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C-BOND SYSTEMS, INC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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03/25/2020 | 03:41pm EDT
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes and other financial information included in
this Report. Some of the information contained in this discussion and analysis
or set forth elsewhere in this Report, including information with respect to our
plans and strategy for our business, includes forward-looking statements that
involve risks and uncertainties as described under the heading "Cautionary Note
Regarding Our Forward-Looking Statements" elsewhere in this Report. You should
review the disclosure under the heading "Risk Factors" in this Report for a
discussion of important factors that could cause actual results to differ
materially from the results described in or implied by the forward-looking
statements contained in the following discussion and analysis.



Overview


We are a nanotechnology company and sole owner, developer and manufacturer of
the patented C-Bond technology.  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.



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 I, 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.



Reverse Merger


On April 25, 2018, pursuant to the Merger Agreement, Acquisition Sub merged with
and into C-Bond Systems, LLC, with C-Bond Systems, LLC remaining as the
surviving entity and a wholly-owned operating subsidiary of our Company. The
Merger was effective as of April 26, 2018, upon the filing of a Certificate of
Merger with the Secretary of State of the State of Texas.



At the time a certificate of merger reflecting the Merger was filed with the
Secretary of State of Texas, or the Effective Time, all of the outstanding
Common Units of C-Bond Systems, LLC ("Common Units") that were issued and
outstanding immediately prior to the closing of the Merger were converted into
an aggregate of 63,505,783 shares of our common stock.  As a result, each common
unit of C-Bond Systems, LLC was converted into approximately 3.233733 shares of
our common stock.



In addition, pursuant to the Merger Agreement, each option to purchase Common
Units issued and outstanding immediately prior to the closing of the Merger was
assumed and converted into an option to purchase an equivalent number of shares
of our common stock and the exercise price of each such option was divided by
the conversion ratio of 3.233733. As a result, a total of 14,494,213 options
were issued.


C-Bond Systems, LLC is considered the accounting acquirer in the Merger and will
account for the transaction as a recapitalization transaction because C-Bond
Systems, LLC's former stockholders received substantially all of the voting
rights in the combined entity and C-Bond Systems, LLC's senior management
represents all of the senior management of the combined entity.



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 audited 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.



                                       11






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
C-Bond technology enables ordinary glass to dissipate energy by permeating the
glass surface and detecting microscopic flaws and defects that are randomly
distributed all over the glass surface. C-Bond's unique qualities then work to
locate and repair the identified surface imperfections that weaken the glass
composite structure and ultimately act as failure initiators. The C-Bond formula
is engineered to maintain original glass design integrity while increasing the
mechanical performance properties of the glass unit.



Revenue is generated by the sale of products through distributors and directly
to authorized dealers.  C-Bond NanoShield sales are generated through large
distribution channels.  Sales of C-Bond I are made to authorized window film
dealers who offer the product as an upsell during installation.  C-Bond BRS is
sold on a project basis.  C-Bond BRS is specified into project plans providing
authorized dealers 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.


Critical Accounting Policies




The following discussion and analysis of our 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.



                                       12






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 and director services received in exchange
for an award of equity instruments over the period the employee or director 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 and
director services received in exchange for an award based on the grant-date fair
value of the award. The Company utilizes the Black-Sholes option pricing model
and uses the simplified method to determine expected term because of lack of
sufficient exercise history.


Additionally, effective January 1, 2017, the Company adopted the Accounting
Standards Update No. 2016-09 ("ASU 2016-09 "), Improvements to Employee
Share-Based Payment Accounting. ASU 2016-09 permits the election of an
accounting policy for forfeitures of share-based payment awards, either to
recognize forfeitures as they occur or estimate forfeitures over the vesting
period of the award. The Company has elected to recognize forfeitures as they
occur and the cumulative impact of this change did not have any effect on the
Company's consolidated financial statements and related disclosures.



Through September 30, 2018, pursuant to ASC 505-50 - "Equity-Based Payments to
Non-Employees", all share-based payments to non-employees, including grants of
stock options, were recognized in the consolidated financial statements as
compensation expense over the service period of the consulting arrangement or
until performance conditions are expected to be met. Using a Black-Scholes
valuation model, the Company periodically reassessed the fair value of
non-employee options until service conditions are met, which generally aligns
with the vesting period of the options, and the Company adjusts the expense
recognized in the consolidated financial statements accordingly. In June 2018,
the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment
Accounting, which simplifies several aspects of the accounting for nonemployee
share-based payment transactions by expanding the scope of the stock-based
compensation guidance in ASC 718 to include share-based payment transactions for
acquiring goods and services from non-employees. ASU No. 2018-07 is effective
for annual periods beginning after December 15, 2018, including interim periods
within those annual periods. Early adoption is permitted, but entities may not
adopt prior to adopting the new revenue recognition guidance in ASC 606. The
Company early adopted ASU No. 2018-07 in the fourth quarter of 2018 and there
was no cumulative effect of adoption.



Upon exercise of the stock options by the holder using the exercise methods delineated in the option contract, the Company issues new shares from its unissued authorized shares.

See Note 2 to our consolidated financial statements for a summary of significant accounting policies and recent accounting pronouncements.



Results of Operations



The following comparative analysis on results of operations was based primarily
on the comparative consolidated financial statements, footnotes and related
information for the periods identified below and should be read in conjunction
with the audited consolidated financial statements and the notes to those
statements for the years ended December 31, 2019 and 2018, which are included
elsewhere in this annual report on Form 10-K. The results discussed below are
for the years ended December 31, 2019 and 2018.



                                       13





Comparison of Results of Operations for the Years ended December 31, 2019 and 2018




Sales



For the year ended December 31, 2019, sales amounted to $602,636 as compared to
$382,244 for the year ended December 31, 2018, an increase of $220,392, or
57.7%. This increase was primarily attributable to an increase in sales of
C-Bond ballistic resistant glass protection systems of $150,920 and an increase
in sales of C-Bond multi-purpose glass protection system of $30,454. We use
multiple sales channels, including distributors and authorized dealers to
generate revenues.  Additionally, during the year ended December 31, 2019, we
recorded sales from installation and other services of $32,306 as compared to $0
during the year ended December 31, 2018.



Cost of Goods Sold



Cost of goods sold is comprised primarily of inventory sold, packaging costs,
and warranty costs. For the year ended December 31, 2019, cost of sales amounted
to $121,967 as compared to $83,384 for the year ended December 31, 2018, an
increase of $38,583, or 46.3%. The increase in cost of sales was primarily due
to an increase in sales and an increase in raw material costs incurred
associated with the purchase and use of an additional additive used in C-Bond
NanoShield product to create hydrophobic properties, which we started using in
late 2018, and the increase in film costs associated with C-Bond BRS projects.



Gross Profit


For the year ended December 31, 2019, gross profit amounted to $480,669, or
79.8% of sales, as compared to $298,860, or 78.2% of sales, for the year ended
December 31, 2018, an increase of $181,809, or 60.8%. This increase in gross
profits is primarily the result of an increase in sales offset by increases in
material costs as discussed above.



Operating Expenses



For the year ended December 31, 2019, operating expenses amounted to $6,839,281
as compared to $9,566,962 for the year ended December 31, 2018, a decrease of
$2,727,681, or 28.5%. For the years ended December 31, 2019 and 2018, operating
expenses consisted of the following:



                                                                       Year ended
                                                                      December 31,
                                                                  2019            2018
Compensation and related benefits, including stock-based
compensation charges                                           $ 5,359,676$ 7,823,381
Research and development                                            31,057         258,294
Professional fees                                                  986,445       1,006,939
General and administrative expenses                                462,103 
       478,348

Total                                                          $ 6,839,281$ 9,566,962

Compensation and related benefits




For the year ended December 31, 2019, compensation and related benefits
decreased by $2,463,705, or 31.5%, as compared to the year ended December 31,
2018. This decrease was primarily due to a decrease in stock-based compensation
of $2,876,157 offset by an increase in compensation related to a 2019 bonus
accrued to executive officers during the three months ended March 31, 2019 of
$255,000 and an increase in compensation expense of $157,452. During the years
ended December 31, 2019 and 2018, stock-based compensation related to the
accretion of stock-option expense and other stock-based compensation amounted to
$3,858,967 and $6,735,124, respectively, a decrease of $2,876,157.



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 year ended December 31, 2019, research and
development expense decreased by $227,237, or 88.0%, as compared to the year
ended December 31, 2018. 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 believe 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 year ended December 31, 2019, professional fees decreased by $20,494, or
2.0%, as compared to the year ended December 31, 2018. This decrease primarily
related to a decrease in legal fees of $472,685 and a decrease in accounting
fees of $12,393 offset by an increase in consulting fees of $430,527 which
included an increase in stock-based consulting fees of $339,993, and an increase
in other professional fees of $34,057.



                                       14






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 year ended December 31, 2019,
general and administrative expenses increased by $16,245, or 3.4%, as compared
to the year ended December 31, 2018. We expect our general and administrative
expenses to increase due to the anticipated growth of our business.



Other Expense


For the year ended December 31, 2019, other expenses increased by $245,511 as
compared to the year ended December 31, 2018. This increase was due to an
increase in derivative expense of $570,059 attributable to the recording of
derivative liabilities related to convertible debt and an increase in interest
expense of $289,936 related to the amortization of debt discount and an increase
in interest-bearing debt offset by a decrease in loss from extinguishment of
debt of $414,484 and a decrease in settlement expense of $200,000. During the
year ended December 31, 2018, we recorded loss on debt extinguishment related to
the issuance of 315,957 shares to a vendor to settle amounts owed to such vendor
whereby we recorded a loss on debt extinguishment of $153,779, and due to a note
termination agreement whereby we recorded debt extinguishment expense of
$229,696. On August 20, 2018, pursuant to a settlement and release agreement, we
issued 500,000 shares of common stock to settle a claim. These shares were
valued at $200,000, or $0.40 per common share, based on contemporaneous common
share sales. In connection with this settlement agreement, we recorded
settlement expense of $200,000. We did not incur such expense in the 2019
period.



Net Loss



For the year ended December 31, 2019, net loss amounted to $7,240,740, or $0.08
per common share (basic and diluted), as compared to $9,904,719, or $0.14 per
common share (basic and diluted), for the year ended December 31, 2018, a
decrease of $2,663,979. The decrease in net loss was primarily attributable to a
decrease in operating and other expenses, offset by an increase gross profit as
discussed above.


Liquidity and Capital Resources




Liquidity is the ability of an enterprise to generate adequate amounts of cash
to meet its needs for cash requirements. We had cash of $77,211 and $128,567 as
of December 31, 2019 and 2018, 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 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 from proceeds from the sale of common shares and from debt to fund our operations and research and development initiatives.

In January 2019, we received proceeds of $19,185 from the collection of subscription receivable related to the exercise of stock options.




From February 13, 2019 to May 15, 2019, we entered into four Securities Purchase
Agreements (the "SPAs") with an Accredited Investor ("Investor") for the
purchase of a Convertible Promissory Notes in the aggregate principal amount of
$244,800 and received net proceeds of $192,000, net of original issue discount
of $40,800 and net of origination fees of $12,000.  These Notes bear interest
rate ranging from 4% per annum to 12% per annum and were due and payable through
May 2020.  The Notes were convertable by the Investor after six months into
shares of the Company's common stock (as determined in the Note) at a price
equal to 81% of the average of the lowest two closing bid prices of the common
stock as reported on the OTC Link ATS owned by OTC Markets Group for the 10
prior trading days. We accounted for these convertible promissory notes as stock
settled debt under ASC 480 and recorded an aggregate debt premium of $57,423
with a charge to interest expense. On August 15, 2019, we issued 295,567 shares
of our common stock upon conversion of principal balance of $12,000. On
September 6, 2019, we satisfied in full all remaining convertible promissory
note obligations with this accredited investor including all Notes and accrued
interest for a cash payment of $238,080. In connection with this debt
extinguishment, we reversed all put premiums recorded and debt remaining debt
discounts and recorded a gain on debt extinguishment of $31,009.



                                       15






In connection with a subscription agreement dated April 23, 2019, during the
three months ended June 30, 2019, the Company received cash proceeds of $300,000
from an investor for the purchase of 2,000,000 shares of the Company's common
stock at $0.15 per share.


In connection with subscription agreements, during the year ended December 31,
2019, the Company received cash proceeds of $480,000 from investors for the
purchase of 10,750,000 shares of the Company's common stock at prices ranging
from $0.04 to $0.05 per share.



On April 26, 2019, we entered into a Promissory Note ("Promissory Note") with an
accredited investor in the aggregate principal amount of $25,000 and received
net proceeds of $25,000. The Promissory Note bears interest at 4% per annum and
is due and payable on April 26, 2020 (the "Maturity Date"). This Promissory
Note
was repaid during 2019.



On September 6, 2019, we closed a Securities Purchase Agreement (the "Purchase
Agreement") with an accredited investor. Pursuant to the terms of the Purchase
Agreement, we issued and sold to this investor a convertible promissory note in
the aggregate principal amount of $300,000 (the "Note"), and a warrant to
purchase up to 750,000 shares of the Company's common stock (the "Warrant"). We
received net proceeds of $267,250, net of origination fees of $32,750. The Note
bears interest at 12% per annum and becomes due and payable on June 6, 2020. In
accordance with the SPA and the Note, subject to the adjustments as defined in
the 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 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 SPA and Note 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
(or debt with an equity component) offerings 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 Note.



During October and November 2019, the Company entered into 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. Each share of Series A Preferred Stock will
carry an annual dividend in the amount of 4% of the Stated Value (the "Divided
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%. 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 and
recorded an aggregate debt premium of $31,197 with a charge to interest expense.



Additional cash liquidity is generated from product sales. However, to date, we
are not profitable, and we cannot provide any assurances that we will be
profitable.  We believe that our existing cash and cash equivalents will not be
sufficient to fund our current operating plans.



                                       16






Cash Flows


For the Years Ended December 31, 2019 and 2018




The following table shows a summary of our cash flows for the years ended
December 2019 and 2018.



                                                     Year Ended
                                                    December 31,
                                                2019             2018

Net cash used in operating activities $ (1,313,711 )$ (1,967,782 ) Net cash provided by investing activities $ - $ 187,401 Net cash provided by financing activities $ 1,262,355$ 1,862,500 Net (decrease) increase in cash

             $    (51,356 )$     82,119
Cash - beginning of the year                $    128,567$     46,448
Cash - end of the year                      $     77,211$    128,567




Net cash flow used in operating activities was $1,313,711 for the year ended
December 31, 2019 as compared to net cash flow used in operating activities of
$1,967,782 for the year ended December 31, 2018, a decrease of $654,071.



Net cash flow used in operating activities for the year ended December 31, 2019
primarily reflected a net loss of $7,240,740, which was then adjusted for the
add-back of non-cash items primarily consisting of depreciation and amortization
of $24,629, stock-based compensation expense of $3,858,967, stock-based
professional fees of $355,393, non-cash interest expense related to a put
premium on convertible debt and preferred stock of $88,620, a non-cash gain on
extinguishment of debt of $31,009, derivative expense of $570,059, and the
amortization of debt discount to interest expense of $160,542, and changes in
operating assets and liabilities consisting primarily of an increase in accounts
receivable of $61,662, an increase in accounts payable of $246,105, an increase
in accrued expenses of $89,266, and an increase in accrued compensation of
$628,977. Net cash flow used in operating activities for the year ended December
31, 2018 primarily reflected a net loss of $9,904,719, which was then adjusted
for the add-back of non-cash items consisting of depreciation and amortization
of $33,718, stock-based compensation expense of $6,735,124, stock-based
professional fees of $118,750, loss on debt extinguishment expense of $380,171,
non-cash settlement expense of $200,000, and the amortization of debt discount
to interest expense of $40,691, and changes in operating assets and liabilities
consisting primarily of an increase in accounts receivable of $55,542, an
increase in accounts payable of $382,067, and an increase in accrued
compensation of $89,528.



For the year ended December 31, 2018, net cash flow provided by investing
activities amounted to $187,401 as compared to $0 for the year ended December
31, 2019. During the year ended December 31, 2018, we received cash of $187,401
in connection with the merger transaction discussed elsewhere in this Report
(after taking into account financing expenses).



Net cash provided by financing activities was $1,262,355 for the year ended
December 31, 2019 as compared to $1,862,500 for the year ended December 31,
2018. During the year ended December 31, 2019, we received net proceeds from the
sale of common stock of $780,000, proceeds from the collection of subscriptions
receivable related to the exercise of stock options of $19,185, proceeds from
the sale of Series A preferred shares of $127,000, proceeds from a note payable
of $25,000, and proceeds from convertible notes payable of $574,250, offset by
the repayment of notes payable of $25,000 and the repayment of convertible debt
of $238,080. During the year ended December 31, 2018, we received net proceeds
from the sale of common stock of $1,267,500, proceeds from the exercise of stock
options of $195,000, and proceeds from notes payable of $400,000.



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 be sufficient to meet anticipated cash requirements not including
potential product sales.  Additional capital will be required to further
research new product verticals and enhancements to current product offerings
based on customer requirements.



As of December 31, 2019, 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 the normal course of business.  Management cannot provide
assurance that we will ultimately achieve profitable operations or become cash
flow positive or raise additional debt and/or equity capital.  We will seek to
raise capital through additional debt and/or equity financings to fund
operations in the future. Although we have historically raised capital from
sales of common shares and from the issuance of convertible promissory notes,
there is no assurance that it will be able to continue to do so. If we are
unable to raise additional capital or secure additional lending in the near
future, management expects that the company will need to curtail its
operations.  Our consolidated financial statements do not include any
adjustments related to the recoverability and classification of assets or the
amounts and classification of liabilities that might be necessary should the
company be unable to continue as a going concern.



Our forecast of the period of time through which our financial resources will be
adequate to support our operations is a forward-looking statement that involves
risks and uncertainties, and actual results could vary materially 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" elsewhere in this Report for additional
risks associated with our capital requirements.



Until such time as we generate substantial product revenue to offset operational
expenses, we expect to finance our cash needs through a combination of public
and private equity offerings, 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.

                                       17





Contractual Obligations and Off-Balance Sheet Arrangements



Contractual Obligations


We have certain fixed contractual obligations and commitments that include
future estimated payments. Changes in our business needs, cancellation
provisions, changing interest rates, and other factors may result in actual
payments differing from the estimates. We cannot provide certainty regarding the
timing and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash flows.



The following tables summarize our contractual obligations as of December 31,
2019, and the effect these obligations are expected to have on our liquidity and
cash flows in future periods.



                                                              Payments Due by Period
                                                   Less than
Contractual obligations:             Total          1 year        1-3 years        3-5 years         5 + years
Notes payable - related party     $   400,000$   400,000     $        -     $           -     $           -
Interest on notes payable-
related party                         145,000         145,000              -                 -                 -
Convertible notes payable             430,000         430,000              -                 -                 -
Mandatorily redeemable series A
preferred stock                       133,000               -        133,000                 -                 -
Operating lease                        76,346          53,461         22,885                 -                 -
Total                             $ 1,184,346$ 1,028,461$  155,885     $           -     $           -



We enter into agreements in the normal course of business with contracted research and testing organization, product distribution and material vendors which are payable or cancelable at any time with 30-day prior written approval.

Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements during the period presented as defined in the rules and regulations of the SEC.

© Edgar Online, source Glimpses

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