, or $0.04 per common share, based on contemporaneous common share sales by the Company. In connection with
this consulting agreement, during the year ended December 31, 2020, the Company recorded stock-based professional fees of $50,000.
On March 31, 2020 and effective April 1, 2020,
the Company entered into two one-year advisory board agreements with two individuals for services to be rendered on the Company’s
medical advisory board. In connection with these advisory board agreements, the Company issued an aggregate of 500,000 restricted common
shares of the Company to these advisory board members. These shares vest on April 1, 2021. These shares were valued at $20,000, or $0.04
per common share, based on contemporaneous common share sales by the Company. In connection with this consulting agreement, during the
year ended December 31, 2020, accretion of stock-based consulting fees amounted to $15,000 and the remaining stock-based consulting fees
of $5,000 shall be accreted over the remaining vesting period.
On July 1, 2020, the Company entered into a six-month
consulting agreement with an entity for investor relations services. In connection with this consulting agreement, the Company issued
500,000 restricted common shares of the Company to the consultant. These shares vest immediately. These shares were valued at $6,500,
or $0.013 per common share, based on contemporaneous common share sales by the Company. In connection with this consulting agreement,
during the year ended December 31, 2020, the Company recorded stock-based professional fees of $6,500.
On October 1, 2020, the Company entered into a
patent expense reimbursement agreement. In connection with this agreement, the Company issued 25,000 restricted common shares of the Company
to this entity. These shares were valued at $275, or $0.011 per common share, based on the quoted closing price of the Company’s
common stock on the measurement date. In connection with this agreement, the Company recorded research and development expense of $275.
On October 6, 2020, the Company entered into a
settlement agreement related to the termination of a previous investor relations agreement. In connection with this settlement agreement,
the Company issued 1,275,000 restricted common shares of the Company to this consultant. These shares were valued at $10,200, or $0.008
per common share, based on the quoted closing price of the Company’s common stock on the measurement date. In connection with this
settlement agreement, the Company recorded stock-based consulting fees of $10,200.
On October 7, 2020, the Company entered into a
six-month consulting agreement for investor relations services to be rendered. In connection with this consulting agreement, the Company
issued 9,000,000 restricted common shares of the Company to this consultant. These shares were valued at $76,500, or $0.0085 per common
share, based on the quoted closing price of the Company’s common stock on the measurement date. In connection with this consulting
agreement, during the year ended December 31, 2020, the Company recorded stock-based professional fees of $38,250 and as of December 31,
2020, recorded prepaid expenses of $38.250 which will be amortized into stock-based consulting fees over the remaining term of the agreement.
On October 9, 2020, the Company issued 500,000
shares of its common stock for strategic consulting services to be rendered. These shares were valued at $6,000, or $0.012 per common
share, based on the quoted closing price of the Company’s common stock on the measurement date. In connection with this consulting
agreement, during the year ended December 31, 2020, the Company recorded stock-based professional fees of $6,000 since there was no defined
term of the agreement.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
Issuance of common shares for stock-based compensation
On July 29, 2019, 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 10,500,000 common shares of the Company
which were valued at $525,000, or $0.05 per common share, based on contemporaneous common share sales. These shares will vest on May 1,
2020. If the employee’s employment is terminated for any reason, these shares will immediately be forfeited. In the event of a change
of control, the employee shall be 100% vested in all shares of restricted shares subject to these Agreements. Each executive officer and
employee shall have the right to vote the restricted shares awarded to them and to receive and retain all regular dividends paid in cash
or property (other than retained distributions), and to exercise all other rights, powers and privileges of a holder of shares of the
stock, with respect to such restricted shares, with the exception that (a) the employee shall not be entitled to delivery of the stock
certificate or certificates or electronic book entries representing such restricted shares until the shares are vested, (b) the Company
shall retain custody of all retained distributions made or declared with respect to the restricted shares until such time, if ever, as
the restricted shares have become vested, and (c) the employee may not sell, assign, transfer, pledge, exchange, encumber, or dispose
of the restricted shares. In connection with these shares, the Company shall record stock-based compensation over the vesting period,
which is included in the aggregate accretion of stock-based compensation reflected below. These shares shall be considered outstanding
for legal purposes but shall be excluded from basic earnings per share until vesting occurs.
In November 2019, the Company entered into restricted
stock award agreements with two employees. Pursuant to these restricted stock award agreements, the Company agreed to grant restricted
stock awards for an aggregate of 1,300,000 common shares of the Company which were valued at $65,000, or $0.05 per common share, based
on contemporaneous common share sales. These shares will vest on May 1, 2021. If the employee’s employment is terminated for any
reason, these shares will immediately be forfeited. In the event of a change of control, the employee shall be 100% vested in all shares
of restricted shares subject to these Agreements. Each employee shall have the right to vote the restricted shares awarded to them and
to receive and retain all regular dividends paid in cash or property (other than retained distributions), and to exercise all other rights,
powers and privileges of a holder of shares of the stock, with respect to such restricted shares, with the exception that (a) the employee
shall not be entitled to delivery of the stock certificate or certificates or electronic book entries representing such restricted shares
until the shares are vested, (b) the Company shall retain custody of all retained distributions made or declared with respect to the restricted
shares until such time, if ever, as the restricted shares have become vested, and (c) the employee may not sell, assign, transfer, pledge,
exchange, encumber, or dispose of the restricted shares. In connection with these shares, the Company recorded stock-based compensation
over the vesting period, which is included in the aggregate accretion of stock-based compensation reflected below. These shares shall
be considered outstanding for legal purposes but shall be excluded from basic earnings per share until vesting occurs.
On April 1, 2020, the Company entered into an
employment agreement with an accounting manager. Pursuant to this employment agreement, the Company agreed to grant a restricted stock
award of 200,000 common shares of the Company which will vest on May 1, 2021. If the employee’s employment is terminated without
cause or for good reason (both as defined in the employment agreement), or a change of control event (as defined in the employment agreement)
occurs, these shares will immediately vest. For any other termination of employment, unvested restricted stock shall immediately terminate.
These shares were valued on the date of grant at $8,000, or $0.04 per common share, based on contemporaneous common share sales. In connection
with these shares, the Company recorded stock-based compensation over the vesting period, which is included in the aggregate accretion
of stock-based compensation reflected below.
On April 28, 2020, the Company entered into restricted
stock award agreements (the “April 2020 Restricted Stock Award Agreements”) with executive officers and employees. Pursuant
to the April 2020 Restricted Stock Award Agreements, the Company agreed to grant restricted stock awards for an aggregate of 6,750,000
common shares of the Company which were valued at $270,000, or $0.04 per common share, based on contemporaneous common share sales. These
shares will vest on May 1, 2021. If the employee’s employment is terminated for any reason, these shares will immediately be forfeited.
In the event of a change of control, the employee shall be 100% vested in all shares of restricted shares subject to these Agreements.
Each executive officer and employee shall have the right to vote the restricted shares awarded to them and to receive and retain all regular
dividends paid in cash or property (other than retained distributions), and to exercise all other rights, powers and privileges of a holder
of shares of the stock, with respect to such restricted shares, with the exception that (a) the employee shall not be entitled to delivery
of the stock certificate or certificates or electronic book entries representing such restricted shares until the shares are vested, (b)
the Company shall retain custody of all retained distributions made or declared with respect to the restricted shares until such time,
if ever, as the restricted shares have become vested, and (c) the employee may not sell, assign, transfer, pledge, exchange, encumber,
or dispose of the restricted shares. In connection with these shares, the Company shall record stock-based compensation over the vesting
period, which is included in the aggregate accretion of stock-based compensation reflected below.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
The following table summarizes activity related
to non-vested shares:
| | |
Number of Non-vested Shares | | |
Weighted Average Grant Date Fair Value | |
| Non-vested, December 31, 2018 | |
| 5,998,672 | | |
$ | 0.61 | |
| Granted | |
| 12,000,000 | | |
| 0.05 | |
| Forfeited | |
| (323,373 | ) | |
| (0.59 | ) |
| Non-vested, December 31, 2019 | |
| 17,675,299 | | |
| 0.23 | |
| Granted | |
| 7,450,000 | | |
| 0.04 | |
| Shares vested | |
| (1,298,373 | ) | |
| (0.41 | ) |
| Non-vested, December 31, 2020 | |
| 23,826,926 | | |
$ | 0.16 | |
During the year ended December 31, 2020 and 2019,
aggregate accretion of stock-based compensation expense on granted non-vested shares amounted to $446,064 and $2,068,368, respectively.
Total unrecognized compensation expense related to these unvested common shares on December 31, 2020 amounted to $110,650 which will be
amortized over the remaining vesting period through May 1, 2021.
Shares Issued for Accounts Payable
On January 13, 2020, the Company issued 151,456
common shares upon conversion of accounts payable of $6,058, or $0.04 per common share, based on contemporaneous common share sales by
the Company.
Common stock issued for debt conversion
On August 15, 2019, the Company issued 295,567
shares of its common stock upon the partial conversion of a convertible note principal balance of $12,000 at the contractual conversion
price (see Note 6).
During the year ended December 31, 2020, the Company
issued 37,171,800 shares of its common stock upon the conversion of convertible notes with bifurcated embedded conversion option derivatives
including principal of $152,285, accrued interest of $36,244, and fees of $2,500. The conversion price was based on contractual terms
of the related debt. The Company accounted for the partial conversion of these convertible notes pursuant to the guidance of ASC 470-20,
Debt with Conversion and Other Options. Under ASC 470-20, the Company recognized an aggregate loss on debt extinguishment upon
conversion in the amount of $297,919 which is related to the principal amount only and is associated with the difference between the fair
market value of the shares issued upon conversion of $450,204 and the conversion price and is equal to the fair value of the additional
shares of common stock transferred upon conversion.
Common Stock Issued for Conversion of Series A Preferred Shares
During the year ended December 31, 2020, the Company
issued 16,132,701 shares its common stock upon the conversion of 211,200 shares of Series A preferred with a stated redemption value of
$211,200 and related accrued dividends payable of $4,224. The conversion price was based on contractual terms of the related Series A
preferred shares. Upon conversion, the Company reclassified put premium of $49,543 to paid-in capital.
Common shares issued for exercise of stock
options
On December 21, 2019, the Company issued 3,000,000
common shares upon the exercise of 3,000,000 stock options. In connection with this option exercise, the Company reduced accrued compensation
by $90,000.
Shares issued for deferred compensation
On July 12, 2019, the Company’s Chief Executive
Officer, elected to convert $80,000 of deferred compensation owed to him into 2,000,000 shares of the Company’s common stock at
$0.04 per share. On July 18, 2019, the Company’s President and Chief Operating Officer, elected to convert $80,000 of deferred compensation
owed to him into 2,000,000 shares of the Company’s common stock at $0.04 per share. The fair market value of these shares of $0.04
per share is based on contemporaneous common share sales. Since the deferred compensation was converted at fair value, no gain or loss
was recorded. These shares are issued under the Company’s 2018 Long-Term Incentive Plan and are restricted as to resale until May
1, 2020.
On July 18, 2019, two employees of the Company
elected to convert an aggregate of $24,000 of deferred compensation owed to them into 600,000 shares of the Company’s common stock
at $0.04 per share, the fair market value of these shares based on contemporaneous common share sales. Since the deferred compensation
was converted at fair value, no gain or loss was recorded. These shares are issued under the Company’s 2018 Long-Term Incentive
Plan and are restricted as to resale until May 1, 2020.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
On July 29, 2019, the Company’s Chief Executive
Officer, elected to convert $40,000 of deferred compensation owed to him into 800,000 shares of the Company’s common stock at $0.05
per share. On July 29, 2019, the Company’s President and Chief Operating Officer, elected to convert $50,000 of deferred compensation
owed to him into 1,000,000 shares of the Company’s common stock at $0.05 per share. The fair market value of these shares of $0.05
per share is based on contemporaneous common share sales. Since the deferred compensation was converted at fair value, no gain or loss
was recorded. These shares are issued under the Company’s 2018 Long-Term Incentive Plan and are restricted as to resale until May
1, 2021.
On April 17, 2020, the Company issued 203,125
common shares upon conversion of an accrued deferred compensation liability of $16,250, or $0.08 per share. The shares issued were value
at a per share price of $0.055, which was based on quoted closing price on the date of grant and the gain was not material.
On December 18, 2020, the Company issued an aggregate
of 547,945 shares upon conversion of an accrued deferred compensation liability of $8,000. The fair market value of these shares of $12,603,
$0.023 per share, was based on quoted closing price on the date of grant. Since the deferred compensation amount converted of $8,000 was
lower than fair value of shares issued, the Company recorded additional stock-based compensation of $4,603.
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 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, 2020 and 2019, the employee was credited $182,500 towards the options exercise. No cash disbursement will be required by the
Company under this provision. The Company recognized compensation expense of $7,500 during the year ended December 31, 2019, with a corresponding
increase to shareholders’ equity.
Stock options
For the year ended December 31, 2020 and 2019,
the Company recorded $609,662 and $1,783,099 of compensation expense related to stock options, respectively. There is no unrecognized
compensation expense related to unvested stock options as of December 31, 2020.
Stock option activities for the years ended December
31, 2020 and 2019 are summarized as follows:
| | |
Number of Options | | |
Weighted Average Exercise
Price | | |
Weighted Average Remaining Contractual Term
(Years) | | |
Aggregate Intrinsic
Value | |
| Balance Outstanding, December 31, 2018 | |
| 11,445,698 | | |
$ | 0.30 | | |
| | | |
| | |
| Exercised | |
| (3,000,000 | ) | |
| 0.03 | | |
| | | |
| | |
| Balance Outstanding, December 31, 2019 | |
| 8,445,698 | | |
| 0.40 | | |
| | | |
| | |
| Exercised | |
| - | | |
| - | | |
| | | |
| | |
| Balance Outstanding, December 31, 2020 | |
| 8,445,698 | | |
$ | 0.40 | | |
| 5.10 | | |
$ | 48,000 | |
| Exercisable, December 31, 2020 | |
| 8,445,698 | | |
$ | 0.40 | | |
| 5.10 | | |
$ | 48,000 | |
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
Warrants
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 the Company shall issue to Dinosaur 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 issued to Dinosaur 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 received Warrants to purchase 200,000 shares of the Company’s
common stock at $0.18 per share. On June 14, 2019, the three-month anniversary of the Letter Agreement, Dinosaur received Warrants to
purchase 400,000 shares of the Company’s common stock at $0.08 per share. On September 14, 2019, Dinosaur received Warrants to purchase
200,000 shares of the Company’s common stock at $0.05 per share. On December 14, 2019, Dinosaur received Warrants to purchase 200,000
shares of the Company’s common stock at $0.07 per share. The Warrants shall be exercisable over a five-year term from date each
tranche date and shall be assignable to others at Dinosaur’s discretion. These warrants were valued at the grant date using a Black-Scholes
option pricing model with the following assumptions; risk-free interest rate of 2.43%, expected dividend yield of 0%, expected warrant
term of five years, and an expected volatility of 275.0%. The aggregate grant date fair value of these awards amounted to $159,700. The
Company recognizes compensation cost for unvested stock-based warrant awards on a straight-line basis over the requisite service period.
For the years ended December 31, 2020 and 2019, the Company recorded $0 and $159,700 of stock-based professional fees related to stock
warrants, respectively.
On September 6, 2019 and December 9, 2019, in
connection with Purchase Agreements with an accredited investor (See Note 6), the Company issued warrants to purchase an aggregate of
up to 1,050,000 shares of the Company’s common stock (the “Warrants”). The Warrants are exercisable at any time on or
after the date of the issuance and entitles this investor to purchase shares of the Company’s common stock for a period of five
years from the initial date the warrants become exercisable. Under the terms of the Warrant, the holder is entitled to exercise the Warrants
to purchase up to 1,050,000 shares of the Company’s common stock at an initial exercise price of $0.10, subject to adjustment as
detailed in the Warrant. In connection with the issuance of the warrants, on the initial measurement date, the relative fair value of
the warrants of $61,899 was recorded as a debt discount and an increase in paid-in capital (See Note 6). On January 7, 2021, the Company
issued 1,008,000 shares of its common stock in connection with the cashless exercise of the 1,050,000 warrants. The exercise price was
based on contractual terms of the related warrant.
On March 30, 2020 and on April 23, 2020, in connection
with Purchase Agreements with an accredited investor (See Note 6), the Company issued warrants to purchase an aggregate amount up to 288,750
shares of the Company’s common stock (the “Warrants”). The Warrants were exercisable at any time on or after the date
of the issuance and entitled this investor to purchase shares of the Company’s common stock for a period of five years from the
initial date the warrants become exercisable. Under the terms of the Warrants, the holder was entitled to exercise the Warrants to purchase
up to 288,750 shares of the Company’s common stock at an initial exercise price of $0.10, subject to adjustment as detailed in the
Warrants. In connection with the issuance of the warrants, on the initial measurement date, the relative fair value of the warrants of
$14,498 was recorded as a debt discount and an increase in paid-in capital (See Note 6). In September 2020, in connection with the repayment
of the debt, these warrants were cancelled.
During the year ended December 31, 2020, the Company
issued common shares related to the sale of common stock and issued shares upon the conversion of convertible debt at prices lower than
the warrant exercise price of $0.10 and accordingly, the warrant down-round provisions were triggered. As a result, the warrant exercise
price was reduced to $0.003 per share. As a result of the trigger of down-round provisions, the Company calculated the difference between
the warrants fair value on the date the down round feature was triggered using the current exercise price and the new exercise price.
If applicable, additional expense shall be recorded as an increase in accumulated deficit and increase in paid-in capital and increased
the net loss to common shareholders by the same amount. Since the fair value of the warrants using the new exercise price was less than
the initial fair value amount, no additional expense was recorded. In connection with the repayment of the debt, the Company and investor
agreed upon a fixed warrant exercise price of $0.01 per share.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
Warrant activities for the years ended December
31, 2020 and 2019 are summarized as follows:
| | |
Number of Warrants | | |
Weighted Average Exercise
Price | | |
Weighted Average Remaining Contractual Term
(Years) | | |
Aggregate Intrinsic
Value | |
| Balance Outstanding December 31, 2018 | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
| Granted | |
| 2,050,000 | | |
| 0.10 | | |
| | | |
| | |
| Cancelled | |
| - | | |
| - | | |
| | | |
| | |
| Balance Outstanding December 31, 2019 | |
| 2,050,000 | | |
$ | 0.10 | | |
| 4.66 | | |
$ | 4,400 | |
| Granted | |
| 288,750 | | |
| 0.10 | | |
| | | |
| | |
| Cancelled | |
| (288,750 | ) | |
| (0.10 | ) | |
| | | |
| | |
| Exercisable, December 31, 2020 | |
| 2,050,000 | | |
$ | 0.05 | | |
| 3.66 | | |
$ | 137,000 | |
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.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
The aggregate number of shares of common stock
and number of shares of the Company’s common stock that may be subject to incentive stock options granted under the 2018 Plan is
50,000,000 shares, of which 11,445,698 shares have been issued or granted under incentive stock options and 25,951,070 shares of restricted
stock have been issued as of December 31, 2020. All shares underlying grants are expected to be issued from the Company’s unissued
authorized shares available.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Legal matters
From time to time, the Company may be involved
in litigation related to claims arising out of its operations in the normal course of business. As of December 31, 2020, 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 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 vested pro rata on a monthly
basis for the term of the employment agreement. On each anniversary, Mr. Silverman will be eligible to be granted a minimum of 500,000
stock options of the Company at a strike price of $0.85 per common unit contingent upon the achievement of certain performance objectives. |
| ● | Certain
other employee benefits and perquisites, including reimbursement of necessary and reasonable travel and participation in retirement and
welfare benefits. |
The April 25, 2018 financing received of $1,240,000
triggered the right of the employee to receive the deferred salary and the 5% bonus provision disclosed above.
Mr. Silverman’s employment agreement provides
that, in the event that his employment is terminated by the Company without “cause” (as defined in his employment agreement),
or if Mr. Silverman resigned for “good reasons” (as defined in his new employment agreement), subject to a complete release
of claims, he will be entitled to (i) retain all stock options previously granted; and (ii) receive any benefits then owed or accrued
along with one year of base salary and any unreimbursed expenses incurred by him. All amounts shall be paid on the termination date. In
the event that Mr. Silverman’s employment is terminated by the Company for “cause” (as defined in his employment agreement),
or if Mr. Silverman resigned without “good reasons” (as defined in his employment agreement), subject to a complete release
of claims, he will be entitled to receive any unpaid base salary and benefits then owed or accrued and any unreimbursed expenses incurred
by him. Additionally, if a change of control (as defined in his employment agreement) occurs during the term of this agreement, all unvested
stock options will vest in full and if the valuation of the Company in the change of control transaction is greater than $0.85 per common
share, then Mr. Silverman shall be paid a bonus equal to two times his minimum base salary and minimum target bonus. Pursuant to the employment
agreement, Mr. Silverman will be subject to a confidentiality covenant, a two-year post-termination non-competition covenant and a two-year
post-termination non-solicitation covenant. On June 30, 2020, the Company amended the employment agreement of Mr. Silverman to provide
for successive one-year extensions until either the executive or the Board of Directors of the Company gives notice to terminate the employment
agreement per its terms. This employment agreement amendment also includes an allowance of up to $10,000 per year to cover uncovered medical/dental
expenses for Mr. Silverman and his family.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
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) |
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 April 28, 2020, the Company’s board of
directors approved a bonus to officers and an employee of the Company in the aggregate amount of $280,000 which shall be initially deferred
and was recorded as an accrued liability on the bonus approval date.
Licensing agreement
Pursuant to an agreement dated April 8, 2016,
between the Company and Rice University, Rice University has granted a non-exclusive license to the Company, in nanotube-based surface
treatment for strengthening glass and related materials under Rice’s intellectual property rights, to use, make, distribute, offer
and sell the licensed products specified in the agreement. In consideration for which, the Company had to pay a one-time non-refundable
license fee of $10,000 and royalty payments of 5% of net sales of the licensed products during the term of the agreement and a sell-off
period of 180 days from termination, In addition, the Company is required to pay for the maintenance of the patents, This agreement will
continue until the expiration of the last to expire of the licensed property rights, unless terminated earlier in accordance with the
terms of the agreement. There have been no royalty payments paid or due through December 31, 2020.
Anti-dilution rights related to C-Bond Systems,
LLC
Prior to the Merger, C-Bond Systems, LLC entered
into certain contracts, described below, which provided certain anti-dilution protection to the counterparties to those contracts.
The Company believes that these contracts do not apply to any future issuances of equity by C-Bond Systems, Inc.
In 2013, pursuant to a subscription agreement,
the Company’s subsidiary. C-Bond Systems, LLC issued 2,425,300 common shares. To the extent that during the term of the agreement
C-Bond Systems, LLC issues any “down-round” or subsequent investments based upon an enterprise value of less than $2,000,000
(“Dilutive Transaction”) (other than an issuance pursuant to an option agreement with an employee or otherwise to compensate
an employee, or incident to an acquisition of assets by C-Bond Systems, LLC in which common units were issued to the seller of such assets)
contemporaneously with the Dilutive Transaction, the contract obligated C-Bond Systems, LLC to issue the investor additional common units
in C-Bond Systems, LLC in an amount which would provide them with the ownership percentage interest which they would have held in C-Bond
Systems, LLC represented by the common units purchased by them on this date.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
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
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 on December 31, 2020 and 2019 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.
The items accounting for the difference between income taxes at the
effective statutory rate and the provision for income taxes for the years ended December 31, 2020 and 2019 were as follows:
| | |
2020 | | |
2019 | |
| Income tax benefit at U.S. statutory rate | |
$ | (931,233 | ) | |
$ | (1,520,555 | ) |
| Non-deductible expenses | |
| 457,894 | | |
| 1,057,052 | |
| Change in valuation allowance | |
| 473,339 | | |
| 463,503 | |
| Total provision for income tax | |
$ | - | | |
$ | - | |
The Company’s approximate net deferred tax asset as of December
31, 2020 and 2019 was as follows:
Deferred Tax Asset: | |
December 31,
2020 | | |
December 31,
2019 | |
| Net operating loss carryforward | |
$ | 1,335,867 | | |
$ | 862,528 | |
| Total deferred tax asset before valuation allowance | |
| 1,335,867 | | |
| 862,528 | |
| Valuation allowance | |
| (1,335,867 | ) | |
| (862,528 | ) |
| Net deferred tax asset | |
$ | - | | |
$ | - | |
The net operating loss carryforward was
approximately $6,361,000 on December 31, 2020. The Company provided a valuation allowance equal to the net deferred income tax asset as
of December 31, 2020 and 2019 because it was not known whether future taxable income will be sufficient to utilize the loss carryforward.
During the year ended December 31, 2020, the valuation allowance increased by $473,339. 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 2020 and 2019 Corporate Income Tax Returns are subject to Internal
Revenue Service examination.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
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. On December 31, 2020, the Company had approximately $77,000 of cash in excess of
FDIC limits of $250,000. There were no balances in excess of FDIC insured levels as of December 31, 2019. The Company has not experienced
any losses in such accounts through December 31, 2020.
Geographic concentrations of sales
For the year ended December 31, 2020, approximately 59.9% of all sales
were in the United States, 21.5% of sales were from one customer based in India and 18.6% of sales were from one customer based in the
Philippines. No other geographical area accounting for more than 10% of total sales during the year ended December 31, 2020. For the year
ended December 31, 2019, approximately 80% of all sales were in the United States, respectively. No other geographical area accounting
for more than 10% of total sales during the year ended December 31, 2019.
Customer concentrations
For the year ended December 31, 2020, two customers
accounted for approximately 40.1% of total sales (18.6% and 21.5%, respectively). For the year ended December 31, 2019, two customers
accounted for approximately 25.9% of total sales (13.9% and 12.0%, 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. On December 31,
2020, one customer accounted for 64.0% of the total accounts receivable balance. On December 31, 2019, three customers accounted for 58.3%
(15.8%, 25.5% and 17.0%, respectively) of the total accounts receivable balance.
Vendor concentrations
Generally, during 2020, the Company purchases
substantially all of its inventory from four 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.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
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, 2020 and 2019. Any sales tax, value added tax, and other tax the Company collects concurrently with its
revenue-producing activities are excluded from revenue.
Revenue Disaggregation
The Company tracks its revenue by product. The
following table summarizes our revenue by product for the year ended December 31, 2020 and 2019:
| | |
For the Year Ended
December 31,
2020 | |
For the Year Ended
December 31,
2019 |
| | |
(As Restated) | |
|
| C-Bond I multi-purpose and BRS ballistic resistant glass protection systems | |
$ | 155,755 | | |
$ | 430,915 | |
| C-Bond Nanoshield solution sales | |
| 118,081 | | |
| 121,163 | |
| Disinfection products | |
| 250,208 | | |
| - | |
| Installation and other services | |
| 8,992 | | |
| 32,306 | |
| Freight and delivery | |
| 22,827 | | |
| 18,252 | |
| Total | |
$ | 555,863 | | |
$ | 602,636 | |
NOTE 13 – OPERATING LEASE RIGHT-OF-USE
(“ROU”) ASSETS AND OPERATING LEASE LIABILITIES
In October 2019, the Company entered into an 18-month
lease agreement for the lease of office and warehouse space under a non-cancelable operating lease through May 31, 2021. From the lease
commencement date of December 1, 2019 until November 30, 2020, monthly rent shall be $4,444 and from December 1, 2020 to May 31, 2021,
monthly rent shall be $4,577 per month.
In adopting ASC Topic 842, Leases (Topic 842)
on January 1, 2019, the Company had elected the ‘package of practical expedients’, which permitted it not to reassess under
the new standard its prior conclusions about lease identification, lease classification and initial direct costs (see Note 2). In addition,
the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less. Since the terms of the Company’s
operating lease for its office space prior to October 2019 was 12 months or less on the date of adoption, pursuant to ASC 842, the Company
determined that the lease met the definition of a short-term lease and the Company did not recognize the right-of use asset and lease
liability arising from this lease. Upon renewal of the lease in October 2019, the Company analyzed the new lease and determined it is
required to record a lease liability and a right of use asset on its consolidated balance sheet, at fair value.
During the years ended December 31, 2020 and 2019,
in connection with its operating leases, the Company recorded rent expense of $95,811 and $101,114, respectively, which includes rent
on a short-term lease for a corporate apartment, and is expensed during the period and included in operating expenses on the accompanying
consolidated statements of operations.
The significant assumption used to determine the
present value of the lease liability in October 2019 was a discount rate of 12% which was based on the Company’s estimated incremental
borrowing rate.
On December 31, 2020 and 2019, right-of-use asset
(“ROU”) is summarized as follows:
| | |
December 31,
2020 | | |
December 31,
2019 | |
| Office leases right of use assets | |
$ | 74,296 | | |
$ | 74,296 | |
| Less: accumulated amortization | |
| (52,524 | ) | |
| (4,488 | ) |
| Balance of ROU assets | |
$ | 21,772 | | |
$ | 69,808 | |
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
On December 31, 2020 and 2019, operating lease
liabilities related to the ROU assets are summarized as follows:
| | |
December 31, 2020 | | |
December 31,
2019 | |
| Lease liabilities related to office leases right of use assets | |
$ | 22,216 | | |
$ | 69,852 | |
| Less: current portion of lease liabilities | |
| (22,216 | ) | |
| (47,636 | )) |
| Lease liabilities – long-term | |
$ | - | | |
$ | 22,216 | |
On December 31, 2020,
future minimum base lease payments due under non-cancelable operating leases are as follows:
| Year ended December 31, | |
Amount | |
| 2021 | |
$ | 22,885 | |
| Total minimum non-cancelable operating lease payments | |
| 22,885 | |
| Less: discount to fair value | |
| (669 | ) |
| Total lease liability on December 31, 2020 | |
$ | 22,216 | |
NOTE 14 – RELATED PARTY TRANSACTIONS
Due from related party
On December 31, 2020, the Company has an amount
due from the Company’s chief executive officer of $5,526 related to the overpayment of accrued compensation. The Company’s
chief executive officer intends to repay this overpayment during the second quarter of 2021.
NOTE 15 – SUBSEQUENT EVENTS
Executive bonus
On January 18, 2021, the Company’s board of
directors approved a bonus to officers and an employee of the Company in the aggregate amount of $330,000 which shall be initially deferred
and was recorded as an accrued liability on the bonus approval date.
Series C preferred shares issued for cash
On February 24, 2021, the Company entered into
a subscription agreement with an accredited investor whereby the investor agreed to purchase 2,500 shares of the Company’s Series
C Convertible Preferred Stock for $250,000, or $100.00 per share, the stated value, which were used from working capital purposes. The
conversion feature of the Series C Preferred Stock at the time of issuance was determined to be beneficial on the commitment date. Because
the Series C Preferred Stock was perpetual with no stated maturity date, and the conversions could occur any time from the date of issuance,
the Company immediately recorded a non-cash deemed dividend of $2,845,238 related to the beneficial conversion feature arising from the
issuance of Series C Preferred Stock.
Series B preferred shares issued for accrued
compensation
On January 18, 2021, the Board of Directors of
the Company agreed to satisfy $295,000 of accrued compensation owed to its executive officers (collectively, the “Management”)
through a Liability Reduction Plan (the “Plan”). Under this Plan, Management agreed to accept 295 shares of the Company’s
Series B convertible preferred stock in settlement of accrued compensation. The conversion feature of the Series B Preferred Stock at
the time of issuance was determined to be beneficial on the commitment date. Because the Series B Preferred Stock was perpetual with no
stated maturity date, and the conversions could occur any time from the date of issuance, the Company immediately recorded non-cash stock-based
compensation of $3,451,032 related to the beneficial conversion feature arising from the issuance of Series B Preferred Stock.
Shares issued for services
On January 6, 2021, the Company issued 100,000
shares of its common stock for business development services rendered. These shares were valued at $10,000, or $0.10 per common share,
based on the quoted closing price of the Company’s common stock on the measurement date.
On February 1, 2021, the Company issued an aggregate
of 900,000 shares of its common stock for business development, advisory and consulting services rendered and to be rendered. These shares
were valued at $70,200, or $0.078 per common share, based on the quoted closing price of the Company’s common stock on the measurement
date and will be amortized into stock-based consulting fees over the term of the agreement or vesting period.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
On March 8, 2021, the Company issued an aggregate
of 750,000 shares of its common stock for business development and consulting services rendered and to be rendered. These shares were
valued at $49,500, or $0.066 per common share, based on the quoted closing price of the Company’s common stock on the measurement
date and will be amortized into stock-based consulting fees over the term of the agreement or vesting period.
On March 8, 2021, the Company agreed to grant
restricted stock awards for an aggregate of 2,500,000 common shares of the Company which were valued at $165,000, or $0.066 per common
share, based on the quoted closing price of the Company’s common stock on the measurement date. These shares will vest on May 1,
2022. In connection with these shares, the Company will record stock-based compensation over the vesting period.
On March 19, 2021, the Company issued 944,767
shares of its common stock pursuant to the terms of a Notice of Separation and General Release Agreement. These shares were valued at
$55,741, or $0.059 per common share, based on the quoted closing price of the Company’s common stock on the measurement date.
On April 7, 2021, the Company issued 2,500,000
shares of its common stock for investor relations services to be rendered. These shares were valued at $135,000, or $0.054 per common
share, based on the quoted closing price of the Company’s common stock on the measurement date. In connection with these shares,
the Company will record stock-based professional fees over the three-month agreement term.
Shares issued for cashless warrant exercise
On January 7, 2021, the Company issued 1,008,000
shares of its common stock in connection with the cashless exercise of 1,050,000 warrants. The exercise price was based on contractual
terms of the related warrant.
NOTE 16 – RESTATEMENT
On April 11, 2022, the Company’s management
determined that the Company’s consolidated financial statements for the year ended December 31, 2020 included herein should be restated
because management determined that it had overstated its sales and bad debt expense in its consolidated financial statements for the year
ended December 31, 2020.
Based on management’s analysis, the Company
determined that a sale in the amount of $102,569 that was recorded in December 2020 did not meet the Company’s revenue recognition
policy pursuant to ASC 606 and should not have been reflected as a sale. Additionally, in the same period, in connection with the Company’s
analysis of collectability, the Company recorded a bad debt allowance and a related bad debt expense of $102,569. Since the sale and related
allowance for bad debt should not have been recorded, the Company is restating its consolidated financial statements to reduce sales and
bad debt expense by $102,569.
Accordingly, the Company’s consolidated
statement of operations and cash flows for the year ended December 31, 2020 have been restated herein. The effect of correcting this error
in the Company’s consolidated financial statements on December 31, 2020 and for the year ended December 31, 2020 are summarized
and shown in the table as follows:
Consolidated Statement of Operations:
| | |
As Previously
Reported | | |
Adjustments | | |
As Restated | |
| Sales | |
$ | 658,432 | | |
$ | (102,569 | ) | |
$ | 555,863 | |
| | |
| | | |
| | | |
| | |
| Operating Expenses: | |
| | | |
| | | |
| | |
| General and administrative expenses - bad debt expense | |
| 588,302 | | |
| (102,569 | ) | |
| 485,733 | |
| Total Operating Expenses | |
| 4,892,959 | | |
| (102,569 | ) | |
| 4,790,390 | |
| | |
| | | |
| | | |
| | |
| Loss from Operations | |
$ | (4,477,033 | ) | |
$ | - | | |
$ | (4,477,033 | ) |
| | |
| | | |
| | | |
| | |
| Consolidated Statement of Cash Flows: | |
| | | |
| | | |
| | |
| Net loss | |
$ | (4,434,443 | ) | |
$ | - | | |
$ | (4,434,443 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | | |
| | |
| Bad debt expense | |
| 202,480 | | |
| (102,569 | ) | |
| 99,911 | |
| Change in operating assets and liabilities: | |
| | | |
| | | |
| | |
| Accounts receivable | |
| (130,188 | ) | |
| 102,569 | | |
| (27,619 | ) |
| | |
| | | |
| | | |
| | |
| NET CASH USED IN OPERATING ACTIVITIES | |
$ | (1,783,027 | ) | |
$ | - | | |
$ | (1,783,027 | ) |
F-37