UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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the quarterly period ended
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(Exact name of Registrant as Specified in its Charter)
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Securities registered pursuant to Section 12(b) of the Exchange Act:
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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
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Indicate
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There
were
C-BOND SYSTEMS, INC.
FORM 10-Q
JUNE 30, 2023
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Contract assets | ||||||||
| Total Current Assets | ||||||||
| OTHER ASSETS: | ||||||||
| Property and equipment, net | ||||||||
| Right of use asset, net | ||||||||
| Intangible asset, net | ||||||||
| Goodwill | ||||||||
| Security deposit | ||||||||
| Total Other Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Convertible note payable, net of discount - current portion | $ | $ | ||||||
| Notes payable, net of discount - current portion | ||||||||
| Note payable - related party | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Accrued interest payable - related party | ||||||||
| Accrued compensation | ||||||||
| Contract liabilities | ||||||||
| Lease liabilities, current portion | ||||||||
| Total Current Liabilities | ||||||||
| LONG-TERM LIABILITIES: | ||||||||
| Convertible notes payable, net of current portion | ||||||||
| Notes payable, net of current portion and discount | ||||||||
| Note payable - related party | ||||||||
| Lease liabilities, net of current portion | ||||||||
| Total Long-term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (See Note 10) | ||||||||
| Series B convertible preferred stock: $ | ||||||||
| Series C convertible preferred stock: $ | ||||||||
| SHAREHOLDERS’ DEFICIT: | ||||||||
| Preferred stock: $ | ||||||||
| Common stock: $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total C-Bond Systems, Inc. shareholders’ deficit | ( | ) | ( | ) | ||||
| Noncontrolling Interest | ||||||||
| Total Shareholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Shareholders’ Deficit | $ | $ | ||||||
See accompanying unaudited notes to the unaudited consolidated financial statements.
1
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| SALES: | $ | $ | $ | $ | ||||||||||||
| COST OF SALES (excluding depreciation expense) | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Compensation and related benefits (including stock-based compensation of $ | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Professional fees | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Operating Expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER OPERATING INCOME: | ||||||||||||||||
| Gain on sale of product line | ||||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | ( | ) | ( | ) | ||||||||||||
| OTHER INCOME (EXPENSES): | ||||||||||||||||
| Gain (loss) on debt extinguishment, net | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense - related party | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Other Income (Expenses), net | ( | ) | ( | ) | ||||||||||||
| NET INCOME (LOSS) | ( | ) | ( | ) | ||||||||||||
| Net loss of subsidiary attributable to noncontrolling interest | ||||||||||||||||
| Preferred stock dividend | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| NET INCOME (LOSS) PER COMMON SHARE: | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying unaudited notes to the unaudited consolidated financial statements.
2
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(Unaudited)
| Additional | Total | |||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Noncontrolling | Shareholders’ | ||||||||||||||||||||
| # of Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Common stock issued for cash and accrued compensation | ||||||||||||||||||||||||
| Common stock issued for professional fees | ||||||||||||||||||||||||
| Common stock issued for accrued compensation | ||||||||||||||||||||||||
| Common stock issued for conversion of Series C preferred stock | ||||||||||||||||||||||||
| Preferred stock dividends and deemed dividend | - | ( | ) | ( | ) | |||||||||||||||||||
| Accretion of stock-based compensation | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||
| Common stock issued for professional fees | ||||||||||||||||||||||||
| Common stock issued for compensation | ||||||||||||||||||||||||
| Common stock issued for conversion of Series C preferred stock | ||||||||||||||||||||||||
| Common stock issued for conversion of debt, accrued interest and fees | ||||||||||||||||||||||||
| Preferred stock dividends and deemed dividend | - | ( | ) | ( | ) | |||||||||||||||||||
| Accretion of stock-based compensation | - | |||||||||||||||||||||||
| Net income | - | ( | ) | |||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Additional | Total | |||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Noncontrolling | Shareholders’ | ||||||||||||||||||||
| # of Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Common stock issued for accounts payable | ||||||||||||||||||||||||
| Common stock issued for compensation | ||||||||||||||||||||||||
| Common stock issued for conversion of Series C preferred stock | ||||||||||||||||||||||||
| Common stock issued in connection with debt | ||||||||||||||||||||||||
| Preferred stock dividends and deemed dividend | - | ( | ) | ( | ) | |||||||||||||||||||
| Accretion of stock-based compensation | - | |||||||||||||||||||||||
| Beneficial conversion charge for issuance of Series B preferred shares for accrued compensation recorded as stock-based compensation | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||
| - | ||||||||||||||||||||||||
| Common stock issued for professional fees | ||||||||||||||||||||||||
| Common stock issued for conversion of Series C preferred stock | ||||||||||||||||||||||||
| Common stock issued in connection with debt | ||||||||||||||||||||||||
| Preferred stock dividends and deemed dividend | - | ( | ) | ( | ) | |||||||||||||||||||
| Accretion of stock-based compensation | - | |||||||||||||||||||||||
| Relative fair value of warrants issued in connection with debt | - | |||||||||||||||||||||||
| Beneficial conversion feature on convertible debt | - | |||||||||||||||||||||||
| Beneficial conversion feature buyback related to debt extinguishment | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
See accompanying unaudited notes to the unaudited consolidated financial statements.
3
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Amortization of debt discount to interest expense | ||||||||
| Interest expense for put premium on convertible notes | ||||||||
| Non-cash interest expense from fees on debt conversion | ||||||||
| Stock-based compensation | ||||||||
| Stock-based professional fees | ||||||||
| Bad debt expense | ||||||||
| Non-cash (gain) loss on debt extinguishment and inducement expense | ( | ) | ||||||
| Gain from sale of Nanoshield product line | ( | ) | ||||||
| Lease costs | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Contract assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ||||||||
| Accrued interest - related party | ||||||||
| Accrued compensation | ||||||||
| Contract liabilities | ||||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds from the sale of Nanoshield product line | ||||||||
| NET CASH PROVIDED BY INVESTING ACTIVITIES | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from sale of common stock | ||||||||
| Proceeds from note payable - related party | ||||||||
| Repayment of note payable - related party | ( | ) | ||||||
| Proceeds from notes payable | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Proceeds from convertible notes payable | ||||||||
| Repayment of convertible notes payable | ( | ) | ||||||
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | ( | ) | ||||||
| NET INCREASE (DECREASE) IN CASH | ( | ) | ||||||
| CASH, beginning of period | ||||||||
| CASH, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Common stock issued as prepaid for services | $ | $ | ||||||
| Common stock issued for accrued compensation | $ | $ | ||||||
| Series B preferred stock issued for accrued compensation | $ | $ | ||||||
| Preferred stock dividend accrued | $ | $ | ||||||
| Deemed dividend related to ratchet provision | $ | $ | ||||||
| Increase in debt discount and paid-in capital for shares issued with convertible debt | $ | $ | ||||||
| Increase in debt discount and paid-in capital for warrants issued with convertible debt | $ | $ | ||||||
| Increase in debt discount and paid-in capital for beneficial conversion feature on convertible debt | $ | $ | ||||||
| Conversion of series C preferred stock to common stock | $ | $ | ||||||
| Conversion of notes payable to common stock | $ | $ | ||||||
| Common stock issued for accounts payable | $ | $ | ||||||
See accompanying unaudited notes to the unaudited consolidated financial statements.
4
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
NOTE 1 – NATURE OF ORGANIZATION
Nature of Organization
C-Bond Systems, Inc., together with its subsidiaries (the “Company”), is a materials development company and sole owner, developer, and manufacturer of the patented C-Bond technology. The Company is engaged in the implementation of proprietary nanotechnology applications and processes to enhance properties of strength, functionality, and sustainability of brittle material systems. The Company’s primary focus is in the multi-billion-dollar glass and window film industry with target markets in the United States and internationally. The Company operates in two divisions: C-Bond Transportation Solutions and Patriot Glass Solutions. C-Bond Transportation Solutions sold a windshield strengthening, water repellent solution called C-Bond nanoShield™ through May 8, 2023, the date that the nanoShield product line and related technologies were sold (see Note 16). Patriot Glass Solutions sells multi-purpose glass strengthening primer and window film mounting solutions, including C-Bond BRS, a ballistic-resistant film system, and C-Bond Secure, a forced entry system.
On
June 30, 2021, the Company entered into a Share Exchange Agreement and Plan of Reorganization (the “Exchange Agreement”)
with (i) Mobile Tint LLC, a Texas limited liability company doing business as A1 Glass Coating (“Mobile”), (ii) the sole
member of Mobile (the “Mobile Shareholder”), and (iii) Michael Wanke as the Representative of the Mobile Shareholder. Pursuant
to the Exchange Agreement, the Company agreed to acquire
On May 8, 2023, the Company entered into an Asset Purchase Agreement (“APA”) with Apex Protect GPS, LLC (the “Buyer”), whereby the Company sold its C-Bond nanoShield™ business, including intangible assets, intellectual property, work in process, furniture, fixtures, equipment, inventory and other physical assets of the Company’s C-Bond nanoShield division (the “Assets”) to the Buyer. Accordingly, the Company assigned, transferred and delivered to the Buyer, free and clear of all liens, all of the Assets. Following the Closing, the Parties entered into an Assignment and Agreement to Re-Execute (“Assignment”) on June 15, 2023, by and among the Company (“Seller”); Apex Protect GPS, LLC, (“Assignor”) and CB Nanoshield, LLC, (“Assignee”), whereby the Assignor assigned all its right to the (i) APA; (ii) Bill of Sale (iii) IP Agreements; and (iv) and any memorandums, schedules and exhibits related to the foregoing to Assignee. The Seller and Assignee also entered into a Lease and Assignment and Assumption Agreement on June 15, 2023 (the “Assignment Agreement”), wherein the Seller assigned to Assignee, and Assignee took assignment from the Seller, of the lease for the premises located at 6035 South Loop East, Houston, Texas 77033 (the “Lease”) pursuant to the Assignment Agreement (See Note 16).
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The
Company’s unaudited consolidated financial statements include the financial statements of its wholly owned subsidiary, C-Bond Systems,
LLC, and its
5
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
Management acknowledges its responsibility for the preparation of the accompanying unaudited condensed consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its financial position and the results of its operations for the periods presented. The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) for interim financial information and with the instructions Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.
Certain information and note disclosure normally included in consolidated financial statements prepared in accordance with U.S. GAAP has been condensed or omitted from these statements pursuant to such accounting principles and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to the consolidated financial statements for the year ended December 31, 2022 of the Company which were included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2023.
Going Concern
These
unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited consolidated
financial statements, the Company had net income of $
Use of Estimates
The preparation of unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Estimates during the six months ended June 30, 2023 and 2022 include estimates for allowance for doubtful accounts on accounts receivable, the estimates for obsolete or slow moving inventory, estimates used in the calculation of progress towards completion on uncompleted jobs, the useful life of property and equipment, assumptions used in assessing impairment of long-term assets, the estimate of the fair value lease liability and related right of use asset, the valuation of redeemable and mandatorily redeemable preferred stock, the value of beneficial conversion features and deemed dividends, the valuation allowances for deferred tax assets, and the fair value of non-cash equity transactions.
6
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(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.
Risks and Uncertainties
The
Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. On June 30,
2023, the Company had cash in bank in excess of FDIC insured levels of $
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents. The Company had no cash equivalents as of June 30, 2023 and December 31, 2022.
Accounts Receivable
The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized as general and administrative expense.
Inventory
Inventory, consisting of raw materials and finished goods, are stated at the lower of cost and net realizable value utilizing the first-in, first-out (FIFO) method. A reserve is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected net realizable value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the net realizable value. These reserves are recorded based on estimates and included in cost of sales.
7
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
Property and Equipment
Property
and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which range from
Goodwill and Intangible Assets
Goodwill
represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized.
Any goodwill arising from the Company’s acquisition is attributable to the value of the potential expanded market opportunity with
new customers. Intangible assets may have either an identifiable or indefinite useful life. Intangible assets with identifiable useful
lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter. The Company’s amortizable
intangible assets are being amortized over a useful life of
Impairment of Long-Lived Assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
Derivative Financial Instruments
The Company had certain financial instruments that were embedded derivatives. The Company evaluated all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-10-05-4, Derivatives and Hedging and 815-40, Contracts in Entity’s Own Equity. This accounting treatment requires that the carrying amount of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period is recorded as either other income or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment or exercise date and then the related fair value amount is reclassified to other income or expense as part of gain or loss on extinguishment.
Warranty Liability
The
Company provides limited warranties on its products for product defects for periods ranging from 12 months to the life of the product.
Warranty costs may include the cost of product replacement, refunds, labor costs and other costs. Allowances for estimated warranty costs
are recorded during the period of sale. The determination of such allowances requires the Company to make estimates of product warranty
claim rates and expected costs to repair or to replace the products under warranty. The Company currently establishes warranty reserves
based on historical warranty costs for each product line combined with liability estimates based on the prior 12 months’ sales
activities. If actual return rates and/or repair and replacement costs differ significantly from the Company’s estimates, adjustments
to recognize additional cost of sales may be required in future periods. Historically the warranty accrual and the expense amounts have
been immaterial. The warranty liability is included in accrued expenses on the accompanying unaudited consolidated balance sheets and
amounted to $
Beneficial Conversion Feature
Convertible debt includes conversion terms that are considered in the money compared to the market price of the stock on the date of the related agreement. The Company calculates the beneficial conversion feature and records a debt discount with the amount being amortized to interest expense over the term of the note.
8
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(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 title is transferred and are recorded net of any discounts or allowances. The warranty does not represent a separate performance obligation.
Revenues from contracts for the distribution and installation of window film solutions are recognized over time on the basis of the Company’s estimates of the progress towards completion of contracts using various output or input methods depending on the type of contract terms including (1) the ratio of number of labor hours spent compared to the number of estimated labor hours to complete a job, (2) using the milestone method, or (3) using a units completed method. These methods are used because management considers these to be the best available measure of progress on these contracts. We use the same method for similar types of contracts. The asset, “contract assets” represents revenues recognized in excess of amounts billed. The liability, “contract liabilities,” represents billings in excess of revenues recognized.
Cost of Sales
Cost of sales includes inventory costs, packaging costs and warranty expenses.
Cost of revenues from fixed-price contracts for the distribution and installation of window film solutions include all direct material, sub-contractor, labor and certain other direct costs, as well as those indirect costs related to contract performance, such as indirect labor and fringe benefits. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability may result in revisions to cost and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period.
Shipping and Handling Costs
Shipping
and handling costs incurred for product shipped to customers are included in general and administrative expenses and amounted to $
Research and Development
Research
and development costs incurred in the development of the Company’s products are expensed as incurred and includes costs such as
labor, materials, and other allocated costs incurred. During the six months ended June 30, 2023 and 2022, research and development costs
incurred in the development of the Company’s products were $
Advertising Costs
The
Company may participate in various advertising programs. All costs related to advertising of the Company’s products are expensed
in the period incurred. For the six months ended June 30, 2023 and 2022, advertising costs charged to operations were $
9
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(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 June 30, 2023 and December 31, 2022, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Tax years that remain subject to examination are the years ending on and after December 31, 2017. The Company recognizes interest and penalties related to uncertain income tax positions in other expenses. However, no such interest and penalties were recorded as of June 30, 2023 and December 31, 2022.
Stock-Based Compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under the FASB’s Accounting Standards Update (“ASU”) 2016-09 Improvements to Employee Share-Based Payment.
Loss Per Common Share
ASC 260 “Earnings Per Share”, requires dual presentation of basic and diluted earnings per common share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilutive securities. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares or resulted in the issuance of common shares that then shared in the earnings of the entity. Basic net loss per common share is computed by dividing net loss available to members by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares, common share equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common shares consist of stock options and warrants (using the treasury stock method) and shares issuable upon conversion of preferred shares and convertible notes payable (using the as-if converted method). Stock options and warrants were excluded from the calculation of diluted shares as they were anti-dilutive. These common share equivalents may be dilutive in the future.
10
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
| Three
Months Ended June 30, | Six
Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income (loss) per common share - basic: | ||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted average common shares outstanding – basic | ||||||||||||||||
| Net income (loss) per common share – basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Net income (loss) per common share - diluted: | ||||||||||||||||
| Net income (loss) attributable to common shareholders - basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Add: preferred stock dividends | ||||||||||||||||
| Add: interest of convertible debt | ||||||||||||||||
| Numerator for income (loss) per common share – diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted average common shares outstanding – basic | ||||||||||||||||
| Add: dilutive shares related to: | ||||||||||||||||
| Convertible debt | ||||||||||||||||
| Series B preferred | ||||||||||||||||
| Series C preferred | ||||||||||||||||
| Weighted average common shares outstanding – diluted | ||||||||||||||||
| Net income (loss) per common share – diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
For the three and six months ended June 30, 2022, all potentially dilutive common shares were excluded from the computation of diluted common shares outstanding as they would have an anti-dilutive impact on the Company’s net losses. For the three and six months ended June 30, 2023, stock options and warrants were excluded from the computation of diluted common shares outstanding as they would have an anti-dilutive impact on the Company’s net income. As of June 30, 2023 and 2022, common share equivalents and potentially dilutive securities consisted of the following:
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Stock options | ||||||||
| Warrants | ||||||||
| Series B preferred stock | ||||||||
| Series C preferred stock | ||||||||
| Convertible debt | ||||||||
Segment Reporting
During the six months ended June 30, 2023 and 2022, the Company operated in two reportable business segments which consisted of (1) the manufacture and sale of a windshield strengthening water repellent solution as well as disinfection products, and the sale of multi-purpose glass strengthening primer and window film mounting solutions, including ballistic-resistant film systems and a forced entry system, and (2) the distribution and installation of window film solutions. The Company’s reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations and locations.
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C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
Leases
The Company accounts for leases in accordance with ASC 842. The lease standard requires certain leases to be reported on the consolidated balance sheets as right-of-use assets and lease liabilities. The Company elected the practical expedients permitted under the transition guidance of this standard that retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. The Company does not reassess whether any contracts entered into prior to adoption are leases or contain leases.
The
Company categorizes leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally
those leases that would allow the Company to substantially utilize or pay for the entire asset over its estimated life. Assets acquired
under finance leases are recorded in property and equipment, net. All other leases are categorized as operating leases. The Company’s
leases generally have terms that range from
Lease liabilities are recognized at the present value of the fixed lease payments using a discount rate based on the Company’s current borrowing rate. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives, plus any direct costs from executing the leases. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.
When the Company has the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and it is reasonably certain that the Company will exercise the option, the Company considers these options in determining the classification and measurement of the lease. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease.
Noncontrolling Interest
The Company accounts for noncontrolling interest in accordance with ASC Topic 810-10-45, which requires the Company to present noncontrolling interests as a separate component of total shareholders’ deficit on the consolidated balance sheets and the consolidated net loss attributable to its noncontrolling interest be clearly identified and presented on the face of the consolidated statements of operations.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of the standard on the consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changes how entities will measure credit losses for most financial assets, including accounts receivable. ASU No. 2016-13 will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. On November 15, 2019, the FASB delayed the effective date of Topic 326 for certain small public companies and other private companies until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities. The adoption of Topic 326 on January 1, 2023 did not have a material impact on the Company’s unaudited consolidated financial statements.
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C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The guidance was issued as improvements to ASU No. 2016-13 described above. The vintage disclosure changes require an entity to disclose current-period gross write-offs by year of origination for financing receivables. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The amendments should be applied prospectively. Early adoption of the amendments is permitted, including adoption in an interim period. The adoption of ASU No. 2022-02 on January 1, 2023 did not have a material impact on the Company’s unaudited consolidated financial statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
NOTE 3 – ACCOUNTS RECEIVABLE
| June
30, 2023 | December 31, 2022 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
For
the six months ended June 30, 2023 and 2022, bad debt expense amounted to $
NOTE 4 – INVENTORY
| June
30, 2023 | December 31, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Inventory | ||||||||
| Less: allowance for obsolete or slow-moving inventory | ||||||||
| Inventory, net | $ | $ | ||||||
During the six months ended June 30, 2023 and 2022, the Company did not record any allowance for slow moving inventory.
NOTE 5 – PROPERTY AND EQUIPMENT
| Useful Life | June
30, 2023 | December 31, 2022 | ||||||||
| Machinery and equipment | $ | $ | ||||||||
| Furniture and office equipment | ||||||||||
| Vehicles | ||||||||||
| Leasehold improvements | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Property and equipment, net | $ | $ | ||||||||
13
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
For
the six months ended June 30, 2023 and 2022, depreciation expense is included in general and administrative expenses and amounted to
$
NOTE 6 – INTANGIBLE ASSETS AND GOODWILL
| Useful life | June
30, 2023 | December 31, 2022 | ||||||||
| Customer relations | $ | $ | ||||||||
| Non-compete | ||||||||||
| Trade name | ||||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||
| Intangible assets, net | $ | $ | ||||||||
| Useful life | June
30, 2023 | December 31, 2022 | ||||||||||
| Goodwill | $ | $ | ||||||||||
For
the six months ended June 30, 2023 and 2022, amortization expense of intangible assets amounted to $
| Twelve months ending June 30: | Amount | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 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
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C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
Pursuant
to the SPA, the Investor agreed to purchase an additional $
The
Initial Note matured 12 months after issuance, bore interest at a rate of
The
Initial Note may be prepaid at any time for the first 90 days at face value plus accrued interest. From day 91 through day 180, the Note
may be prepaid in an amount equal to
The
Note and Warrants contain conversion limitations providing that a holder thereof may not convert the Notes or exercise the Warrants to
the extent (but only to the extent) that, if after giving effect to such conversion, the holder or any of its affiliates would beneficially
own in excess of
In connection with the SPA, the Company entered into a Registration Rights Agreement dated October 15, 2021 (the “Registration Rights Agreement”), with the Investor pursuant to which it is obligated to file a registration statement with the SEC within 45 days after the date of the agreement to register the resale by the Investor of the conversion shares and warrant shares, and use all commercially reasonable efforts to have the registration statement declared effective by the SEC within 60 days after the registration statement is filed.
Upon the occurrence of an event of default under the Notes, the Investor has the right to be prepaid at 125% of the outstanding principal balance and accrued interest, and interest accrues at 18% per annum. Events of default included, among other things,
| (i) | any default in the payment of (A) principal and interest payment under this Note or any other Indebtedness, or (B) Late Fees, liquidated damages and other amounts owing to the Holder of this Note, as and when the same shall become due and payable (whether on a Conversion Date, or the Maturity Date, or by acceleration or otherwise), which default, solely in the case of a default under clause (B) above, is not cured within five Trading Days; |
| (ii) | the Company or any Subsidiary shall be subject to a Bankruptcy Event; |
| (iii) | the SEC suspends the Common Stock from trading or the Company’s Common Stock is not listed or quoted for trading on a Trading Market which failure is not cured, if possible to cure, within the earlier to occur of 10 Trading Days after notice of such failure is sent by the Holder or by any other Holder to the Company or the transfer of shares of Common Stock through the Depository Trust Company System is no longer available or is subject to a “chill” by the Depository Trust Company or any successor; |
| (iv) | the Company shall be a party to any Change of Control Transaction or shall agree to sell or dispose of all or in excess of 50% of its assets in one transaction or a series of related transactions (whether or not such sale would constitute a Change of Control Transaction); |
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C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
| (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 Initial Note for a new Convertible
Promissory Note (the “New Note”) and (ii) the Initial Warrant for a new five-year warrant to purchase, in the aggregate,
On
October 15, 2022, the due date of the New Note, the New Note defaulted due to non-payment. Accordingly, the Company added a default penalty
of $
In
accordance with ASC 470-50, Debt Modifications and Extinguishments, the Company performed an assessment of whether the Exchange Agreement
transaction was deemed to be new debt, a modification of existing debt, or an extinguishment of existing debt. The Company evaluated
the April 20, 2022 Exchange Agreement for debt modification and concluded that the debt qualified for debt extinguishment. On April 20,
2022, the Company agreed to reduce the conversion price from $
16
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
The
Company determined the transaction was considered a debt extinguishment because of the change in conversion price was substantial. Upon
extinguishment, the Company had $
The Company uses the Binomial Valuation Model to determine the fair value of its stock warrants which requires the Company to make several key judgments including:
| ● | the value of the Company’s common stock; | |
| ● | the expected life of issued stock warrants; | |
| ● | the expected volatility of the Company’s stock price; | |
| ● | the expected dividend yield to be realized over the life of the stock warrants; and | |
| ● | the risk-free interest rate over the expected life of the stock warrants. |
The Company’s computation of the expected life of issued stock warrants was based on the simplified method as the Company does not have adequate exercise experience to determine the expected term. The interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The computation of volatility was based on the historical volatility of the Company’s common stock.
| 2022 | ||
| Dividend rate | ||
| Term (in years) | ||
| Volatility | ||
| Risk—free interest rate |
At
any time this Note or any amounts accrued and payable thereunder remain outstanding, the Company or any Subsidiary, as applicable, sells
or grants any option to purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or announces any sale,
grant or any option to purchase or other disposition), any common stock or common stock equivalents entitling any Person to acquire shares
of the Company’s common stock at an effective price per share that is lower than the conversion price then in effect (such lower
price, the “Base Conversion Price” and each such issuance or announcement a “Dilutive Issuance”), then the conversion
price shall be immediately reduced to equal the Base Conversion Price. Such adjustment shall be made whenever such common stock or common
stock equivalents are issued. On June 23, 2022, the Company issued common stock equivalents with an initial conversion price of $
17
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
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.
1800 Diagonal Lending Convertible Debt
On
November 9, 2022, the Company closed a Securities Purchase Agreement dated November 4, 2022, with 1800 DIAGONAL LENDING LLC, a Virginia
limited liability company, (“Diagonal”), pursuant to which a Promissory Note (the “November 2022 Diagonal Note”)
dated November 4, 2022, was made to Diagonal in the aggregate principal amount of $
On
December 27, 2022, the Company closed a Securities Purchase Agreement dated December 27, 2022, with 1800 Diagonal pursuant to which a
Promissory Note (“December 2022 Diagonal Note”) dated December 27, 2022, was made to Diagonal in the aggregate principal
amount of $
On
March 17, 2023, the Company closed a Securities Purchase Agreement dated November 4, 2022, with Diagonal pursuant to which a Promissory
Note (the “March 2023 Diagonal Note”) dated March 17, 2023, was made to Diagonal in the aggregate principal amount of $
The
Company had the right to prepay the November 2022, December 2022 and March 2023 Diagonal Notes (principal and accrued interest) at any
time during the first six months the note is outstanding at the rate 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 $
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C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
For
the six months ended June 30, 2023 and 2022, amortization of debt discounts related to the convertible notes payable amounted to $
On
June 30, 2023 and December 31, 2022, accrued interest payable under the convertible notes discussed above amounted to $
| June
30, 2023 | December 31, 2022 | |||||||
| Convertible notes payable | $ | $ | ||||||
| Add: put premium | ||||||||
| Less: unamortized debt discount | ( | ) | ||||||
| Convertible notes payable, net | ||||||||
| Less: current portion of convertible notes payable | ( | ) | ( | ) | ||||
| Convertible notes payable – long-term | $ | $ | ||||||
NOTE 8 – NOTES PAYABLE
| June
30, 2023 | December 31, 2022 | |||||||
| Notes payable | $ | $ | ||||||
| Note payable – PPP note | ||||||||
| Total notes payable | ||||||||
| Less: unamortized debt discount | ( | ) | ||||||
| Notes payable, net | ||||||||
| Less: current portion of notes payable, net of discount | ( | ) | ( | ) | ||||
| Notes payable – long-term | $ | $ | ||||||
Notes Payable
BOCO Investment Note
On
November 14, 2018, the Company entered into a Revolving Credit Facility Loan and Security Agreement (“Loan Agreement”) and
a Secured Promissory Note (the “Note”) with BOCO Investments, LLC (the “Lender”). Subject to and in accordance
with the terms and conditions of the Loan Agreement and the Note, the Lender agreed to lend to the Company up to $
19
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
Commencing
on January 10, 2019 and on or before the 10th day of each month thereafter, the Company should have paid Lender all interest
accrued on outstanding principal under the Loan Agreement and Notes as of the end of the month then concluded. Upon the occurrence of
any Event of Default and at any time thereafter, Lender may, at its option, declare any and all obligations immediately due and payable
without demand or notice. The Company did not meet the Minimum Asset Amount covenant as defined in the Loan Agreement, failed to timely
pay interest payments due, and has violated other default provisions. Through the date of repayment and settlement, the note balance
due of $
In
May 2023, the Company and the Lender entered into a Debt Exchange and Release Agreement whereby the Company paid the Lender cash of $
On
June 30, 2023 and December 31, 2022, the principal amount due under this Note amounted to $
Mercer Street Global Opportunity Fund Notes
On
March 14, 2022, the Company entered into an Original Issue Discount Promissory Note and Security Agreement (the “March 2022 Note”)
in the principal amount of $
20
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
On
November 22, 2022, the Company entered into a Promissory Note and Security Agreement (the “November 2022 Note”) in the principal
amount of $
GS Capital Debt
On
June 23, 2022, the Company entered into entered into a Securities Purchase Agreement (“Agreement”) with GS Capital Partners,
LLC (“GS Capital”), pursuant to which a Promissory Note (the “GS Capital June 2022 Note”) was made to GS Capital
in the aggregate principal amount of $
On
June 30, 2023, the principal balance due on the GS Capital Note and accrued interest payable amounted to $
21
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
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 $
22
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
In
connection with the Letter Agreement dated December 15, 2022, in order to induce GS Capital to extend the due dates of the GS Capital
Notes, the Company issued
In May 2023, the GS Capital June 2022 Note, the GS Capital July 2022 Note, and the September 2022 Note were paid in full without any default penalty (see Note 16).
Other Notes Payable
On
May 10, 2021, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) and a Secured Promissory Note
(the “Promissory Note”) in the amount of $
On
July 22, 2021, in connection with the acquisition of Mobile Tint, the Company assumed vehicle and equipment loans in the amount of $
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 $
23
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
On
April 4, 2023, the Company entered into a Secured Promissory Note (the “April 2023 Note”) in the amount of $
For
the six months ended June 30, 2023 and 2022, amortization of debt discounts related to notes payable amounted to $
PPP Loan
On
April 28, 2020, the Company entered into a Paycheck Protection Program Promissory Note (the “PPP Note”) with respect to a
loan of $
| June 30, | Amount | |||
| 2024 | $ | |||
| 2025 | ||||
| Total notes payable on June 30, 2023 | $ | |||
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 $
24
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
The Series B is subject to redemption (at Stated Value, plus any accrued, but unpaid dividends (the “Liquidation Value”) by the Company no later than three years after a Deemed Liquidation Event and at the Company’s option after one year from the issuance date of the Series B, subject to a ten-day notice (to allow holder conversion). A “Deemed Liquidation Event” will mean: (a) a merger or consolidation in which the Company is a constituent party or a subsidiary of the Company is a constituent party and the Company issues shares of its capital stock pursuant to such merger or consolidation, except any such merger or consolidation involving the Company or a subsidiary in which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, at least a majority, by voting power, of the capital stock of the surviving or resulting corporation or, if the surviving or resulting corporation is a wholly-owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation; or (b) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Company or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries taken as a whole, or the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Company if substantially all of the assets of the Company and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Company.
The
Series B is convertible into common stock at the option of a holder or if the closing price of the common stock exceeds
In the event of a conversion of any Series B, the Company shall issue to the holder a number of shares of common stock equal to the sum of the Stated Value plus accrued but unpaid dividends multiplied by the number of shares of Series B Preferred Stock being converted divided by the Conversion Price.
Upon liquidation of the Company after payment or provision for payment of liabilities of the Company and after payment or provision for any liquidation preference payable to the holders of any preferred stock ranking senior to the Series B but prior to any distribution to the holders of Common Stock or preferred stock ranking junior upon liquidation to the Series B, the holders of Series B will be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount with respect to each share of Series B equal to the Liquidation Value.
The Series B has voting rights per Series B Share equal to the Liquidation Value per share, divided by the Conversion Price, multiplied by fifty (50). Subject to applicable Colorado law, the holders of Series B will have functional voting control in situations requiring shareholder vote.
These Series B preferred share issuances with redemption provisions that permit the issuer to settle in either cash or common stock, at the option of the issuer, were evaluated to determine whether temporary or permanent equity classification on the consolidated balance sheet was appropriate. As per the terms of the Series B preferred stock agreements, Series B preferred stock is redeemable for cash and other assets on the occurrence of a deemed liquidation event. A deemed liquidation event includes a change of control which is not in the Company’s control. As such, since Series B preferred stock is redeemable upon the occurrence of an event that is not within the Company’s control, the Series B preferred stock is classified as temporary equity.
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.
25
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
On
January 6, 2022, the Board of Directors of the Company agreed to satisfy $
On
January 17, 2023, the Board of Directors of the Company agreed to satisfy $
During
the six months ended June 30, 2023 and 2022, the Company accrued dividends of $
As
of June 30, 2023, the net Series B Preferred Stock balance was $
Series C Preferred Stock
On
August 20, 2020, the Company filed an Amendment to its Articles of Incorporation to designate a series of preferred stock, the Series
C Convertible Preferred Stock (the “Series C”), with the Secretary of State of the State of Colorado. The Certificate of
Designations established
The
Series C ranks senior with respect to dividends and right of liquidation with the Company’s common stock and junior to all existing
and future indebtedness of the Company. The Series C has a stated value per share of $
The
Company has no option to redeem the Series C Preferred Stock. If the Company determines to liquidate, dissolve or wind-up its business
and affairs, or effect any Deemed Liquidation Event as defined below, each of which has been approved by the holders of a majority of
the shares of Series C Preferred Stock then outstanding, the Company will redeem all of the shares of Series C Preferred Stock outstanding
immediately prior to such mandatory redemption event at a price per share of Series C Preferred Stock equal to the aggregate Series C
Liquidation Value, which is
26
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
The Company will deliver ten-day advance written notice prior to the consummation of any mandatory redemption event via email or overnight courier (“Notice of Mandatory Redemption”) to each Holder whose shares are to be redeemed. The Series C is subject to redemption at liquidation Value noted above by the Company. Upon receipt by any Holder of a Notice of Mandatory Redemption, if Holder does not choose to convert, such Holder will promptly submit to the Company such Holder’s Series C Preferred Stock certificates on the Redemption Payment Date. Upon receipt of such Holder’s Series C Preferred Stock certificates, the Company will pay the applicable redemption price to such Holder in cash. A “Deemed Liquidation Event” will mean: (a) a merger or consolidation in which the Company is a constituent party or a subsidiary of the Company is a constituent party and the Company issues shares of its capital stock pursuant to such merger or consolidation, except any such merger or consolidation involving the Company or a subsidiary in which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, at least a majority, by voting power, of the capital stock of the surviving or resulting corporation or, if the surviving or resulting corporation is a wholly-owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation; or (b) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Company or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries taken as a whole, or the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Company if substantially all of the assets of the Company and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Company. Since the Company has determined that a deemed liquidation event is not probable, the Series C is stated at the Stated Value plus accrued and unpaid dividends rather than redemption value, which is liquidation value.
The Series C is convertible at the option of a holder at any time following the issuance date. In the event of a conversion of any Series C Preferred Stock, the Company shall issue to such Holder a number of Conversion Shares equal to (x) the sum of (1) the Stated Value per share of Series C Preferred Stock plus (2) any accrued but unpaid dividends thereon multiplied by (y) the number of shares of Series C Preferred Stock held by such Holder and subject to the Holder Conversion Notice, divided by (z) the Conversion Price with respect to such Series C Preferred Stock. Conversion Price means a price per share of the common stock equal to the lowest daily volume weighted average price of the common stock for any trading day during the two years preceding the date of delivery of the conversion notice, subject to adjustment as otherwise provided in the Series C Certificate of Designation.
Upon liquidation of the Company after payment or provision for payment of liabilities of the Company and after payment or provision for any liquidation preference payable to the holders of any preferred stock ranking senior to the Series C but prior to any distribution to the holders of Common Stock or preferred stock ranking junior upon liquidation to the Series C, the holders of Series C will be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount with respect to each share of Series C equal to the Liquidation Value.
Through
April 28, 2021, each share of Series C Preferred Stock was entitled to vote on all matters requiring shareholder vote. Each share of
Series C Preferred Stock was entitled to the number of votes per share based on the calculation of the number of conversion shares of
Series C Preferred Stock is then convertible. On April 28, 2021, the Company filed an Amended and Restated Certificate of Designations
of Preferences, Rights, and Limitations of Series C Convertible Preferred Stock (the “Amended Certificate”). The Amended
Certificate changed the voting rights of the Series C Preferred Stock on any matters requiring shareholder approval or any matters on
which the common shareholders are permitted to vote. Series C Preferred Stock shall have no right to vote on any matters requiring shareholder
approval or any matters on which the common shareholders (or other preferred stock of the Company which may vote with the common shareholders)
are permitted to vote. With respect to any voting rights of the Series C Preferred Stock set forth herein, the Series C Preferred Stock
shall vote as a class, each share of Series C Preferred Stock shall have one vote on any such matter, and any such approval may be given
via a written consent in lieu of a meeting of the Holders of the Series C Preferred Stock. Any reference herein to a determination, decision
or election being made by the “Majority Holders” shall mean the determination, decision or election as made by Holders holding
a majority of the issued and outstanding shares of Series C Preferred Stock at such time. It also adjusts the conversion feature of the
Series C Preferred Stock so that any Holder of Series C Preferred Stock cannot convert any portion of the Series C in excess of that
number of Series C Preferred Stock that upon conversion would result in beneficial ownership by the Holder of more than
27
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
These Series C preferred stock issuances with redemption provisions that permit the issuer to settle in either cash or common stock, at the option of the holder, were evaluated to determine whether temporary or permanent equity classification on the consolidated balance sheet was appropriate. As per the terms of the Series C preferred stock agreements, Series C preferred stock is redeemable for cash and other assets on the occurrence of a deemed liquidation event. A deemed liquidation event includes a change of control which is not in the Company’s control. As such, since Series C preferred stock is redeemable upon the occurrence of an event that is not within the Company’s control, the Series C preferred stock is classified as temporary equity.
The Company concluded that the Series C Preferred Stock represented an equity host and, therefore, the redemption feature of the Series C Preferred Stock was not considered to be clearly and closely related to the associated equity host instrument. However, the redemption features did not meet the net settlement criteria of a derivative and, therefore, were not considered embedded derivatives that required bifurcation. The Company also concluded that the conversion rights under the Series C Preferred Stock were clearly and closely related to the equity host instrument. Accordingly, the conversion rights feature on the Series C Preferred Stock were not considered an embedded derivative that required bifurcation. The conversion feature of the Series C Preferred Stock at the time of issuance was determined to be beneficial on the commitment date.
On
January 12, 2022, the Company issued
On
April 20, 2022, the Company issued
During
the three months ended March 31, 2023, the Company issued
During
the three months ended June 30, 2023, the Company issued
During
the six months ended June 30, 2023 and 2022, the Company accrued dividends of $
As
of June 30, 2023, the net Series C Preferred Stock balance was $
Common Stock
Common Stock Issued for Cash and Accrued Compensation
On
January 17, 2023, the Company entered into a Subscription Agreement with its Chairman and Chief Executive Officer, Scott R. Silverman
(the “Subscription Agreement”), whereby Mr. Silverman purchased
28
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
On
January 17, 2023, Barry Edelstein, a member of the Company’s Board of Directors, elected to convert $
Issuance of Common Stock for Services
Issuance of Common Stock for Professional Fees
On
June 7, 2022, the Company issued an aggregate of
On
June 24, 2022, the Company issued an aggregate of
On
February 6, 2023, the Company issued
On
April 3, 2023, the Company issued
On
June 3, 2023, the Company issued
During
the six months ended June 30, 2023 and 2022, the Company recorded stock-based professional fees of $
Issuance of Common Stock for Stock-Based Compensation
On
March 24, 2022, the Company granted restricted stock awards of
29
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
On
June 7, 2023, the Company issued
During
the six months ended June 30, 2023 and 2022, aggregate accretion of stock-based compensation expense on granted common shares amounted
to $
| Number of Non-Vested Shares | Weighted Average Grant Date Fair Value | |||||||
| Non-vested, December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Shares vested | ( | ) | ||||||
| Non-vested, June 30, 2023 | $ | |||||||
Common stock issued for Accounts Payable
On
January 6, 2022, the Company issued
Common Stock Issued in Connection with Notes Payable
In
connection with the March 2022 Note, the Company issued
In
connection with the June 2022 GS Capital Note, the Company issued
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
On
January 12, 2022, the Company issued
On
April 20, 2022, the Company issued
During
the three months ended March 31, 2023, the Company issued
During
the three months ended June 30, 2023, the Company issued
30
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(UNAUDITED)
Stock Options
For
the six months ended June 30, 2023 and 2022, the Company recorded no compensation expense related to stock options. Total unrecognized
compensation expense related to unvested stock options on June 30, 2023 amounted to $
| Number
of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding, December 31, 2022 | $ | |||||||||||||||
| Exercised | ||||||||||||||||
| Balance Outstanding, June 30, 2023 | $ | $ | ||||||||||||||
| Exercisable, June 30, 2023 | $ | $ | ||||||||||||||
Warrants
| Number
of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding December 31, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Balance Outstanding June 30, 2023 | $ | $ | ||||||||||||||
| Exercisable, June 30, 2023 | $ | $ | ||||||||||||||
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 |
31
C-BOND
SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
(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 June 30, 2023, other than discussed below, the Company is not involved in any other pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition, results of operations, or cash flows.
On
January 20, 2022, we received an Order Directing Examination and Designating Officers to Take Testimony (a “Formal Order”)
from the SEC. The Formal Order authorizes that an examination be made to determine whether a stop order should be issued under Section
8(d) of the Securities Act of 1933 with respect to the Company’s Registration Statement on Form S-1, and any supplements and amendments
thereto. The Formal Order indicates that the Form S-1 may be deficient in that it may contain untrue statements of material fact or omit
to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not
misleading concerning, among other things, the Company’s revenue and financial condition. On April 15, 2022, the Company filed
an amendment to its Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The restatement had the cumulative effect
of decreasing the Company’s reported revenue for Fiscal 2020 by $