UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from _____ to _____
Commission File No.
(Exact name of Registrant as Specified in its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | |
| (Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
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.
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 (Section 232.405
of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or, an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company “, and “emerging growth company”, in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
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
is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No
There were
C-BOND SYSTEMS, INC.
FORM 10-Q
SEPTEMBER 30, 2023
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Contract assets | ||||||||
| Total Current Assets | ||||||||
| OTHER ASSETS: | ||||||||
| Property and equipment, net | ||||||||
| Right of use asset, net | ||||||||
| Intangible asset, net | ||||||||
| Goodwill | ||||||||
| Security deposit | ||||||||
| Total Other Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Convertible note payable, net of discount - current portion | $ | $ | ||||||
| Notes payable, net of discount - current portion | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Accrued interest payable - related party | ||||||||
| Accrued compensation | ||||||||
| Contract liabilities | ||||||||
| Lease liabilities, current portion | ||||||||
| Total Current Liabilities | ||||||||
| LONG-TERM LIABILITIES: | ||||||||
| Convertible notes payable, net of current portion | ||||||||
| Notes payable, net of current portion and discount | ||||||||
| Note payable - related party | ||||||||
| Lease liabilities, net of current portion | ||||||||
| Total Long-term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (See Note 10) | ||||||||
| Series B convertible preferred stock: $ | ||||||||
| Series C convertible preferred stock: $ | ||||||||
| SHAREHOLDERS’ DEFICIT: | ||||||||
| Preferred stock: $ | ||||||||
| Common stock: $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total C-Bond Systems, Inc. shareholders’ deficit | ( | ) | ( | ) | ||||
| Noncontrolling interest | ||||||||
| Total Shareholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Shareholders’ Deficit | $ | $ | ||||||
See accompanying unaudited notes to the unaudited consolidated financial statements.
1
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| SALES: | $ | $ | $ | $ | ||||||||||||
| COST OF SALES (excluding depreciation expense) | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Compensation and related benefits (including stock-based compensation of $ | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Professional fees | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Operating Expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER OPERATING INCOME: | ||||||||||||||||
| Gain on sale of product line | - | |||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ||||||||||
| OTHER INCOME (EXPENSES): | ||||||||||||||||
| Gain (loss) on debt extinguishment, net | - | ( | ) | |||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense - related party | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Other Income (Expenses), net | ( | ) | ( | ) | ( | ) | ||||||||||
| NET INCOME (LOSS) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net (income) loss of subsidiary attributable to noncontrolling interest | ( | ) | ||||||||||||||
| Preferred stock dividend | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| NET INCOME (LOSS) PER COMMON SHARE: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying unaudited notes to the unaudited consolidated financial statements.
2
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(Unaudited)
| Additional | Total | |||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Noncontrolling | Shareholders’ | ||||||||||||||||||||
| # of Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Common stock issued for cash and accrued compensation | ||||||||||||||||||||||||
| Common stock issued for professional fees | ||||||||||||||||||||||||
| Common stock issued for accrued compensation | ||||||||||||||||||||||||
| Common stock issued for conversion of Series C preferred stock | ||||||||||||||||||||||||
| Preferred stock dividends and deemed dividend | - | ( | ) | ( | ) | |||||||||||||||||||
| Accretion of stock-based compensation | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||
| Common stock issued for professional fees | ||||||||||||||||||||||||
| Common stock issued for compensation | ||||||||||||||||||||||||
| Common stock issued for conversion of Series C preferred stock | ||||||||||||||||||||||||
| Common stock issued for conversion of debt, accrued interest and fees | ||||||||||||||||||||||||
| Preferred stock dividends and deemed dividend | - | ( | ) | ( | ) | |||||||||||||||||||
| Accretion of stock-based compensation | - | |||||||||||||||||||||||
| Net income | - | ( | ) | |||||||||||||||||||||
| Balance, June 30, 2023 | ( | ) | ( | ) | ||||||||||||||||||||
| Common stock issued for professional fees | ||||||||||||||||||||||||
| Common stock issued for conversion of Series C preferred stock | ||||||||||||||||||||||||
| Preferred stock dividends and deemed dividend | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Additional | Total | |||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Noncontrolling | Shareholders’ | ||||||||||||||||||||
| # of Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Common stock issued for accounts payable | ||||||||||||||||||||||||
| Common stock issued for compensation | ||||||||||||||||||||||||
| Common stock issued for conversion of Series C preferred stock | ||||||||||||||||||||||||
| Common stock issued in connection with debt | ||||||||||||||||||||||||
| Preferred stock dividends and deemed dividend | - | ( | ) | ( | ) | |||||||||||||||||||
| Accretion of stock-based compensation | - | |||||||||||||||||||||||
| Beneficial conversion charge for issuance of Series B preferred shares for accrued compensation recorded as stock-based compensation | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||
| - | ||||||||||||||||||||||||
| Common stock issued for professional fees | ||||||||||||||||||||||||
| Common stock issued for conversion of Series C preferred stock | ||||||||||||||||||||||||
| Common stock issued in connection with debt | ||||||||||||||||||||||||
| Preferred stock dividends and deemed dividend | - | ( | ) | ( | ) | |||||||||||||||||||
| Accretion of stock-based compensation | - | |||||||||||||||||||||||
| Relative fair value of warrants issued in connection with debt | - | |||||||||||||||||||||||
| Beneficial conversion feature on convertible debt | - | |||||||||||||||||||||||
| Beneficial conversion feature buyback related to debt extinguishment | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||
| Common stock issued for compensation | ( | ) | ||||||||||||||||||||||
| Common stock issued for professional fees | ||||||||||||||||||||||||
| Common stock issued in connection with debt | ||||||||||||||||||||||||
| Preferred stock dividends and deemed dividend | - | ( | ) | ( | ) | |||||||||||||||||||
| Accretion of stock-based compensation | - | |||||||||||||||||||||||
| Beneficial conversion feature on convertible debt adjustment | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
See accompanying unaudited notes to the unaudited consolidated financial statements.
3
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Amortization of debt discount to interest expense | ||||||||
| Interest expense for put premium on convertible notes | ||||||||
| Non-cash interest expense from fees on debt conversion | ||||||||
| Stock-based compensation | ||||||||
| Stock-based professional fees | ||||||||
| Bad debt (recovery) expense | ( | ) | ||||||
| Non-cash (gain) loss on debt extinguishment and inducement expense | ( | ) | ||||||
| Gain from sale of Nanoshield product line | ( | ) | ||||||
| Lease costs | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Contract assets | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued expenses | ||||||||
| Accrued interest - related party | ( | ) | ||||||
| Accrued compensation | ||||||||
| Contract liabilities | ||||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Proceeds from the sale of Nanoshield product line | ||||||||
| NET CASH PROVIDED BY INVESTING ACTIVITIES | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from sale of common stock | ||||||||
| Proceeds from note payable - related party | ||||||||
| Repayment of note payable - related party | ( | ) | ||||||
| Proceeds from notes payable | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Proceeds from convertible notes payable | - | |||||||
| Repayment of convertible notes payable | ( | ) | ||||||
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | ( | ) | ||||||
| NET INCREASE (DECREASE) IN CASH | ( | ) | ||||||
| CASH, beginning of period | ||||||||
| CASH, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Common stock issued as prepaid for services | $ | $ | ||||||
| Common stock issued for accrued compensation | $ | $ | ||||||
| Series B preferred stock issued for accrued compensation | $ | $ | ||||||
| Preferred stock dividend accrued | $ | $ | ||||||
| Deemed dividend related to ratchet provision | $ | $ | ||||||
| Increase in debt discount and paid-in capital for shares issued with convertible debt | $ | $ | ||||||
| Increase in debt discount and paid-in capital for warrants issued with convertible debt | $ | $ | ||||||
| Common stock issued for accounts payable | $ | $ | ||||||
| Conversion of series C preferred stock to common stock | $ | $ | ||||||
| Conversion of notes payable and accrued interest to common stock | $ | $ | ||||||
| Increase in right of use and lease liability | $ | $ | ||||||
See accompanying unaudited notes to the unaudited consolidated financial statements.
4
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
NOTE 1 – NATURE OF ORGANIZATION
Nature of Organization
C-Bond Systems, Inc., together with 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 primary focus is in the multi-billion-dollar glass and window film industry with target markets in the United States and internationally. During the nine months ended September 30, 2023 and 2022, the Company operated in two segments: C-Bond Transportation Solutions and Patriot Glass Solutions. C-Bond Transportation Solutions sold a windshield strengthening, water repellent solution called C-Bond nanoShield™ through May 8, 2023, the date that the nanoShield product line and related technologies were sold (see Note 16). Patriot Glass Solutions sells multi-purpose glass strengthening primer and window film mounting solutions, including C-Bond BRS, a ballistic-resistant film system, and C-Bond Secure, a forced entry system.
On June 30, 2021, the Company entered into a Share
Exchange Agreement and Plan of Reorganization (the “Exchange Agreement”) with (i) Mobile Tint LLC, a Texas limited liability
company doing business as A1 Glass Coating (“Mobile”), (ii) the sole member of Mobile (the “Mobile Shareholder”),
and (iii) Michael Wanke as the Representative of the Mobile Shareholder. Pursuant to the Exchange Agreement, the Company agreed to acquire
On May 8, 2023, the Company entered into an Asset Purchase Agreement (“APA”) with Apex Protect GPS, LLC (the “Buyer”), whereby the Company sold its C-Bond nanoShield™ business, including intangible assets, intellectual property, work in process, furniture, fixtures, equipment, inventory and other physical assets of the Company’s C-Bond nanoShield division (the “Assets”) to the Buyer. Accordingly, the Company assigned, transferred and delivered to the Buyer, free and clear of all liens, all of the Assets. Following the Closing, the Parties entered into an Assignment and Agreement to Re-Execute (“Assignment”) on June 15, 2023, by and among the Company (“Seller”); Apex Protect GPS, LLC, (“Assignor”) and CB Nanoshield, LLC, (“Assignee”), whereby the Assignor assigned all its right to the (i) APA; (ii) Bill of Sale (iii) IP Agreements; and (iv) and any memorandums, schedules and exhibits related to the foregoing to Assignee. The Seller and Assignee also entered into a Lease and Assignment and Assumption Agreement on June 15, 2023 (the “Assignment Agreement”), wherein the Seller assigned to Assignee, and Assignee took assignment from the Seller, of the lease for the premises located at 6035 South Loop East, Houston, Texas 77033 (the “Lease”) pursuant to the Assignment Agreement (See Note 16).
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The Company’s unaudited consolidated financial
statements include the financial statements of its wholly owned subsidiary, C-Bond Systems, LLC, and its
Management acknowledges its responsibility for the preparation of the accompanying unaudited condensed consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its financial position and the results of its operations for the periods presented. The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) for interim financial information and with the instructions Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.
Certain information and note disclosure normally included in consolidated financial statements prepared in accordance with U.S. GAAP has been condensed or omitted from these statements pursuant to such accounting principles and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to the consolidated financial statements for the year ended December 31, 2022 of the Company which were included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2023.
5
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Going Concern
These unaudited consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments
in the normal course of business. As reflected in the accompanying unaudited consolidated financial statements, the Company had net income
of $
Use of Estimates
The preparation of unaudited consolidated financial statements in conformity with U.S. GAAP 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. Estimates during the nine months ended September 30, 2023 and 2022 include estimates for allowance for doubtful accounts on accounts receivable, the estimates for obsolete or slow moving inventory, estimates used in the calculation of progress towards completion on uncompleted jobs, the useful life of property and equipment, assumptions used in assessing impairment of long-term assets, the estimate of the fair value lease liability and related right of use asset, the valuation of redeemable and mandatorily redeemable preferred stock, the value of beneficial conversion features and deemed dividends, the valuation allowances for deferred tax assets, and the fair value of non-cash equity transactions.
Fair Value of Financial Instruments and Fair Value Measurements
The carrying amounts reported in the unaudited consolidated balance sheets for cash, accounts receivable, contract assets and liabilities, notes payable, convertible note payable, accounts payable, accrued expenses, accrued compensation, and lease liabilities approximate their fair market value based on the short-term maturity of these instruments.
The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Board’s (the “FASB”) accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with Accounting Standards Codification (“ASC”) Topic 820.
ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
Risks and Uncertainties
The Company maintains its cash in bank and financial
institution deposits that at times may exceed federally insured limits. On September 30, 2023, the Company had cash in bank in excess
of FDIC insured levels of $
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 had no cash equivalents as of September 30, 2023 and December 31, 2022.
6
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Accounts Receivable
The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized as general and administrative expense.
Inventory
Inventory, consisting of raw materials and finished goods, are stated at the lower of cost and net realizable value utilizing the first-in, first-out (FIFO) method. A reserve is established when management determines that certain inventories may not be saleable. If inventory costs exceed the 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
Goodwill and Intangible Assets
Goodwill represents the future economic benefit
arising from other assets acquired that could not be individually identified and separately recognized. Any goodwill arising from the
Company’s acquisition is attributable to the value of the potential expanded market opportunity with new customers. Intangible assets
may have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized on a straight-line
basis over their economic or legal life, whichever is shorter. The Company’s amortizable intangible assets are being amortized over
a useful life of
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 had certain financial instruments that were embedded derivatives. The Company evaluated 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.
Warranty Liability
The Company provides limited warranties on its
products for product defects for periods ranging from 12 months to the life of the product. Warranty costs may include the cost of product
replacement, refunds, labor costs and other costs. Allowances for estimated warranty costs are recorded during the period of sale. The
determination of such allowances requires the Company to make estimates of product warranty claim rates and expected costs to repair
or to replace the products under warranty. The Company currently establishes warranty reserves based on historical warranty costs for
each product line combined with liability estimates based on the prior 12 months’ sales activities. If actual return rates and/or
repair and replacement costs differ significantly from the Company’s estimates, adjustments to recognize additional cost of sales
may be required in future periods. Historically the warranty accrual and the expense amounts have been immaterial. The warranty liability
is included in accrued expenses on the accompanying unaudited consolidated balance sheets and amounted to $
7
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Beneficial Conversion Feature
Convertible debt includes conversion terms that are considered in the money compared to the market price of the stock on the date of the related agreement. The Company calculates the beneficial conversion feature and records a debt discount with the amount being amortized to interest expense over the term of the note.
Revenue Recognition
The Company follows ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). This standard establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASC 606 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and requires certain additional disclosures.
The Company sells its products, which include standard warranties, primarily to distributors and authorized dealers. Product sales are recognized at a point in time when the product is shipped to the customer and title is transferred and are recorded net of any discounts or allowances. The warranty does not represent a separate performance obligation.
Revenues from contracts for the distribution and installation of window film solutions are recognized over time on the basis of the Company’s estimates of the progress towards completion of contracts using various output or input methods depending on the type of contract terms including (1) the ratio of number of labor hours spent compared to the number of estimated labor hours to complete a job, (2) using the milestone method, or (3) using a units completed method. These methods are used because management considers these to be the best available measure of progress on these contracts. We use the same method for similar types of contracts. The asset, “contract assets” represents revenues recognized in excess of amounts billed. The liability, “contract liabilities,” represents billings in excess of revenues recognized.
Cost of Sales
Cost of sales includes inventory costs, packaging costs and warranty expenses.
Cost of revenues from fixed-price contracts for the distribution and installation of window film solutions include all direct material, sub-contractor, labor and certain other direct costs, as well as those indirect costs related to contract performance, such as indirect labor and fringe benefits. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability may result in revisions to cost and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period.
Shipping and Handling Costs
Shipping and handling costs incurred for product
shipped to customers are included in general and administrative expenses and amounted to $
8
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
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. During the nine months ended September 30, 2023 and 2022, research and development costs incurred in the development of
the Company’s products were $
Advertising Costs
The Company may participate in various advertising
programs. All costs related to advertising of the Company’s products are expensed in the period incurred. For the nine months ended
September 30, 2023 and 2022, advertising costs charged to operations were $
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 ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of September 30, 2023 and December 31, 2022, 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, 2017. The Company recognizes interest and penalties related to uncertain income tax positions in other expenses. However, no such interest and penalties were recorded as of September 30, 2023 and December 31, 2022.
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 the FASB’s Accounting Standards Update (“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. 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 warrants (using the treasury stock method) and shares issuable upon conversion of preferred shares and convertible notes payable (using the as-if converted method). Stock options and warrants were excluded from the calculation of diluted shares as they were anti-dilutive. These common share equivalents may be dilutive in the future.
9
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income (loss) per common share - basic: | ||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Weighted average common shares outstanding – basic | ||||||||||||||||
| Net income (loss) per common share – basic | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Net income (loss) per common share - diluted: | ||||||||||||||||
| Net income (loss) attributable to common shareholders - basic | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Add: preferred stock dividends | ||||||||||||||||
| Add: interest of convertible debt | - | |||||||||||||||
| Numerator for income (loss) per common share – diluted | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Weighted average common shares outstanding – basic | ||||||||||||||||
| Add: dilutive shares related to: | ||||||||||||||||
| Convertible debt | - | |||||||||||||||
| Series B preferred | - | |||||||||||||||
| Series C preferred | - | |||||||||||||||
| Weighted average common shares outstanding – diluted | ||||||||||||||||
| Net income (loss) per common share – diluted | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
For the three months ended September 30, 2023
and for the three and nine months ended September 30, 2022, 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. For the nine months
ended September 30, 2023, stock options and warrants were excluded from the computation of diluted common shares outstanding as they
would have an anti-dilutive impact on the Company’s net income.
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Stock options | ||||||||
| Warrants | ||||||||
| Series B preferred stock | ||||||||
| Series C preferred stock | ||||||||
| Convertible debt | ||||||||
Segment Reporting
During the nine months ended September 30, 2023 and 2022, the Company operated in two reportable business segments which consisted of (1) the manufacture and sale of a windshield strengthening water repellent solution as well as disinfection products, and the sale of multi-purpose glass strengthening primer and window film mounting solutions, including ballistic-resistant film systems and a forced entry system, and (2) the distribution and installation of window film solutions. The Company’s reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations and locations.
10
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Leases
The Company accounts for leases in accordance with ASC 842. The lease standard requires certain leases to be reported on the consolidated balance sheets as right-of-use assets and lease liabilities. The Company elected the practical expedients permitted under the transition guidance of this standard that retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. The Company does not reassess whether any contracts entered into prior to adoption are leases or contain leases.
The Company categorizes leases with contractual
terms longer than twelve months as either operating or finance. Finance leases are generally those leases that would allow the Company
to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance leases are recorded in property
and equipment, net. All other leases are categorized as operating leases. The Company’s leases generally have terms that range from
Lease liabilities are recognized at the present value of the fixed lease payments using a discount rate based on the Company’s current borrowing rate. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives, plus any direct costs from executing the leases. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.
When the Company has the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and it is reasonably certain that the Company will exercise the option, the Company considers these options in determining the classification and measurement of the lease. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease.
Noncontrolling Interest
The Company accounts for noncontrolling interest in accordance with ASC Topic 810-10-45, which requires the Company to present noncontrolling interests as a separate component of total shareholders’ deficit on the consolidated balance sheets and the consolidated net loss attributable to its noncontrolling interest be clearly identified and presented on the face of the consolidated statements of operations.
Recent Accounting Pronouncements
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 U.S. 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. The Company is currently evaluating the impact of the adoption of the standard on the consolidated financial statements.
11
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changes how entities will measure credit losses for most financial assets, including accounts receivable. ASU No. 2016-13 will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. On November 15, 2019, the FASB delayed the effective date of Topic 326 for certain small public companies and other private companies until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities. The adoption of Topic 326 on January 1, 2023 did not have a material impact on the Company’s unaudited consolidated financial statements.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The guidance was issued as improvements to ASU No. 2016-13 described above. The vintage disclosure changes require an entity to disclose current-period gross write-offs by year of origination for financing receivables. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The amendments should be applied prospectively. Early adoption of the amendments is permitted, including adoption in an interim period. The adoption of ASU No. 2022-02 on January 1, 2023 did not have a material impact on the Company’s unaudited 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
| September 30, 2023 | December 31, 2022 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
For the nine months ended September 30, 2023 and 2022, bad debt
(recovery) expense amounted to $(
NOTE 4 – INVENTORY
| September 30, 2023 | December 31, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Inventory | ||||||||
| Less: allowance for obsolete or slow-moving inventory | ||||||||
| Inventory, net | $ | $ | ||||||
During the nine months ended September 30, 2023 and 2022, the Company did not record any allowance for slow moving inventory.
12
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
NOTE 5 – PROPERTY AND EQUIPMENT
| Useful Life | September 30, 2023 | December 31, 2022 | ||||||||
| Machinery and equipment | $ | $ | ||||||||
| Furniture and office equipment | ||||||||||
| Vehicles | ||||||||||
| Leasehold improvements | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Property and equipment, net | $ | $ | ||||||||
For the nine months ended September 30, 2023 and
2022, depreciation expense is included in general and administrative expenses and amounted to $
NOTE 6 – INTANGIBLE ASSETS AND GOODWILL
| Useful life | September 30, 2023 | December 31, 2022 | ||||||||
| Customer relations | $ | $ | ||||||||
| Non-compete | ||||||||||
| Trade name | ||||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||
| Intangible assets, net | $ | $ | ||||||||
| Useful life | September 30, 2023 | December 31, 2022 | ||||||||
| Goodwill | $ | $ | ||||||||
For the nine months ended September 30, 2023 and
2022, amortization expense of intangible assets amounted to $
| Twelve months ending September 30: | Amount | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| Total | $ | |||
NOTE 7 – CONVERTIBLE NOTES PAYABLE
Mercer Convertible Debt
On October 15, 2021, the Company entered into
a Securities Purchase Agreement (the “SPA”) with Mercer Street Global Opportunity Fund, LLC (the “Investor”),
pursuant to which the Company issued and sold to Investor a
13
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Pursuant to the SPA, the Investor agreed to purchase
an additional $
The Initial Note matured 12 months after issuance,
bore interest at a rate of
The Initial Note may be prepaid at any time for
the first 90 days at face value plus accrued interest. From day 91 through day 180, the Note may be prepaid in an amount equal to
The Note and Warrants contain conversion limitations
providing that a holder thereof may not convert the Notes or exercise the Warrants to the extent (but only to the extent) that, if after
giving effect to such conversion, the holder or any of its affiliates would beneficially own in excess of
In connection with the SPA, the Company entered into a Registration Rights Agreement dated October 15, 2021 (the “Registration Rights Agreement”), with the Investor pursuant to which it is obligated to file a registration statement with the SEC within 45 days after the date of the agreement to register the resale by the Investor of the conversion shares and warrant shares, and use all commercially reasonable efforts to have the registration statement declared effective by the SEC within 60 days after the registration statement is filed.
Upon the occurrence of an event of default under the Notes, the Investor has the right to be prepaid at 125% of the outstanding principal balance and accrued interest, and interest accrues at 18% per annum. Events of default included, among other things,
| (i) | any default in the payment of (A) principal and interest payment under this Note or any other Indebtedness, or (B) Late Fees, liquidated damages and other amounts owing to the Holder of this Note, as and when the same shall become due and payable (whether on a Conversion Date, or the Maturity Date, or by acceleration or otherwise), which default, solely in the case of a default under clause (B) above, is not cured within five Trading Days; |
| (ii) | the Company or any Subsidiary shall be subject to a Bankruptcy Event; |
| (iii) | the SEC suspends the Common Stock from trading or the Company’s Common Stock is not listed or quoted for trading on a Trading Market which failure is not cured, if possible to cure, within the earlier to occur of 10 Trading Days after notice of such failure is sent by the Holder or by any other Holder to the Company or the transfer of shares of Common Stock through the Depository Trust Company System is no longer available or is subject to a “chill” by the Depository Trust Company or any successor; |
| (iv) | the Company shall be a party to any Change of Control Transaction or shall agree to sell or dispose of all or in excess of 50% of its assets in one transaction or a series of related transactions (whether or not such sale would constitute a Change of Control Transaction); |
| (v) | the Company incurs any Indebtedness other than Permitted Indebtedness; |
| (vi) | the Company restates any financial statements included in its reports or registration statements filed pursuant to the Securities Act or the Exchange Act for any date or period from two years prior to the Original Issue Date of this Note and until this Note is or the Warrants issued to the Holder are no longer outstanding, if following first public announcement or disclosure that a restatement will occur the VWAP on the next Trading Day is 20% less than the VWAP on the prior Trading Day. For the purposes of this clause the next Trading Day if an announcement is made before 4:00 pm New York, NY time is either the day of the announcement or the following Trading Day. The Company filed a Report on Form 8-K announcing the restatement of its financial statements for the year ended December 31, 2020. Following the first public announcement or disclosure that a restatement occurred, the VWAP on the next Trading Day was not 20% less than the VWAP on the prior Trading Day and accordingly, the default provisions were not triggered. |
14
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
The Company has also granted the investor a 12-month
(or until the Notes are no longer outstanding) right to participate in specified future financings, up to a level of
On April 20, 2022, the Company and the Investor
entered into an Exchange Agreement (the “Exchange Agreement”). The original SPA remains in effect. Per the terms of the Exchange
Agreement, the Parties agreed to exchange (i) the Initial Note for a new Convertible Promissory Note (the “New Note”) and
(ii) the Initial Warrant for a new five-year warrant to purchase, in the aggregate,
On October 15, 2022, the due date of the New Note,
the New Note defaulted due to non-payment. Accordingly, the Company added a default penalty of $
In accordance with ASC 470-50, Debt Modifications
and Extinguishments, the Company performed an assessment of whether the Exchange Agreement transaction was deemed to be new debt, a modification
of existing debt, or an extinguishment of existing debt. The Company evaluated the April 20, 2022 Exchange Agreement for debt modification
and concluded that the debt qualified for debt extinguishment. On April 20, 2022, the Company agreed to reduce the conversion price from
$
The Company determined the transaction was considered
a debt extinguishment because the change in conversion price was substantial. Upon extinguishment, the Company had $
The Company uses the Binomial Valuation Model to determine the fair value of its stock warrants which requires the Company to make several key judgments including:
| ● | the value of the Company’s common stock; | |
| ● | the expected life of issued stock warrants; | |
| ● | the expected volatility of the Company’s stock price; | |
| ● | the expected dividend yield to be realized over the life of the stock warrants; and | |
| ● | the risk-free interest rate over the expected life of the stock warrants. |
15
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
The Company’s computation of the expected life of issued stock warrants was based on the simplified method as the Company does not have adequate exercise experience to determine the expected term. The interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The computation of volatility was based on the historical volatility of the Company’s common stock.
| 2022 | ||
| Dividend rate | ||
| Term (in years) | ||
| Volatility | ||
| Risk—free interest rate |
At any time this Note or any amounts accrued and
payable thereunder remain outstanding, the Company or any Subsidiary, as applicable, sells or grants any option to purchase or sells or
grants any right to reprice, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition),
any common stock or common stock equivalents entitling any Person to acquire shares of the Company’s common stock at an effective
price per share that is lower than the conversion price then in effect (such lower price, the “Base Conversion Price” and
each such issuance or announcement a “Dilutive Issuance”), then the conversion price shall be immediately reduced to equal
the Base Conversion Price. Such adjustment shall be made whenever such common stock or common stock equivalents are issued. On June 23,
2022, the Company issued common stock equivalents with an initial conversion price of $
Pursuant to the provisions of ASC 815-40 – Derivatives and Hedging – Contracts in an Entity’s Own Stock, the convertible note and related warrants issued in connection with the Mercer convertible note was analyzed and it was determined that the terms of the convertible note and warrants contained terms that were not considered derivatives.
16
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
1800 Diagonal Lending Convertible Debt
On November 9, 2022, the Company closed a Securities
Purchase Agreement dated November 4, 2022, with 1800 DIAGONAL LENDING LLC, a Virginia limited liability company, (“Diagonal”),
pursuant to which a Promissory Note (the “November 2022 Diagonal Note”) dated November 4, 2022, was made to Diagonal in the
aggregate principal amount of $
On December 27, 2022, the Company closed a Securities
Purchase Agreement dated December 27, 2022, with 1800 Diagonal pursuant to which a Promissory Note (“December 2022 Diagonal Note”)
dated December 27, 2022, was made to Diagonal in the aggregate principal amount of $
On March 17, 2023, the Company closed a Securities
Purchase Agreement dated November 4, 2022, with Diagonal pursuant to which a Promissory Note (the “March 2023 Diagonal Note”)
dated March 17, 2023, was made to Diagonal in the aggregate principal amount of $
The Company accounted for the November 2022 and
December 2022 Diagonal Notes as stock settled debt under ASC 480 and recorded an aggregate debt premium of $
For the nine months ended September 30, 2023 and
2022, amortization of debt discounts related to the convertible notes payable amounted to $
On September 30, 2023 and December 31, 2022, accrued
interest payable under the convertible notes discussed above amounted to $
| September 30, 2023 | December 31, 2022 | |||||||
| Convertible notes payable | $ | $ | ||||||
| Add: put premium | ||||||||
| Less: unamortized debt discount | ( | ) | ||||||
| Convertible notes payable, net | ||||||||
| Less: current portion of convertible notes payable | ( | ) | ( | ) | ||||
| Convertible notes payable – long-term | $ | $ | ||||||
17
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
NOTE 8 – NOTES PAYABLE
| September 30, 2023 | December 31, 2022 | |||||||
| Notes payable | $ | $ | ||||||
| Note payable – PPP note | ||||||||
| Total notes payable | ||||||||
| Less: unamortized debt discount | ( | ) | ( | ) | ||||
| Notes payable, net | ||||||||
| Less: current portion of notes payable, net of discount | ( | ) | ( | ) | ||||
| Notes payable – long-term | $ | $ | ||||||
Notes Payable
BOCO Investment Note
On November 14, 2018, the Company entered into
a Revolving Credit Facility Loan and Security Agreement (“Loan Agreement”) and a Secured Promissory Note (the “Note”)
with BOCO Investments, LLC (the “Lender”). Subject to and in accordance with the terms and conditions of the Loan Agreement
and the Note, the Lender agreed to lend to the Company up to $
Commencing on January 10, 2019 and on or before
the 10th day of each month thereafter, the Company should have paid Lender all interest accrued on outstanding principal under
the Loan Agreement and Notes as of the end of the month then concluded. Upon the occurrence of any Event of Default and at any time thereafter,
Lender may, at its option, declare any and all obligations immediately due and payable without demand or notice. 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. Through the date of repayment and settlement, the note balance due of $
18
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
In May 2023, the Company and the Lender entered
into a Debt Exchange and Release Agreement in regard to the $
On September 30, 2023 and December 31, 2022, the
principal amount due under this Note amounted to $
Mercer Street Global Opportunity Fund Notes
On March 14, 2022, the Company entered into an
Original Issue Discount Promissory Note and Security Agreement (the “March 2022 Note”) in the principal amount of $
On November 22, 2022, the Company entered into
a Promissory Note and Security Agreement (the “November 2022 Note”) in the principal amount of $
19
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
GS Capital Debt
On June 23, 2022, the Company entered into entered
into a Securities Purchase Agreement (“Agreement”) with GS Capital Partners, LLC (“GS Capital”), pursuant to which
a Promissory Note (the “GS Capital June 2022 Note”) was made to GS Capital in the aggregate principal amount of $
On September 30, 2023, the principal balance
due on the GS Capital Note and accrued interest payable amounted to $
On July 26, 2022, the Company closed a Securities
Purchase Agreement (“July 2022 Agreement”) with GS Capital, pursuant to which a Promissory Note (“GS Capital July 2022
Note”) was made to GS Capital in the aggregate principal amount of $
20
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
On September 6, 2022, the Company closed a Securities
Purchase Agreement (“September 2022 Agreement”) with GS Capital, pursuant to which a Promissory Note (“September 2022
Note”) was made to GS Capital in the aggregate principal amount of $
In connection with the Letter Agreement dated
December 15, 2022, in order to induce GS Capital to extend the due dates of the GS Capital Notes, the Company issued
In May 2023, the GS Capital June 2022 Note, the GS Capital July 2022 Note, and the September 2022 Note were paid in full without any default penalty (see Note 16).
Other Notes Payable
On May 10, 2021, the Company entered into a Loan
and Security Agreement (the “Loan Agreement”) and a Secured Promissory Note (the “Promissory Note”) in the amount
of $
On July 22, 2021, in connection with the acquisition
of Mobile Tint, the Company assumed vehicle and equipment loans in the amount of $
21
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
On November 8, 2022, the Company entered into
a Promissory Note (the “November 2022 Note”) with a lender investor (the “Private Investor”) in the principal
amount of $
On April 4, 2023, the Company entered into a Secured
Promissory Note (the “April 2023 Note”) in the amount of $
During the three months ended September 30, 2023,
in connection with the acquisition of a vehicle and an air conditioner unit, the Company entered into three vehicle and equipment loans
in the amount of $
For the nine months ended September 30, 2023 and
2022, amortization of debt discounts related to notes payable amounted to $
PPP Loan
On April 28, 2020, the Company entered into a
Paycheck Protection Program Promissory Note (the “PPP Note”) with respect to a loan of $
| September 30, | Amount | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total notes payable on September 30, 2023 | $ | |||
22
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
NOTE 9 – SHAREHOLDERS’ DEFICIT
Preferred Stock
Series B Preferred Stock
On December 12, 2019, the Company filed an Amendment
to its Articles of Incorporation to designate a series of preferred stock, the Series B Convertible Preferred Stock (the “Series
B”), with the Secretary of State of the State of Colorado. The Certificate of Designations established
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 $
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
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.
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.
23
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
The Company concluded that the Series B Preferred Stock represented an equity host and, therefore, the redemption feature of the Series B Preferred Stock was not considered to be clearly and closely related to the associated equity host instrument. However, the redemption features did not meet the net settlement criteria of a derivative and, therefore, were not considered embedded derivatives that required bifurcation. The Company also concluded that the conversion rights under the Series B Preferred Stock were clearly and closely related to the equity host instrument. Accordingly, the conversion rights feature on the Series B Preferred Stock were not considered an embedded derivative that required bifurcation. The conversion feature of the Series B Preferred Stock at the time of issuance was determined to be beneficial on the commitment date.
On January 6, 2022, the Board of Directors of
the Company agreed to satisfy $
On January 17, 2023, the Board of Directors of
the Company agreed to satisfy $
During the nine months ended September 30, 2023
and 2022, the Company accrued dividends of $
As of September 30, 2023, the net Series B Preferred
Stock balance was $
Series C Preferred Stock
On August 20, 2020, the Company filed an Amendment
to its Articles of Incorporation to designate a series of preferred stock, the Series C Convertible Preferred Stock (the “Series
C”), with the Secretary of State of the State of Colorado. The Certificate of Designations established
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 $
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
24
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
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.
Through April 28, 2021, each share of Series C
Preferred Stock was entitled to vote on all matters requiring shareholder vote. Each share of Series C Preferred Stock was 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.
On April 28, 2021, the Company filed an Amended and Restated Certificate of Designations of Preferences, Rights, and Limitations of Series
C Convertible Preferred Stock (the “Amended Certificate”). The Amended Certificate changed the voting rights of the Series
C Preferred Stock on any matters requiring shareholder approval or any matters on which the common shareholders are permitted to vote.
Series C Preferred Stock shall have no right to vote on any matters requiring shareholder approval or any matters on which the common
shareholders (or other preferred stock of the Company which may vote with the common shareholders) are permitted to vote. With respect
to any voting rights of the Series C Preferred Stock set forth herein, the Series C Preferred Stock shall vote as a class, each share
of Series C Preferred Stock shall have one vote on any such matter, and any such approval may be given via a written consent in lieu of
a meeting of the Holders of the Series C Preferred Stock. Any reference herein to a determination, decision or election being made by
the “Majority Holders” shall mean the determination, decision or election as made by Holders holding a majority of the issued
and outstanding shares of Series C Preferred Stock at such time. It also adjusts the conversion feature of the Series C Preferred Stock
so that any Holder of Series C Preferred Stock cannot convert any portion of the Series C in excess of that number of Series C Preferred
Stock that upon conversion would result in beneficial ownership by the Holder of more than
These Series C preferred stock issuances with redemption provisions that permit the issuer to settle in either cash or common stock, at the option of the holder, were evaluated to determine whether temporary or permanent equity classification on the consolidated balance sheet was appropriate. As per the terms of the Series C preferred stock agreements, Series C preferred stock is redeemable for cash and other assets on the occurrence of a deemed liquidation event. A deemed liquidation event includes a change of control which is not in the Company’s control. As such, since Series C preferred stock is redeemable upon the occurrence of an event that is not within the Company’s control, the Series C preferred stock is classified as temporary equity.
The Company concluded that the Series C Preferred Stock represented an equity host and, therefore, the redemption feature of the Series C Preferred Stock was not considered to be clearly and closely related to the associated equity host instrument. However, the redemption features did not meet the net settlement criteria of a derivative and, therefore, were not considered embedded derivatives that required bifurcation. The Company also concluded that the conversion rights under the Series C Preferred Stock were clearly and closely related to the equity host instrument. Accordingly, the conversion rights feature on the Series C Preferred Stock were not considered an embedded derivative that required bifurcation. The conversion feature of the Series C Preferred Stock at the time of issuance was determined to be beneficial on the commitment date.
On January 12, 2022, the Company issued
On April 20, 2022, the Company issued
25
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
During the three months ended March 31, 2023,
the Company issued
During the three months ended June 30, 2023, the
Company issued
During the three months ended September 30, 2023,
the Company issued
During the nine months ended September 30, 2023
and 2022, the Company accrued dividends of $
As of September 30, 2023, the net Series C Preferred
Stock balance was $
Common Stock
Common Stock Issued for Cash and Accrued Compensation
On January 17, 2023, the Company entered into
a Subscription Agreement with its Chairman and Chief Executive Officer, Scott R. Silverman (the “Subscription Agreement”),
whereby Mr. Silverman purchased
On January 17, 2023, Barry Edelstein, a member
of the Company’s Board of Directors, elected to convert $
Issuance of Common Stock for Services
Issuance of Common Stock for Professional Fees
2022
On June 7, 2022, the Company issued an aggregate
of
On June 24, 2022, the Company issued an aggregate
of
26
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
On July 1, 2022, the Company granted a restricted
stock award of
On July 15, 2022, the Company granted a restricted
stock award of
2023
On February 6, 2023, the Company issued
On April 3, 2023, the Company issued
On June 3, 2023, the Company issued
On September 3, 2023, the Company issued
During the nine months ended September 30, 2023
and 2022, the Company recorded stock-based professional fees of $
Issuance of Common Stock for Stock-Based Compensation
2022
On March 24, 2022, the Company granted restricted
stock awards of
On July 12, 2022, the Company granted a restricted stock award of
On August 12, 2022, the Company granted a restricted stock award of
27
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
2023
On June 7, 2023, the Company issued
During the nine months ended September 30, 2023
and 2022, aggregate accretion of stock-based compensation expense on granted common shares amounted to $
| Number of Non-Vested Shares | Weighted Average Grant Date Fair Value | |||||||
| Non-vested, December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Shares vested | ( | ) | ||||||
| Non-vested, September 30, 2023 | $ | |||||||
Common stock issued for Accounts Payable
On January 6, 2022, the Company issued
Common Stock Issued in Connection with Notes Payable
2022
In connection with the March 2022 Note, the Company
issued
In connection with the June 2022 GS Capital Note,
the Company issued
2023
During April and May 2023, the Company issued
In May 2023,
28
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Common Stock Issued for Conversion of Series C Preferred Stock
2022
On January 12, 2022, the Company issued
On April 20, 2022, the Company issued
2023
During the three months ended March 31, 2023,
the Company issued
During the three months ended June 30, 2023, the
Company issued
During the three months ended September 30, 2023,
the Company issued
Stock Options
For the nine months ended September 30, 2023 and
2022, the Company recorded no compensation expense related to stock options. Total unrecognized compensation expense related to unvested
stock options on September 30, 2023 amounted to $
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding, December 31, 2022 | $ | |||||||||||||||
| Exercised | ||||||||||||||||
| Balance Outstanding, September 30, 2023 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2023 | $ | $ | ||||||||||||||
Warrants
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding December 31, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Balance Outstanding September 30, 2023 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2023 | $ | $ | ||||||||||||||
29
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
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 |
| ● | 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,
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
30
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, the Company may be involved in litigation related to claims arising out of its operations in the normal course of business. As of September 30, 2023, other than discussed below, the Company is not involved in any other pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition, results of operations, or cash flows.
On January 20, 2022, we received an Order Directing
Examination and Designating Officers to Take Testimony (a “Formal Order”) from the SEC. The Formal Order authorizes that
an examination be made to determine whether a stop order should be issued under Section 8(d) of the Securities Act of 1933 with respect
to the Company’s Registration Statement on Form S-1, and any supplements and amendments thereto. The Formal Order indicates that
the Form S-1 may be deficient in that it may contain untrue statements of material fact or omit to state material facts necessary in
order to make the statements made, in light of the circumstances under which they were made, not misleading concerning, among other things,
the Company’s revenue and financial condition. On April 15, 2022, the Company filed an amendment to its Annual Report on Form 10-K
for the fiscal year ended December 31, 2020. The restatement had the cumulative effect of decreasing the Company’s reported revenue
for Fiscal 2020 by $
On March 8, 2021, a former officer of the Company resigned. Both parties alleged certain claims against the other, including certain compensation claims. Neither party has filed litigation. The Company intends to vigorously defend itself against any possible claims and assert any relevant claims against the former executive and believes it will prevail.
In July 2021, a former consultant of the Company
filed a small claims case for approximately $
Employment Agreements
On October 18, 2017,
| ● | 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 receipt of $
31
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Mr. Silverman’s employment agreement provides
that, in the event that his employment is terminated by the Company without “cause” (as defined in his employment agreement),
or if Mr. Silverman resigned for “good reasons” (as defined in his new employment agreement), subject to a complete release
of claims, he will be entitled to (i) retain all stock options previously granted; and (ii) receive any benefits then owed or accrued
along with
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 $
On July 21, 2021, the Company entered into the
Employment Agreement with Mr. Wanke, the President of Mobile, to serve as the President of C-Bond’s Safety Solutions Group. Under
the three-year Employment Agreement, Mr. Wanke will receive a base salary of $
On December 7, 2022, the Company’s board
of directors approved a bonus to certain officers in the aggregate amount of $
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 $
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
32
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
In 2015, pursuant to a subscription agreement,
C-Bond Systems, LLC issued
In 2016, pursuant to a subscription agreement,
C-Bond Systems, LLC issued
Option to purchase 20% of Mobile Tint
In connection with the Exchange Agreement with
Mobile and the Mobile Shareholder (See Note 1), the Company had the option to acquire the remaining
If the Company exercises the Option, the Company
shall acquire the Additional Units in exchange for (i) a number of shares of Company Common Stock equal to (a) the Share Value (as defined
below) divided by (b) the Additional Closing Share Price (as defined below) (the “Additional Closing Exchange Shares”), and
(ii) a cash payment equal to the Net Income (as below). “Total EBIT Value” shall mean
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 September 30, 2023, the Company had cash in bank in excess
of FDIC insured levels of $
Geographic Concentrations of Sales
During the nine months ended September 30, 2023 and 2022, all sales were in the United States.
33
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Customer Concentrations
For the nine months ended September 30, 2023,
one customer accounted for approximately
Vendor concentrations
Generally, the Company purchases substantially all of its inventory from five suppliers. The loss of these suppliers may have a material adverse effect on the Company’s consolidated results of operations and financial condition. However, the Company believes that, if necessary, alternate vendors could supply similar products in adequate quantities to avoid material disruptions to operations.
NOTE 12 – SEGMENT REPORTING
Through May 8, 2023, the date that the Company
entered into an Asset Purchase Agreement with Apex Protect GPS, LLC agreed to sell its C-Bond nanoShield™ business (See Note 16),
the Company operated in
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||||
| C-Bond | $ | - | $ | $ | $ | |||||||||||
| Mobile Tint | ||||||||||||||||
| Depreciation and amortization: | ||||||||||||||||
| C-Bond | - | |||||||||||||||
| Mobile Tint | ||||||||||||||||
| Interest expense: | ||||||||||||||||
| C-Bond | - | |||||||||||||||
| Mobile Tint | ||||||||||||||||
| Other (a) | ||||||||||||||||
| Net income (loss): | ||||||||||||||||
| C-Bond | ( | ) | ( | ) | ( | ) | ||||||||||
| Mobile Tint | ( | ) | ( | ) | ( | ) | ||||||||||
| Other (a) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||
| September 30, 2023 | December 31, 2022 | |||||||
| Identifiable long-lived tangible assets on September 30, 2023 and December 31, 2022 by segment: | ||||||||
| C-Bond | $ | $ | ||||||
| Mobile Tint | ||||||||
| $ | $ | |||||||
| (a) |
34
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
NOTE 13 – REVENUE RECOGNITION
In connection with the Company’s C-Bond segment, the revenue that the Company recognizes arises from purchase requests the Company receives from its customers. The Company’s performance obligations under purchase orders or by a verbal order correspond to each shipment of product that the Company makes to its customer under the purchase order or verbal order. As a result, each purchase order or verbal 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. In connection with the Company’s C-Bond segment, when the Company receives a purchase order or verbal 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 or verbal 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.
In connection with the Company’s Mobile Tint segment, the revenue that the Company recognizes arises from purchase requests the Company receives from its customers. The Company’s performance obligations under purchase order or a signed proposal correspond to each job for the distribution and installation of window film solutions. As a result, each purchase order or signed proposal generally may contain more than one performance obligation based on the specific job. 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 when the job or a specific portion of the job is completed. Once this occurs, the Company has satisfied its performance obligation and the Company recognizes revenue. Revenues from contracts for the distribution and installation of window film solutions are recognized over time on the basis of the Company’s estimates of the progress towards completion of contracts using various output of input methods including (1) the ratio of number of labor hours spent compared to the number of estimated labor hours to complete a job, (2) using the milestone method, or (3) using a units completed method. These methods are used because management considers these methods to be the best available measure of progress on these contracts.
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, labor costs, and freight. In the Company’s C-Bond contracts with customers, the Company allocates the entire transaction price to the sale of product to the customer, which is the basis for the determination of the relative standalone selling price allocated to each performance obligation. Returns of the Company’s product by its customers are permitted only when the product is not to specification and were not material for the nine months ended September 30, 2023 and 2022. Any sales tax, value added tax, and other tax the Company collects concurrently with its revenue-producing activities are excluded from revenue.
Revenue Disaggregation
| For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| C-Bond Secure multi-purpose and BRS ballistic resistant glass protection systems | $ | $ | ||||||
| C-Bond nanoShield solution sales (See Note 16) | ||||||||
| Disinfection products | ||||||||
| C-Bond installation and other services | ||||||||
| Window tint installation and sales recognized over time and sales of product | ||||||||
| Freight and delivery | ||||||||
| Total | $ | $ | ||||||
35
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
NOTE 14 – OPERATING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING LEASE LIABILITIES
In October 2019, the Company entered into an 18-month
lease agreement for the lease of office and warehouse space under a non-cancelable operating lease through May 31, 2021. From the lease
commencement date of December 1, 2019 until November 30, 2020, monthly rent shall be $
In connection with the 2021 Exchange Agreement
between in the Company and Mobile Tint, the Company was named as guarantor (“Guarantor”) of a Commercial Lease Agreement dated
July 21, 2021, by and between landlord MDW Management, LLC, a company owned by Mr. Wanke and his wife and tenant Mobile Tint, LLC d/b/a
A-1 Glass (the “Lease”). The term of the Lease is 60 months, at a minimum monthly rent of $
In September 2021,
In February 2022,
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 months or less. Upon signing of new leases for property and equipment, the Company analyzed the new leases and determined it is required to record a lease liability and a right of use asset on its consolidated balance sheets, at fair value.
During the nine months ended September 30, 2023
and 2022, in connection with its property operating leases, the Company recorded rent expense of $
The significant assumption used to determine the
present value of the lease liabilities in February 2022 was discount rates ranging from
| September 30, 2023 | December 31, 2022 | |||||||
| Office leases and office equipment right of use assets | $ | $ | ||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Balance of ROU assets | $ | $ | ||||||
36
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
| September 30, 2023 | December 31, 2022 | |||||||
| Lease liabilities related to office leases right of use assets | $ | $ | ||||||
| Less: current portion of lease liabilities | ( | ) | ( | ) | ||||
| Lease liabilities – long-term | $ | $ | ||||||
| Twelve months ended September 30, | Amount | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| Total minimum non-cancelable operating lease payments | ||||
| Less: discount to fair value | ( | ) | ||
| Total lease liability on September 30, 2023 | $ | |||
NOTE 15 – RELATED PARTY TRANSACTIONS
Note Payable - Related Party
On May 2, 2022, the Company entered into a Promissory
Note (the “May 2022 Note”) in the principal amount of $
NOTE 16 – SALE OF NANOSHIELD PRODUCT LINE
On May 8, 2023, the Company entered into an Asset
Purchase Agreement (the “APA”) with Apex Protect GPS, LLC (the “Buyer”), a Texas limited liability company, whereby
the Company agreed to sell its C-Bond nanoShield™ business, including intangible assets, intellectual property, work in process,
furniture, fixtures, equipment, inventory and other physical assets of the Company’s C-Bond nanoShield division (the “Assets”)
to the Buyer for a purchase price of $
The Assets were sold and transferred to buyer by means of (i) with respect to the physical assets, a Bill of Sale”); and (ii) with respect to intangible assets or intellectual property, a Patent and Trademark Assignment Agreement, a Patent and Know-How License Agreement, and a Patent License-Back Agreement.
The APA contains customary representations, warranties, and covenants by each party including, among other things, that no bankruptcy or similar insolvency proceeding under state or federal law has been filed, or is currently being contemplated, with respect to the Company; that the Company has provided the Seller a true and accurate list of each of the following items of Intellectual Property which comprises a part of the Assets, including, among other things, patents and trademarks (the “Sold Intellectual Property”); and that the Company has good, valid, and legal title to, and is the sole and exclusive owner of all rights, title and interest in and to, the Sold Intellectual Property, free and clear of all liens.
37
C-BOND SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(UNAUDITED)
Under the terms of the APA, the Parties entered into a Patent and Trademark Assignment Agreement, whereby the Company conveyed, transferred, and assigned to Buyer, among other assets, the C-Bond nanoShield trademark (the “Trademark”) and U.S. Patent No. 11,155,491 B2 (the “C-Bond nanoShield Patent”), and the Company agreed to execute and deliver an assignment of the Trademark and C-Bond nanoShield Patent, for recording with governmental authorities including, but not limited to, the U.S. Patent and Trademark Office.
The Parties also entered into a Patent and Know-How License Agreement whereby the Company granted to the Buyer a non-transferable, non-sub-licensable, exclusive right and license to four patents owned by the Company and licensed know-how to make, have made, use, offer to sell, sell and import glass and other products and components used in or in relation to the manufacture and operation of civilian, agricultural or military vehicles and equipment (the “Licensed Product”) in the United States and its legal territories.
Lastly, the Parties entered into a Patent License-Back Agreement whereby the Buyer agreed to grant to the Company a perpetual, non-exclusive, worldwide, royalty-free, non-transferable, non-sublicensable license to the C-Bond nanoShield Patent, for all uses and applications except for any that involve, market to, sell to, do business with, provide related goods or services to, or are consumed by any uses and applications of the patented technology within the civilian or military automotive, vehicle and/or transportation industry. The Patent License-Back Agreement also stipulates that all improvements made by either Party to the technology covered by the C-Bond nanoShield Patent shall be owned by the Buyer. In the event that the Company desires to utilize such improvements to the C-Bond nanoShield Patent made by either Party, the Parties hereby agree that they will negotiate in good faith a separate license agreement having pricing and other terms and conditions that are mutually acceptable to both Parties.
Following the Closing, the Parties completed a transaction wherein the Company assigned to Buyer, and Buyer took assignment from the Company, the lease for the premises located at 6035 South Loop East, Houston, Texas 77033 (the “Lease”) pursuant to a lease assignment and assumption agreement as agreed to by the Parties and the lessor pursuant to the Lease.
In connection with the APA, the Company received
net proceeds of $
| 1) | The
Company repaid and settled the BOCO Investments, LLC Note (See Note 8) with a principal balance of $ |
| 2) | The
Company repaid GS Capital Partners, LLC $ |
| 3) | The
Company repaid Mercer Street Global Opportunity Fund, LLC (“Mercer”) $ |
| 4) | The
Company repaid Jeff Badders $ |
| 5) | The
Company repaid 1800 Diagonal Lending, LLC $ |
In connection with the sale of the C-Bond nanoShield
product line, the Company recorded a gain from the sale of the product line of $
38
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes and other financial information included in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading “Cautionary Note Regarding Our Forward-Looking Statements” elsewhere in this Report. You should review the disclosure under the heading “Risk Factors” in this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a nanotechnology company and 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 (through the date of sale on May 8, 2023) and Patriot Glass Solutions. C-Bond Transportation Solutions sold a windshield strengthening, water repellent solution called C-Bond nanoShield™ and disinfection products. Patriot Glass Solutions sells multi-purpose glass strengthening primer and window film mounting solutions, including C-Bond BRS, a ballistic-resistant film system, and C-Bond Secure, a forced entry system. To date, we have filed, licensed and/or acquired a total of 23 individual patents and patent applications spanning core and strategic nano-technology applications and processes.
On June 30, 2021, we entered into a Share Exchange Agreement and Plan of Reorganization (the “Exchange Agreement”) with (i) Mobile Tint LLC, a Texas limited liability company doing business as A1 Glass Coating (“Mobile”), (ii) the sole member of Mobile (the “Mobile Member”), and (iii) Michael Wanke as the Representative of the Mobile Member. Pursuant to the Exchange Agreement, we agreed to acquire 80% of Mobile’s member units, representing 80% of Mobile’s issued and outstanding capital stock (the “Mobile Member Units”). On July 22, 2021, we closed the Exchange Agreement and acquired 80% of the Mobile Shares. The Mobile Member Units were exchanged for restricted shares of the Company’s common stock, in an amount equal to $800,000, divided by the average of the closing prices of the Company’s common stock during the 30-day period immediately prior to the closing as defined in the Exchange Agreement. In connection with the Exchange Agreement, we issued 28,021,016 shares of its common stock. Initially, for two years after closing, we had the option to acquire the remaining 20% of Mobile’s issued and outstanding membership interests in exchange for a number of shares of the Company’s common stock equal to 300% of Mobile’s average EBIT value, divided by the price of the Company’s common stock as defined in the Exchange Agreement. On September 20, 2023, the Company and the Mobile Shareholder entered into amendment #2 to the Exchange Agreement (the “Amended Exchange Agreement”). Pursuant to the Amended Exchange Agreement, we shall have the option (the “Option”), beginning on July 1, 2025 (the “Option Start Date”) and ending on 5:00 P.M. EST on the date that is thirty calendar days after the Option Start Date (the “Option Period”), to acquire the remaining 20% of Mobile Units (the “Additional Units”), representing 20% of Mobile’s issued and outstanding membership interests. Mobile provides quality window tint solutions for auto, home, and business owners across Texas, specializing in automotive window tinting, residential window film, and commercial window film that stop harmful UV rays from passing through its window films for reduced glare, comfortable temperatures, and lower energy bills. Mobile also carries products that offer forced-entry protection and films that protect glass from scratches, graffiti, other types of vandalism, and even bullets, including our C-Bond BRS and C-Bond Secure products. As part of the transaction, Mobile’s owner-operator, Michael Wanke, joined the Company as President of its Safety Patriot Glass Solutions Group. Mobile has been in business for more than 30 years and produced annual revenue of approximately $2 million in both 2019 and 2020. As part of the transaction, Mobile’s owner-operator, Michael Wanke, has agreed to join us as President of our Patriot Glass Solutions group.
We expect that our recent acquisition of Mobile will be the springboard to provide glass security solutions across the United States. We recently launched Patriot Glass Solutions to protect personal and business property across the United States using C-Bond’s proprietary glass strengthening technology to protects property from looting, rioting, break-ins, and gunfire. With our recent acquisition of Mobile, we are re-branding our Safety Solutions Group as “Patriot Glass Solutions.” Patriot Glass Solutions’ primary products include C-Bond BRS, a ballistic-resistant film system; and C-Bond Secure, a multi-purpose glass strengthening primer and window film mounting solution that deters forced entry.
On May 8, 2023, the Company entered into an Asset Purchase Agreement (the “APA”) with Apex Protect GPS, LLC (the “Buyer”), a Texas limited liability company, whereby the Company agreed to sell its C-Bond nanoShield™ business, including intangible assets, intellectual property, work in process, furniture, fixtures, equipment, inventory and other physical assets of the Company’s C-Bond nanoShield division (the “Assets”) to the Buyer for a purchase price of $4,000,000 in cash (the “Transaction”). The Transaction closed on May 8, 2023.
The Assets were sold and transferred to buyer by means of (i) with respect to the physical assets, a Bill of Sale”); and (ii) with respect to intangible assets or intellectual property, a Patent and Trademark Assignment Agreement in the form attached hereto as Exhibit 10.1, a Patent and Know-How License Agreement in the form attached hereto as Exhibit 10.2, and a Patent License-Back Agreement in the form attached hereto as Exhibit 10.3.
The APA contains customary representations, warranties, and covenants by each party including, among other things, that no bankruptcy or similar insolvency proceeding under state or federal law has been filed, or is currently being contemplated, with respect to the Company; that the Company has provided the Seller a true and accurate list of each of the following items of Intellectual Property which comprises a part of the Assets, including, among other things, patents and trademarks (the “Sold Intellectual Property”); and that the Company has good, valid, and legal title to, and is the sole and exclusive owner of all rights, title and interest in and to, the Sold Intellectual Property, free and clear of all liens.
39
Under the terms of the APA, the Parties entered into a Patent and Trademark Assignment Agreement, whereby the Company conveyed, transferred, and assigned to Buyer, among other assets, the C-Bond nanoShield trademark (the “Trademark”) and U.S. Patent No. 11,155,491 B2 (the “C-Bond nanoShield Patent”), and the Company agreed to execute and deliver an assignment of the Trademark and C-Bond nanoShield Patent, for recording with governmental authorities including, but not limited to, the U.S. Patent and Trademark Office.
The Parties also entered into a Patent and Know-How License Agreement whereby the Company granted to the Buyer a non-transferable, non-sub-licensable, exclusive right and license to four patents owned by the Company and licensed know-how to make, have made, use, offer to sell, sell and import glass and other products and components used in or in relation to the manufacture and operation of civilian, agricultural or military vehicles and equipment (the “Licensed Product”) in the United States and its legal territories.
Lastly, the Parties entered into a Patent License-Back Agreement whereby the Buyer agreed to grant to the Company a perpetual, non-exclusive, worldwide, royalty-free, non-transferable, non-sublicensable license to the C-Bond nanoShield Patent, for all uses and applications except for any that involve, market to, sell to, do business with, provide related goods or services to, or are consumed by any uses and applications of the patented technology within the civilian or military automotive, vehicle and/or transportation industry. The Patent License-Back Agreement also stipulates that all improvements made by either Party to the technology covered by the C-Bond nanoShield Patent shall be owned by the Buyer. In the event that the Company desires to utilize such improvements to the C-Bond nanoShield Patent made by either Party, the Parties hereby agree that they will negotiate in good faith a separate license agreement having pricing and other terms and conditions that are mutually acceptable to both Parties.
Following the Closing, the Parties completed a transaction wherein the Company assigned to Buyer, and Buyer took assignment from the Company, the lease for the premises located at 6035 South Loop East, Houston, Texas 77033 (the “Lease”) pursuant to a lease assignment and assumption agreement as to be reasonably agreed to by the Parties and the lessor pursuant to the Lease.
On May 8, 2023, in connection with the APA, the Company received net proceeds of $1,989,755, after paying debt and accrued interest of approximately $2,053,000.
On September 30, 2023, the Company had cash of $1,133,129.
The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis are based on our unaudited consolidated financial statements contained in this Report, which have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). You should read the discussion and analysis together with such financial statements and the related notes thereto.
Operating Overview
We are a nanotechnology company and 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 operated in two divisions: C-Bond Transportation Solutions (through the date of sale on May 8, 2023), and Patriot Glass Solutions. C-Bond Transportation Solutions, sold a windshield strengthening, water repellent solution called C-Bond nanoShield™ as well as disinfection products, and Patriot Glass Solutions, which sells multi-purpose glass strengthening primer and window film mounting solutions, including C-Bond BRS, a ballistic-resistant film systems, and C-Bond Secure, a forced entry system. 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.
Revenue is generated by the sale of products through distributors and directly to dealers. C-Bond nanoShield and disinfection sales were generated through distribution channels. Sales of C-Bond Secure are made primarily to window film dealers who offer the product as an upsell during installation. Revenue is generated from the sale of C-Bond BRS on a project basis. C-Bond BRS is specified into project plans providing authorized installers a competitive advantage.
Additionally, through the acquisition of 80% of Mobile Tint, LLC, we now provide quality window tint solutions for auto, home, and business owners across Texas, specializing in automotive window tinting, residential window film, and commercial window film that stop harmful UV rays from passing through its window films for reduced glare, comfortable temperatures, and lower energy bills. Mobile also carries products that offer forced-entry protection and films that protect glass from scratches, graffiti, other types of vandalism, and even bullets, including our C-Bond BRS and C-Bond Secure products.
40
Going Concern
The unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited consolidated financial statements, the Company had net income (loss) of $2,887,118 and $(3,875,161) for the nine months ended September 30, 2023 and 2022, respectively. Net cash used in operations was $1,228,280 and $1,183,111 for the nine months ended September 30, 2023 and 2022, respectively. Additionally, as of September 30, 2023, the Company had an accumulated deficit, shareholders’ deficit, and working capital deficit of $59,840,149, $3,310,817 and $1,275,193, respectively. On May 8, 2023, the Company sold its C-Bond nanoShield product line and technology and received net proceeds of $4,042,631, before paying off debt. The proceeds were used to repay convertible notes payable, notes payable and related accrued interest. On September 30, 2023, the Company had cash of $1,133,129. 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 preferred shares, and from the issuance of promissory notes and 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 unaudited 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.
Critical Accounting Policies
The following discussion and analysis of our consolidated financial condition and consolidated results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management continually evaluates such estimates, including those related to estimates for allowance for doubtful accounts on accounts receivable, the estimates for obsolete or slow moving inventory, estimated used in the calculation of percentage of completion on uncompleted jobs, purchase price allocation of acquired businesses, the useful life of property and equipment, assumptions used in assessing impairment of long-term assets, the estimate of the fair value of the right of use asset and lease liability, the valuation of redeemable and mandatorily redeemable preferred stock, the value of beneficial conversion features and deemed dividends, the valuation of deferred tax assets, and the fair value of non-cash equity transactions. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the unaudited consolidated financial statements.
Segment reporting
Through May 8, 2023, the date that the Company entered into an Asset Purchase Agreement with Apex Protect GPS, LLC agreed to sell its C-Bond nanoShield™ business, we operated in two reportable business segments - (1) the manufacture and sale of a windshield strengthening water repellent solution through the sale date of the nanoShield product line and related technology on May 8, 2023, and the sale of multi-purpose glass strengthening primer and window film mounting solutions, including ballistic-resistant film systems and a forced entry system (the “C-Bond Segment”), and (2) the distribution and installation of window film solutions (the “Mobile Segment”). Our reportable segments were strategic business units that offered different products. They were managed separately based on the fundamental differences in their operations and locations. Upon the sale of the C-Bond nanoShield™ business, the legacy C-Bond business is being conducted through Mobile Tint in order to combine administrative functions and they are now being managed together.
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, is 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.
41
Revenue recognition
We follow the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). This standard establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASC 606 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and requires certain additional disclosures.
We sell our products, which include standard warranties primarily to distributors and authorized dealers. Product sales are recognized at a point in time when the product is shipped to the customer and title is transferred and are recorded net of any discounts or allowances. The warranty does not represent a separate performance obligation.
Revenues from contracts for the distribution and installation of window film solutions are recognized over time on the basis of the Company’s estimates of the progress towards completion of contracts using various output or input methods depending on the type of contract terms including (1) the ratio of number of labor hours spent compared to the number of estimated labor hours to complete a job, (2) using the milestone method, or (3) using a units completed method. These methods are used because management considers these to be the best available measure of progress on these contracts. We use the same method for similar types of contracts. The asset, “contract assets” represents revenues recognized in excess of amounts billed. The liability, “contract liabilities,” represents billings in excess of revenues recognized.
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 Accounting Standards Update (“ASU”) 2016-09 Improvements to Employee Share-Based Payment.
See Note 2 to our unaudited consolidated financial statements for a summary of significant accounting policies and recent accounting pronouncements.
Results of Operations
The following comparative analysis on results of operations was based primarily on the comparative consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the unaudited consolidated financial statements and the notes to those statements for the three and nine months ended September 30, 2023 and 2022, which are included elsewhere in this quarterly report on Form 10-Q. The results discussed below are for the three and nine months ended September 30, 2023 and 2022.
42
Comparison of Results of Operations for the Three and Nine Months ended September 30, 2023 and 2022
Sales
For the three months ended September 30, 2023, sales amounted to $813,951 as compared to $573,649 for the three months ended September 30, 2022, an increase of $240,302, or 41.9%. This increase was attributable to an increase in sales of window tint installation and sales of C-Bond Secure multi-purpose and BRS ballistic resistant glass protection systems of $353,582 to school districts in Texas. The Texas Education Agency (TEA) is now mandating that each school district and open-enrollment charter school install either entry-resistant film od fencing on ground-floor windows that would allow access, glass doors, and windows adjacent to glass doors. This increase was offset by a decrease in sales of our recently sold C-Bond nanoShield solutions product line of approximately $119,900.
For the nine months ended September 30, 2023, sales amounted to $1,743,226 as compared to $1,624,725 for the nine months ended September 30, 2022, an increase of $118,501, or 7.3%. This increase was attributable to an increase in sales of window tint installation and sales of -Bond Secure multi-purpose and BRS ballistic resistant glass protection systems of $285,383 to school districts in Texas. The Texas Education Agency (TEA) is now mandating that each school district and open-enrollment charter school install either entry-resistant film or fencing on ground-floor windows that would allow access, glass doors, and windows adjacent to glass doors. This increase was offset by a decrease in sales of our recently sold C-Bond nanoShield solutions product line of approximately $167,000.
Cost of Goods Sold
In connection with our C-Bond Solutions segment, cost of goods sold is comprised primarily of the cost of raw materials and finished inventory sold, packaging costs, and warranty costs. In connection with our Mobile segment, cost of goods sold is comprised primarily of cost of raw materials such as film, labor, subcontractor costs, equipment rental, and supplies.
For the three months ended September 30, 2023, cost of sales amounted to $346,611 as compared to $246,346 for the three months ended September 30, 2022, an increase of $100,265, or 40.7%.
For the nine months ended September 30, 2023, cost of sales amounted to $801,042 as compared to $705,680 for the nine months ended September 30, 2022, an increase of $95,362, or 13.5%.
Gross Profit
For the three months ended September 30, 2023, gross profit amounted to $467,340, or 57.4% of sales, as compared to $327,303, or 57.1% of sales, for the three months ended September 30, 2022, an increase of $140,037, or 42.8%.
For the nine months ended September 30, 2023, gross profit amounted to $942,184, or 54.1% of sales, as compared to $919,045, or 56.6% of sales, for the nine months ended September 30, 2022, an increase of $23,139, or 2.5%. Generally, we recognize a higher gross profit percentage on the sale of C-Bond nanoShield and C-Bond ballistic resistant glass protections systems than we do on the sale of disinfection products and from Mobile Tint installations and services.
Operating Expenses
For the three months ended September 30, 2023, operating expenses amounted to $581,971 as compared to $828,127 for the three months ended September 30, 2022, a decrease of $246,156, or 29.7%. For the nine months ended September 30, 2023, operating expenses amounted to $2,152,281 as compared to $3,505,127 for the nine months ended September 30, 2022, a decrease of $1,352,846, or 38.6%. For the three and nine months ended September 30, 2023 and 2022, operating expenses consisted of the following:
| Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Compensation and related benefits, including stock-based compensation charges | $ | 308,991 | $ | 412,642 | $ | 1,177,044 | $ | 2,253,374 | ||||||||
| Professional fees | 111,005 | 217,123 | 491,958 | 663,387 | ||||||||||||
| General and administrative expenses | 161,975 | 198,362 | 483,279 | 588,366 | ||||||||||||
| Total | $ | 581,971 | $ | 828,127 | $ | 2,152,281 | $ | 3,505,127 | ||||||||
43
Compensation and related benefits
For the three months ended September 30, 2023, compensation and related benefits decreased by $103,651, or 25.1%, as compared to the three months ended September 30, 2022. This decrease was primarily due to a decrease in compensation and related benefits due to a reduction in the number of employees.
For the nine months ended September 30, 2023, compensation and related benefits decreased by $1,076,330, or 47.8%, as compared to the nine months ended September 30, 2022. This decrease was primarily due to a decrease in stock-based compensation of $983,388 and a decrease in compensation and related benefits of $92,942 primarily attributable to a decrease in the number of employees.
On January 6, 2022, the Board of Directors of the Company agreed to satisfy $278,654 of accrued compensation owed to its executive officers (collectively, the “Management”) as of December 31, 2021 and included in accrued compensation on the accompanying condensed consolidated balance sheet. Management agreed to accept 278 shares of the Company’s Series B convertible preferred stock in settlement of this 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 $957,556 related to the beneficial conversion feature arising from the issuance of Series B Preferred Stock.
Professional fees
For the three months ended September 30, 2023, professional fees decreased by $106,118, or 48.9%, as compared to the three months ended September 30, 2022. This decrease was primarily related to a decrease in legal fees of $17,706 and a decrease in consulting fees of $93,759, offset by an increase in other professional fees of $5,347.
For the nine months ended September 30, 2023, professional fees decreased by $171,429, or 25.8%, as compared to the nine months ended September 30, 2022. This decrease was primarily related to a decrease in legal fees of $19,104, a decrease in consulting fees of $86,438, and a decrease in accounting fees of $71,676, offset by an increase in other professional fees of $5,789.
General and administrative
For the three months ended September 30, 2023, general and administrative expenses decreased by $36,387, or 18.3%, as compared to the three months ended September 30, 2022. For the nine months ended September 30, 2023, general and administrative expenses decreased by $105,087, or 17.9%, as compared to the nine months ended September 30, 2022. These decreases are primarily attributable to a decrease in sales and marketing expenses, and other cost cutting measures, including the reduction of rent and other costs associated with our recently sold C-Bond Nanoshield product line.
Other Operating Income
During the nine months ended September 30, 2023, we reported a gain on sale of our nanoShield product line of $4,051,709. We did not record other operating income during the 2022 periods.
Income (Loss) from Operations
For the three months ended September 30, 2023, loss from operations amounted to $(114,631) and $(500,824), respectively, a decrease of $386,193, or 77.1%.
For the nine months ended September 30, 2023, income (loss) from operations amounted to $2,841,612 and $(2,586,082), respectively, a positive change of $5,427,694, or 209.9%.
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Other Income (Expenses), net
For the three months ended September 30, 2023, other (expenses), net amounted to $(49,437) as compared to $(445,566) for the three months ended September 30, 2022, a decrease of $396,129, or 88.9%. This decrease was primarily due to a decrease in interest expense of $386,879 related to a decrease in the amortization of debt discount and a decrease in interest-bearing debt, and an increase in gain on debt extinguishment of $9,250 related to the payoff and settlement of accrued compensation.
For the nine months ended September 30, 2023, other income (expenses), net amounted to $45,506 as compared to $(1,289,079) for the nine months ended September 30, 2022, a positive change of $1,334,585, or 103.5%. This change was primarily due to a decrease in interest expense of $631,359 related to a decrease in the amortization of debt discount and a decrease in interest-bearing debt, and an increase in gain on debt extinguishment of $703,226 related to the payoff and settlement of debt using proceeds from the sale of nanoShield product line and related technologies the payoff and settlement of accrued compensation.
Net Income (Loss)
Due to factors discussed above, for the three months ended September 30, 2023 and 2022, net (loss) amounted to $(164,068) and $(946,390), respectively. For the three months ended September 30, 2023, net loss attributable to common shareholders, which included dividends accrued on Series B and C preferred stock of $13,483 and the deduction of net (income) attributable to noncontrolling interests of $(28,657), amounted to $(206,208), or $(0.00) per common share (basic and diluted). For the three months ended September 30, 2022, net loss attributable to common shareholders, which included dividends accrued on Series B and C preferred stock and a deemed dividend related to price protection provisions in our convertible debt instruments of $14,619, and the deduction of net loss attributable to noncontrolling interests of $8,529, amounted to $952,480, or $(0.00) per basic and diluted common share.
Due to factors discussed above, for the nine months ended September 30, 2023 and 2022, net income (loss) amounted to $2,887,118 and $(3,875,161), respectively. For the nine months ended September 30, 2023, net income attributable to common shareholders, which included dividends accrued on Series B and C preferred stock of $40,788 and the deduction of net loss attributable to noncontrolling interests of $6,705, amounted to $2,853,035, or $0.01 per common share (basic) and $0.00 per common share (diluted). For the nine months ended September 30, 2022, net loss attributable to common shareholders, which included dividends accrued on Series B and C preferred stock of $46,246 and the deduction of net loss attributable to noncontrolling interests of $31,615, amounted to $(3,889,792), or $(0.01) per basic and diluted common share.
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had cash of $1,133,129 and $97,091 as of September 30, 2023 and December 31, 2022, respectively.
Our primary uses of cash have been for compensation and related benefits, fees paid to third parties for professional services, and general and administrative expenses. We have received funds from the sales of products, from various financing activities such as from the sale of our common shares, from the sale of preferred shares and from debt financings. Additionally, we received net proceeds from the sale of our nanoShield product line and related technologies of $1,989,755, after the repayment and settlement of notes payable and convertible notes payable. The following trends are reasonably likely to result in changes in our liquidity over the near to long term:
| ● | An increase in working capital requirements to finance our current business, |
| ● | Research and development fees; |
| ● | Addition of administrative and sales personnel needed for business growth; |
| ● | The cost of being a public company; |
| ● | Marketing expense for building brand; |
| ● | Capital requirements for production capacity. | |
| ● | Working capital requirements to support acquired companies. |
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Since inception, we have raised proceeds from the sale of common shares and preferred shares, and from debt to fund our operations and research and development initiatives.
As discussed elsewhere, on May 8, 2023, the Company entered into an Asset Purchase Agreement (the “APA”) with Apex Protect GPS, LLC (the “Buyer”), a Texas limited liability company, whereby the Company agreed to sell its C-Bond nanoShield™ business, including intangible assets, intellectual property, work in process, furniture, fixtures, equipment, inventory and other physical assets of the Company’s C-Bond nanoShield division (the “Assets”) to the Buyer for a purchase price of $4,000,000 in cash (the “Transaction”). The Transaction closed on May 8, 2023.
In connection with the APA, we received net proceeds of $1,989,755, after the repayment and settlement of notes payable and convertible notes payable as follows:
| 1) | The Company repaid and settled the BOCO Investments, LLC Note (See Note 8) with a principal balance of $400,000 and accrued interest payable of $317,293 for a cash payment of $200,000 and the issuance of 22,000,000 shares of the Company’s common stock. |
| 2) | The Company repaid GS Capital Partners, LLC $419,260 for notes dated June 23, 2022, July 26, 2022, and September 6, 2022 (collectively, the “GS Notes”), and GS Capital Partners, LLC deemed the GS Notes paid in full. |
| 3) | The Company repaid Mercer Street Global Opportunity Fund, LLC (“Mercer”) $271,825 for notes dated March 14, 2022 and November 22, 2022 (collectively, the “Secured Mercer Notes”). |
| 4) | The Company repaid Jeff Badders $875,000 for notes dated May 5, 2021, November 8, 2022, and April 4, 2023. |
| 5) | The Company repaid 1800 Diagonal Lending, LLC $288,035 for notes dated November 4, 2022, December 27, 2022, and March 17, 2023 (collectively, the “1800 Diagonal Notes”), and 1800 Diagonal Lending, LLC deemed the 1800 Diagonal Notes paid in full. |
Additional cash liquidity is generated from product sales. However, to date, we are not profitable, and we cannot provide any assurances that we will be profitable. We believe that our existing cash and cash equivalents will not be sufficient to fund our current operating plans.
Cash Flows
For the Nine months ended September 30, 2023 and 2022
The following table shows a summary of our cash flows for the nine months ended September 30, 2023 and 2022.
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (1,228,280 | ) | $ | (1,183,111 | ) | ||
| Net cash provided by investing activities | 3,927,861 | - | ||||||
| Net cash (used in) provided by financing activities | (1,663,543 | ) | 815,780 | |||||
| Net increase (decrease) in cash | 1,036,038 | (367,331 | ) | |||||
| Cash - beginning of the period | 97,091 | 519,898 | ||||||
| Cash - end of the period | $ | 1,133,129 | $ | 152,567 | ||||
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Net Cash Used in Operating Activities:
Net cash flow used in operating activities was $1,228,280 for the nine months ended September 30, 2023 as compared to net cash flow used in operating activities of $1,183,111 for the nine months ended September 30, 2022, an increase of $45,169.
Net cash flow used in operating activities for the nine months ended September 30, 2023 primarily reflected net income of $2,887,118, which was then adjusted for the add-back (deduction) of non-cash items primarily consisting of depreciation and amortization of $63,953, stock-based compensation expense of $42,183, stock-based professional fees of $119,700, amortization of debt discount of $96,075, non-cash interest expense for put premiums of $29,212, non-cash gain on debt extinguishment and inducement expense of $462,581, and gain from sale of nanoShield product line of $4,051,709, and changes in operating assets and liabilities consisting primarily of a decrease in accounts receivable of $8,970, an increase in inventory of $42,388, a decrease in accounts payable of $55,162, an increase in accrued expenses of $23,285, an increase in contract liabilities of $113,790, an increase in accrued compensation of $16,791, and a decrease in accrued interest – related party of $9,641.
Net cash flow used in operating activities for the nine months ended September 30, 2022 primarily reflected a net loss of $3,875,161, which was then adjusted for the add-back (deduction) of non-cash items primarily consisting of depreciation and amortization of $68,230, stock-based compensation expense of $1,025,571, stock-based professional fees of $228,946, amortization of debt discount of $910,907, and a non-cash loss on debt extinguishment of $231,395, and changes in operating assets and liabilities consisting primarily of an increase in accounts receivable of $86,571, an increase in inventory of $1,287, a decrease in prepaid expenses of $23,763, a decrease in contract assets of $82,805, an increase in accrued expenses of $122,074, an increase in accrued interest – related party of $6,247, an increase in accrued compensation of $26,927, an increase in contract liabilities of $53,462, and a decrease in accounts payable of $8,721.
Net Cash Provided by Investing Activities:
Net cash provided by investing activities was $3,927,861 for the nine months ended September 30, 2023 as compared to $0 for the nine months ended September 30, 2022. During the nine months ended September 30, 2023, we received net proceeds of $4,042,631 from the sale of our nanoShield product line and related technologies. Additionally, we purchased property and equipment for $114,770.
Net Cash Provided by (Used in) Financing Activities:
Net cash used in financing activities was $(1,663,543) for the nine months ended September 30, 2023 as compared to net cash provided by financing activities of $815,780 for the nine months ended September 30, 2022.
During the nine months ended September 30, 2023, we received net proceeds from the sale of our common stock to our chief executive officer of $275,000, we received net proceeds from convertible notes payable of $50,000, and we received proceeds from notes payable of $291,621. These proceeds were offset by the repayment of notes payable of $1,807,414, the repayment of note payable – related party of $250,000, and the repayment of convertible notes payable of $222,750.
During the nine months ended September 30, 2022, we received net proceeds from notes payable of $641,260 and received proceeds from a related party note payable of $250,000. These proceeds were offset by the repayment of notes payable of $75,480.
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Funding Requirements
We expect the primary use of capital to continue to be salaries, legal, accounting and regulatory expenses and general overhead costs including sales and marketing. Additional uses of capital will include additional headcount, tools and equipment, capacity expansion and operational control software. We believe current cash and cash equivalents will not be sufficient to meet anticipated cash requirements. Additional capital will be required to further research new product verticals and enhancements to current product offerings based on customer requirements.
As of September 30, 2023, we determined that there was substantial doubt about our ability to maintain operations as a going concern. Our unaudited 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. Management cannot provide assurance that we will ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or equity capital. We will seek to raise capital through additional debt and/or equity financings to fund operations in the future. Although we have historically raised capital from sales of common and preferred shares, from the issuance of notes payable, and from the issuance of convertible promissory notes, there is no assurance that it will be able to continue to do so. If we are unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail its operations. Our unaudited 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.
Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially because of a number of factors. We have based this estimate on assumptions that may prove to be wrong and could utilize our available capital resources sooner than we currently expect. Our capital requirements are difficult to forecast. Please see the section titled “Risk Factors” in this Annual Report on Form 10-K for additional risks associated with our capital requirements.
Until such time as we generate substantial product revenue to offset operational expenses, we expect to finance our cash needs through a combination of public and private equity offerings and debt financings. We may be unable to raise capital or enter into such other arrangements when needed or on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.
The following tables summarize our contractual obligations as of September 30, 2023, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
| Payments Due by Period | ||||||||||||||||||||
| Contractual obligations: | Total | Less than 1 year | 1-2 years | 3-5 years | 5 + years | |||||||||||||||
| Notes payable | $ | 141,511 | $ | 81,642 | $ | 44,734 | $ | 15,135 | $ | - | ||||||||||
| Convertible note payable | 1,031,250 | 1,031,250 | - | - | - | |||||||||||||||
| Interest on notes payable | 220,452 | 220,452 | - | - | - | |||||||||||||||
| Operating lease gross base rent | 203,005 | 76,654 | 126,351 | - | - | |||||||||||||||
| Total | $ | 1,596,218 | $ | 1,409,998 | $ | 171,085 | $ | 15,135 | $ | - | ||||||||||
As disclosed elsewhere, in connection with net proceeds received from the sale of our C-Bond nanoShield product line, we repaid or settled substantially all our notes payable and a portion of our convertible notes payable. We enter into agreements in the normal course of business with contracted research and testing organization, product distribution and material vendors which are payable or cancelable at any time with 30-day prior written approval.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements during the period presented as defined in the rules and regulations of the SEC.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e), promulgated by the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Our management, with the participation of the principal executive officer and principal financial officer, evaluated our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of September 30, 2023, our disclosure controls and procedures were not effective.
As reported in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2022, our management concluded that our internal control over financial reporting was not effective as of that date because of a material weakness in our internal control over financial reporting. The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses in our internal control over financial reporting: (1) the lack of multiples levels of management review on complex business, accounting and financial reporting issues, and (2) a lack of adequate segregation of duties as a result of our limited financial resources to support hiring of personnel.
Until such time as we expand our staff to include additional accounting and executive personnel, it is likely we will continue to report material weaknesses in our internal control over financial reporting.
A material weakness is a deficiency or a combination of control deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. 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.
Except as set forth below, 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.
On January 20, 2022, we received an Order Directing Examination and Designating Officers to Take Testimony (a “Formal Order”) from the SEC. The Formal Order authorizes that an examination be made to determine whether a stop order should be issued under Section 8(d) of the Securities Act of 1933 with respect to the Company’s Registration Statement on Form S-1, and any supplements and amendments thereto. The Formal Order indicates that the Form S-1 may be deficient in that it may contain untrue statements of material fact or omit to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading concerning, among other things, the Company’s revenue and financial condition. On April 15, 2022, the Company filed an amendment to its Annual Report on Form 10-K for the fiscal year ended December 31, 2020. 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. There was no effect on the Company’s reported net loss for Fiscal 2020 or on the financial condition of the Company at December 31, 2020. The Company received a subpoena from the SEC on April 25, 2022, requesting all documents and communications concerning the review of C-Bond’s revenue recognition practices for fiscal year 2020. The Company has provided the requested information and its Chief Executive Officer provided his testimony regarding this Formal Order in October 2022. The Company also filed a request to withdraw its Registration Statement on Form S-1 (“S-1”) (File No. 333-261472) (the “Registration Statement”), filed by the Company with the Securities and Exchange Commission on December 3, 2021. The S-1 related to shares of common stock underlying certain convertible promissory notes held by selling securityholders. The S-1 was not declared effective and no securities were sold in reliance thereon.
On March 8, 2021, a former officer of the Company resigned. The Company and the former officer alleged certain claims against each other, including certain compensation claims. Neither party has initiated litigation. The Company intends to vigorously defend itself against any possible claims and assert any relevant claims against the former executive and believes it will prevail.
In July 2021, a former consultant of the Company filed a small claims case for approximately $16,000 in Harris County, TX, and the Company filed its response in August 2021. The Company received a civil notice of trial setting for September 7, 2023. On September 7, 2023, the Company and the former consultant entered into a settlement agreement, whereby the Company paid $9,000 as full settlement of this claim.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
| 1. | On September 3, 2023, the Company issued 1,000,000 shares of its common stock for investor relations services to be rendered. These shares were valued at $4,500, or $0.0045 per common share, based on the quoted closing price of the Company’s common stock on the measurement date. | |
| 2. | During the three months ended September 30, 2023, the Company issued 8,584,376 shares of its common stock upon the conversion of 300 shares of Series C preferred with a stated redemption value of $30,000. The conversion price was based on contractual terms of the related Series C preferred shares. | |
The above securities were issued in reliance upon the exemptions provided by Section 4(a)(2) under the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None,
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
| Exhibit No. | Description of Exhibit | |
| 31.1* | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1** | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS* | Inline XBRL Instance Document. | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| C-BOND SYSTEMS, INC. | ||
| Dated: November 14, 2023 | By: | /s/ Scott R. Silverman |
| Scott R. Silverman | ||
|
Chief Executive Officer and Chief Financial Officer (principal executive officer, | ||
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