UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
For the Quarterlyquarterly period endedSeptember June 30, 20172020
☐
For the transition period from _____ to _____
Commission File No. 0-53029
C-BOND SYSTEMS, INC.
(Exact Namename of IssuerRegistrant as specifiedSpecified in its charter)
| Colorado | 26-1315585 | |
| (State or | (IRS Employer | |
| Identification No.) | ||
| 77033 | ||
| (Address of | ( |
832-649-5658
(Registrant'sRegistrant’s telephone number, including area code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Indicate by check mark whether the issuer: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 pastpreceding 12 months (or for such shorter period that the registrant was required to file such reports);, and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(SectionS-T (Section 232.405 of this chapter) during the preceding 12 months(ormonths (or such shorter period that the registrant was required to submit and post such files. Yes þ No o☐
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“large accelerated filer," "accelerated filer"filer”, "smaller“accelerated filer”, “smaller reporting company",company “, and "emerging“emerging growth company"company”, in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer | ☒ | Smaller reporting company | ||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o☐ No þ
There were 206,250,377 shares outstanding of the Registrant'sregistrant’s common stock, par value $0.001 per share, issued and outstanding as of the latest practicable date, November 13, 2017 was 9,106,250.
C-BOND SYSTEMS, INC.
FORM 10-Q
June 30, 2020
TABLE OF CONTENTS
i
References in this document to "us," "we,"“us,” “we,” or "Company"“Company” refer to WestMountain Alternative Energy,C-Bond Systems, Inc.
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Assets | (Unaudited) | |||||||
| Cash | $ | 93,525 | $ | 138,812 | ||||
| Certificates of deposit | 155,959 | 155,854 | ||||||
| Accounts receivable, related party | 1,000 | 1,000 | ||||||
| Income tax receivable | 2,140 | 2,140 | ||||||
| Prepaid expenses and other assets | 3,333 | 1,667 | ||||||
| Total assets | $ | 255,957 | $ | 299,473 | ||||
| Liabilities and Shareholders' Equity | ||||||||
| Liabilities: | ||||||||
| Accrued liabilities, related parties | 500 | 800 | ||||||
| Accounts payable and accrued liabilities | 7,200 | 16,500 | ||||||
| Total liabilities | 7,700 | 17,300 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders' equity: | ||||||||
| Preferred stock, $0.10 par value; 1,000,000 shares authorized, | - | - | ||||||
| -0- shares issued and outstanding for 2017 and 2016 | ||||||||
| Common stock, $0.001 par value; 100,000,000 shares authorized, | 9,106 | 9,106 | ||||||
| 9,106,250 shares issued and outstanding 2017 and 2016 | ||||||||
| Additional paid-in-capital | 366,659 | 366,659 | ||||||
| Accumulated deficit | (127,508 | ) | (93,592 | ) | ||||
| Total shareholders' equity | 248,257 | 282,173 | ||||||
| Total liabilities and shareholders' equity | $ | 255,957 | $ | 299,473 | ||||
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 243,265 | $ | 77,211 | ||||
| Accounts receivable, net | 29,023 | 151,989 | ||||||
| Inventory | 174,928 | 14,820 | ||||||
| Prepaid expenses and other current assets | 21,605 | 18,577 | ||||||
| Total Current Assets | 468,821 | 262,597 | ||||||
| OTHER ASSETS: | ||||||||
| Property, plant and equipment, net | 24,289 | 32,776 | ||||||
| Right of use asset, net | 46,498 | 69,808 | ||||||
| Security deposit | 7,132 | 7,132 | ||||||
| Total Other Assets | 77,919 | 109,716 | ||||||
| TOTAL ASSETS | $ | 546,740 | $ | 372,313 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Notes payable - related party | $ | 400,000 | $ | 400,000 | ||||
| Convertible notes payable, net | 356,938 | 135,833 | ||||||
| Note payable, current portion | 71,200 | - | ||||||
| Accounts payable | 867,346 | 746,663 | ||||||
| Accrued expenses | 160,696 | 126,986 | ||||||
| Accrued compensation | 785,968 | 351,708 | ||||||
| Deferred revenue | 2,275 | - | ||||||
| Lease liability | 46,809 | 47,636 | ||||||
| Derivative liability | 1,571,077 | 890,410 | ||||||
| Total Current Liabilities | 4,262,309 | 2,699,236 | ||||||
| LONG-TERM LIABILITIES: | ||||||||
| Note payable | 85,000 | - | ||||||
| Lease liability, net of current portion | - | 22,216 | ||||||
| Mandatorily redeemable convertible Series A preferred stock; $0.10 par value, 800,000 shares designated; 154,800 and 159,600 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively ($1.00 per share redemption and liquidation value) | 176,543 | 159,798 | ||||||
| Total Long-term Liabilities | 261,543 | 182,014 | ||||||
| Total Liabilities | 4,523,852 | 2,881,250 | ||||||
| Commitments and Contingencies (See Note 10) | ||||||||
| Series B convertible preferred stock: $0.10 par value, 100,000 shares designated; 108 and 108 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively ($1,000 per share redemption and liquidation value) | 109,195 | 108,000 | ||||||
| SHAREHOLDERS’ DEFICIT: | ||||||||
| Preferred stock: $0.10 par value, 2,000,000 shares authorized; 800,000 Series A and 100,000 Series B designated | - | - | ||||||
| Common stock: $0.001 par value, 4,998,000,000 shares authorized; 163,061,830 and 116,749,633 issued and outstanding at June 30, 2020 and December 31, 2019, respectively | 163,062 | 116,750 | ||||||
| Additional paid-in capital | 38,850,794 | 37,266,328 | ||||||
| Accumulated deficit | (43,100,163 | ) | (40,000,015 | ) | ||||
| Total Shareholders’ Deficit | (4,086,307 | ) | (2,616,937 | ) | ||||
| Total Liabilities and Shareholders’ Deficit | $ | 546,740 | $ | 372,313 | ||||
See accompanying notes are an integral part of theseto unaudited condensed consolidated financial statements.
1
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Operating Expenses | ||||||||||||||||
| Sales, general and administrative expense | $ | 9,965 | $ | 9,240 | $ | 34,021 | $ | 31,193 | ||||||||
| Total operating expenses | 9,965 | 9,240 | 34,021 | 31,193 | ||||||||||||
| Net loss from operations | (9,965 | ) | (9,240 | ) | (34,021 | ) | (31,193 | ) | ||||||||
| Other income | ||||||||||||||||
| Interest income | 35 | 20 | 105 | 90 | ||||||||||||
| Net loss before income taxes | (9,930 | ) | (9,220 | ) | (33,916 | ) | (31,103 | ) | ||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net loss | $ | (9,930 | ) | $ | (9,220 | ) | $ | (33,916 | ) | $ | (31,103 | ) | ||||
| Basic and diluted income per share | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
| Basic and diluted weighted average common | ||||||||||||||||
| shares outstanding | 9,106,250 | 9,106,250 | 9,106,250 | 9,106,250 | ||||||||||||
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| SALES | $ | 43,004 | $ | 157,712 | $ | 103,830 | $ | 244,795 | ||||||||
| COST OF SALES (excluding depreciation expense) | 25,174 | 35,068 | 40,669 | 56,137 | ||||||||||||
| GROSS PROFIT | 17,830 | 122,644 | 63,161 | 188,658 | ||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Compensation and related benefits (including stock-based compensation of $308,922 and $1,011,897 for the three months ended June 30, 2020 and 2019, and $670,302 and $2,479,173 for the six months ended June 30, 2020 and 2019, respectively) | 916,454 | 1,311,677 | 1,605,824 | 3,320,882 | ||||||||||||
| Research and development | 2,339 | 12,298 | 4,729 | 20,400 | ||||||||||||
| Professional fees | 150,539 | 278,662 | 287,080 | 510,104 | ||||||||||||
| General and administrative expenses | 77,280 | 121,180 | 182,475 | 246,334 | ||||||||||||
| Total Operating Expenses | 1,146,612 | 1,723,817 | 2,080,108 | 4,097,720 | ||||||||||||
| LOSS FROM OPERATIONS | (1,128,782 | ) | (1,601,173 | ) | (2,016,947 | ) | (3,909,062 | ) | ||||||||
| OTHER INCOME (EXPENSES): | ||||||||||||||||
| Gain on debt extinguishment, net | 110,408 | - | 110,408 | - | ||||||||||||
| Other income | 8,000 | - | 8,000 | - | ||||||||||||
| Derivative expense | (365,108 | ) | - | (744,028 | ) | - | ||||||||||
| Interest expense | (216,378 | ) | (60,105 | ) | (457,581 | ) | (112,639 | ) | ||||||||
| Total Other Income (Expenses) | (463,078 | ) | (60,105 | ) | (1,083,201 | ) | (112,639 | ) | ||||||||
| NET LOSS | $ | (1,591,860 | ) | $ | (1,661,278 | ) | $ | (3,100,148 | ) | $ | (4,021,701 | ) | ||||
| NET LOSS PER COMMON SHARE: | ||||||||||||||||
| Basic and diluted | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.05 | ) | ||||
| WEIGHTED AVERAGE COMMON SHARE OUTSTANDING: | ||||||||||||||||
| Basic and diluted | 143,010,150 | 81,413,297 | 132,095,900 | 81,008,490 | ||||||||||||
See accompanying notes are an integral part of theseto unaudited condensed consolidated financial statements.
2
| For the nine months ended | ||||||||
| September 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (33,916 | ) | $ | (31,103 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and write off of assets | - | 2,280 | ||||||
| Changes in operating assets and operating liabilities: | ||||||||
| Interest income on certificates of deposit | (105 | ) | (90 | ) | ||||
| Accounts receivable, related party | - | (1,000 | ) | |||||
| Prepaid expenses and other assets | (1,666 | ) | 3,069 | |||||
| Accounts payable and accrued liabilities | (9,300 | ) | (10,000 | ) | ||||
| Accrued liabilities, related parties | (300 | ) | (300 | ) | ||||
| Net cash used in operating activities | (45,287 | ) | (37,144 | ) | ||||
| Net change in cash | (45,287 | ) | (37,144 | ) | ||||
| Cash, beginning of period | 138,812 | 186,462 | ||||||
| Cash, end of period | $ | 93,525 | $ | 149,318 | ||||
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019
(Unaudited)
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Shareholders’ | |||||||||||||||||
| # of Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance, December 31, 2018 | 80,459,006 | $ | 80,459 | $ | 31,863,693 | $ | (32,759,275 | ) | $ | (815,123 | ) | |||||||||
| Common shares issued for services and prepaid services | 685,060 | 685 | 113,775 | - | 114,460 | |||||||||||||||
| Accretion of stock-based compensation | - | - | 909,375 | - | 909,375 | |||||||||||||||
| Stock option exercise compensation | - | - | 7,500 | - | 7,500 | |||||||||||||||
| Accretion of stock option expense | - | - | 586,934 | - | 586,934 | |||||||||||||||
| Net loss | - | - | - | (2,360,423 | ) | (2,360,423 | ) | |||||||||||||
| Balance, March 31, 2019 | 81,144,066 | 81,144 | 33,481,277 | (35,119,698 | ) | (1,557,277 | ) | |||||||||||||
| Common shares issued for cash | 2,000,000 | 2,000 | 298,000 | - | 300,000 | |||||||||||||||
| Common shares issued for services and prepaid services | 500,000 | 500 | 46,500 | - | 47,000 | |||||||||||||||
| Accretion of stock-based compensation | - | - | 519,792 | - | 519,792 | |||||||||||||||
| Accretion of stock option and warrant expense | - | - | 589,029 | - | 589,029 | |||||||||||||||
| Net loss | - | - | - | (1,661,278 | ) | (1,661,278 | ) | |||||||||||||
| Balance, June 30, 2019 | 83,644,066 | $ | 83,644 | $ | 34,934,598 | $ | (36,780,976 | ) | $ | (1,762,734 | ) | |||||||||
| Common Stock | Paid-in | Accumulated | Shareholders’ | |||||||||||||||||
| # of Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance, December 31, 2019 | 116,749,633 | $ | 116,750 | $ | 37,266,328 | $ | (40,000,015 | ) | $ | (2,616,937 | ) | |||||||||
| Shares issued for conversion of accounts payable | 151,456 | 151 | 5,907 | - | 6,058 | |||||||||||||||
| Common shares issued for cash | 7,000,000 | 7,000 | 273,000 | - | 280,000 | |||||||||||||||
| Common shares issued for conversion of accrued interest | 475,000 | 475 | 12,245 | - | 12,720 | |||||||||||||||
| Common shares issued for services | 1,250,000 | 1,250 | 48,750 | - | 50,000 | |||||||||||||||
| Issuance of warrants in connection with convertible debt | - | - | 8,676 | - | 8,676 | |||||||||||||||
| Accretion of stock-based compensation | - | - | 170,072 | - | 170,072 | |||||||||||||||
| Accretion of stock option expense | - | - | 191,308 | - | 191,308 | |||||||||||||||
| Net loss | - | - | - | (1,508,288 | ) | (1,508,288 | ) | |||||||||||||
| Balance, March 31, 2020 | 125,626,089 | 125,626 | 37,976,286 | (41,508,303 | ) | (3,406,391 | ) | |||||||||||||
| Shares issued for conversion of acrued compensation | 203,125 | 203 | 16,047 | - | 16,250 | |||||||||||||||
| Common shares issued for cash | 7,000,000 | 7,000 | 154,000 | - | 161,000 | |||||||||||||||
| Common shares issued for conversion of debt, accrued interest and fees | 12,800,000 | 12,800 | 78,565 | - | 91,365 | |||||||||||||||
| Extinguishment loss related to conversion of debt | - | - | 123,455 | - | 123,455 | |||||||||||||||
| Common shares issued for conversion of Series A preferred shares and dividends | 9,982,616 | 9,983 | 152,809 | - | 162,792 | |||||||||||||||
| Common shares issued for services | 7,450,000 | 7,450 | (7,450 | ) | - | - | ||||||||||||||
| Issuance of warrants in connection with convertible debt | - | - | 5,822 | - | 5,822 | |||||||||||||||
| Recassification of put premium to equity upon conversion of Series A preferred | - | - | 37,438 | - | 37,438 | |||||||||||||||
| Accretion of stock-based compensation | - | - | 117,515 | - | 117,515 | |||||||||||||||
| Accretion of stock-based professional fees | - | - | 5,000 | - | 5,000 | |||||||||||||||
| Accretion of stock option expense | - | - | 191,307 | - | 191,307 | |||||||||||||||
| Net loss | - | - | - | (1,591,860 | ) | (1,591,860 | ) | |||||||||||||
| Balance, June 30, 2020 | 163,061,830 | $ | 163,062 | $ | 38,850,794 | $ | (43,100,163 | ) | $ | (4,086,307 | ) | |||||||||
See accompanying notes are an integral part of theseto unaudited condensed consolidated financial statements.
3
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (3,100,148 | ) | $ | (4,021,701 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | 8,487 | 12,872 | ||||||
| Amortization of debt discount to interest expense | 305,438 | 14,142 | ||||||
| Accretion of preferred shares stated value to interest expense | 40,217 | - | ||||||
| Stock-based compensation | 670,202 | 2,479,173 | ||||||
| Stock-based professional fees | 45,000 | 235,042 | ||||||
| Interest expense related to put premium on convertible debt | 47,870 | 57,423 | ||||||
| Derivative expense | 744,028 | - | ||||||
| Non-cash gain on debt extinguishment | (110,408 | ) | - | |||||
| Non-cash fees upon conversion | 1,750 | - | ||||||
| Lease costs | 267 | - | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | 122,966 | 2,945 | ||||||
| Inventory | (160,108 | ) | (10,378 | ) | ||||
| Prepaid expenses and other assets | 6,972 | 8,878 | ||||||
| Accounts payable | 211,741 | 189,861 | ||||||
| Accrued expenses | 78,045 | 28,371 | ||||||
| Deferred revenue | 2,275 | - | ||||||
| Accrued compensation | 434,260 | 370,905 | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | (651,146 | ) | (632,467 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from sale of stock | 441,000 | 300,000 | ||||||
| Proceeds from sale of series A preferred stock | 120,000 | - | ||||||
| Proceeds from exercise of stock options | - | 19,185 | ||||||
| Proceeds from note payable | 156,200 | 25,000 | ||||||
| Proceeds from convertible notes payable | 100,000 | 192,000 | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 817,200 | 536,185 | ||||||
| NET INCREASE (DECREASE) IN CASH | 166,054 | (96,282 | ) | |||||
| CASH, beginning of period | 77,211 | 128,567 | ||||||
| CASH, end of period | $ | 243,265 | $ | 32,285 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | 273 | $ | 361 | ||||
| Income taxes | $ | - | $ | - | ||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Common stock issued as prepaid for services | $ | 50,000 | $ | 114,460 | ||||
| Common stock issued for accouts payable | $ | 6,058 | $ | - | ||||
| Common stock issued for conversion of debt and accrued interest | $ | 102,335 | $ | - | ||||
| Common stock issued for conversion of Series A preferred shares and related dividends | $ | 162,792 | $ | - | ||||
| Reclassification of put premium to equity | $ | 37,438 | $ | - | ||||
| Increase in debt discount and derivative liability | $ | 85,502 | $ | - | ||||
| Increase in debt discount and paid-n capital for warrants | $ | 14,498 | $ | - | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
Nature of organization
C-Bond Systems, Inc. and its subsidiaries (the “Company”) is a materials development company and sole owner, developer and manufacturer of the patented C-Bond technology. The Company is engaged in the implementation of proprietary nanotechnology applications and processes to enhance properties of strength, functionality and sustainability of brittle material systems. The Company’s present primary focus is in the multi-billion-dollar glass and window film industry with target markets in the United States and internationally. Additionally, the Company has expanded its product line to include disinfecting products including hand sanitizer. The Company operates in two divisions: C-Bond Transportation Solutions that sells windshield strengthening and water repellant solution and C-Bond Safety Solutions that sells multi-purpose glass strengthening primer and window film mounting solutions and ballistic resistant film systems.
On April 25, 2018, the Company (which was formerly known as WestMountain Alternative Energy, Inc.
The Merger was treated as a reverse merger and recapitalization of C-Bond Systems, LLC for financial reporting purposes since the C-Bond Systems LLC members retained an approximate 87% controlling interest in the post-merger consolidated entity. C-Bond Systems, LLC is considered the acquirer for accounting purposes, and the Company’s historical financial statements before the Merger will be replaced with the historical financial statements of C-Bond Systems, LLC and Subsidiaries before the Merger in future filings with the SEC. The balance sheets at their historical cost basis of both entities are combined at the merger date and the results of operations from the merger date forward will include the historical results of C-Bond Systems, LLC and its subsidiaries and results of C-Bond Systems, Inc. from the merger date forward. The Merger was intended to be treated as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.
Basis of Presentation
The Company’s unaudited condensed consolidated financial statements include the financial statements of its wholly-owned subsidiaries, C-Bond Systems, LLC, C-Bond R&D Solutions, LLC, C-Bond Industrial Solutions, LLC, and C-Bond Security Solutions, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
Management acknowledges its responsibility for the statepreparation of Colorado on November 13, 2007the 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 on this date approvedthe results of its business plan and commenced operations.
Going concern
These unaudited condensed 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 condensed consolidated financial statements, the Company had a net loss of $3,100,148 for the six months ended June 30, 2020. The net cash used in operations was $651,146 for the six months ended June 30, 2020. Additionally, the Company had an accumulated deficit, shareholders’ deficit, and working capital deficit of $43,100,163, $4,086,307 and $3,793,488, respectively, at June 30, 2020. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the issuance date of this report. Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital. The Company is seeking to raise capital through additional debt and/or equity financings to fund its operations in the future.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Although the Company has historically raised capital from sales of common shares and from the issuance of convertible promissory notes, there is no assurance that it will be able to continue to do so. If the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail its operations. These unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates during the six months ended June 30, 2020 and 2019 include estimates for allowance for doubtful accounts on accounts receivable, the estimates for obsolete inventory, the useful life of property and equipment, assumptions used in assessing impairment of long-term assets, the estimate of the fair value of the right of use asset and lease liability, the valuation of redeemable and mandatorily redeemable preferred stock, the fair value of derivative liabilities, the value of beneficial conversion features, and the fair value of non-cash equity transactions.
Fair value of financial instruments and fair value measurements
The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Board’s (the “FASB”) accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Disclosures about the fair value of financial instruments are based on pertinent information available to the Company on June 30, 2020. Accordingly, the estimates presented in these consolidated financial statements are not necessarily indicative of operating resultsthe amounts that could be realized on disposition of the financial instruments. FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
| Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. |
| Level 2—Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. |
| Level 3—Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. |
The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, notes payable – related party, convertible note payable, accounts payable, accrued expenses, accrued compensation, and subscription payable approximate their fair market value based on the short-term maturity of these instruments.
Assets and liabilities measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019 is as follows:
| At June 30, 2020 | At December 31, 2019 | |||||||||||||||||||||||
| Description | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| Derivative liabilities | - | - | $ | 1,571,077 | - | - | $ | 890,410 | ||||||||||||||||
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
A roll forward of the level 3 valuation financial instruments is as follows:
| For the Six Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Balance at beginning of period | $ | 890,410 | $ | - | ||||
| Initial valuation of derivative liabilities included in debt discount | 85,502 | - | ||||||
| Initial valuation of derivative liabilities included in derivative expense | 160,416 | - | ||||||
| Gain on extinguishment of debt related to repayment/conversion of debt | (148,863 | ) | - | |||||
| Change in fair value included in derivative expense | 583,612 | - | ||||||
| Balance at end of period | $ | 1,571,077 | $ | - | ||||
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 future interim period or for the full year.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid securitiesinstruments with original maturitiesa maturity of three months or less when acquiredat the purchase date and money market accounts to be cash equivalents. At September 30, 2017
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 December 31, 2016,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 held no such securities.
Property and equipment
Property and equipment are stated at cost and are depreciated using the consolidated financial statementsstraight-line method over their estimated useful lives, which range from three to ten years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income tax returns. Deferred income taxin the year of disposition. The Company examines the possibility of decreases in the value of these assets and liabilities are determined based on differenceswhen events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Derivative financial statementinstruments
The Company has certain financial instruments that are embedded derivatives. The Company evaluates all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-10-05-4, Derivatives and tax basesHedging and 815-40, Contracts in Entity’s Own Equity. This accounting treatment requires that the carrying amount of assetsany embedded derivatives be recorded at fair value at issuance and liabilities using tax ratesmarked-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.
In July 2017, FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features. These amendments simplify the accounting for certain financial instruments with down-round features. The amendments require companies to disregard the down-round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. The guidance was adopted as of January 1, 2019 and the Company elected to record the effect forof this adoption, if any, retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the years incondensed consolidated balance sheet as of the beginning of 2019, the period which the differences are expected to reverse.
Revenue recognition
In May 2014, the FASB issued an update Accounting Standards Update (“ASU”) (“ASU 2014-09, 2014-09”) establishing Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (Topic 606), which (“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes previousmost of the existing revenue recognition guidance. This standard, introduces a new five-step revenue recognition modelwhich is effective for interim and annual reporting periods in whichfiscal years that begin after December 15, 2017, requires an entity should recognize revenue. The new standard requires that a companyto recognize revenue when it transfersto depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the companyentity expects to receivebe entitled in exchange for those goods or services. Companiesservices and also requires certain additional disclosures. The Company adopted this standard on January 1, 2018 using the modified retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.
Based on an evaluation of the impact ASU 2014-09 will have on the Company’s sources of revenue, the Company has concluded that ASU 2014-09 did not have a material impact on the process for, timing of, and presentation and disclosure of revenue recognition from customers and there was no cumulative effect adjustment.
The Company sells its products primarily to distributors and authorized dealers. Product sales are recognized when the product is shipped to the customer and title is transferred and are recorded net of any discounts or allowances.
Cost of sales
Cost of sales includes inventory costs, packaging costs and warranty expenses.
Shipping and handling costs
Shipping and handling costs incurred for product shipped to customers are included in general and administrative expenses and amounted to $14,498 and $19,233 for the six months ended June 30, 2020 and 2019, respectively. Shipping and handling costs charged to customers are included in sales.
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 six months ended June 30, 2020 and 2019, research and development costs incurred in the development of the Company’s products were $4,729 and $20,400, respectively, and are included in operating expenses on the accompanying unaudited condensed consolidated statements of operations.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
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 condensed consolidated balance sheets and amounted $26,833 and $26,933 at June 30, 2020 and December 31, 2019, respectively. For the six months ended June 30, 2020 and 2019, warranty expense amounted to $0 and $4,650, respectively, and is included in cost of sales on the accompanying unaudited condensed consolidated statements of operations. For the six months ended June 30, 2020 and 2019, a roll forward of warranty liability is as follows:
| For the Six Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Balance at beginning of period | $ | 26,933 | $ | 24,190 | ||||
| Increase in estimated warranty liability | - | 4,650 | ||||||
| Warranty expenses incurred | (100 | ) | (1,737 | ) | ||||
| Balance at end of period | $ | 26,833 | $ | 27,103 | ||||
Advertising costs
The Company participates in various advertising programs. All costs related to advertising of the Company’s products are expensed in the period incurred. For the six months ended June 30, 2020 and 2019, advertising costs charged to operations were $19,789 and $25,738, respectively and are included in general and administrative expenses on the accompanying unaudited condensed consolidated statements of operations. These advertising expenses do not include cooperative advertising and sales incentives which have been deducted from sales.
Federal and state income taxes
The Company accounts for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The Company follows the accounting guidance for uncertainty in income taxes using the provisions of Accounting Standards Codification (ASC) 740 “Income Taxes”. Using that guidance, tax positions initially need to usebe recognized in the financial statements when it is more judgmentlikely than not the position will be sustained upon examination by the tax authorities. As of June 30, 2020 and estimates than underDecember 31, 2019, the guidance currentlyCompany had no uncertain tax positions that qualify for either recognition or disclosure in effect, including estimating the amountfinancial statements. Tax years that remain subject to examination are the years ending on and after December 31, 2015. 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 variable revenueJune 30, 2020 and December 31, 2019.
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director , or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(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 convertible notes payable (using the as-if converted method). These common share equivalents may be dilutive in the future. All potentially dilutive common shares were excluded from the computation of diluted common shares outstanding as they would have an anti-dilutive impact on the Company’s net losses and consisted of the following:
| June 30, 2020 | June 30, 2019 | |||||||
| Convertible notes | 149,603,175 | 6,044,444 | ||||||
| Stock options | 8,445,698 | 11,445,698 | ||||||
| Warrants | 2,338,750 | 1,000,000 | ||||||
| Series A preferred stock | 25,481,481 | - | ||||||
| Series B preferred stock | 15,428,571 | - | ||||||
| Non-vested, forfeitable common shares | 23,851,926 | 5,875,299 | ||||||
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over each identified performance obligation. Additional disclosuresthe term of the lease. A lessee is also required to recognize a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The pronouncement requires a modified retrospective method of adoption and is effective on January 1, 2019, with early adoption permitted. For the Company’s administrative office lease, the Company analyzed if it would be required to help usersrecord a lease liability and a right of use asset on its consolidated balance sheets at fair value upon adoption of ASU 2016-02. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less.
Operating lease ROU assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the unaudited condensed consolidated statements of operations.
Segment reporting
During the six months ended June30, 2020 and 2019, the Company operated in one business segment.
Risk factors
The Company’s results of operations could be adversely affected by general conditions in the global economy and in the global financial statements understandmarkets, including conditions that are outside of its control, including the nature, amountimpact of health and timingsafety concerns, such as those relating to the current COVID-19 outbreak. The most recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn could result in a variety of revenuerisks to our business, including weakened demand for the company’s products and cash flows arising from contracts. Thisits ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could strain the Company’s domestic and international customers, possibly resulting in delays in customer payments. Any of the foregoing could harm the Company’s business and it cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact the Company’s business.
10
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Recent accounting pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies certain disclosure requirements related to fair value measurements including (i) requiring disclosures on changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements; and (ii) a requirement to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 was effective for fiscal years beginning after December 15, 2019, including interim periods within those years. The adoption of this standard on January 1, 2020 did not have a material impact on our fair value measurement disclosures.
In December 2019, the FASB issued Accounting Standards Update No. 2019-12 – Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in the accounting standards. The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. The amendments in ASU 2019-12 will become effective for WestMountain Alternative Energy, Inc. beginning with the first quarter 2018 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustmentus as of the beginning of our 2022 fiscal year. Early adoption is permitted, including adoption in any interim period. We are currently evaluating the impact that this guidance will have upon our financial position and results of operations, if any.
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
At June 30, 2020 and December 31, 2019, accounts receivable consisted of the following:
| June 30, 2020 | December 31, 2019 | |||||||
| Accounts receivable | $ | 29,023 | $ | 151,989 | ||||
| Less: allowance for doubtful accounts | - | - | ||||||
| Accounts receivable, net | $ | 29,023 | $ | 151,989 | ||||
For the six months ended June 30, 2020 and 2019, bad debt (recovery) expense amounted to $0 and $0, respectively.
NOTE 4 – INVENTORY
At June 30, 2020 and December 31, 2019, inventory consisted of the following:
| June 30, 2020 | December 31, 2019 | |||||||
| Raw materials | $ | 9,639 | $ | 12,250 | ||||
| Finished goods | 165,289 | 2,570 | ||||||
| Inventory | $ | 174,928 | $ | 14,820 | ||||
NOTE 5 – PROPERTY AND EQUIPMENT
At June 30, 2020 and December 31, 2019, property and equipment consisted of the following:
| Useful Life | 2020 | 2019 | ||||||||
| Machinery and equipment | 5 - 7 years | $ | 52,184 | $ | 52,184 | |||||
| Furniture and office equipment | 3 - 7 years | 45,063 | 45,063 | |||||||
| Vehicles | 5 years | 68,341 | 68,341 | |||||||
| Leasehold improvements | 3 years | 16,701 | 16,701 | |||||||
| 182,289 | 182,289 | |||||||||
| Less: accumulated depreciation | (158,000 | ) | (149,513 | ) | ||||||
| Property and equipment, net | $ | 24,289 | $ | 32,776 | ||||||
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
For the six months ended June 30, 2020 and 2019, depreciation and amortization expense is included in general and administrative expenses and amounted to $8,487 and $12,872, respectively.
NOTE 6 – CONVERTIBLE NOTES PAYABLE
On September 6, 2019 and on December 9, 2019, the Company closed on Securities Purchase Agreements (the “SPAs”) with an accredited investor. Pursuant to the terms of the September 6, 2019 SPA, the Company issued and sold to this investor a convertible promissory note in the aggregate principal amount of $300,000 and a warrant to purchase up to 750,000 shares of the Company’s common stock. The Company received net proceeds of $267,250, net of original issue discount of $30,000 and origination fees of $2,750. The Note bears interest at 12% per annum and becomes due and payable on June 6, 2020. Pursuant to the terms of the December 9, 2019 SPA, the Company issued and sold to this investor a convertible promissory note in the aggregate principal amount of $130,000, and a warrant to purchase up to 300,000 shares of the Company’s common stock. The Company received net proceeds of $115,000, net of original issue discount of $15,000. These Notes bear interest at 12% per annum. The September 6, 2019 Note becomes due and payable on June 6, 2020 and the December 9, 2019 Note is due and payable on September 9, 2020.
On March 30, 2020, the Company closed on a Securities Purchase Agreement (the “March 2020 SPA”) with an accredited investor. Pursuant to the terms of the March 2020 SPA, the Company issued and sold to this investor a convertible promissory note in the aggregate principal amount of $57,750 and a warrant to purchase up to 144,375 shares of the Company’s common stock. The Company received net proceeds of $50,000, net of original issue discount of $5,000 and origination fees of $2,750. The Note bears interest at 12% per annum and becomes due and payable on December 30, 2020.
On April 23, 2020, the Company closed on a Securities Purchase Agreement (the “April 2020 SPA”) with an accredited investor. Pursuant to the terms of the April 2020 SPA, the Company issued and sold to this investor a convertible promissory note in the aggregate principal amount of $57,750 and a warrant to purchase up to 144,375 shares of the Company’s common stock. The Company received net proceeds of $50,000, net of original issue discount of $5,000 and origination fees of $2,750. The Note bears interest at 12% per annum and becomes due and payable on January 23, 2021.
In accordance with these SPAs and these Notes, subject to the adjustments as defined in the respective SPA and Note, the conversion price (the “Conversion Price”) shall equal the lesser of: (i) the lowest Trading Price (as defined below) during the previous twenty-five Trading Day period ending on the latest complete Trading Day prior to the date of adoption. Currentlythis Note, and (ii) the Variable Conversion Price (as defined below) (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company). The “Variable Conversion Price” shall mean 60% multiplied by the Market Price (as defined herein) (representing a discount rate of 40%). “Market Price” means the lowest Trading Price (as defined below) for the Company’s common stock during the twenty-five Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means, for any security as of any date, the lesser of: (i) the lowest trade price on the applicable trading market as reported by a reliable reporting service (“Reporting Service”) designated by the Holder or (ii) the closing bid price on the applicable trading market as reported by a Reporting Service designated by the Holder. The Company may prepay the Note at any time prior to its six-month anniversary, subject to pre-payment charges as detailed in the Note.
The SPAs and Notes contain customary representations, warranties and covenants, including certain restrictions on the Company’s ability to sell, lease or otherwise dispose of any significant portion of its assets. The Investor also has the right of first refusal with respect to any future equity offerings (or debt with an equity component) conducted by the Company until the 12-month anniversary of the Closing. The SPA and the Note also provide for certain events of default, including, among other things, payment defaults, breaches of representations and warranties, bankruptcy or insolvency proceedings, delinquency in periodic report filings with the Securities and Exchange Commission, and cross default with other agreements. Upon the occurrence of an event of default, this investor may declare the outstanding obligations due and payable at significant applicable default rates and take such other actions as set forth in the Notes.
The Warrants are exercisable at any time on or after the date of the issuance and entitles this investor to purchase shares of the Company’s common stock for a period of five years from the initial date the warrants become exercisable. Under the terms of the Warrants, the holder is entitled to exercise the Warrant to purchase up to an aggregate of 1,338,750 shares of the Company’s common stock at an initial exercise price of $0.10, subject to adjustment as detailed in the Warrants.
These Notes and related Warrants include a down-round provision under which the Notes conversion price and warrant exercise price could be affected by future equity offerings undertaken by the Company.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
In connection with the issuance of the Notes, the Company determined that the terms of the Note contain terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of ASC 815-40 - Derivatives and Hedging – Contracts in an Entity’s Own Stock, the embedded conversion options contained in the convertible instruments were bifurcated and accounted for as derivative liability at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded conversion option derivatives was determined using the Binomial valuation model. At the end of each period and on the date that debt is converted into common shares, the Company revalues the embedded conversion option derivative liabilities.
In connection with the issuance of the March 30, 2020 and April 23, 2020 Notes, in March and April 2020, on the initial measurement dates, the fair values of the embedded conversion option derivatives of $245,918 was recorded as a derivative liability and was allocated as a debt discount up to the net proceeds of the Notes of $85,502, with the remainder of $160,416 charged to current period operations as initial derivative expense. At the end of the period, the Company revalued the embedded conversion option derivative liabilities and recorded a derivative expense of $583,612. In connection with the revaluation and the initial derivative expense, the Company recorded an aggregate derivative expense of $744,028 during the six months ended June 30, 2020.
In connection with the warrants issued in connection with the March 2020 and April 2020 Notes, the Company determined that the terms of the warrants contain terms that are fixed monetary amounts at inception and, accordingly, the warrant was not considered a derivative. The fair value of the warrant was determined using the Binomial valuation model. In connection with the issuance of this warrants, on the initial measurement date, the relative fair value of the warrants of $14,498 was recorded as a debt discount and an increase in paid-in capital.
During the six months ended June 30, 2020, the fair value of the derivative liabilities and warrants was estimated using the Binomial valuation model with the following assumptions:
| 2020 | ||||
| Dividend rate | — | % | ||
| Term (in years) | 0.25 to 5.00 years | |||
| Volatility | 300.3 to 345.7 | % | ||
| Risk—free interest rate | 0.12% to 0.39 | % | ||
During the six months ended June 30, 2020, the Company issued 13,275,000 shares its common stock upon the conversion of principal of $74,250, accrued interest of $28,085, and fees of $1,750.
For the six months ended June 30, 2020 and 2019, interest expense related to convertible notes and warrants amounted to $322,862 and $76,393, including amortization of debt discount and debt premium charged to interest expense of $295,355 and $71,565, respectively.
The weighted average interest rate on the above notes and notes payable – related party (see note 7) during the six months ended June 30, 2020 and 2019 was 12.7% and 13.2%, respectively.
At June 30, 2020 and December 31, 2019, convertible notes consisted of the following:
| June 30, 2020 | December 31, 2019 | |||||||
| Principal amount | $ | 471,250 | $ | 430,000 | ||||
| Less: unamortized debt discount | (114,312 | ) | (294,167 | ) | ||||
| Convertible notes payable, net | $ | 356,938 | $ | 135,833 | ||||
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
NOTE 7 – NOTES PAYABLE – RELATED PARTY
On November 14, 2018, the Company entered into a Revolving Credit Facility Loan and Security Agreement (“Loan Agreement”) and a Secured Promissory Note (the “Note”) with BOCO Investments, LLC (the “Lender”), a beneficial shareholder of the Company. Subject to and in accordance with the terms and conditions of the Loan Agreement and the Note, the Lender agrees to lend to the Company up to $400,000 (the “Maximum Loan Amount”) against the issuance and delivery by the Company of the Note for use as working capital and to assist in inventory acquisition. The Lender loaned an initial amount of $200,000 at closing and loaned an additional $200,000 to the Company and may loan at any time and from time to time through November 14, 2020, up to an aggregate amount not to exceed the Maximum Loan Amount. The Company must repay all principal, interest and other amounts outstanding on or before November 14, 2020. The Company’s obligations under the Loan Agreement and the Note are secured by a first-priority security interest in substantially all of the Company’s assets (the “Collateral”). The outstanding principal advanced to Company pursuant to the Loan Agreement bears interest at the rate of 12% per annum, compounded annually.
Upon the occurrence of an Event of Default under the Loan Agreement and Note, all amounts then outstanding (including principal and interest) shall bear interest at the rate of 18% per annum, compounded annually until the Event of Default is cured. Additionally, at or prior to December 31, 2018, the Company should have achieved an accounts receivable balance plus inventory equal to the unpaid principal balance of the Note (the “Minimum Asset Amount”).
In the event that the Company’s accounts receivable balance plus inventory balance is less than paid principal balance of the Note as of December 31, 2018, the Company shall have 45 days (through and until February 15, 2019) to cure such violation and an establish accounts receivable plus inventory equal to the unpaid principal balance of the Note. Commencing March 31, 2019 and at all times thereafter through the remainder of the commitment period and for so long thereafter as there is any amount still due and owing under the Note, the Company must maintain an accounts receivable balances plus inventory such that the outstanding principal borrowed by Company under the Loan Agreement and Note is less than or equal to eighty five percent (85%) of accounts receivable plus fifty percent (50%) of inventory, all as measured at the same point in time.
Commencing on January 10, 2019 and on or before the l0th day of each month thereafter, the Company shall pay Lender all interest accrued on outstanding principal under the Loan Agreement and Notes as of the end of the month then concluded. Upon the occurrence of any Event of Default and at any time thereafter, Lender may, at its option, declare any and all Obligations immediately due and payable without demand or notice. As of June 30, 2020 and December 31, 2019, the Company did not meet the Minimum Asset Amount covenant as defined in the Loan Agreement, failed to timely pay interest payments due, and has violated other default provisions. Accordingly, the note balance due of $400,000 has been reflected as a current liability on the accompanying consolidated balance sheet.
The Loan Agreement and Note contain customary representations, warranties and covenants, including certain restrictions on the Company’s ability to incur additional debt or create liens on its property. The Loan Agreement and the Note also provide for certain events of default, including, among other things, payment defaults, breaches of representations and warranties, breach of covenants, and bankruptcy or insolvency proceedings, the occurrence of which, after any applicable cure period, would permit Lender, among other things, to accelerate payment of all amounts outstanding under the Loan Agreement and the Note, as applicable, and to exercise its remedies with respect to the Collateral, including the sale of the Collateral.
For the six months ended June 30, 2020 and 2019, interest expense related to this Note amounted to $35,901 and $35,704, respectively.
NOTE 8 – NOTE PAYABLE
On April 28, 2020, the Company entered into a Paycheck Protection Program Promissory Note (the “PPP Note”) with respect to a loan of $156,200 (the “PPP Loan”) from Comerica Bank. The PPP Loan was obtained pursuant to the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES act”) administered by the U.S. Small Business Administration (“SBA”). The PPP Loan matures on April 28, 2022 and bears interest at a rate of 1.00% per annum. The PPP Loan is payable in 18 equal monthly payments of approximately $8,900 commencing November 1, 2020. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The Company may apply to have the loan forgiven pursuant to the terms of the PPP if certain criteria are met. For the six months ended June 30, 2020, interest expense related to this Note amounted to $274.
14
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
NOTE 9 - SHAREHOLDERS’ DEFICIT
Preferred Stock
Series A Preferred stock
On October 16, 2019, the Company filed an Amendment to its Articles of Incorporation to designate a series of preferred stock, the Series A Convertible Preferred Stock, with the Secretary of State of the State of Colorado.
The Certificate of Designations established 800,000 shares of the Series A Preferred Stock, par value $0.10, having such designations, preferences, and rights as determined by the Company’s Board of Directors in its sole discretion, in accordance with the Company’s Articles of Incorporation and Amended and Restated Bylaws. The Certificate of Designations, Preferences, Rights, and Limitations of Series A Convertible Preferred Stock (“Certificate of Designations”) provides that the Series A Convertible Preferred Stock shall have no right to vote on any matters on which the common shareholders are permitted to vote. The Series A Convertible Preferred Stock ranks senior with respect to dividends and right of liquidation to the Company’s common stock and junior with respect to dividends and right of liquidation to all existing and future indebtedness of the Company and existing and outstanding preferred stock of the Company. Each share of Series A Preferred Stock shall have a stated value of $1.00 (the “Stated Value”).
Each share of Series A Preferred Stock will carry an annual dividend in the amount of 4% of the Stated Value (the “Dividend Rate”), which shall be cumulative and compounded daily, payable solely upon redemption, liquidation or conversion. Upon the occurrence of an Event of Default, the Dividend Rate shall automatically increase to 22%.
At any time during the periods set forth on the table immediately following this paragraph (the “Redemption Periods”) provided that an Event of Default has not occurred, the Company will have the right, at the Company’s option, to redeem all or any portion of the shares of Series A Preferred Stock for an amount equal to (i) the total number of Series A Preferred Stock held by the applicable Holder multiplied by (ii) the Stated Value plus the Adjustment Amount, (the “Optional Redemption Amount”). The Adjustment Amount shall equal to any accrued but unpaid dividends, the default adjustment amounts, as defined in the Certificate of Designation, if applicable, failure to deliver fees, if any, and any other fees as set forth in the Certificate of Designation. After the expiration of 180 days following the Issuance Date of the applicable shares of Series A Preferred Stock, the Company shall have no right of redemption.
| Redemption Period | Redemption Percentage | |||
| 1. The period beginning on the date of the issuance of shares of Series A Preferred Stock and ending on the date which is sixty days following the Issuance Date. | 100 | % | ||
| 2. The period beginning on the date that is sixty-one days from the Issuance Date and ending ninety days following the Issuance Date. | 107 | % | ||
| 3. The period beginning on the date that is ninety-one days from the Issuance Date and ending one hundred twenty days following the Issuance Date. | 112 | % | ||
| 4. The period beginning on the date that is one hundred twenty-one days from the Issuance Date and ending one hundred fifty days following the Issuance Date. | 117 | % | ||
| 5. The period beginning on the date that is one hundred fifty-one days from the Issuance Date and ending one hundred eighty days following the Issuance Date. | 120 | % | ||
On the earlier to occur of (i) the date which is eighteen months following the Issuance Date and (ii) the occurrence of an Event of Default (the “Mandatory Redemption Date”), the Company shall redeem all of the shares of Series A Preferred Stock of the Holders (which have not been previously redeemed or converted). Within five days of the Mandatory Redemption Date, the Company shall make payment to each Holder of an amount in cash equal to (i) the total number of Series A Preferred Stock held by such Holder multiplied by (ii) the Stated Value plus the Adjustment Amount.
The Holder of Series A Preferred stock shall have the right from time to time, and at any time during the period beginning on the date which is 180 days following the issuance date, to convert all or any part of the outstanding Series A Preferred Stock into the Company’s common stock. The conversion price (the “Conversion Price”) shall equal the Variable Conversion Price (as defined below) (subject to equitable adjustments by the Company relating to the Company’s securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The “Variable Conversion Price” shall mean 81% multiplied by the Market Price (as defined below) (representing a discount rate of 19%). “Market Price” means the average of the two lowest Trading Prices for the common stock during the ten Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means, for any security as of any date, the closing bid price on the applicable trading market as reported by a reliable reporting service designated by the Holder. “Trading Day” shall mean any day on which the Common Stock is tradable for any period on the OTC, or on the principal securities exchange or other securities market on which the common stock is then being traded. The Company has accounted for the Series A Preferred Stock as stock settled debt under ASC 480. During the six months ended June 30, 2020, the Company recorded an aggregate debt premium of $42,553 with a charge to interest expense.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
During October and November 2019, the Company entered into a Series A Preferred Stock Purchase Agreements with an accredited investor whereby the investor agreed to purchase an aggregate of 159,600 unregistered shares of the Company’s Series A Preferred stock, par value $0.10 for $133,000, or $0.833 per share. During October and November 2019, the Company received the cash proceeds of $127,000, net of fees of $6,000. This discount of $6,000 was recognized and is being amortized to interest expense over the redemption terms of the Series A preferred shares or the date that the debt is convertible into common shares, whichever is shorter. During the six months ended June 30, 2020, the Company entered into Series A Preferred Stock Purchase Agreements with an accredited investor whereby the investor agreed to purchase an aggregate of 154,800 unregistered shares of the Company’s Series A Preferred stock, par value $0.10 for $129,000, or $0.833 per share. During the six months ended June 30, 2020, the Company received cash proceeds of $120,000, net of fees of $9,000. This discount of $9,000 was recognized and is being amortized to interest expense over the redemption terms of the Series A preferred shares or the date that the debt is convertible into common shares, whichever is shorter.
For the six months ended June 30, 2020, amortization of discount charged to interest expense amounted to $10,083. During the six months ended June 30, 2020, the Company accrued a dividend payable of $4,123 which was included in interest expense on the accompanying condensed consolidated statement of operations. At June 30, 2020, the Company has not recorded any revenue. As such, we do not expect this ASUaccrued $1,864 of dividends on these liabilities which is included in mandatorily redeemable convertible Series A preferred stock liability on the accompanying consolidated balance sheet.
During the six months ended June 30, 2020, the Company issued 9,982,616 shares its common stock upon the conversion of 159,600 shares of Series A preferred with a stated redemption value of $159,600 and related accrued dividends payable of $3,192. The conversion price was based on contractual terms of the related Series A preferred shares. Upon conversion, the Company reclassified put premium of $37,438 to impact our financial reporting. Should we have revenue, we will review and disclose the expected impact at that time.
The Company has classified the Series A Preferred Stock as a liability in accordance with ASC Topic No. 480, “Distinguishing Liabilities from Equity,” which states that mandatorily redeemable financial instruments should be classified as liabilities and therefore the related dividend payments are treated as a component of interest expense in the accompanying unaudited condensed consolidated statements of operations.
The mandatorily redeemable Series A preferred stock is recorded at the liquidation preference, less unamortized discounts plus the debt premium and accrued dividends due, on the Company’s accompanying consolidated statements of operations as of December 31, 2019 which in total exceeds the redemption value. As of June 30, 2020, the net Series A Preferred Stock balance was $176,543 which includes stated liquidation value of $154,800, an agreementaggregate remaining put premium of $36,312 and accrued dividends payable of $1,864, and is net of an unaccreted debt discount of $12,183 and unamortized debt offering costs of $4,250. The Company recognized interest expense on the Series A Preferred Stock of $96,976 for the six months ended June 30, 2020, which includes accretion expense, put premium on stock-settled debt, accrued dividends, and the amortization of offering costs.
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 SP Business Solutions ("SP")the Secretary of State of the State of Colorado. The Certificate of Designations established 100,000 shares of the Series B, par value $0.10, having such designations, preferences, and rights as determined by the Company’s Board of Directors in its sole discretion, in accordance with the Company’s Articles of Incorporation and Amended and Restated Bylaws. The Certificate of Designations became effective with the State of Colorado upon filing.
The Series B ranks senior with respect to provide accountingdividends and related services forright of liquidation with the Company’s common stock and junior to all existing and future indebtedness of the Company. The owner, Joni Troska,Series B has a stated value per share of $1,000, subject to adjustment as provided in the Certificate of Designations (the “Stated Value”), and a dividend rate of 2% per annum of the Stated Value.
The Series B is subject to redemption (at Stated Value, plus any accrued, but unpaid dividends (the “Liquidation Value”)) by the Company no later than three years after a Deemed Liquidation Event and at the Company’s option after one year from the issuance date of the Series B, subject to a ten-day notice (to allow holder conversion). A “Deemed Liquidation Event” will mean: (a) a merger or consolidation in which the Company is a constituent party or a subsidiary of the Company is a constituent party and the Company issues shares of its capital stock pursuant to such merger or consolidation, except any such merger or consolidation involving the Company or a subsidiary in which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, at least a majority, by voting power, of the capital stock of the surviving or resulting corporation or, if the surviving or resulting corporation is a wholly-owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation; or (b) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Company or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries taken as a whole, or the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Company if substantially all of the assets of the Company and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Company.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
The Series B is convertible at the option of a holder or if the closing price of the common stock exceeds 400% of the Conversion Price for a period of twenty consecutive trading days, at the option of the Company. Conversion Price means a price per share of the common stock equal to 100% of the lowest daily volume weighted average price of the common stock during the two years preceding or subsequent two years following the Issuance Date, subject to adjustment as otherwise provided in the Certificate of Designations (the “Conversion Price”).
In the event of a conversion of any Series B, the Company shall issue to the holder a number of shares of common stock equal to the Liquidation Value multiplied by the number of shares of Series B Preferred Stock being converted divided by the Conversion Price.
Upon liquidation of the Company after payment or provision for payment of liabilities of the Company and after payment or provision for any liquidation preference payable to the holders of any preferred stock ranking senior to the Series B but prior to any distribution to the holders of Common Stock or preferred stock ranking junior upon liquidation to the Series B, the holders of Series B will be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount with respect to each share of Series B equal to the Liquidation Value.
The Series B has voting rights per Series B Share equal to the Liquidation Value per share, divided by the Conversion Price, multiplied by fifty (50). Subject to applicable Colorado law, the holders of Series B will have functional voting control in situations requiring shareholder vote.
The Series B Preferred Stock will vest on May 1, 2021, subject to acceleration in the event of conversion or redemption.
On December 12, 2019, the Board of Directors of the Company agreed to satisfy $108,000 of accrued compensation owed to its directors and executive officers (collectively, the “Management”) through a Liability Reduction Plan (the “Plan”). Under this Plan, Management agreed to accept 108 shares of the Company’s Series B convertible preferred stock in settlement of accrued compensation.
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 appointed Secretaryappropriate. As per the terms of WestMountain Alternative Energy, Inc.the Series B preferred stock agreements, Series B preferred stock is redeemable for cash and other assets on March 19, 2010,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, istherefore, 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 party.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.
During the six months ended June 30, 2020, the Company accrued a dividend payable of $1,195 which was included in interest expense on the accompanying condensed consolidated statement of operations. As of June 30, 2020, the net Series B Preferred Stock balance was $109,195 which includes stated liquidation value of $108,000 and accrued dividends payable of $1,195.
Sale of common stock
In connection with subscription agreements dated January 13, 2020 and February 18, 2020, the Company received cash proceeds of $280,000 from an investor for the purchase of 7,000,000 shares of the Company’s common stock at $0.04 per share.
In connection with subscription agreements dated May 8, 2020, the Company received cash proceeds of $161,000 from an investor for the purchase of 7,000,000 shares of the Company’s common stock at $0.023 per share.
17
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Issuance of common shares for services
On February 20, 2020 and effective March 1, 2020, the Company entered into a six-month consulting agreement with an entity for investor relations services. In connection with this consulting agreement, the Company issued 1,250,000 restricted common shares of the Company to the consultant. These shares vest immediately. These shares were valued at $50,000, or $0.04 per common share, based on contemporaneous common share sales by the Company. In connection with this consulting agreement, as of June 30, 2020, the Company recorded stock-based professional fees of $33,333 and prepaid expenses of $16,667 which will be amortized over the remaining term of the agreement.
On March 31, 2020 and effective April 1, 2020, the Company entered into two one-year advisory board agreements with two individuals for services to be rendered on the Company’s medical advisory board. In connection with these advisory board agreements, the Company issued an aggregate of 500,000 restricted common shares of the Company to these advisory board members. These shares vest on April 1, 2021. These shares were valued at $20,000, or $0.04 per common share, based on contemporaneous common share sales by the Company. In connection with this consulting agreement, during the six months ended June 30, 2020, accretion of stock-based consulting fees amounted to $5,000 and the remaining stock-based consulting fees of $15,000 shall be accreted over the remaining vesting period.
On April 1, 2020, the Company entered into an employment agreement with an accounting manager. Pursuant to this employment agreement, the Company agreed to grant a restricted stock award of 200,000 common shares of the Company which will vest on May 1, 2021. If the employee’s employment is terminated without cause or for good reason (both as defined in the employment agreement), or a change of control event (as defined in the employment agreement) occurs, these shares will immediately vest. For any other termination of employment, unvested restricted stock shall immediately terminate. These shares were valued on the date of grant at $8,000, or $0.04 per common share, based on contemporaneous common share sales. In connection with these shares, the Company shall record stock-based compensation over the vesting period.
On April 28, 2020, the Company entered into restricted stock award agreements (the “Restricted Stock Award Agreements”) with executive officers and employees. Pursuant to the Restricted Stock Award Agreements, the Company agreed to grant restricted stock awards for an aggregate of 6,750,000 common shares of the Company which were valued at $270,000, or $0.04 per common share, based on contemporaneous common share sales. These shares will vest on May 1, 2021. If the employee’s employment is terminated for any reason, these shares will immediately be forfeited. In the event of a change of control, the employee shall be 100% vested in all shares of restricted shares subject to these Agreements. Each executive officer and employee shall have the right to vote the restricted shares awarded to them and to receive and retain all regular dividends paid in cash or property (other than retained distributions), and to exercise all other rights, powers and privileges of a holder of shares of the stock, with respect to such restricted shares, with the exception that (a) the employee shall not be entitled to delivery of the stock certificate or certificates or electronic book entries representing such restricted shares until the shares are vested, (b) the Company shall retain custody of all retained distributions made or declared with respect to the restricted shares until such time, if ever, as the restricted shares have become vested, and (c) the employee may not sell, assign, transfer, pledge, exchange, encumber, or dispose of the restricted shares. In connection with these shares, the Company shall record stock-based compensation over the vesting period.
The following table summarizes activity related to non-vested shares:
| Number of Non-vested Shares | Weighted Average Grant Date Fair Value | |||||||
| Non-vested, December 31, 2019 | 17,675,299 | $ | 0.23 | |||||
| Granted | 7,450,000 | 0.04 | ||||||
| Shares vested | (1,273,373 | ) | (0.41 | ) | ||||
| Non-vested, June 30, 2020 | 23,851,926 | $ | 0.16 | |||||
During the six months ended June 30, 2020 and 2019, aggregate accretion of stock-based compensation expense on granted non-vested shares amounted to $287,587 and $1,429,167, respectively. Total unrecognized compensation expense related to these unvested common shares at June 30, 2020 amounted to $279,127 which will be amortized over the remaining vesting period.
Shares issued for accounts payable
On January 13, 2020, the Company issued 151,456 common shares upon conversion of accounts payable of $6,058, or $0.04 per common share, based on contemporaneous common share sales by the Company.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Common stock issued for debt conversion
During the six months ended June 30, 2020, the Company issued 13,275,000 shares of its common stock upon the conversion of convertible notes with bifurcated embedded conversion option derivatives including principal of $74,250, accrued interest of $28,085, and fees of $1,750. The conversion price was based on contractual terms of the related debt. The Company accounted for the partial conversion of these convertible notes pursuant to the guidance of ASC 470-20, Debt with Conversion and Other Options. Under ASC 470-20, the Company recognized an aggregate loss on debt extinguishment upon conversion in the amount of $123,455 which is associated with the different between the fair market value of the shares issued upon conversion and the conversion price and is equal to the fair value of the additional shares of common stock transferred upon conversion.
Common stock issued for conversion of series A preferred shares
During the six months ended June 30, 2020, the Company issued 9,982,616 shares its common stock upon the conversion of 159,600 shares of Series A preferred with a stated redemption value of $159,600 and related accrued dividends payable of $3,192. The conversion price was based on contractual terms of the related Series A preferred shares. Upon conversion, the Company reclassified put premium of $37,438 to paid-in capital.
Common shares issued for deferred compensation
On April 17, 2020, the Company issued 203,125 common shares upon conversion of an accrued deferred compensation liability of $16,250.
Stock options
For the six months ended June 30, 2020 and 2019, the Company recorded $382,615 and $1,042,506 of compensation expense related to stock options, respectively. Total unrecognized compensation expense related to unvested stock options at June 30, 2020 amounted to $227,046. The weighted average period over which stock-based compensation expense related to these options will be recognized is approximately 4 months.
Stock option activities for the six months ended June 30, 2020 are summarized as follows:
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding, December 31, 2019 | 8,445,698 | $ | 0.40 | |||||||||||||
| Granted | - | - | ||||||||||||||
| Forfeited | - | - | ||||||||||||||
| Balance Outstanding, June 30, 2020 | 8,445,698 | $ | 0.40 | 5.69 | $ | 0 | ||||||||||
| Exercisable, June 30, 2020 | 8,152,547 | $ | 0.41 | 5.63 | $ | 0 | ||||||||||
Warrants
On March 30, 2020 and on April 23, 2020, in connection with Purchase Agreements with an accredited investor (See Note 6), the Company issued warrants to purchase an aggregate amount up to 288,750 shares of the Company’s common stock (the “Warrants”). The Warrants are exercisable at any time on or after the date of the issuance and entitles this investor to purchase shares of the Company’s common stock for a period of five years from the initial date the warrants become exercisable. Under the terms of the Warrants, the holder is entitled to exercise the Warrants to purchase up to 288,750 shares of the Company’s common stock at an initial exercise price of $0.10, subject to adjustment as detailed in the Warrants. In connection with the issuance of the warrants, on the initial measurement date, the relative fair value of the warrants of $14,498 was recorded as a debt discount and an increase in paid-in capital (See Note 6).
During the six months ended June 30, 2020, the Company issued common shares related to the sale of common stock and issued shares upon the conversion of convertible debt at prices lower than the warrant exercise price of $0.10 and accordingly, the warrant down-round provisions were triggered. As a result, the warrant exercise price was reduced to $0.003 per share. As a result of the trigger of down-round provisions, the Company calculated the difference between the warrants fair value on the date the down round feature was triggered using the current exercise price and the new exercise price. If applicable, a deemed dividend shall be recorded as an increase in accumulated deficit and increase in paid-in capital and increased the net loss to common shareholders by the same amount. Since the fair value of the warrants using the new exercise price was less than the initial fair value amount, no deemed dividend was recorded.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Warrant activities for the six months ended June 30, 2020 are summarized as follows:
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding December 31, 2019 | 2,050,000 | $ | 0.10 | - | $ | - | ||||||||||
| Granted | 288,750 | 0.003 | ||||||||||||||
| Cancelled | - | - | ||||||||||||||
| Balance Outstanding June 30, 2020 | 2,338,750 | $ | 0.04 | 4.23 | $ | 11,848 | ||||||||||
| Exercisable, June 30, 2020 | 2,338,750 | $ | 0.04 | 4.23 | $ | 11,848 | ||||||||||
2018 Long-term Incentive Plan
On June 7, 2018, a majority of the Company’s shareholders and its board approved the adoption of a 2018 Long-Term Incentive Plan (the “2018 Plan”). The purpose of the 2018 Plan is to advance the interests of the Company, its affiliates and its stockholders and promote the long-term growth of the Company by providing employees, non-employee directors and third-party service providers with incentives to maximize stockholder value and to otherwise contribute to the success of the Company and its affiliates, thereby aligning the interests of such individuals with the interests of the Company’s stockholders and providing them additional incentives to continue in their employment or affiliation with the Company. The Plan was adopted on June 7, 2018 and effective on August 2, 2018. Under the 2018 Plan, the Plan Administrator may grant:
| ● | options to acquire the Company’s common stock, both incentive stock options that are intended to satisfy the requirements of Section 422 of the Internal Revenue Code and nonqualified stock options which are not intended to satisfy such requirements. The exercise price of options granted under our 2018 Plan must at least be equal to the fair market value of the Company’s common stock on the date of grant and the term of an option may not exceed ten years, except that with respect to an incentive stock option granted to any employee who owns more than 10% of the voting power of all classes of the Company’s outstanding stock as of the grant date the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. |
| ● | stock appreciation rights, or SARs, which allow the recipient to receive the appreciation in the fair market value of the Company’s common stock between the date of grant and the exercise date. The amount payable under the stock appreciation right may be paid in cash or with shares of the Company’s common stock, or a combination thereof, as determined by the Administrator. |
| ● | restricted stock awards, which are awards of the Company’s shares of common stock that vest in accordance with terms and conditions established by the Administrator. |
| ● | restricted stock units, which are awards that are based on the value of the Company’s common stock and may be paid in cash or in shares of the Company’s common stock. |
| ● | other types of stock-based or stock-related awards not otherwise described by the terms and provision of the 2018 Plan, including the grant or offer for sale of unrestricted shares of the Company’s common stock, and which may involve the transfer of actual shares of the Company’s common stock or payment in cash or otherwise of amounts based on the value of shares of the Company’s common stock and may be designed to comply with or take advantage of the applicable local laws of jurisdictions other than the United States. |
| ● | other cash-based awards to eligible persons in such amounts and upon such terms as the Administrator shall determine. |
An award granted under the 2018 Plan must include a minimum vesting period of at least one year, provided, however, that an award may provide that the award will vest before the completion of such one-year period upon the death or qualifying disability of the grantee of the award or a change of control of the Company and awards covering, in the aggregate, 25,000,000 shares of our Common Stock may be issued without any minimum vesting period.
The aggregate number of shares of common stock and number of shares of the Company’s common stock that may be subject to incentive stock options granted under the 2018 Plan is 50,000,000 shares, of which 11,445,698 shares have been issued or granted under incentive stock options and 22,700,000 shares of restricted stock have been issued as of June 30, 2020. All shares underlying grants are expected to be issued from the Company’s unissued authorized shares available.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Legal matters
From time to time, the Company may be involved in litigation related to claims arising out of its operations in the normal course of business. Other than the matter discussed below, as of June 30, 2020, 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.
Roy Duplantier and Sleeping Creek Partners vs. C-Bond Systems LLC; Court Filed: Harris County, Texas, Precinct 7; Small Claims Case Number: 207100033133; Date Filed: January 24, 2020.
On January 24, 2020, Roy Duplantier and Sleeping Creek Partners (“Plaintiff”) filed a Citation (Small Claims Case) against C-Bond Systems LLC. Pursuant to the Small Claims Case, the Plaintiff demanded $10,000 for unpaid commissions and damages. The Company believes that this claim is without merit and will vigorously defend against this claim.
Employment agreements
On October 18, 2017, the Company entered into an employment agreement with Mr. Scott Silverman, pursuant to which he serves as the Chief Executive Officer of the Company for an initial term of three years that extends for successive one-year renewal terms unless either party gives 30-days’ advance notice of non-renewal. As consideration for these services, the employment agreement provides Mr. Silverman with the following compensation and benefits:
| ● | An annual base salary of $300,000, with a 10% increase on each anniversary date contingent upon achieving certain performance objectives as set by the Board. Until the Company raises $1,000,000 in debt or equity financing after entering into this agreement, Mr. Silverman will receive ½ of the base salary on a monthly basis with the other ½ being deferred. Upon the financing being raised, Mr. Silverman will receive the deferred portion of his compensation and his base salary will be paid in full moving forward. |
| ● | After the first $500,000 of equity investments is raised by the Company, after entering into this employment agreement, Mr. Silverman will receive a capital raise success bonus of 5% of all equity capital raised from investors/lenders introduced by him to the Company. | |
| ● | Annual cash performance bonus opportunity as determined by the Board. | |
| ● | An option to acquire 3,000,000 common shares of the Company, with a strike price of $0.31 per unit. These options will vest pro rata on a monthly basis for the term of the employment agreement. On each anniversary, Mr. Silverman will be eligible to be granted a minimum of 500,000 stock options of the Company at a strike price of $0.85 per common unit contingent upon the achievement of certain performance objectives. | |
| ● | Certain other employee benefits and perquisites, including reimbursement of necessary and reasonable travel and participation in retirement and welfare benefits. |
The April 25, 2018 financing received of $1,240,000 triggered the right of the employee to receive the deferred salary and the 5% bonus provision disclosed above.
Mr. Silverman’s employment agreement provides that, in the event that his employment is terminated by the Company without “cause” (as defined in his employment agreement), or if Mr. Silverman resigned for “good reasons” (as defined in his new employment agreement), subject to a complete release of claims, he will be entitled to (i) retain all stock options previously granted; and (ii) receive any benefits then owed or accrued along with one year of base salary and any unreimbursed expenses incurred by him. All amounts shall be paid on the termination date. In the event that Mr. Silverman’s employment is terminated by the Company for “cause” (as defined in his employment agreement), or if Mr. Silverman resigned without “good reasons” (as defined in his employment agreement), subject to a complete release of claims, he will be entitled to receive any unpaid base salary and benefits then owed or accrued and any unreimbursed expenses incurred by him. Additionally, if a change of control (as defined in his employment agreement) occurs during the term of this agreement, all unvested stock options will vest in full and if the valuation of the Company in the change of control transaction is greater than $0.85 per common share, then Mr. Silverman shall be paid a bonus equal to two times his minimum base salary and minimum target bonus. Pursuant to the employment agreement, Mr. Silverman will be subject to a confidentiality covenant, a two-year post-termination non-competition covenant and a two-year post-termination non-solicitation covenant. On June 30, 2020, the Company amended the employment agreement of Mr. Silverman to provide for successive one-year extensions until either the executive or the Board of Directors of the Company gives notice to terminate the employment agreement per its terms. This employment agreement amendment also includes an allowance of up to $10,000 per year to cover uncovered medical/dental expenses for Mr. Silverman and his family.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
On March 27, 2019 and effective March 1, 2019, the Company entered into an employment agreement with SP were $500Mr. Vincent Pugliese. Pursuant to this employment agreement, he serves as the President and $500Chief Operating Officer of the Company. The employment agreement shall terminate on the earliest of a) the third anniversary or b) terminated pursuant to terms in the employment agreement. As consideration for these services, the employment agreement provided Mr. Pugliese with the following compensation and benefits:
| ● | An annual base salary of $240,000. | |
| ● | Annual cash performance bonus opportunity as determined by the Board. | |
| ● | Annual stock grant as determined by the Board. | |
| ● | Certain other employee benefits and perquisites, including reimbursement of necessary and reasonable travel. |
In the event that the Company terminates the term of Mr. Pugliese’s employment hereunder without Cause or for “good reason” (as defined in this employment agreement) by Mr. Pugliese, then in such event:
| (A) | Mr. Pugliese will retain and vest immediately all stock options/grants previously granted and will be exercisable over a ten-year period; |
| (B) | the Company shall pay any benefits but not limited to accrued and deferred base salary, commissions and expense reimbursements then owed or accrued plus eighteen (18) months of the current Base Salary, and any unreimbursed expenses incurred through the termination date, and each of which shall be paid on the termination date (in cash and/or stock as mutually agreed between the Parties) |
In the event of a change of control (as defined in this employment agreement), all unvested stock options/grants of Mr. Pugliese shall vest in full, and Mr. Pugliese will be entitled to receive, subject to a complete release of all claims, a lump sum payment equal to two times his current annual base salary upon closing of the change in control transaction, and then this employment agreement shall terminate. Pursuant to the employment agreement, Mr. Pugliese will be subject to a confidentiality covenant, a two-year post-termination non-competition covenant and a two-year post-termination non-solicitation covenant. All unvested stock will expire upon termination unless termination is with cause for incapacity for physical or mental illness, without cause or change of control as defined in the employment agreement.
On April 28, 2020, the Company’s board of directors approved a bonus to officers and an employee of the Company in the aggregate amount of $280,000 which shall be deferred and was recorded as an accrued liability.
Licensing agreement
Pursuant to an agreement dated April 8, 2016, between the Company and Rice University, Rice University has granted a non-exclusive license to the Company, in nanotube-based surface treatment for strengthening glass and related materials under Rice’s intellectual property rights, to use, make, distribute, offer and sell the licensed products specified in the agreement. In consideration for which, the Company had to pay a one-time non-refundable license fee of $10,000 and royalty payments of 5% of net sales of the licensed products during the term of the agreement and a sell-off period of 180 days from termination, In addition, the Company is required to pay for the three months ended Septembermaintenance of the patents, This agreement will continue until the expiration of the last to expire of the licensed property rights, unless terminated earlier in accordance with the terms of the agreement. There have been no royalty payments paid or due through June 30, 20172020.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Anti-dilution rights related to C-Bond Systems, LLC
Prior to the Merger, C-Bond Systems, LLC entered into certain contracts, described below, which provided certain anti-dilution protection to the counterparties to those contracts. The Company believes that these contracts do not apply to any future issuances of equity by C-Bond Systems, Inc.
In 2013, pursuant to a subscription agreement, the Company’s subsidiary. C-Bond Systems, LLC issued 2,425,300 common shares. To the extent that during the term of the agreement C-Bond Systems, LLC issues any “down-round” or subsequent investments based upon an enterprise value of less than $2,000,000 (“Dilutive Transaction”) (other than an issuance pursuant to an option agreement with an employee or otherwise to compensate an employee, or incident to an acquisition of assets by C-Bond Systems, LLC in which common units were issued to the seller of such assets) contemporaneously with the Dilutive Transaction, the contract obligated C-Bond Systems, LLC to issue the investor additional common units in C-Bond Systems, LLC in an amount which would provide them with the ownership percentage interest which they would have held in C-Bond Systems, LLC represented by the common units purchased by them on this date.
In 2015, pursuant to a subscription agreement, C-Bond Systems, LLC issued 3,880,480 common shares to an entity at $0.77 per common share. This agreement entitled the subscriber to anti-dilution protection to the extent that C-Bond Systems, LLC issued any equity in a “down-round” based upon a value of less than $0.77 per common unit of C-Bond Systems, LLC (other than an issuance pursuant to an option agreement with an employee or consultant or otherwise to compensate an employee or consultant, or incident to an acquisition of assets by C-Bond Systems, LLC in which common units are issued to the seller of such assets (“Dilutive Transaction”)). Contemporaneously with the Dilutive Transaction the contract obligated C-Bond Systems, LLC to issue the Subscriber additional common units in C-Bond Systems, LLC in an amount which would provide the investor with the ownership percentage interest in C-Bond Systems, LLC on a fully diluted basis which Subscriber held immediately prior to the Dilutive Transaction.
In 2016, pursuant to a subscription agreement, C-Bond Systems, LLC issued 1,175,902 common shares to an entity at $0.85 per common share. This agreement entitled this investor to customary broad-based weighted average anti-dilution protection to the extent that after the date of this subscription agreement C-Bond Systems, LLC issued any equity in a “down round” based upon a value of less than $0.85 per common share, including the issuance of options with an exercise price per share of less than $0.85 to compensate employees or consultants (“Dilutive Transaction”), subject to exclusions for issuances of common shares or options in connection with strategic partnerships, equity kickers to lenders or vendors, mergers or acquisitions. The agreement obligated C-Bond Systems, LLC to give to this investor written notice (an “Issuance Notice”) of any proposed issuance by C-Bond Systems, LLC of any C-Bond Systems, LLC common units, or other form of equity interest (excluding issuances of C-Bond Systems, LLC options or other equity to compensate employees or consultants and 2016, respectively. Total expenses incurredthe issuance of shares in connection with SPstrategic partnerships, equity kickers to lenders or vendors, mergers or acquisitions) at least ten business days prior to the proposed issuance date. This contract entitled the investor to purchase their pro rata portion of such shares or other equity interest of C-Bond Systems, LLC at the price and on the other terms and conditions specified in the issuance notice.
NOTE 11 – CONCENTRATIONS
Concentrations of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable and cash deposits.
The Company places its cash in banks at levels that, at times, may exceed federally insured limits. There were $1,500 and $1,500 for the nine months ended Septemberno balances in excess of FDIC insured levels as of June 30, 2017 and 2016, respectively. As of September 30, 20172020 and December 31, 2016,2019. The Company has not experienced any losses in such accounts through June30, 2020.
Geographic concentrations of sales
For the six months ended June 30, 2020 and 2019, all sales were in the United States. No other geographical area accounted for any sales during the six months ended June 30, 2020 and 2019.
Customer concentrations
For the six months ended June 30, 2020, four customers accounted for approximately 51.5% of total sales (10.2%, 13.3%, 15.0% and 13.0%, respectively). For the six months ended June 30, 2019, one customer accounted for approximately 34.1% of total sales. A reduction in sales from or loss of such customers would have a material adverse effect on the Company’s consolidated results of operations and financial condition. At June 30, 2020, one customer accounted for 89.0% of the total accounts receivable balance.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Vendor concentrations
Generally, the Company purchases substantially all of its inventory from two suppliers. The loss of these suppliers may have a material adverse effect on the Company’s consolidated results of operations and financial condition. However, the Company believes that, if necessary, alternate vendors could supply similar products in adequate quantities to avoid material disruptions to operations.
NOTE 12 – REVENUE RECOGNITION
The revenue that the Company recognizes arises from purchase requests the Company receives from its customers. The Company’s performance obligations under the purchase orders correspond to each shipment of product that the Company makes to its customer under the purchase orders; as a result, each purchase order generally contains more than one performance obligation based on the number of products ordered, the quantity of product to be shipped and the mode of shipment requested by the customer. Control of the Company’s products transfers to its customers when the customer is able to direct the use of, and obtain substantially all of the benefits from, the Company’s products, which generally occurs at the later of when the customer obtains title to the product or when the customer assumes risk of loss of the product. The transfer of control generally occurs at a point of shipment from the Company’s warehouse. Once this occurs, the Company has satisfied its performance obligation and the Company recognizes revenue.
When the Company receives a purchase order from a customer, the Company is obligated to provide the product during a mutually agreed upon time period. Depending on the terms of the purchase order, either the Company or the customer arranges delivery of the product to the customer’s intended destination. In situations where the Company has agreed to arrange delivery of the product to the customer’s intended destination and control of the product transfers upon loading of the Company’s product onto transportation equipment, the Company has elected to account for any freight income associated with the delivery of these products as freight revenue, since this activity fulfills the Company’s obligation to transfer the product to the customer.
Transaction Price
The Company agrees with its customers on the selling price of each transaction. This transaction price is generally based on the product, market conditions, including supply and demand balances and freight. In the Company’s contracts with customers, the Company allocates the entire transaction price to the sale of product to the customer, which is the basis for the determination of the relative standalone selling price allocated to each performance obligation. Returns of the Company’s product by its customers are permitted only when the product is not to specification and were not material for the six months ended June 30, 2020 and 2019. Any sales tax, value added tax, and other tax the Company collects concurrently with its revenue-producing activities are excluded from revenue.
Revenue Disaggregation
The Company tracks its revenue by product. The following table summarizes our revenue by product for the six months ended June 30, 2020 and 2019:
For the Six Months Ended | For the Six Months Ended June 30, 2019 | |||||||
| C-Bond Secure multi-purpose and BRS ballistic resistant glass protection systems | $ | 62,183 | $ | 177,641 | ||||
| C-Bond Nanoshield solution sales | 16,329 | 49,976 | ||||||
| Sanitizer products | 18,138 | - | ||||||
| Installation and other services | 1,377 | 6,833 | ||||||
| Freight and delivery | 5,803 | 10,345 | ||||||
| Total | $ | 103,830 | $ | 244,795 | ||||
NOTE 13 – OPERATING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING LEASE LIABILITIES
In October 2019, the Company entered into an accrual18-month lease agreement for the lease of $500office and $800, has beenwarehouse space under a non-cancelable operating lease through May 31, 2021. From the lease commencement date of December 1, 2019 until November 30, 2020, monthly rent shall be $4,444 and from December 1, 2020 to May 31, 2021, monthly rent shall be $4,577 per month.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
In adopting ASC Topic 842, Leases (Topic 842) on January 1, 2019, the Company had elected the ‘package of practical expedients’, which permitted it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs (see Note 2). In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less. Since the terms of the Company’s operating lease for its office space prior to October 2019 was 12 months or less on the date of adoption, pursuant to ASC 842, the Company determined that the lease met the definition of a short-term lease and the Company did not recognize the right-of use asset and lease liability arising from this lease. Upon renewal of the lease in October 2019, the Company analyzed the new lease and determined it is required to record a lease liability and a right of use asset on its consolidated balance sheet, at fair value.
During the six months ended June 30, 2020 and 2019, in connection with its operating leases, the Company recorded rent expense of $51,602 and $50,502, respectively, which is expensed during the period and included in operating expenses on the accompanying condensed consolidated statements of operations.
The significant assumption used to determine the present value of the lease liability in October 2019 was a discount rate of 12% which was based on the Company’s estimated incremental borrowing rate.
At June 30, 2020 and December 31, 2019, right-of-use asset (“ROU”) is summarized as follows:
June 30, 2020 | December 31, 2019 | |||||||
| Office leases right of use assets | $ | 74,296 | $ | 74,296 | ||||
| Less: accumulated amortization | (27,798 | ) | (4,488 | ) | ||||
| Balance of ROU assets | $ | 46,498 | $ | 69,808 | ||||
At June 30, 2020 and December 31, 2019, operating lease liabilities related to the ROU assets are summarized as follows:
June 30, 2020 | December 31, 2019 | |||||||
| Lease liabilities related to office leases right of use assets | $ | 46,809 | $ | 69,852 | ||||
| Less: current portion of lease liabilities | (46,809 | ) | (47,636 | ) | ||||
| Lease liabilities – long-term | $ | - | $ | 22,216 | ||||
At June 30, 2020, future minimum base lease payments due under non-cancelable operating leases are as follows:
| Year ended June 30, | Amount | |||
| 2021 | $ | 49,684 | ||
| Total minimum non-cancelable operating lease payments | 49,684 | |||
| Less: discount to fair value | (2,875 | ) | ||
| Total lease liability at June 30, 2020 | $ | 46,809 | ||
NOTE 14 – SUBSEQUENT EVENT
Shares issued for unpaid services respectively.
On July 1, 2020, the Company entered into a six-month consulting agreement with an entity for investor relations services. In connection with this consulting agreement, the Company issued 500,000 restricted common shares of the Company to the consultant. These shares vest immediately. These shares were valued at $6,500, or $0.013 per common share, based on contemporaneous common share sales by the Company.
Common stock issued for cash
In connection with subscription agreements dated July 2, 2020, the Company received cash proceeds of $280,000 from investors for the purchase of 21,538,462 shares of the Company’s common stock at $0.013 per share.
C-BOND SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
Common stock issued for debt conversion
On July 15, 2020, the Company issued 7,500,000 shares its common stock upon the conversion of principal of $23,551, accrued interest of $2,449, and fees of $250. The conversion price was based on contractual terms of the related debt.
On August 5, 2020, Company issued 7,500,000 shares its common stock upon the conversion of principal of $27,656, accrued interest of $2,094, and fees of $250. The conversion price was based on contractual terms of the related debt.
Common stock issued for conversion of Series A preferred shares
On July 16, 2020, the Company issued 1,561,224 shares its common stock upon the conversion of 15,000 shares of Series A preferred with a stated redemption value of $15,000 and related accrued dividends payable of $300. On July 20, 2020, the Company issued 1,800,000 shares its common stock upon the conversion of 15,000 shares of Series A preferred with a stated redemption value of $15,000 and related accrued dividends payable of $300. On July 22, 2020, the Company issued 1,936,709 shares its common stock upon the conversion of 15,000 shares of Series A preferred with a stated redemption value of $15,000 and related accrued dividends payable of $300. On July 24, 2020, the Company issued 852,152 shares its common stock upon the conversion of 6,600 shares of Series A preferred with a stated redemption value of $6,600 and related accrued dividends payable of $132. The conversion price was based on contractual terms of the related Series A preferred shares.
ITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLANRESULTS OF OPERATION
Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes and other financial information included in this Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading “Forward-Looking Statements” elsewhere in this Report on Form 10-Q. Forward-looking statements include those preceded by, followed by or including the words “will,” “expect,” “intended,” “anticipated,” “believe,” “project,” “forecast,” “propose,” “plan,” “estimate,” “enable,” and similar expressions, including, for example, statements about our business strategy, our industry, our future profitability, growth in the industry sectors we serve, our expectations, beliefs, plans, strategies, objectives, prospects and assumptions, and estimates and projections of future activity and trends in our industry. These forward-looking statements are not a guarantee of future performance. These statements are based on management’s expectations that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, most of which are difficult to predict and many of which are beyond our control, which include, but are not limited to: the risk that we continue to sustain prolonged losses and never achieve profitability, our ability to continue as a going concern, and risks related to protection and maintenance of our intellectual property. You should review the disclosure under the heading “Risk Factors” in our Annual Report on Form 10-K as filed on March 25, 2020, for a discussion of important factors and risks that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a nanotechnology company and sole owner, developer and manufacturer of the patented C-Bond technology. 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. Our present primary focus is in the multi-billion-dollar glass and window film industry with target markets in the United States and internationally. We operate in two divisions: C-Bond Transportation Solutions and C-Bond Safety Solutions.
To date, we have filed, licensed and/or acquired a total of 22 individual patents and patent applications spanning core and strategic nano-technology applications and processes. Our intellectual property portfolio was recently valued at $33.7 million by a leading, independent, global intellectual property valuation firm. The IP valuation firm’s review covered the valuation of our intangible assets including our developed technology, trade name, customer relationships, and assembled workforce, and the Company’s determination of the fair value or other amounts of any assets and liabilities including current assets, real property, personal property, and current liabilities. Our developed technology includes C-Bond NanoShield, C-Bond Secure, and C-Bond BRS. The valuation firm also reviewed historical and projected financial information for the Company giving consideration to general economic and industry trends.
On April 25, 2018, our wholly-owned subsidiary, Acquisition Sub, merged with and into C-Bond Systems, LLC, pursuant to which C-Bond Systems, LLC was the surviving corporation and became our wholly-owned subsidiary. All of the outstanding membership interests of C-Bond Systems, LLC were converted into shares of our common stock, as described in more detail below. We changed our name to C-Bond Systems, Inc. on July 18, 2018.
On May 20, 2020, we entered into a two-year Distributor Agreement with an entity where we were appointed as a distributor to exclusively sell MB-10 Disinfectant Tablets for use in certain markets. MB-10 Disinfectant Tablets are the most convenient way yet to deliver the benefits of chlorine dioxide to hygiene or biosafety programs. MB-10 disinfectant tablets have one of the broadest, most complete EPA registration labels on the market. It is a safe, easy and effective way to disinfect a vehicle’s interior using an EPA registered disinfectant (Reg No.70060-19-46269) included on List N for use against human coronavirus SARS-CoV-2. Proven effective against emerging viral pathogens, including enveloped and large and small non-enveloped viruses.MB-10 provides fast-acting virus and bacteria protection that is safe for all vehicle surfaces including LED screens and electronics without leaving a residue or odor. We were appointed as a distributor to exclusively sell MB-10 Disinfectant Tablets for use in the following markets:
| ● | Automotive, Trucking, RV, rental agencies (auto and truck), service vehicles (taxi, Uber, Lyft), mass transit (train, buses), golf carts, aviation, train, marine (potential future growth) |
| ● | School facilities and buses |
| ● | Dealerships |
| ● | Insurance Providers |
| ● | Service Providers |
| ● | Transportation Detailing. |
The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis are based on our unaudited condensed consolidated financial statements contained in this Report, which have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). You should read the discussion and analysis together with such financial statements and the related notes thereto.
Operating Overview
We are a nanotechnology company and sole owner, developer and manufacturer of the patented C-Bond technology. We are engaged in the implementation of proprietary nanotechnology applications and processes to enhance properties of strength, functionality and sustainability of brittle material systems. Our present primary focus is in the multi-billion-dollar glass and window film industry with target markets in the United States and internationally. The Company operates in two divisions: C-Bond Transportation Solutions that sells windshield strengthening and water repellant solution and C-Bond Safety Solutions that sells multi-purpose glass strengthening primer and window film mounting solutions (“C-Bond Secure”) and ballistic resistant film systems (C-Bond BRS”). The C-Bond technology enables ordinary glass to dissipate energy by permeating the glass surface and detecting microscopic flaws and defects that are randomly distributed all over the glass surface. C-Bond’s unique qualities then work to locate and repair the identified surface imperfections that weaken the glass composite structure and ultimately act as failure initiators. The C-Bond formula is engineered to maintain original glass design integrity while increasing the mechanical performance properties of the glass unit. As a result of the Covid-19 pandemic we created partnerships to distribute disinfecting related products which we began to sell in the second quarter of 2020 initially for the production of an IPA based WHO hand sanitizer.
Revenue is generated by the sale of products through distributors and directly to dealers. C-Bond NanoShield sales are generated through large distribution channels. Sales of C-Bond Secure are made to window film dealers who offer the product as an upsell during installation. Revenue is generated from the sale of C-Bond BRS on a project basis. C-Bond BRS is specified into project plans providing authorized installers a competitive advantage.
Product sales are recognized when the product is shipped to the customer and title is transferred and are recorded net of any discounts or allowances.
We anticipate continued losses requiring either revenue generation to achieve sustained profitability or obtaining additional financial resources to maintain operations as well as research and development into product performance and new product verticals.
Going Concern
Our condensed 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 condensed consolidated financial statements, we had a net loss and cash used in operations of $3,100,148 and $651,146 for the six months ended June 30, 2020, respectively. Additionally, we had an accumulated deficit, stockholders’ deficit, and working capital deficit of $43,100,163. $4,086,307 and $3,793,488 at June 30, 2020. 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. If we are unable to raise additional capital or secure additional lending in the near future to fund our business plan, management expects that we will need to curtail our operations. Our condensed 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.
COVID-19
In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. We are monitoring this closely, and although operations have not been materially affected by the COVID-19 outbreak to date, the ultimate duration and severity of the outbreak and its impact on the economic environment and our business is uncertain. As of May 14, 2020, our facilities are open. However, we have seen a material decrease in sales from our international customers as a result of the unprecedented public health crisis from the COVID-19 pandemic. As a result, our international customers have delayed the ordering of products and have delayed payment of balances due to us. Accordingly, we anticipate that there will be an impact on our operations. We cannot estimate the duration of the pandemic and potential impact on our business if customer’s business remain closed or if customers are otherwise unable or unwilling to make payments to us. In addition, a severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand for our products and a decreased ability to raise additional capital when needed on acceptable terms, if at all. At this time, the Company is unable to estimate the impact of this event on its operations.
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Critical Accounting Policies
The following discussion and analysis of our unaudited condensed consolidated financial condition and consolidated results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management continually evaluates such estimates, including those related to estimates for allowance for doubtful accounts on accounts receivable, the estimates for obsolete inventory, the useful life of property and equipment, assumptions used in assessing impairment of long-term assets, the fair value of a beneficial conversion feature, 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 consolidated financial statements.
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.
Revenue recognition
In May 2014, FASB issued an update Accounting Standards Update (“ASU”) (“ASU 2014-09”) establishing Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard, which is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. The Company adopted this standard in 2018 using the modified retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Based on an evaluation of the impact ASU 2014-09 will have on the Company’s sources of revenue, the Company has concluded that ASU 2014-09 did not have a material impact on the process for, timing of, and presentation and disclosure of revenue recognition from customers and there was no cumulative effect adjustment.
The Company sells its products primarily to distributors and authorized dealers. Product sales are recognized when the product is shipped to the customer and title is transferred and are recorded net of any discounts or allowances.
Derivative financial instruments
We have certain financial instruments that are embedded derivatives associated with capital raises. We evaluate all our 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 810-10-05-4 and 815-40. 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.
In July 2017, FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features. These amendments simplify the accounting for certain financial instruments with down-round features. The amendments require companies to disregard the down-round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. The guidance was adopted as of January 1, 2019 and we elected to record the effect of this adoption, if any, retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the condensed consolidated balance sheet as of the beginning of 2019, the period which the amendment is effective. The adoption of ASU No. 2017-11 had no effect on our financial position or results of operations.
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director , or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment.
See Note 2 to our unaudited condensed consolidated financial statements for a summary of significant accounting policies and recent accounting pronouncements.
Results of Operations
The following comparative analysis on results of operations was based primarily on the comparative consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with and is qualified in its entirety by, the audited consolidated financial statements and the notes thereto included in, Item 1 in this Quarterly Report on Form 10-Q. This item contains forward-lookingto those statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements.
Comparison of selling, generalResults of Operations for the Three and administrative costs were $9,965Six Months ended June 30, 2020 and 2019
Sales
For the three months ended June 30, 2020, sales amounted to $43,004 as compared to $157,712 for the three months ended SeptemberJune 30, 2017,2019, a decrease of $114,708, or 72.3%. The decrease was primarily attributable to a decrease in sales of C-Bond ballistic resistant glass protection systems of $95,186, a decrease in sales of C-Bond multi-purpose glass protection system of $28,018, and a decrease in installation and freight and delivery revenue of $9,642, offset by an increase in the sale of sanitizer products of $18,138. For the six months ended June 30, 2020, sales amounted to $103,830 as compared to $9,240$244,795 for the six months ended June 30, 2019, a decrease of $140,965, or 57.6%. This decrease was primarily attributable to a decrease in sales of C-Bond ballistic resistant glass protection systems of $115,458, a decrease in sales of C-Bond multi-purpose glass protection system of $33,647, and a decrease in installation and freight and delivery revenue of $9,998, offset by an increase in the sale of sanitizer products of $18,138 in our new C-Bond Safety Solutions division. The decrease in sales of C-Bond ballistic resistant glass protection systems and C-Bond multi-purpose glass protection system was primarily due to a decrease in international sales resulting from the shutdown of economies caused by COVID-19. These decreases were offset by the sale of sanitizer products which consisted primarily of hand sanitizer.
Cost of Goods Sold
Cost of goods sold is comprised primarily of cost of raw materials and finished inventory sold, packaging costs, and warranty costs. For the three months ended June 30, 2020, cost of sales amounted to $25,174 as compared to $35,068 for the three months ended SeptemberJune 30, 2016. Operating expenses were $34,0212019, a decrease of $9,894, or 22.2%. For the six months ended June 30, 2020, cost of sales amounted to $40,669 as compared to $56,137 for the ninesix months ended SeptemberJune 30, 2017,2019, a decrease of $15,468, or 27.5%. The decrease in cost of sales was primarily due to a decrease in sales of C-Bond ballistic resistant glass protection systems and C-Bond multi-purpose glass protection systems, offset by an increase in cost of sales related to sanitizing products.
Gross Profit
For the three months ended June 30, 2020, gross profit amounted to $17,830, or 41.5% of sales, as compared to $31,193 for the nine months ended September 30, 2016. Most$122,644, or 77.7% of the costs were attributable to professional and contract services. We do not anticipate these professional fees or contract services to increase significantly in the near future.
Operating Expenses
For the three months ended June 30, 2020, operating expenses amounted to $1,146,612 as compared to $1,723,817 for the three months ended SeptemberJune 30, 2016.2019, a decrease of $577,205, or 33.5%. For the six months ended June 30, 2020, operating expenses amounted to $2,080,108 as compared to $4,097,720 for the six months ended June 30, 2019, a decrease of $2,017,612, or 49.2%. For the three and six months ended June 30, 2020 and 2019, operating expenses consisted of the following:
| Three Months ended June 30, | Six Months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Compensation and related benefits, including stock-based compensation charges | $ | 916,454 | $ | 1,311,677 | $ | 1,605,824 | $ | 3,320,882 | ||||||||
| Research and development | 2,339 | 12,298 | 4,729 | 20,400 | ||||||||||||
| Professional fees | 150,539 | 278,662 | 287,080 | 510,104 | ||||||||||||
| General and administrative expenses | 77,280 | 121,180 | 182,475 | 246,334 | ||||||||||||
| Total | $ | 1,146,612 | $ | 1,723,817 | $ | 2,080,108 | $ | 4,097,720 | ||||||||
Compensation and related benefits
For the three months ended June 30, 2020, compensation and related benefits decreased by $395,223, or 30.1%, as compared to the three months ended June 30, 2019. This decrease was primarily due to a decrease in stock-based compensation of $702,975, offset by an increase in compensation related to a 2020 bonus accrued to executive officers and employees during the three months ended June 30, 2020 of $280,000. During the three months ended June 30, 2020 and 2019, stock-based compensation related to the accretion of stock-option expense and other stock-based compensation amounted to $308,922 and $1,011,897, respectively, a decrease of $702,975. For the six months ended June 30, 2020, compensation and related benefits decreased by $1,715,058, or 51.6%, as compared to the six months ended June 30, 2019. This decrease was primarily due to a decrease in stock-based compensation of $1,808,871 and a decrease in compensation of $186,187, offset by an increase in compensation related to a 2020 bonus accrued to executive officers and employees during the six months ended June 30, 2020 of $280,000. During the six months ended June 30, 2020 and 2019, stock-based compensation related to the accretion of stock-option expense and other stock-based compensation amounted to $670,302 and $2,479,173, respectively, a decrease of $1,808,871.
Research and development
Research and development expenses consist primarily of contracted development services, third party testing laboratories, materials used and allocated overhead expenses. For the three months ended June 30, 2020, research and development expense decreased by $9,959, or 81.0%, as compared to the three months ended June 30, 2019. For the six months ended June 30, 2020, research and development expense decreased by $15,671, or 76.8%, as compared to the six months ended June 30, 2019. The decrease in research and development expense is primarily related to a decrease in use of contracted development services due a lack of working capital. We hadbelieve continued investment is important to attaining our strategic objectives and expect research and development expenses to increase in the foreseeable future, if working capital is available.
Professional fees
For the three months ended June 30, 2020, professional fees decreased by $128,123, or 46.0%, as compared to the three months ended June 30, 2019. This decrease primarily related to a decrease in consulting fees of $194,215, offset by an increase in investor relations fees of $53,520 and an increase in legal fees of $12,572. For the six months ended June 30, 2020, professional fees decreased by $223,024, or 43.7%, as compared to the six months ended June 30, 2019. This decrease primarily related to a decrease in legal fees of $63,681 and a decrease in consulting fees of $239,526, offset by an increase in investor relations fees of $75,035.
General and Administrative
General and administrative expenses consist primarily of rent, insurance, depreciation expense, sale and marketing, delivery and freight, travel and entertainment, and other office expenses. For the three months ended June 30, 2020, general and administrative expenses decreased by $43,900, or 36.2%, as compared to the three months ended June 30, 2019. For the six months ended June 30, 2020, general and administrative expenses decreased by $63,859, or 25.9%, as compared to the six months ended June 30, 2019. This decrease was attributable to a decrease in travel and advertising and marketing expenses. We expect our general and administrative expenses to increase due to the anticipated growth of our business.
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Loss from operations
For the three months ended June 30, 2020, loss from operations decreased by $472,391, or 29.5%, as compared to the three months ended June 30, 2019. For the six months ended June 30, 2020, loss from operations decreased by $1,892,115, or 48.4%, as compared to the six months ended June 30, 2019.
Other Expense, net
For the three months ended June 30, 2020, other expenses, net increased by $402,973, or 670.4%, as compared to the three months ended June 30, 2019. This increase was due to an increase in derivative expense of $365,108 attributable to the recording of derivative liabilities related to convertible debt and an increase in interest expense of $156,273 related to the amortization of debt discount, an increase in interest-bearing debt, and an increase in interest expense related to accretion of debt discount related to Series A preferred shares, offset by the recording of a gain from debt extinguishment of $110,408 related to the conversion of convertible debt. For the six months ended June 30, 2020, other expenses, net increased by $970,562, or 861.7%, as compared to the six months ended June 30, 2019. This increase was due to an increase in derivative expense of $744,028 attributable to the recording of derivative liabilities related to convertible debt and an increase in interest expense of $344,942 related to the amortization of debt discount, an increase in interest-bearing debt, and an increase in interest expense related to accretion of debt discount related to Series A preferred shares, offset by the recording of a gain from debt extinguishment of $110,408 related to the conversion of convertible debt and the settlement of accounts payable.
Net Loss
For the three months ended June 30, 2020, net loss of $33,916amounted to $1,591,860, or $(0.01) per common share (basic and diluted), as compared to $1,661,278, or $(0.02) per common share (basic and diluted), for the ninethree months ended SeptemberJune 30, 2017,2019, a decrease of $69,418. For the six months ended June 30, 2020, net loss amounted to $3,100,148, or $(0.02) per common share (basic and diluted), as compared to $4,021,701, or $(0.05) per common share (basic and diluted), for the six months ended June 30, 2019, a decrease of $921,553. These decreases in net loss of $31,103 for the nine months ended September 30, 2016.
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash on September 30, 2017 was $93,525.to meet its needs for cash requirements. We had cash of $243,265 and $77,211 as of June 30, 2020 and December 31, 2020, respectively.
Our primary uses of cash have been for salaries, fees paid to third parties for professional services, research and development expense, and general and administrative expenses. We have received funds from the sales of products and 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, |
| ● | Research and development fees; |
| ● | Addition of administrative and sales personnel as the business grows, and |
| ● | The cost of being a public company; |
| ● | Marketing expense for building brand; |
| ● | Capital requirements for production capacity. |
Since inception, we have raised proceeds from the sale of common shares and preferred shares, and from debt to fund our operations and research and development initiatives.
In connection with subscription agreements dated January 13, 2020 and February 18, 2020, we received cash proceeds of $280,000 from an additionalinvestor for the purchase of 7,000,000 shares of the Company’s common stock at $0.04 per share.
During the six months ended June 30, 2020, the Company entered into Series A Preferred Stock Purchase Agreements with an accredited investor whereby the investor agreed to purchase an aggregate of 154,800 unregistered shares of the Company’s Series A Preferred stock, par value $0.10 for $129,000, or $0.833 per share. During the six months ended June 30, 2020, the Company received cash proceeds of $120,000, net of fees of $9,000. During the six months ended June 30, 2020, the Company issued 9,982,616 shares of its common stock upon the conversion of 159,600 shares of Series A preferred with a stated redemption value of $159,600 and related accrued dividends payable of $3,192. The conversion price was based on contractual terms of the related Series A preferred shares.
On March 30, 2020, we closed on a Securities Purchase Agreement (the “March 2020 SPA”) with an accredited investor. Pursuant to the terms of the March 2020 SPA, we issued and sold to this investor a convertible promissory note in the aggregate principal amount of $155,959$57,750 and a warrant to purchase up to 144,375 shares of the Company’s common stock. We received net proceeds of $50,000, net of original issue discount of $5,000 and origination fees of $2,750. This Note bears interest at 12% per annum and becomes due and payable on December 30, 2020.
On April 23, 2020, we closed on a Securities Purchase Agreement (the “April 2020 SPA”) with an accredited investor. Pursuant to the terms of the April 2020 SPA, we issued and sold to this investor a convertible promissory note in Certificatesthe aggregate principal amount of Deposit.$57,750 and a warrant to purchase up to 144,375 shares of the Company’s common stock. We anticipate that operating costs will range betweenreceived net proceeds of $50,000, net of original issue discount of $5,000 and $60,000,origination fees of $2,750. The Note bears interest at 12% per annum and becomes due and payable on January 23, 2021.
In accordance with the March 2020 SPA and April 2020 SPA and the related Notes, subject to the adjustments as defined in the respective SPA and Note, the conversion price (the “Conversion Price”) shall equal the lesser of: (i) the lowest Trading Price (as defined below) during the previous twenty-five Trading Day period ending on the latest complete Trading Day prior to the date of this Note, and (ii) the Variable Conversion Price (as defined below) (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company). The “Variable Conversion Price” shall mean 60% multiplied by the Market Price (as defined herein) (representing a discount rate of 40%). “Market Price” means the lowest Trading Price (as defined below) for the fiscal yearCompany’s common stock during the twenty-five Trading Day period ending December 31, 2017. These operating costs include contract serviceson the latest complete Trading Day prior to the Conversion Date. “Trading Price” means, for any security as of any date, the lesser of: (i) the lowest trade price on the applicable trading market as reported by a reliable reporting service (“Reporting Service”) designated by the Holder or (ii) the closing bid price on the applicable trading market as reported by a Reporting Service designated by the Holder. We may prepay the Note at any time prior to its six-month anniversary, subject to pre-payment charges as detailed in the Note.
During the six months ended June 30, 2020, the Company issued 13,275,000 shares its common stock upon the conversion of principal of $74,250, accrued interest of $28,085, and all other costsfees of operations.$1,750. The conversion price was based on contractual terms of the related debt.
On April 28, 2020, we entered into a Paycheck Protection Program Promissory Note (the “PPP Note”) with respect to a loan of $156,200 (the “PPP Loan”) from Comerica Bank. The PPP Loan was obtained pursuant to the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES act”) administered by the U.S. Small Business Administration (“SBA”). The PPP Loan matures on April 28, 2022 and bears interest at a rate of 1.00% per annum. The PPP Loan is payable in 18 equal monthly payments of approximately $8,900 commencing November 1, 2020. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. We will use contract employees whomay apply to have the loan forgiven pursuant to the terms of the PPP if certain criteria are met.
On May 8, 2020, we closed a subscription agreement with an accredited investor (the “Investor”) whereby the Investor purchased 7,000,000 unregistered shares of the Company’s common stock for proceeds of $161,000, or $0.023 per share.
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 paid on an hourly basis as each investment transaction is evaluated. However,profitable. We believe that our existing cash and cash equivalents will not be sufficient to fund our current operating plans.
Cash Flows
For the operating costsSix Months ended June 30, 2020 and expected revenue generation are difficult to predict.
The following table shows a summary of our cash flows for the six months ended June 30, 2020 and 2019.
Six Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Net cash used in operating activities | $ | (651,146 | ) | $ | (632,467 | ) | ||
| Net cash provided by financing activities | $ | 817,200 | $ | 536,185 | ||||
| Net increase (decrease) in cash | $ | 166,054 | $ | (96,282 | ) | |||
| Cash - beginning of the period | $ | 77,211 | $ | 128,567 | ||||
| Cash - end of the period | $ | 243,265 | $ | 32,285 | ||||
Net cash flow used in operating activities were $45,287was $651,146 for the ninesix months ended SeptemberJune 30, 2017,2020 as compared to net cash flowsflow used in operating activities of $37,144$632,467 for the ninesix months ended SeptemberJune 30, 2016. We had revenues2019, an increase of $-0-$18,679.
Net cash flow used in operating activities for the three and ninesix months ended SeptemberJune 30, 2017 and 2016.
Net cash provided by financing activities were $-0-was $817,200 for the ninesix months ended SeptemberJune 30, 20172020 as compared to $536,185 for the six months ended June 30, 2019. During the six months ended June 30, 2020, we received net proceeds from the sale of common stock of $441,000, proceeds from the sale of Series A preferred shares of $120,000, proceeds from convertible notes payable of $100,000, and 2016, respectively.
Funding Requirements
We expect the primary use of capital to continue to be salaries, third party outside research and testing services, product and research supplies, legal and regulatory expenses and general overhead costs including sales and marketing. Additional uses of capital will include additional headcount, tools and equipment, capacity expansion and operational control software. We believe the estimated net proceeds from the merger with current cash and cash equivalents will not expect any materialbe sufficient to meet anticipated cash requirements not including potential product sales. Additional capital costswill be required to further research new product verticals and enhancements to current product offerings based on customer requirements.
As of June 30, 2020, we determined that there was substantial doubt about our ability to maintain operations as a going concern. Our 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 our operations.
Our principal sourceforecast of liquidity historically wasthe 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 as a result 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 as filed with the SEC on March 25, 2020 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 flow generatedneeds through a combination of public and private equity offerings, debt financing, collaborative research and licensing agreements. We may be unable to raise capital or enter into such other arrangements when needed or on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from our operations. Our business activity is closely tied to the U.S. economy. Our ability to maintain profitability and positive cash flow is dependent upon our ability to successfully develop alternative energy investments, provide consulting to related parties with respect to their investments in alternative energy projects and our ability to generate revenues.
The following tables summarize our contractual obligations as of June 30, 2020, and the effect these obligations are expected to buildhave on our companyliquidity and cash flows in future periods.
| Payments Due by Period | ||||||||||||||||||||
| Contractual obligations: | Total | Less than 1 year | 1-3 years | 3-5 years | 5 + years | |||||||||||||||
| Notes payable – related party | $ | 400,000 | $ | 400,000 | $ | - | $ | - | $ | - | ||||||||||
| Interest on notes payable– related party | 112,000 | 112,000 | - | - | - | |||||||||||||||
| Convertible notes payable | 471,750 | 471,750 | - | - | - | |||||||||||||||
| Mandatorily redeemable series A preferred stock | 154,800 | - | 154,800 | - | - | |||||||||||||||
| Note payable | 156,200 | 71,200 | 85,000 | - | - | |||||||||||||||
| Operating lease gross base rent | 49,684 | 49,684 | - | - | - | |||||||||||||||
| Total | $ | 1,344,434 | $ | 1,104,634 | $ | 239,800 | $ | - | $ | - | ||||||||||
We enter into agreements in the normal course of business with contracted research and testing organization, product distribution and material vendors which are payable or cancelable at any manner which will be successful.
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.
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 Controlscontrols and Procedures
As reported in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2019, 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 controls over financial reporting. The ineffectiveness of our disclosure controls and procedures (as definedwas due to the following material weaknesses in Rules 13a -15(e)our internal control over financial reporting: (1) the lack of multiples levels of management review on complex business, accounting and 15(d)-15(e) underfinancial reporting issues, and (2) a lack of adequate segregation of duties as a result of our limited financial resources to support hiring of personnel. In the Exchange Act), our Chief Executive Officerfourth quarter of 2018, we developed and the Chief Financial Officer have concluded that our disclosureimplemented system and control procedure manuals and plan on developing and implementing additional controls and procedures are effective.
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 Controlinternal control over Financial Reporting
There were no changes in our internal controlscontrol over financial reporting that occurred during our most recent fiscalthe quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Unfavorable global economic, business or political conditions could materially adversely affect our business, financial condition or operating results and could negatively impact the value of your investment.
Our investments will be materially affected by conditions in the global financial markets and economic conditions throughout the world. The global market and economic climate may deteriorate because of many factors beyond our control, including rising interest rates or inflation, terrorism or political uncertainty. In the event of a market downturn, our businesses could be affected in different ways.
On March 31, 2020 and effective April 1, 2020, we entered into two one-year advisory board agreements with two individuals for services to be rendered on the Company’s medical advisory board. In connection with these advisory board agreements, we issued an aggregate of 500,000 restricted common shares of the Company to these advisory board members. These shares vest on April 1, 2021. These shares were valued at $20,000, or $0.04 per common share, based on contemporaneous common share sales by the Company.
On April 1, 2020, we entered into an employment agreement with an accounting manager. Pursuant to this employment agreement, we agreed to grant a restricted stock award of 200,000 common shares of the Company which will vest on May 1, 2021. If the employee’s employment is terminated without cause or for good reason (both as defined in the employment agreement), or a change of control event (as defined in the employment agreement) occurs, these shares will immediately vest. For any other termination of employment, unvested restricted stock shall immediately terminate. These shares were valued on the date of grant at $8,000, or $0.04 per common share, based on contemporaneous common share sales.
On April 17, 2020, we issued 203,125 common shares upon conversion of deferred compensation of $16,250.
On April 28, 2020, we entered into restricted stock award agreements (the “Restricted Stock Award Agreements”) with executive officers and employees. Pursuant to the Restricted Stock Award Agreements, we agreed to grant restricted stock awards for an aggregate of 6,750,000 common shares of the Company which were valued at $270,000, or $0.04 per common share, based on contemporaneous common share sales. These shares will vest on May 1, 2021. If the employee’s employment is terminated for any reason, these shares will immediately be forfeited. In the event of a change of control, the employee shall be 100% vested in all shares of restricted shares subject to these Agreements. Each executive officer and employee shall have the right to vote the restricted shares awarded to them and to receive and retain all regular dividends paid in cash or property (other than retained distributions), and to exercise all other rights, powers and privileges of a holder of shares of the stock, with respect to such restricted shares, with the exception that (a) the employee shall not be entitled to delivery of the stock certificate or certificates or electronic book entries representing such restricted shares until the shares are vested, (b) the Company shall retain custody of all retained distributions made or declared with respect to the restricted shares until such time, if ever, as the restricted shares have become vested, and (c) the employee may not sell, assign, transfer, pledge, exchange, encumber, or dispose of the restricted shares. In connection with these shares, the Company shall record stock-based compensation over the vesting period
In connection with subscription agreements dated May 8, 2020, we received cash proceeds of $161,000 from an investor for the purchase of 7,000,000 shares of the Company’s common stock at $0.023 per share.
During June 2020, we entered into a Series A Preferred Stock Purchase Agreement with an accredited investor whereby the investor agreed to purchase an aggregate of 51,600 unregistered shares of the Company’s Series A Preferred stock, par value $0.10 for $43,000, or $0.833 per share. During June 2020, we received the cash proceeds of $40,000, net of fees of $3,000.
During the three months ended June 30, 2020, the Company issued 12,800,000 shares its common stock upon the conversion of principal of $74,250, accrued interest of $15,865, and fees of $1,250.
During the three months ended June 30, 2020, the Company issued 9,982,616 shares its common stock upon the conversion of 159,600 shares of Series A preferred with a stated redemption value of $159,600 and related accrued dividends payable of $3,192. The conversion price was based on contractual terms of the related Series A preferred shares.
The above securities were issued in reliance upon the exemptions provided by Section 4(a) (2) under the Securities Act of 1933, as amended.
As of June 30, 2019, we were in default of certain requirements under a Loan Agreement with a principal amount of $400,000, including not meeting the requirement regarding minimum asset amount as defined therein. Upon the occurrence of such event of defaults, the Lender may, at its option and in accordance with the Loan Agreement, declare all obligations immediately due and payable, however, as of the date of this Report, the Lender has not made any such declaration. As of June 30, 2020 and as of the date of this report, we are in default on monthly interest payments of $111,945.
None.
| * | Filed herewith. |
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 November 14, 2017.
| Dated: August 14, 2020 | By: | /s/ | Scott R. Silverman |
Chief Executive Officer (Principal Executive | |||
| Dated: August 14, 2020 | By: | /s/ Vincent J. Pugliese | |
| Vincent J. Pugliese | |||
Chief Financial Officer (Principal Financial Officer) | |||
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