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)
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(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 | ||
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
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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.
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There were
C-BOND SYSTEMS, INC.
FORM 10-Q
SEPTEMBER 30, 2024
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, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Due from related party | ||||||||
| Contract assets | ||||||||
| Total Current Assets | ||||||||
| OTHER ASSETS: | ||||||||
| Property and equipment, net | ||||||||
| Right of use asset, net | ||||||||
| Intangible asset, net | ||||||||
| Goodwill | ||||||||
| Total Other Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Convertible notes payable, net of discount - current portion | $ | $ | ||||||
| Notes payable, net of discount - current portion | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| 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 | ||||||||
| Lease liabilities, net of current portion | ||||||||
| Total Long-term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (See Note 10) | ||||||||
| 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 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, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| SALES | $ | $ | $ | $ | ||||||||||||
| COST OF SALES (excluding depreciation expense) | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Compensation and related benefits | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Professional fees | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Operating Expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER OPERATING INCOME: | ||||||||||||||||
| Gain on sale of product line | ||||||||||||||||
| (LOSS) INCOME FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ||||||||||
| OTHER INCOME (EXPENSES): | ||||||||||||||||
| (Loss) gain on debt extinguishment, net | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense - related party | ( | ) | ( | ) | ||||||||||||
| Total Other Income (Expenses), net | ( | ) | ( | ) | ( | ) | ||||||||||
| NET (LOSS) INCOME BEFORE NONCONTROLLING INTEREST | ( | ) | ( | ) | ( | ) | ||||||||||
| Net (income) loss of subsidiary attributable to noncontrolling interest | ( | ) | ||||||||||||||
| Preferred stock dividend | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| NET (LOSS) INCOME PER COMMON SHARE: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying 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, 2024 AND 2023
(Unaudited)
| Additional | Total | |||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Noncontrolling | Shareholders' | ||||||||||||||||||||
| # of Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Common stock issued for conversion of Series C preferred stock | ||||||||||||||||||||||||
| Cancellation of common stock and Series B preferred shares | ( | ) | ( | ) | ||||||||||||||||||||
| Preferred stock dividends | - | ( | ) | ( | ) | |||||||||||||||||||
| Beneficial conversion charge for issuance of Series B preferred shares for accrued compensation recorded as stock-based compensation | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, March 31, 2024 | ( | ) | ( | ) | ||||||||||||||||||||
| Common stock issued for conversion of Series C preferred stock | ||||||||||||||||||||||||
| Cancellation of Series B preferred shares | - | |||||||||||||||||||||||
| Preferred stock dividends | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, June 30, 2024 | ( | ) | ( | ) | ||||||||||||||||||||
| Preferred stock dividends | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| 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 | - | ( | ) | ( | ) | |||||||||||||||||||
| 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 | - | ( | ) | ( | ) | |||||||||||||||||||
| 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 | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
See accompanying 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, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income 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 | ||||||||
| Non-cash gain on debt extinguishment | ( | ) | ( | ) | ||||
| Gain from sale of nanoShield product line | ( | ) | ||||||
| Lease costs | ||||||||
| Non-cash compensation claw back | ( | ) | ||||||
| Bad debt expense (recovery) | ( | ) | ||||||
| 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 sale of Nanoshield product line | ||||||||
| NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from sale of common stock | ||||||||
| Proceeds from notes payable | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Repayment of note payable - related party | ( | ) | ||||||
| Proceeds from convertible notes payable | ||||||||
| Repayment of convertible notes payable | ( | ) | ( | ) | ||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | ( | ) | ||||||
| NET (DECREASE) INCREASE 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 dividends accrued | $ | $ | ||||||
| Conversion of Series C preferred stock to common stock | $ | $ | ||||||
| Conversion of notes payable and accrued interest to common stock | $ | $ | ||||||
| Reclassification of Series B preferred stock to additional paid-in capital | $ | $ | ||||||
| Reclassification of Series C preferred to notes payable | $ | $ | ||||||
| Reclassification of notes payable to convertible notes payable | $ | $ | ||||||
See accompanying notes to the unaudited consolidated financial statements.
4
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(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 owner and developer 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. Prior to May 8, 2023, the Company operated in
On June 30, 2021, the Company entered into a Share
Exchange Agreement and Plan of Reorganization (the “Exchange Agreement”) with (i) Patriot Glass Solutions, LLC (formerly Mobile
Tint LLC), a Texas limited liability company doing business as A1 Glass Coating (“Patriot Glass”), (ii) the sole member of
Patriot Glass (the “Patriot Glass Shareholder”), and (iii) Michael Wanke as the Representative of the Patriot Glass Shareholder.
Pursuant to the Exchange Agreement, on July 22, 2021, the Company acquired
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™ product line, including intangible assets, intellectual property, work in process, furniture, fixtures, equipment, inventory and other physical assets of the Company’s C-Bond nanoShieldTM 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).
5
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
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 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 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 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, 2023 of the Company which were included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as filed with the Securities and Exchange Commission (the “SEC”) on April 1, 2024.
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 a net
loss of $
Use of Estimates
The preparation of 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 unaudited 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, 2024 and 2023 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.
6
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
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.
Cash and Cash Equivalents
For the purposes of the unaudited 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, 2024 and December 31, 2023.
Accounts Receivable
The Company recognizes an allowance for losses on accounts receivable and notes receivable in an amount equal to the estimated probable losses net of recoveries under the current expected credit loss method. 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 and notes receivable considered at risk or uncollectible. On January 1, 2023, the Company adopted ASC 326, “Financial Instruments - Credit Losses”. In accordance with ASC 326, an allowance is maintained for estimated forward-looking losses resulting from the possible inability of customers to make the required payments (current expected losses). The amount of the allowance is determined principally based on past collection experience and known financial factors regarding specific customers. The expense associated with the allowance for doubtful accounts on accounts receivable is recognized in general and administrative expenses.
Inventory
Inventory, consisting of raw materials and finished goods, are stated at 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
7
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
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
Goodwill is not subject to amortization but is subject to impairment tests at least annually. The Company reviews the carrying amounts of goodwill by reporting unit at least annually, or when indicators of impairment are present, to determine if goodwill may be impaired. To evaluate goodwill impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of goodwill is less than its carrying value. The Company would not be required to quantitatively determine the fair value of goodwill unless it determines, based on the qualitative assessment there are indicators of impairment. Under the quantitative test of goodwill, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. If the carrying value exceeds the fair value, then the goodwill is impaired by the excess amount. The Company performs its annual testing for goodwill during the fourth quarter of each fiscal year or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit.
Intangible assets determined to have finite lives
are amortized over their estimated useful lives of
As of December 31, 2023, the Company performed
its annual goodwill impairment test for its
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.
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 $
8
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
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 the title is transferred and is 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 $
Research and Development
Research and development costs incurred in the
development of the Company’s products are expensed as incurred and includes costs such as labor, materials, and other allocated
costs incurred. For the nine months ended September 30, 2024 and 2023, 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, 2024 and 2023, advertising costs charged to operations were $
9
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
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, 2024 and December 31, 2023, 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, 2018. The Company recognizes interest and penalties related to uncertain income tax positions in other expense. However, no such interest and penalties were recorded as of September 30, 2024 and December 31, 2023.
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.
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 has 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 does not have any finance leases as of September
30, 2024 and December 31, 2023. 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.
10
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
Loss Per Common Share
ASC 260 “Earnings Per Share”, requires dual presentation of basic and diluted earnings per common share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilutive securities and non-vested forfeitable shares. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares or resulted in the issuance of common shares that then shared in the earnings of the entity. Basic net loss per common share is computed by dividing net loss available to members by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares, common share equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common shares consist of stock options and non-vested forfeitable shares (using the treasury stock method) and shares issuable upon conversion of preferred shares and convertible notes payable (using the as-if converted method). These common share equivalents may be dilutive in the future.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net (loss) income per common share - basic: | ||||||||||||||||
| Net (loss) income attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Weighted average common shares outstanding – basic | ||||||||||||||||
| Net (loss) income per common share – basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Net (loss) income per common share - diluted: | ||||||||||||||||
| Net (loss) income attributable to common shareholders - basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Add: preferred stock dividends | ||||||||||||||||
| Add: interest of convertible debt | ||||||||||||||||
| Numerator for (loss) income 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 (loss) income per common share – diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
For the three and nine months ended September 30, 2024 and for the three months ended September 30, 2023, all potentially dilutive securities were excluded from the computation of diluted common shares outstanding as they would have an anti-dilutive impact on the Company’s net loss.
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Stock options | ||||||||
| Warrants | ||||||||
| Series B preferred stock | ||||||||
| Series C preferred stock | ||||||||
| Convertible debt | ||||||||
11
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
Segment Reporting
Prior to May 8, 2023, the Company operated in
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 unaudited consolidated balance sheets and the consolidated net loss attributable to its noncontrolling interest be clearly identified and presented on the face of the unaudited consolidated statements of operations.
Risk and Uncertainties
The Company operates in an industry that is subject to intense competition and changes in consumer and commercial demand. The Company’s operations are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business failure.
The Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected to contribute to this variability include, among others, (i) the cyclical nature of the business, (ii) general economic conditions in the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the volatility of prices in connection with the Company’s products and services. These factors, among others, make it difficult to project the Company’s operating results on a consistent basis.
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 adoption of this standard on January 1, 2024 had no 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.
12
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
NOTE 3 – ACCOUNTS RECEIVABLE
| September 30, 2024 | December 31, 2023 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
For the nine months ended September 30, 2024 and
2023, bad debt expense (recovery) amounted to
NOTE 4 – INVENTORY
| September 30, 2024 | December 31, 2023 | |||||||
| Finished goods | $ | $ | ||||||
| Total Inventory | $ | $ | ||||||
For the nine months ended September 30, 2024 and 2023, the Company did not record any allowance for slow moving inventory.
NOTE 5 – PROPERTY AND EQUIPMENT
| Useful Life | September 30, 2024 | December 31, 2023 | ||||||||
| Machinery and equipment | $ | $ | ||||||||
| Furniture and office equipment | ||||||||||
| Vehicles | ||||||||||
| Leasehold improvements | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Property and equipment, net | $ | $ | ||||||||
For the nine months ended September 30, 2024 and
2023, depreciation expense was included in general and administrative expenses and amounted to $
13
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
NOTE 6 – INTANGIBLE ASSETS AND GOODWILL
| Useful life | September 30, 2024 | December 31, 2023 | ||||||||
| Customer relations | $ | $ | ||||||||
| Non-compete | ||||||||||
| Trade name (non-amortizable) | ||||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||
| Intangible assets, net | $ | $ | ||||||||
| Useful life | September 30, 2024 | December 31, 2023 | ||||||||||
| Goodwill | - | $ | $ | |||||||||
For the nine months ended September 30, 2024 and
2023, amortization expense of amortizable intangible assets amounted to $
| Twelve months ending September 30: | Amount | |||
| 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
The Mercer Note matured 12 months after issuance,
bore interest at a rate of
The Mercer Note and Mercer 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
14
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
Upon the occurrence of an event of default under
the Mercer Note, the Investor has the right to be prepaid at
| (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 |
| (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 |
| (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 |
| (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. |
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 Mercer Note for a new Convertible Promissory Note (the “New Note”) and (ii)
the Mercer Warrant for a new five-year warrant to purchase, in the aggregate,
15
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
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 $
On December 4, 2023, the Company entered into
a letter agreement (the “Agreement”) with the Investor to eliminate the convertible features and implement a standstill on
the interest due under the Convertible Promissory Note Dated October 15, 2021 (the “Note”). Per the terms of the Agreement,
provided that the Company continues making the Payments as outlined in the Agreement and meets its obligations under the Agreement, the
Investor shall not have the right to convert the Note into the Company’s common stock. The Company shall make the Payments on the
15th of every month. “Payments” shall mean $
Additionally, the Company shall pay Mercer
Additionally, provided that the Company is in
compliance with this Agreement, Mercer agrees to a standstill on the interest due under the Note beginning with the date that the first
$
As of September 30, 2024 and December 31, 2023,
the principal balance of the New Note was $
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.
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, 2024
(UNAUDITED)
1800 Diagonal Lending Convertible Debt
2022/2023
On November 9, 2022, the Company closed a Securities
Purchase Agreement dated November 4, 2022, with 1800 DIAGONAL LENDING LLC (“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 $
2024
On March 1, 2024, the Company executed a Promissory
Note (the “March 2024 Note”) in favor of Diagonal in the aggregate principal amount of $
17
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
On April 8, 2024, the Company executed a Promissory
Note (the “April 2024 Note”) in favor of Diagonal in the aggregate principal amount of $
On June 5, 2024, the Company executed a Promissory
Note (the “June 2024 Note”) in favor of Diagonal in the aggregate principal amount of $
On August 15, 2024, the Company entered into an
amendment to its June 2024 Note in favor of Diagonal in the principal amount of $
In accordance with ASC 470-50, Debt Modifications
and Extinguishments, on August 15, 2024, in connection with the amendments to the March 2024 Note, April 2024 Note and June 2024 Note
discussed above (the “Amendments”), the Company performed an assessment of whether the Amendments were deemed to be new debt,
a modification of existing debt, or an extinguishment of existing debt. The Company evaluated the Amendments for debt modification and
concluded that the debt qualified for debt extinguishment. On August 15, 2024, the Company agreed to make the March 2024 Note, April 2024
Note and July 2024 Note convertible, at the option of the holder, at a conversion price of
18
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
On August 15, 2024, the Company accounted for
the amended March 2024 Note, April 2024 Note, and June 2024 Note as stock settled debt under ASC 480 and recorded an aggregate debt premium
of $
For the nine months ended September 30, 2024 and
2023, amortization of debt discounts related to the convertible notes payable amounted to
On September 30, 2024 and December 31, 2023, accrued
interest payable under all outstanding convertible notes discussed above amounted to $
| September 30, 2024 | December 31, 2023 | |||||||
| Convertible notes payable | $ | $ | ||||||
| Put premium | ||||||||
| Convertible notes payable, net | ||||||||
| Less: current portion of convertible notes payable | ( | ) | ( | ) | ||||
| Convertible notes payable – long-term | $ | $ | ||||||
| September 30, | Amount | |||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| Total convertible notes payable on September 30, 2024 | $ | |||
NOTE 8 – NOTES PAYABLE
| September 30, 2024 | December 31, 2023 | |||||||
| Notes payable | $ | $ | ||||||
| Note payable – PPP note | ||||||||
| Total notes payable | ||||||||
| Less: unamortized debt discount | ( | ) | ( | ) | ||||
| Note payable, net | ||||||||
| Less: current portion of notes payable, net of discount | ( | ) | ( | ) | ||||
| Notes payable – long-term | $ | $ | ||||||
19
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
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 Patriot Glass, the Company’s subsidiary, Patriot Glass, assumed vehicle and equipment loans in the amount of $
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 $
During the year ended December 31, 2023, in connection
with the acquisition of a vehicle and an air conditioner unit, the Company’s subsidiary, Patriot Glass, entered into three vehicle
and equipment loans in the amount of $
On February 21, 2024, the Company’s subsidiary,
Patriot Glass, entered into a Promissory Note (the “February 2024 Note”) with a lender in the principal amount of $
On June 17, 2024, the Company’s subsidiary,
Patriot Glass, entered into a Merchant Loan (the “June 2024 Merchant Loan”) with a lender in the principal amount of $
On July 24, 2024, in connection with the acquisition
of a vehicle, the Company’s subsidiary, Patriot Glass, entered into a vehicle loan in the amount of $
On July 31, 2024, the Company’s subsidiary,
Patriot Glass, entered into a Merchant Loan (the “July 2024 Merchant Loan”) with a lender in the principal amount of $
On August 9, 2024, the Company entered into a
Promissory Note and Security Agreement (the “August 2024 Note”) with a Private investor (the “Private Investor”)
in the principal amount of $
20
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
On September 19, 2024, the Company’s subsidiary,
Patriot Glass, entered into a Merchant Loan (the “September 2024 Merchant Loan”) with a lender in the principal amount of
$
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 $
1800 Diagonal Lending Note Payable - March 2024
On March 1, 2024, the Company executed a Promissory
Note (the “March 2024 Note”) in favor of Diagonal in the aggregate principal amount of $
1800 Diagonal Lending Note Payable – April 2024
On April 8, 2024, the Company executed a Promissory
Note (the “April 2024 Note”) in favor of Diagonal in the aggregate principal amount of $
21
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
1800 Diagonal Lending Note Payable – June 2024
On June 5, 2024, the Company executed a Promissory
Note (the “June 2024 Note”) in favor of Diagonal in the aggregate principal amount of $
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 $
In May 2023, the Company and the Lender entered
into a Debt Exchange and Release Agreement in regard to the $
On September 30, 2024 and December 31, 2023, the
principal amount due and accrued interest payable 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”) with a principal amount of $
22
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
GS Capital Debt
On June 23, 2022, the Company 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 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 $
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 $
23
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
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 and the Company recorded a gain on
debt extinguishment of approximately $
For the nine months ended September 30, 2024 and
2023, amortization of debt discounts related to all the above notes payable amounted to $
| September 30, | Amount | |||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Total principal amount of notes payable on September 30, 2024 | $ | |||
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.
24
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
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.
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 17, 2023, the Board of Directors of
the Company agreed to satisfy $
On January 2, 2024, the Board of Directors of
the Company agreed to satisfy $
25
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
On January 2, 2024, the Board of Directors of
the Company agreed to issue
On February 8, 2024,
On May 20, 2024, the Company’s chief executive
officer returned
During the nine months ended September 30, 2024
and 2023, the Company accrued dividends of $
As of September 30, 2024, the net Series B Preferred
Stock balance was $
| For the Nine Months Ended September 30, 2024 | For the Nine Months Ended September 30, 2023 | |||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | |||||||||||||
| Balance at beginning of period | $ | $ | ||||||||||||||
| Shares issued for accrued compensation | ||||||||||||||||
| Shares issued for compensation | ||||||||||||||||
| Shares and accrued dividends forfeited | ( | ) | ( | ) | ||||||||||||
| Dividends accrued | ||||||||||||||||
| Balance at end of period | $ | $ | ||||||||||||||
26
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
Series C Preferred Stock
On August 20, 2020, the Company filed an Amendment
to its Articles of Incorporation to designate a series of preferred stock, the Series C Convertible Preferred Stock (the “Series
C”), with the Secretary of State of the State of Colorado. The Certificate of Designations established
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
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.
27
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
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.
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.
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
On February 1, 2024, the Company issued
28
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
On March 1, 2024, the Company issued
On May 1, 2024, the Company issued
On August 9, 2024, the Company entered into a
Promissory Note and Security Agreement (the “August 2024 Note”) with a Private investor (the “Private Investor”)
in the principal amount of $
During the nine months ended September 30, 2024
and 2023, the Company accrued dividends of $
As of September 30, 2024, the net Series C Preferred
Stock balance was $
| For the Nine Months Ended September 30, 2024 | For the Nine Months Ended September 30, 2023 | |||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | |||||||||||||
| Balance at beginning of period | $ | $ | ||||||||||||||
| Conversion of Series C shares to common shares | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Reclassification of stated value to notes payable upon conversion | ( | ) | ( | ) | ||||||||||||
| Dividends accrued | ||||||||||||||||
| Balance at end of period | $ | $ | ||||||||||||||
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 $
29
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
Issuance of Common Stock for Services
Issuance of Common Stock for Professional Fees
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, 2024
and 2023, the Company recorded stock-based professional fees of
Issuance of Common Stock for Stock-Based Compensation
On June 7, 2023, the Company issued
During the nine months ended September 30, 2024
and 2023, 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, 2023 | $ | |||||||
| Shares vested | ||||||||
| Non-vested, September 30, 2024 | $ | |||||||
30
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
Common Stock Forfeited
On February 8, 2024,
Common Stock Issued in Connection with Notes Payable
During April and May 2023, the Company issued
In May 2023, the Company issued the Lender
Common Stock Issued for Conversion of Series C Preferred Stock
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
2024
On February 1, 2024, the Company issued
On March 1, 2024, the Company issued
On May 1, 2024, the Company issued
31
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
Stock Options
For the nine months ended September 30, 2024 and
2023, the Company recorded no compensation expense related to stock options. Total unrecognized compensation expense related to unvested
stock options on September 30, 2024 and December 31, 2023 amounted to
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding, December 31, 2023 | $ | $ | ||||||||||||||
| Expired | ( | ) | - | |||||||||||||
| Balance Outstanding, September 30, 2024 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2024 | $ | $ | ||||||||||||||
Warrants
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding December 31, 2023 | $ | $ | ||||||||||||||
| Expired | ( | ) | ||||||||||||||
| Balance Outstanding September 30, 2024 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2024 | $ | $ | ||||||||||||||
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 |
32
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
| ● | 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
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, 2024, other than discussed below, the Company is not involved in any other pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition, results of operations, or cash flows.
On March 8, 2021, a former officer of the Company
resigned. Both parties alleged certain claims against the other, including with respect to 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. The Board of Directors of the Company has resolved and taken action in February 2024
to cause the forfeiture of equity and deferred compensation owed/outstanding by said officer. Accordingly, on February 8, 2024, the Board
of Directors of the Company determined that
33
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
Employment Agreements
On October 18, 2017, the Company entered into an employment agreement with Mr. Scott Silverman, pursuant to which he serves as the Chief Executive Officer of the Company for an initial term of three years that extends for successive one-year renewal terms unless either party gives 30-days’ advance notice of non-renewal. As consideration for these services, the employment agreement provides Mr. Silverman with the following compensation and benefits:
| ● | An annual base salary of $ | |
| ● | After the first $ | |
| ● | Annual cash performance bonus opportunity as determined by the Board. | |
| ● | An option to acquire | |
| ● | Certain other employee benefits and perquisites, including reimbursement of necessary and reasonable travel and participation in retirement and welfare benefits. |
The receipt of $
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
34
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
On July 21, 2021, the Company entered into the
Employment Agreement with Mr. Wanke, the President of Patriot Glass, 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, 2023, the Company’s board
of directors approved a bonus to two officers in the aggregate amount 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
In 2015, pursuant to a subscription agreement,
C-Bond Systems, LLC issued
35
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
In 2016, pursuant to a subscription agreement,
C-Bond Systems, LLC issued
Option to purchase 20% of Patriot Glass
In connection with the Exchange Agreement with
Patriot Glass and the Patriot Glass 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 the sum of (i) Patriot Glass’s
net income, before income tax expense and interest expense have been deducted, for the period beginning on July 1, 2023 and ending on
June 30, 2025 plus (ii) $
36
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
M&A advisory agreement
On October 18, 2023, the Company and Maxim Group
LLC (“Maxim”) entered into an engagement letter, whereby Maxim was engaged as the Company’s exclusive financial advisor
to perform merger and acquisition advisory services. Either Maxim or the Company may terminate this Agreement at any time upon thirty
(30) days’ prior written notice to the other party after the six (6) month anniversary of this Agreement. The Company paid Maxim
a one-time non-refundable cash fee of $
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, 2024, the Company had no cash in bank in excess of FDIC insured levels. To reduce its risk associated with the failure of such a financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits. Any material loss that the Company may experience in the future could have an adverse effect on its ability to pay its operational expenses or make other payments and may require the Company to move its cash to other high quality financial institutions. The Company reviews its bank relationships in order to mitigate its risk to ensure that its exposure is limited or reduced to the FDIC protection limits. The Company has not experienced any losses in such accounts through September 30, 2024.
Geographic Concentrations of Sales
During the nine months ended September 30, 2024 and 2023, all sales were in the United States.
Customer Concentrations
For the nine months ended September 30, 2024,
one customer accounted for approximately
37
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
Vendor concentrations
Generally, the Company purchases substantially all its inventory from four suppliers. The loss of these suppliers may have a material adverse effect on the Company’s consolidated results of operations and financial condition. However, the Company believes that, if necessary, alternate vendors could supply similar products in adequate quantities to avoid material disruptions to operations.
NOTE 12 – 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™ product line (See Note
16), the Company operated in
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues: | ||||||||||||||||
| C-Bond | $ | $ | $ | $ | ||||||||||||
| Patriot Glass | ||||||||||||||||
| Depreciation and amortization: | ||||||||||||||||
| C-Bond | ||||||||||||||||
| Patriot Glass | ||||||||||||||||
| Interest expense: | ||||||||||||||||
| C-Bond | ||||||||||||||||
| Patriot Glass | ||||||||||||||||
| Other (a) | ||||||||||||||||
| Net income (loss): | ||||||||||||||||
| C-Bond | ( |
) | ( |
) | ( |
) | ||||||||||
| Patriot Glass | ( |
) | ( |
) | ( |
) | ||||||||||
| Other (a) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |||||||
| September 30, 2024 | December 31, 2023 | |||||||
| Identifiable long-lived tangible assets on September 30, 2024 and December 31, 2023 by segment: | ||||||||
| C-Bond | $ | $ | ||||||
| Patriot Glass | ||||||||
| $ | $ | |||||||
| (a) |
38
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
NOTE 13 – REVENUE RECOGNITION
Prior to the sale of the Company’s C-Bond segment in May 2023, the revenue that the Company recognized arose from purchase requests the Company received 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 the time 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 Patriot Glass 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, 2024 and 2023. Any sales tax, value added tax, and other tax the Company collects concurrently with its revenue-producing activities are excluded from revenue.
Revenue Disaggregation
The Company tracks its revenue by product.
| For the Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| C-Bond Secure multi-purpose and BRS ballistic resistant glass protection systems | $ | $ | ||||||
| C-Bond nanoShield solution sales | ||||||||
| Window tint installation and sales recognized over time | ||||||||
| Freight and delivery | ||||||||
| Total | $ | $ | ||||||
39
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
NOTE 14 – OPERATING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING LEASE LIABILITIES
In October 2019, the Company entered into an
In connection with the 2021 Exchange Agreement
between in the Company and Patriot Glass, 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 Patriot Glass 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, the Company entered into a
48-month lease agreement for the lease of office equipment under a non-cancelable operating lease through September 2025. The monthly
base rent is $
In February 2022, the Company entered into a 36-month
lease agreement for the lease of a vehicle under a non-cancelable operating lease through January 2025. The monthly base rent is $
During the nine months ended September 30, 2024
and 2023, in connection with its property operating leases, the Company recorded rent expense of $
As of September 30, 2024, the weighted-average
remaining lease term for the operating lease is
| September 30, 2024 | December 31, 2023 | |||||||
| Office leases and office equipment right of use assets | $ | $ | ||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Balance of ROU assets | $ | $ | ||||||
| September 30, 2024 | December 31, 2023 | |||||||
| Lease liabilities related to office leases right of use assets | $ | $ | ||||||
| Less: current portion of lease liabilities | ( | ) | ( | ) | ||||
| Lease liabilities – long-term | $ | $ | ||||||
40
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
| Twelve months ending September 30, | Amount | |||
| 2025 | $ | |||
| 2026 | ||||
| Total minimum non-cancelable operating lease payments | ||||
| Less: discount to fair value | ( | ) | ||
| Total lease liability on September 30, 2024 | $ | |||
NOTE 15 – RELATED PARTY TRANSACTIONS
Due from Related Party
On May 8, 2024, the SEC filed an administrative
proceeding, File No. 3-21932, and agreed to accept the settlement offers and institute an Order. Without admitting or denying the SEC’s
findings, C-Bond and its Chief Executive Officer consented to a cease-and-desist order and agreed to pay penalties 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™ product line, 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.
41
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(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 $ |
| 6) | The
Company repaid its CEO $ |
42
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024
(UNAUDITED)
In accordance with ASC 205-20, the sale of the C-Bond nanoShield™ product line was not reported in discontinued operations since the disposal did not represent a strategic shift that has (or will have) a major effect on the Company’s operations and financial results. The C-Bond nanoShield™ product line was only a component of the C-Bond segment which comprised of operations and cash flows that were not clearly distinguished, operationally and for financial reporting purposes, from the rest of the C-Bond segment.
In connection with the sale of the C-Bond nanoShield™
product line, on May 8, 2023, the Company recorded a gain from the sale of the product line of $
NOTE 17 – SUBSEQUENT EVENTS
On October 1, 2024, the Company’s subsidiary,
Patriot Glass, entered into a Merchant Loan (the “October 2024 Merchant Loan”) with a lender in the principal amount of $
On October 21, 2024, the Company received a notice
default stating that the Company is now in default of its March 2024 Note, April 2024 Note and June 2024 Note with Diagonal (See Note
7) for non-payment of the October 2024 installment payment due. Demand was made for the immediate payment (as provided in these Notes)
of a sum representing 220% of the remaining outstanding principal balances (in the aggregate, ($
On October 21, 2024, the Company issued
On October 25, 2024, the Company issued
On October 31, 2024, the Company issued
On November 1, 2024, the Company entered into an addendum to the Institutional
and Retail Investor Outreach Services Contract with Cervitude LLC, whereby the Company agreed to issue
On November 6, 2024, the Company’s subsidiary,
Patriot Glass, entered into a Merchant Loan (the “November 2024 Merchant Loan”) with a lender in the principal amount of $
On November 12, 2024, the Company issued
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management and expected market growth, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “will,” “would,” “should,” “expect,” “plan,”, “anticipate,” “believe,” “estimate,” “intend,” “predict,” “seek,” “contemplate,” “project,” “continue,” “potential,” “ongoing” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:
| ● | our ability to obtain additional funds for our operations; |
| ● | our ability to obtain and maintain intellectual property protection for our products and our ability to operate our business without infringing the intellectual property rights of others; |
| ● | our reliance on third party distributors; |
| ● | the initiation, timing, progress and results of our research and development programs; |
| ● | our dependence on current and future collaborators for developing new products; |
| ● | the rate and degree of market acceptance of our commercial products; |
| ● | the implementation of our business model and strategic plans for our business; |
| ● | our estimates of our expenses, losses, future revenue and capital requirements, including our needs for additional financing; |
| ● | our reliance on third party suppliers to supply the materials and components for our products; |
| ● | our ability to attract and retain qualified key management and technical personnel; |
| ● | our financial performance; |
| ● | the impact of government regulation and developments relating to our competitors or our industry; and |
| ● | other risks and uncertainties, including those listed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as the same may be updated from time to time, including in this Report. |
These statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed in our SEC filings.
Any forward-looking statement in this Report reflects our current view with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our business, results of operations, industry, and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Report completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
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This Report also may contain estimates, projections and other information concerning our industry, our business and the markets for certain glass strengthening solutions, hydrophobic products, and window film mounting solutions, including data regarding the estimated size of those markets and their projected growth rates. Information that is based on estimates, forecasts, projections, or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained these industry, business, market and other data from reports, research surveys, studies and similar data prepared by third parties, industry, and general publications, government data and similar sources. In some cases, we do not expressly refer to the sources from which these data are derived.
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Report. Except as required by law, we do not undertake any obligation to update or release any revisions to these forward-looking statements to reflect any events or circumstances, whether as a result of new information, future events, changes in assumptions or otherwise, after the date hereof.
Overview
We are a nanotechnology company and marketer 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. Our PGS subsidiary sells two main security products: C-Bond BRS, a ballistic-resistant window film solution and C-Bond Secure, a forced entry deterrent solution, to private enterprises, schools, government agencies, and general contractors. PGS also sells offers other types of window film for various applications, including solar, decorative, reflective, and more.
On May 8, 2023, we entered into an APA with Apex Protect GPS, LLC (the “Buyer”), a Texas limited liability company, whereby we agreed to sell its C-Bond nanoShield™ product line, including intangible assets, intellectual property, work in process, furniture, fixtures, equipment, inventory and other physical assets of our C-Bond nanoShield product line (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, a Patent and Know-How License Agreement, and a Patent License-Back Agreement.
On June 15, 2023, an Assignment and Agreement to Re-Execute was entered into by and among the Company (“Seller”); Apex Protect GPS, LLC, (“Assignor”) and CB Nanoshield, LLC, a Texas limited liability company (“Assignee”), whereby the Assignor assigned to the Assignee 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 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.
45
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.
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 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.
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, we had a net loss of $1,226,346 for the nine months ended September 30, 2024. Net cash used in operations was $1,136,520 and $1,228,280 for the nine months ended September 30, 2024 and 2023, respectively. Additionally, as of September 30, 2024, we had an accumulated deficit, shareholders’ deficit, and working capital deficit of $62,094,359, $4,869,010 and $1,786,279, respectively. On September 30, 2024, we had cash of $21,673. These factors raise substantial doubt about our ability to continue as a going concern for a period of twelve months from the issuance date of this report. 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 are seeking to raise capital through additional debt and/or equity financings to fund our operations in the future. Although we have 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 we 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 we will need to curtail our 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 we be unable to continue as a going concern.
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Critical Accounting Estimates
The following discussion and analysis of our consolidated financial condition and consolidated results of operations are based upon our unaudited 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 require 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 critical estimates for estimates used in the calculation of percentage of completion on uncompleted jobs, assumptions used in assessing impairment of long-term 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.
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.
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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, 2024 and 2023, 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, 2024 and 2023.
Comparison of Results of Operations for the Three and Nine Months ended September 30, 2024 and 2023
Sales
For the three months ended September 30, 2024, sales amounted to $659,881 as compared to $813,951 for the three months ended September 30, 2023, a decrease of $154,070, or 18.9%, primarily attributable to a decrease in window tint installation and services to school districts in Texas. For the nine months ended September 30, 2024, sales amounted to $2,460,218 as compared to $1,743,226 for the nine months ended September 30, 2023, an increase of $716,992, or 41.1%. Thise increase was attributable to an increase in sales of window tint installation and services to school districts in Texas. The Texas Education Agency (TEA) mandated 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. Additionally, we had an increase in sales from the sales of C-Bond Secure multi-purpose and BRS ballistic resistant glass protection systems. These increases were offset by a decrease in sales of our recently sold C-Bond nanoShield™ solutions product line of $112,413 during the nine months ended September 2024 and compared to the nine months ended September 30, 2023, due to product line sale in May 2023, and a decrease in freight and delivery sales.
Cost of Goods Sold
In connection with our C-Bond Solutions segment, cost of goods sold was comprised primarily of the cost of raw materials and finished inventory sold, packaging costs, and warranty costs. In connection with our Patriot Glass 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, 2024, cost of sales amounted to $381,773 as compared to $346,611 for the three months ended September 30, 2023, an increase of $35,162, or 10.1%. For the nine months ended September 30, 2024, cost of sales amounted to $1,268,661 as compared to $801,042 for the nine months ended September 30, 2023, an increase of $467,619, or 58.4%.
Gross Profit
For the three months ended September 30, 2024, gross profit amounted to $278,108, or 42.2% of sales, as compared to $467,340, or 57.4% of sales, for the three months ended September 30, 2023, a decrease of $189,232, or 40.5%. For the nine months ended September 30, 2024, gross profit amounted to $1,191,557, or 48.3% of sales, as compared to $942,184, or 54.1% of sales, for the nine months ended September 30, 2023, an increase of $249,373, or 26.5%.
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Operating Expenses
For the three months ended September 30, 2024, operating expenses amounted to $641,167 as compared to $581,971 for the three months ended September 30, 2023, an increase of $59,196, or 10.2%. For the nine months ended September 30, 2024, operating expenses amounted to $2,388,496 as compared to $2,152,281 for the nine months ended September 30, 2023, an increase of $236,215, or 11.0%. For the three and nine months ended September 30, 2024 and 2023, operating expenses consisted of the following:
| Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Compensation and related benefits, including stock-based compensation charges | $ | 403,517 | $ | 308,991 | $ | 1,556,184 | $ | 1,177,044 | ||||||||
| Professional fees | 86,814 | 111,005 | 316,428 | 491,958 | ||||||||||||
| General and administrative expenses | 150,836 | 161,975 | 515,884 | 483,279 | ||||||||||||
| Total | $ | 641,167 | $ | 581,971 | $ | 2,388,496 | $ | 2,152,281 | ||||||||
Compensation and related benefits
For the three months ended September 30, 2024, compensation and related benefits increased by $94,526, or 30.6%, as compared to the three months ended September 30, 2023. This increase was primarily due to an overall increase in executive compensation and related benefits of $71,752 and an increase in sales compensation and related benefits of $22,774.
For the nine months ended September 30, 2024, compensation and related benefits increased by $379,140, or 32.2%, as compared to the nine months ended September 30, 2023. This increase was primarily due to an increase in stock-based compensation of $334,785, and an overall increase in compensation and related benefits of $44,355.
On January 2, 2024, the Board of Directors of the Company agreed to satisfy $312,000 of accrued compensation owed to its executive officers (collectively, the “Management”) as of December 31, 2023, which was included in accrued compensation on the accompanying unaudited consolidated balance sheet. Management agreed to accept 312 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 $281,807 related to the beneficial conversion feature arising from the issuance of Series B Preferred Stock. Additionally, on January 2, 2024, the Board of Directors of the Company agreed to issue 50 shares of the Company’s Series B convertible preferred stock to a director for services rendered. 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 $95,161, which consisted of (i) $50,000 of Series B stated value and (ii) $45,161 related to the beneficial conversion feature arising from the issuance of Series B Preferred Stock.
Professional fees
For the three months ended September 30, 2024, professional fees decreased by $24,191, or 21.8%, as compared to the three months ended September 30, 2023. This decrease was primarily related to a decrease in consulting fees of $36,180, offset by an increase in other professional fees of $11,989.
For the nine months ended September 30, 2024, professional fees decreased by $175,530, or 35.7%, as compared to the nine months ended September 30, 2023. This decrease was primarily related to a decrease in consulting fees of $170,814 and a decrease in legal fees of $30,363, offset by an increase in accounting fees of $7,631 and a net increase in other professional fees of $18,016.
General and administrative
For the three months ended September 30, 2024, general and administrative expenses decreased by $11,139, or 6.9%, as compared to the three months ended September 30, 2023. The decrease is primarily attributable to a decrease in bad debt expense of $17,987, offset by an increase in other selling, general and administrative expenses of $6,848.
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For the nine months ended September 30, 2024, general and administrative expenses increased by $32,605, or 6.7%, as compared to the nine months ended September 30, 2023. The increase is primarily attributable to an increase in bad debt expense of $5,107, an increase in advertising expense of $21,102, an increase in other selling, general and administrative expenses of $21,465, an increase in depreciation expense of $11,152, and an increase in shipping and handling expense of $8,080, offset by a decrease in rent of $34,301 associated with the sale of the C-Bond nanoShield™ product line in May 2023.
Other Operating Income
During the nine months ended September 30, 2024 and 2023, we reported a gain on sale of our nanoShield™ product line of $0 and $4,051,709, respectively. We did not record any other operating income during the three months ended September 30, 2024 and 2023.
(Loss) Income from Operations
For the three months ended September 30, 2024 and 2023, loss from operations amounted to $363,059 and $114,631, respectively, an increase of $248,428, or 216.7%. For the nine months ended September 30, 2024 and 2023, (loss) income from operations amounted to $(1,196,939) and $2,841,612, respectively, a negative change of $4,038,551, or 142.1%.
Other Income (Expenses), net
For the three months ended September 30, 2024, other expenses, net amounted to $309,670 as compared to $49,437 for the three months ended September 30, 2023, an increase of $260,233, or 526.4%. This change was primarily due to an increase in interest expense of $29,763 related to an increase in interest-bearing debt, which includes an increase in merchant loans with high interest rates. Additionally, during the three months ended September 30, 2024, we recorded a loss on debt extinguishment aggregating $221,220 that included the recording of a put premium expense of $189,642 and the write off of remaining debt discount of $31,578, both which were related to the amendment of certain notes payable.
For the nine months ended September 30, 2024, other income (expenses), net amounted to $(29,407) as compared to $45,506 for the nine months ended September 30, 2023, a negative change of $74,913, or 164.6%. This change was primarily due to a decrease in interest expense of $270,148 related to an average decrease in interest-bearing debt during the period, offset by a decrease in gain on debt extinguishment of $345,061 related to the reversal of previously accrued compensation and settlement of debt. Additionally, during the nine months ended September 30, 2024, we recorded a loss on debt extinguishment aggregating $221,220 that included the recording of a put premium expense of $189,642 and the write off of remaining debt discount of $31,578, both which were related to the amendment of certain notes payable.
Net (Loss) Income
Due to factors discussed above, for the three months ended September 30, 2024 and 2023, net loss amounted to $(672,729) and $(164,068), respectively. For the three months ended September 30, 2024, net loss attributable to common shareholders, which included dividends accrued on Series B and C preferred stock of $(11,008) and the add back of net loss attributable to noncontrolling interests of $36,524, amounted to $(647,213), or $(0.00) per common share (basic and diluted). 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 addition of net (income) attributable to noncontrolling interests of $28,657, amounted to $(206,208), or $(0.00) per common shares (basic and diluted).
Due to factors discussed above, for the nine months ended September 30, 2024 and 2023, net (loss) income amounted to $(1,226,346) and $2,887,118, respectively. For the nine months ended September 30, 2024, net loss attributable to common shareholders, which included dividends accrued on Series B and C preferred stock of $(39,106) and the add back of net loss attributable to noncontrolling interests of $22,807, amounted to $(1,242,645), or $(0.00) per common share (basic and diluted). 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 add back of net loss attributable to noncontrolling interests of $6,705, amounted to $2,853,035, or $0.01 per basic common shares and $0.00 per diluted common share.
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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 $21,673 and $736,461 as of September 30, 2024 and December 31, 2023, 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. Historically, 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. 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, | |
| ● | 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. |
Recent Fundings
On March 1, 2024, we executed a Promissory Note (the “March 2024 Note”) in favor of Diagonal in the aggregate principal amount of $157,000 (the “Principal”), and an accompanying Securities Purchase Agreement (“SPA”). Through August 15, 2024, the March 2024 Note was only convertible into shares of the Company’s common stock in the event of a default. On August 15, 2024, we entered into two amendments to the March 2024 Note. The amendments to the March 2024 Note changed the number and dollar amount of mandatory monthly payments to be paid to 9 payments, each in the amount of $17,877 (a total payback to the Holder of $160,893). The first payment shall be due August 30, 2024, with 8 subsequent payments due on the 30th day of each month thereafter. The amendments to the March 2024 Note also made the March 2024 Note convertible at any time at Diagonal’s option and changed the conversion price to 65% multiplied by the lowest closing bid price during the 10 trading days prior to the conversion date (representing a discount rate of 35%). All other terms in the March 2024 Note remain the same. Among other things, an event of default (“Event of Default”) shall occur if the Company fails to pay the principal or interest when due on the March 2024 Note, whether at maturity, upon acceleration or otherwise. Upon the occurrence of any Event of Default, the March 2024 Note shall become immediately due and payable and the Company shall pay to the Investor, in full satisfaction of its obligations hereunder, an amount equal to 220% times the sum of the then outstanding principal amount of this March 2024 Note plus accrued and unpaid interest on the unpaid principal amount of this March 2024 Note to the date of payment plus Default Interest, if any. At no time may the Note be converted into shares of our common stock if such conversion would result in the Investor and its affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of our common stock. As of September 30, 2024, the principal balance of the March 2024 Note was $139,548.
On April 8, 2024, we executed a Promissory Note (the “April 2024 Note”) in favor of Diagonal in the aggregate principal amount of $127,693 (the “Principal”), and an accompanying Securities Purchase Agreement (“SPA”). The April 2024 Note was funded on April 10, 2024, in the amount of $100,000. Through August 15, 2024, the April 2024 Note was only convertible into shares of the Company’s common stock in the event of a default. On August 15, 2024, the Company entered into two amendments to its April 2024 Note in favor of Diagonal in the principal amount of $127,693. The amendments to the April 2024 Note changed the number and dollar amount of mandatory monthly payments to be paid to 9 payments, each in the amount of $21,980 (a total payback to the Holder of $197,820). The first payment shall be due August 13, 2024, with 8 subsequent payments due on the 15th day of each month thereafter. The amendments to the April 2024 Note also made the April 2024 Note convertible at any time at Diagonal’s option and changed the conversion price to 65% multiplied by the lowest closing bid price during the 10 trading days prior to the conversion date (representing a discount rate of 35%). All other terms in the April 2024 Note remain the same. A one-time interest charge of 12% (the “Interest Rate”) shall be applied on the issuance date to the Principal. Under the terms of the original April 2024 Note, the Company was required to make monthly payments beginning on August 15, 2024. Any amount of principal or interest on the April 2024 Note which is not paid when due shall bear interest at the rate of 22% per annum from the due date thereof until the same is paid (“Default Interest”). Among other things, an event of default (“Event of Default”) shall occur if the Company fails to pay the principal or interest when due on the Note, whether at maturity, upon acceleration or otherwise. Upon the occurrence of any Event of Default, the April 2024 Note shall become immediately due and payable and the Company shall pay to the Investor, in full satisfaction of its obligations hereunder, an amount equal to 220% times the sum of the then outstanding principal amount of this April 2024 Note plus accrued and unpaid interest on the unpaid principal amount of this April 2024 Note to the date of payment plus Default Interest, if any. At no time may the April 2024 Note be converted into shares of our common stock if such conversion would result in the Investor and its affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares As of September 30, 2024, the principal balance of the April 2024 Note was $97,407.
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On June 5, 2024, we executed a Promissory Note (the “June 2024 Note”) in favor of Diagonal in the aggregate principal amount of $67,500 (the “Principal”), and an accompanying Securities Purchase Agreement (“SPA”). The June 2024 Note was funded on June 5, 2024, in the amount of $50,000, net of original issue discount and fees of $17,500. Under the terms of the June 2024 Note, the Company is required to make nine monthly payments of principal and interest of $8,775 beginning on July 15, 2024. Any amount of principal or interest on the April 2024 Note which is not paid when due shall bear interest at the rate of 22% per annum from the due date thereof until the same is paid (“Default Interest”). Through August 15, 2024, the June 2024 Note was only convertible into shares of the Company’s common stock in the event of a default. On August 15, 2024, we entered into an amendment to its June 2024 Note in favor of Diagonal in the principal amount of $67,500. The amendment to the June 2024 Note made the June 2024 Note convertible at any time at Diagonal’s option and changed the conversion price to 65% multiplied by the lowest closing bid price during the 10 trading days prior to the conversion date (representing a discount rate of 35%). All other terms in the June 2024 Note remain the same. Accordingly, on August 15, 2024, the principal amount outstanding of $47,453 was reclassified from notes to convertible notes payable (See Note 8). Among other things, an event of default (“Event of Default”) shall occur if the Company fails to pay the principal or interest when due on the June 2024 Note, whether at maturity, upon acceleration or otherwise. Upon the occurrence of any Event of Default, the June 2024 Note shall become immediately due and payable and the Company shall pay to the Investor, in full satisfaction of its obligations hereunder, an amount equal to 220% times the sum of the then outstanding principal amount of this June 2024 Note plus accrued and unpaid interest on the unpaid principal amount of this June 2024 Note to the date of payment plus Default Interest, if any. At no time may the June 2024 Note be converted into shares of our common stock if such conversion would result in the Investor and its affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of the Company’s common stock. As of September 30, 2024, the principal balance of the June 2024 Note was $47,453.
On June 17, 2024, our subsidiary, Patriot Glass, entered into a Merchant Loan (the “June 2024 Merchant Loan”) with a lender in the principal amount of $85,000 and received net proceeds of $81,550, net of fees of $3,450, which was reflected as a debt discount to be amortized into interest expense over the term of the note. The June 2024 Merchant Loan requires a weekly payment of principal and interest of $2,988 through March 19, 2025 for an effective interest rate of 85.9%. On September 30, 2024, the principal amount due on the June 2024 Merchant Loan is $60,790.
On July 31, 2024, our subsidiary, Patriot Glass, entered into a Merchant Loan (the “July 2024 Merchant Loan”) with a lender in the principal amount of $75,000 and received net proceeds of $73,030, net of fees of $1,970, which was reflected as a debt discount to be amortized into interest expense over the term of the note. The July 2024 Merchant Loan requires a weekly payment of principal and interest of $3,022 through April 2025. On September 30, 2024, the principal amount due on the July 2024 Merchant Loan is $62,941.
On August 9, 2024, we entered into a Promissory Note and Security Agreement (the “August 2024 Note”) with a Private investor (the “Private Investor”) in the principal amount of $990,000 in connection with the conversion of 8,000 shares Series C Preferred Stock held by the Private Investor with a stated value of $800,000 plus additional cash proceeds from the Private Investor of $190,000. The August 2024 Note consists of $800,000 stated value of Series C Preferred stock converted plus additional cash proceeds of $190,000 received from the Private Investor. The August 2024 Note shall bear interest at 6% per annum. We shall pay quarterly interest expense of $14,850 starting on October 1, 2024 and continuing until the maturity date, which is the earlier of August 9, 2027, or a change of control in the Company, as defined in the August 2024 Note. All outstanding principal and unpaid interest is due on the maturity date. The August 2024 Note is secured all assets of the Company.
On September 19, 2024, our subsidiary, Patriot Glass, entered into a Merchant Loan (the “September 2024 Merchant Loan”) with a lender in the principal amount of $70,000 and received net proceeds of $65,100, net of fees of $4,900, which was reflected as a debt discount to be amortized into interest expense over the term of the note. The September 2024 Merchant Loan requires a weekly payment of principal and interest of $4,287 through September 2025. On September 30, 2024, the principal amount due on the September 2024 Merchant Loan is $67,284.
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Summary
As of September 30, 2024, 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. As reflected in the accompanying unaudited consolidated financial statements, the Company had a net loss of $1,226,346 for the nine months ended September 30, 2024. Net cash used in operations was $1,136,520 and $1,228,280 for the nine months ended September 30, 2024 and 2023, respectively. Additionally, as of September 30, 2024, the Company had an accumulated deficit, shareholders’ deficit, and working capital deficit of $62,094,359, $4,869,010 and $1,786,279, respectively. 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as filed with the SEC, 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.
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, 2024 and 2023
The following table shows a summary of our cash flows for the nine months ended September 30, 2024 and 2023.
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash used in operating activities | $ | (1,136,520 | ) | $ | (1,228,280 | ) | ||
| Net cash (used in) provided by investing activities | (42,157 | ) | 3,927,861 | |||||
| Net cash provided by (used in) financing activities | 463,889 | (1,663,543 | ) | |||||
| Net (decrease) increase in cash | (714,788 | ) | 1,036,038 | |||||
| Cash - beginning of the period | 736,461 | 97,091 | ||||||
| Cash - end of the period | $ | 21,673 | $ | 1,133,129 | ||||
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Net Cash Used in Operating Activities:
Net cash flow used in operating activities was $1,136,520 for the nine months ended September 30, 2024 as compared to net cash flow used in operating activities of $1,228,280 for the nine months ended September 30, 2023, a decrease of $91,760.
Net cash flow used in operating activities for the nine months ended September 30, 2024 primarily reflected a net loss of $1,226,346, which was then adjusted for the add-back (deduction) of non-cash items primarily consisting of depreciation and amortization of $75,104, stock-based compensation expense of $376,968, amortization of debt discount of $48,705, non-cash gain on debt extinguishment of $(126,770), non-cash compensation claw back of $(21,961), and bad debt expense of $7,021, and changes in operating assets and liabilities consisting primarily of a decrease in accounts receivable of $190,425, a decrease in inventory of $35,226, an increase in prepaid expenses of $57,941, an increase in contract assets of $81,085, an increase in contract liabilities of $370,262, an increase in accounts payable of $102,357, and a decrease in accrued expenses of $95,143.
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 Provided by (Used in) Investing Activities:
Net cash provided by investing activities was $3,927,861 for the nine months ended September 30, 2023 as compared to net cash used in investing activities of $42,157 for the nine months ended September 30, 2024.
During the nine months ended September 30, 2024, we used cash for the purchase of property and equipment for $42,157.
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 provided by financing activities was $463,889 for the nine months ended September 30, 2024 as compared to net cash used in financing activities of $(1,663,543) for the nine months ended September 30, 2023.
During the nine months ended September 30, 2024, we received net proceeds from notes payable of $775,837. These proceeds were offset by the repayment of notes payable of $176,948 and the repayment of convertible notes payable of $135,000.
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.
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.
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The following tables summarize our contractual obligations as of September 30, 2024, 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 | $ | 1,326,776 | $ | 280,630 | $ | 1,020,054 | $ | 26,092 | $ | - | ||||||||||
| Convertible note payable | 1,437,141 | 654,050 | 783,091 | - | - | |||||||||||||||
| Interest on notes payable | 191,292 | 191,292 | - | - | - | |||||||||||||||
| Operating lease gross base rent | 126,351 | 70,351 | 56,000 | - | - | |||||||||||||||
| Total | $ | 3,081,560 | $ | 1,196,323 | $ | 1,859,145 | $ | 26,092 | $ | - | ||||||||||
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.
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, 2024, 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, 2023, 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, 2024 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 March 8, 2021, a former officer of the Company resigned. Both parties alleged certain claims against the other, including with respect to 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. The Board of Directors of the Company have resolved and taken action in February 2024 to cause the forfeiture of equity and deferred compensation owed/outstanding by said officer. Accordingly, on February 8, 2024, the Board of Directors of the Company determined that 120 shares of Series B convertible preferred stock and 5,250,000 shares of the Company’s common stock shall be forfeited (See Note 9). Additionally, on February 8, 2024, the Company reversed accrued compensation that was outstanding to this former officer as of December 31, 2023 of $347,097 and accordingly, during the nine months ended September 30, 2024, the Company recorded a gain on debt extinguishment of $347,097.
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, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On October 21, 2024, we received a notice default stating that the Company is now in default of its Notes Payable with an investor for non-payment of the October 2024 installment payment due. Demand was made for the immediate payment (as provided in the Notes) of a sum representing 220% of the remaining outstanding principal balances (in the aggregate, ($140,086 (March Note balance) + $99,056 (April Note balance) + $52,650 (June Note balance) * 2.2= $641,942), together with accrued interest and Default Interest as provided for in the Notes.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a) None.
(b) There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors since the Company last provided disclosure in response to the requirements of Item 407(c)(3) of Regulation S-K.
(c) During the quarter ended
September 30, 2024, no director or officer of the Company
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ITEM 6. EXHIBITS
| * | 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, 2024 | By: | /s/ Scott R. Silverman |
| Scott R. Silverman | ||
|
Chief Executive Officer and Chief Financial Officer (principal executive officer, | ||
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