UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ until ___
Commission File Number 001-38739
TOUGHBUILT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation organization)
25371 Commercentre Drive, Suite 200
Lake Forest, CA
(Address of principal executive offices)
46-0820877
(I.R.S. Employer
Identification No.)
92630
(Zip Code)
Registrant’s telephone number, including area code (949) 528-3100
Securities Registered under Section 12(b) of the Act
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common stock
Series A Warrants
Trading Symbol(s)
TBLT
TBLTW
Name of each exchange on which registered:
NASDAQ CAPITAL MARKET
NASDAQ CAPITAL MARKET
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Non-accelerated filer [X]
Accelerated filer [ ]
Smaller reporting company [X]
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of
the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
[X] Emerging growth company
[ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the 23,186,931 shares of voting stock held by non-affiliates of the registrant on June 30, 2019 was $8,092,239.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Title of Class
Common Stock
Shares Outstanding
March 27, 2020
109,990,257
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
PART I
Item 1.
Description of Business
Item 1A.
Risk Factors
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Securities
Item 7.
Management’s Discussion and Analysis of Financial Conditions and Results of Operations
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits
Item 16.
10-K Summary
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F-1
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Cautionary Note Regarding Forward-Looking Information
This Report on Form 10-K, in particular Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains certain “forward-
looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but
not limited to, any statements regarding our assumptions about financial performance; the continuation of historical trends; the sufficiency of our cash balances for future
liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems
and our plans for future operations; and the economy in general or the future of the defense industry, all of which were subject to various risks and uncertainties.
When used in this Report on Form 10- K and other reports, statements, and information we have filed with the Securities and Exchange Commission (“Commission” or “SEC”),
in our press releases, presentations to securities analysts or investors, in oral statements made by or with the approval of an executive officer, the words or phrases “believes,”
“may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to
identify such forward-looking statements. However, any statements contained in this Report on Form 10-K that are not statements of historical fact may be deemed to be
forward-looking statements. We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may
differ materially depending on a variety of important factors.
We do not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements in light of factors described in this annual report. In
this Form 10-K, ToughBuilt Industries, Inc. (“ToughBuilt”) has identified important factors that could cause actual results to differ from expected or historic results. You should
understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete list of all potential risks or
uncertainties.
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Item 1 Description of Business
Overview
PART I
Our company was formed on April 9, 2012 as Phalanx, Inc., under the laws of the State of Nevada and changed its name to ToughBuilt Industries, Inc. on December 29, 2015.
We were formed to design, manufacture and distribute innovative tools and accessories to the building industry. We market and distribute various home improvement and
construction product lines for both do-it-yourself (“DIY”) and professional markets under the TOUGHBUILT® brand name, within the global multibillion dollar per year tool
market. All of our products are designed by our in-house design team. Since our initial launch of product sales eight years ago, we have experienced significant annual sales
growth from approximately $1,000,000 in 2013 to $20,000,000 in 2019.
Since August 2013, pursuant to a Service Agreement, we have been collaborating with Belegal, a Chinese firm, whose team of experts has provided ToughBuilt with additional
engineering, sourcing services and quality control support for our operations in China. Belegal assists us with supply-chain management (process and operations in China) for
our operations in China, among other things, facilitating the transmission of our purchase orders to our suppliers in China, conducting “in-process” quality checking and
inspection, and shipping end-products manufactured in China to their final destinations. In accordance with the agreement, we pay all of the monthly costs for payroll, overhead
and other operation expenses associated with the Belegal’s activities on behalf of ToughBuilt.
Our business is currently based on development of innovative and state of the art products, primarily in tools and hardware category, with particular focus on building and
construction industry with the ultimate goal of making life easier and more productive for contractors and workers alike. Our current product line includes two major categories
related to this field, with several additional categories in various stages of development, consisting of Soft Goods and Kneepads and Sawhorses and Work Products.
ToughBuilt designs and manages its product life cycles through a controlled and structured process. We involve customers and industry experts from our target markets in the
definition and refinement of our product development. Product development emphasis is placed on meeting and exceeding industry standards and product specifications, ease
of integration, ease of use, cost reduction, design-for manufacturability, quality and reliability.
Our mission consists, of providing products to the building and home improvement communities that are innovative, of superior quality derived in part from enlightened
creativity for our end users while enhancing performance, improving well-being and building high brand loyalty.
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Recent Business Developments
The following highlights recent developments in our business over the past five years:
●
In 2018, we entered into contractual agreements with two additional distributors and retailers.
● We launched a new line of miter-saw stands with three different SKUs and a new line of gloves with 16 different SKUs. Our sales increased from $14,201,836 in 2017 to
$15,289,400 in 2018.
●
In November 2018, we completed our initial public offering, pursuant to which we received net proceeds of $12,415,500 after deducting underwriting discounts and
commissions of $934,500. The Company incurred $743,765 in expenses related to the initial public offering.
● On August 19, 2019, the Company entered into a Securities Purchase Agreement with an institutional investor pursuant to which it sold $11.5 million aggregate principal
amount of promissory notes (at an aggregate original issue discount of 15%) to the investor in a transaction exempt from registration under Section 4(a)(2) of the
Securities Act of 1933, as amended.
●
In the January 28, 2020 public offering, the Company sold 43 million shares of its common stock and 47.45 million warrants (each exercisable into ½ of a share of
common stock for a total of 23.725 million shares of common stock) from which it received gross proceeds of $9,030,000 (less underwriters discount of $722,400 for net
proceeds of $8,307,600).
● On February 24, 2020, ToughBuilt Industries, Inc. (the “Company”) closed on the public offering of 4.45 million shares of its common stock, for gross proceeds of
$934,500 (less underwriters discount of $74,760 for net proceeds of $859,740) based upon the overallotment option arising from the closing of its January 28, 2020
public offering.
Products
We create innovative products that help our customers build faster, build stronger and work smarter. We accomplish this by listening to what our customers want and need and
researching how professionals work, then we create tools that help them save time, save hassle and save money.
TOUGHBUILT® manufactures and distributes an array of high quality and rugged tool belts, tool bags and other personal tool organizer products. We also manufacture and
distribute a complete line of knee pads for various construction applications. Our line of job-site tools and material support products consists of a full line of miter-saw and table
saw stands and saw horses/job site tables and roller stands. All of our products are designed and engineered in the United States and manufactured in China and India under our
quality control supervision. We do not need government approval for any of our products.
Our soft sided tool storage line is designed for a wide range of do-it-yourself and professional needs. This line of pouches and tool and accessories bags is designed to organize
our customers’ tools faster and easier. Interchangeable pouches clip on and off any belt, bag ladder wall or vehicle. Our products let our customers carry what they want so they
have it when they want it.
ToughBuilt’s wide mouth tool carry-all bags come in sizes from 12 inches to 30 inches. They all have steel reinforced handles and padded shoulder straps which allow for
massive loads to be carried with ease. Rigid plastic hard-body lining protects everything inside. Double mesh pockets included inside provide complete visibility for stored
items. They include a lockable zipper for added security and safety and secondary side handles for when it takes more than one to carry the load.
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All of these products have innovative designs with unique features that provide extra functionality and enhanced user experience. Patented features such as our exclusive
“Cliptech” mechanism incorporated in some of the products in this line are unique in these products for the industry and have distinguished the line from other similarly situated
products thus we believe, increasing appeal amongst the other products of this category in the professional community and among the enthusiasts.
Soft Goods
The flagship of the product line is the Soft Goods line that consists of over 100 variations of tool pouches, tool rigs, tool belts and accessories, tools bags, totes, variety of
storage solutions, and office organizers/bags for laptop/tablet/cellphones, etc. Management believes that the breadth of the line is one of the deepest in the industry and has
specialized designs to suit professionals from all sectors of the industry including plumbers, electricians, framers, builders and more.
We have a selection of over 10 models of kneepads, some with revolutionary and patented design features that allow the users to interchange components to suit particular
conditions of use. Management believes that these kneepads are among the best performing kneepads in the industry. Our “all terrain” knee pad protection with snapshell
technology is part of our interchangeable kneepad system which helps to customize the jobsite needs. They are made with superior quality using multilevel layered construction,
heavy duty webbing and abrasion-resistant PVC rubber.
Sawhorses and Work Products
The second major category consists of Sawhorses and Work Support products with unique designs and robust construction targeted for the most discerning users in the industry.
The innovative designs and construction of the more than 15 products in this category have led to the sawhorses becoming among the best sellers of category everywhere they
are sold. The newest additions in this category include several stands and work support products that are quickly gaining recognition in the industry and are expected to position
themselves in the top tier products in a short time. Our sawhorse line, miter saw, table saw & roller stands are built to very high standards. Our sawhorse/jobsite table is fast to
set up, holds 2,400 pounds, has adjustable heights, is made of all metal construction and has a compact design. We believe that these lines of products are slowly becoming the
standard in the construction industry.
All of our products are designed in house to achieve features and benefits for not only the professional construction worker but also for the do-it-yourself person.
Business Strategy
Our product strategy is to develop product lines in a number of categories rather than focus on a single line of goods. We believe that this approach allows for rapid growth,
wider brand recognition, and may ultimately result in increased sales and profits within an accelerated time period. We believe that building brand awareness of our current
ToughBuilt lines of products will expand our share of the pertinent markets. Our business strategy includes the following key elements:
● A commitment to technological innovation achieved through consumer insight, creativity and speed to market;
● A broad selection of products in both brand and private labels;
●
●
● Value pricing.
Prompt response;
Superior customer service; and
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We will continue to consider other market opportunities while focusing on our customers’ specific requirements to increase sales.
Market
According to “Statista & Statistic Brain” the annual revenue in the construction industry (based on firm revenue) was $1.731 trillion for 2016 in the United States. There was
approximately $394.6 billion in home improvement sales in the U.S. in 2018 (https://www.statista.com/statistics/239759/predicted-sales-of-home-improvement-retailers-in-the-
us/). The heavy and civil engineering industry is over $260 billion in sales with tools and hardware alone totaling over $60 billion for that same time period. In 2016, there were
approximately 729,000 construction companies in the United States employing more than 7.3 million employees. In addition to the construction market, our products are
marketed to the “do-it-yourself” and home improvement market place. The home improvement industry has fared much better in the aftermath of the Great Recession than the
housing market. The U.S. housing stock of more than 130 million homes requires regular investment merely to offset normal depreciation. And many households that might
have traded up to more desirable homes during the downturn decided instead to make improvements to their current homes. Meanwhile, federal and state stimulus programs
encouraged homeowners and rental property owners to invest in energy-efficient upgrades that they might otherwise have deferred. Finally, many rental property owners,
responding to a surge in demand from households either facing foreclosure or nervous about buying amid the housing market uncertainty, reinvested in their units.
As a result, improvement and repair spending held up well compared to residential construction spending. According to “Home Improvement – Still Growing in 2019”, on
www.hiri.org, “the HIRI/IHS Markit forecast expects 5.5% growth in the home improvement products market in 2019 after a strong 6.2% in 2018.”
Total home improvement products sales was expected to increase 5.5% in 2018 to $420 billion in total sales. The Professional Market was expected to increase 6.0% in 2019
over 2018 and the Consumer Market will see a sales increase of 5.3%.
TOUGHBUILT® products are available worldwide in many major retailers ranging from home improvement and construction products and services stores to major online
outlets. Currently, we have placement in Home Depot, Menards, Toolbank (UK), Bunning’s (Australia), Princess Auto (Canada), Dong Shin Tool PIA (S. Korea) as well as
seeking to grow our sales in global markets such as Western and Central Europe, Russia and Eastern Europe, South America and the Middle East.
Retailers by region include:
United States: Home Depot, Menards, GM products, Fire Safety, Hartville Hardware, ORR, Pooley, YOW, Wesco, Buzzi, and Western Pacific Building Materials.
Canada: Princess Auto
United Kingdom: Toolbank (distribution throughout the U.K. and online selling for Europe).
France: Birck
Australia: Bunnings
New Zealand: Bunnings
Russia: VSEInstrumenti.ru
South Korea: Dong Shin Tool PIA Co., Ltd.
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We are actively expanding into markets in Mexico and Latin American countries the Middle East and South Africa.
We are currently in product line reviews and discussions with Lowe’s, Home Depot Canada, Do It Best, True Value and other major retailers both domestically and
internationally. A product line review requires the supplier to submit a comprehensive proposal which includes product offerings, prices, competitive market studies and
relevant industry trends and other information. Management anticipates, within the near term, adding to its customer base up to three major retailers, along with several
distributors and private retailers within six sectors and among 56 targeted countries.
Innovation and Brand Strength
Management believes that the robust capabilities at ToughBuilt eclipse those of many competitors as not every distributor or factory has the ability to quickly identify industry
and end user opportunities and execute quickly to deliver winning product lines consistently. Also, in our view, most distributors and factories do not have a recognizable and
reputable brand or the proven ability to reach major retailers globally to position their products and brands. We believe that we are able to take a design from concept to market
within a very short period of time.
Product and Services Diversification
TOUGHBUILT® is a singular brand with a driven team that is poised to scale into a highly recognized global entity. We aim to grow ToughBuilt with several significant
subsidiaries in the next few years to become the hub/platform for professionals, DIY’s (Do It Yourselfers) and passionate builders everywhere. Management anticipates that
future subsidiaries will focus on licensing, gear, mobile, equipment rentals and maintenance services.
New Products
Tools
In 2018, we ordered and launched a new line of gloves and 28 SKUs of tool belt and pouches. We also intend to launch the following tools in the second half of 2020:
● Clamp line
● Hammer line
●
●
●
Pliers line
Screwdriver line
Tape measure line
● Utility knife line
Mobile Device Products
Since 2013, we have been planning, designing, engineering and sourcing the development of a new line of ToughBuilt mobile devices and accessories to be used in the
construction industry and by building enthusiasts. We are planning to have our mobile device products ready to market by late 2020 at which time we intend to commence
marketing and selling our mobile device products to our current global customer base. We believe that increasing numbers of companies in the construction industry are
requiring their employees to utilize mobile devices not just to communicate with others but to utilize the special apps that will allow the construction workers to do their job
better and more efficiently. All of our mobile devices are designed and built in accordance with IP-68 and to a military standard level of durability and with the cooperation of
Foxconn Manufacturing.
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Our ruggedized mobile line of products was created to place customized technology and wide varieties of data in the palm of the building professionals and enthusiasts such as
contractors, subcontractors, foreman, general laborers and others. We are designing the devices, accessories and custom apps to allow the users to plan with confidence,
organize faster, find labor and products faster, estimate accurately, purchase wisely, protect themselves, workers and their business, create and track invoicing faster and easier.
By the fourth quarter of 2020 or first quarter of 2021, we intend to launch our T.55 rugged mobile phones and earbud headphones, as well as a “T-Dock”, attachable battery, tri
lens camera and tough shield cover and accessories. In the fourth quarter of 2020, we also intend to launch the following accessories: car charger, QI charger, car mounts and
earbud pack, and we will focus on sales in the following industries: construction, industrial, military and law enforcement and “.coms”.
By the fourth quarter of 2020, we intend to launch applications for our mobile phones relating to the following topics:
1. National building codes
2.
Inspection booking
3. Labor ready
4. Estimating apps & programs
5. Structural engineers
6. Architects
7. Building plans
8. Workers comp
9. Equipment insurance
10. Project insurance & bonds
11. Vehicle insurance
12. Liability insurance
13. Umbrella insurance
14. Collection agencies
15. Construction loans
16. Small business loans
17. Job listings
18. Tool exchange
Agreement with Foxconn
On October 18, 2016, we entered into a Project Statement of Work Agreement (“SOW”) with Hon Hai Precision Ind. Co., Ltd., a corporation organized under the law of Taiwan
(referred to as “Foxconn”) to design, manufacture and supply to us a certain rugged mobile telephone (the “Product”). The Company will pay to Foxconn all fees and costs
required to develop the Product. The Product will be developed by Foxconn to our specifications. We will submit to Foxconn written specifications, features and concepts
required to be included in the Product. The specifications are subject to review and update by the parties and upon written approval by the parties such new or revised
specifications will become part of the SOW. The SOW also provides dates for completion of deliverables, such as prototypes, “Beta” testing of the Product, sample assembly of
the prototype and commencement of mass production of the Product. We may terminate the SOW at any time, in which case we must pay the costs for those portions of the
development work completed by Foxconn up to the date of termination. The SOW is governed, construed and enforced in accordance with the laws of the State of California.
Mobile Device Market
Based upon an annual white paper published by the Mobile and Wireless Practice of Venture Development Corporation, we believe that an increasing number of companies are
requiring their employees to transact business in the field and/or other non-traditional office environments. Because of this and other factors, the construction industry is
accelerating its acceptance of wireless technology. We further believe that the construction industry, like other industries, will be leveraging mobile and wireless solutions to
address the need for greater collaboration among a highly mobile and distributed workforce.
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We believe that mobility is one of the top technology trends that construction companies are focusing on in 2020 and beyond. Mobile technology continues to have a significant
impact on business, specifically with regard to business communication as this technology enhances the ability for colleagues at different locations to easily communicate,
enhances customer experience through the improvement of applications and websites available to consumers to do business through their devices “at their fingertips”, and
optimizes business operations as there is instant access to business functions at any time and from any location.
While the construction industry has widely adopted solutions such as push to talk (PTT) telephony applications, the use of mobile and wireless data applications has been
limited. IT solutions in general and mobile and wireless solutions specifically have been adopted at varying degrees within organizations and to support the various phases of
construction projects. Currently the business planning, engineering and procurement operations have more effectively deployed IT solutions while actual construction
operations have fallen behind in IT infrastructure and field automation solutions. The construction and engineering workforce is inherently mobile. However, construction sites
have never effectively leveraged (wireless) communications networks to connect these distributed and often remote workers and their assets. Nevertheless, construction project
managers require real time access to a variety of information, including real time tool inventory management, raw materials deliveries, job costing, time stamping and general
project management information. The challenge, however, is the lack of network access on construction sites resulting in an information bottleneck on the job site. Buoyed by
advances in wireless technologies – including coverage, performance, security and cost of ownership – we believe this is becoming an issue of the past for construction
operations.
Mobile Apps
We intend to include apps on our mobile devices and are developing, with a third party applications developer, apps which will include, among other things, building codes,
permitting, estimating and job listings. The purposes of the apps that are being developed address:
●
●
●
●
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Reducing construction delays. Gathering real-time information at the job site about issues such as tradesmen and contractors present at the site, construction progress, or
incidents, can reduce overall project delays. This critical information helps to bring issues to light that might put projects on hold, and keep construction on schedule.
Improving communication with owners and project stakeholders. Completing daily reports at the job site on mobile devices and sending automated emails can tighten the
communication loop with project stakeholders. When all parties involved in the project have access to the same information at the same time, errors are reduced and
issues requiring attention can be addressed faster.
Increasing back-office efficiency. By eliminating the use of paper and spreadsheets, construction companies can save hundreds of hours spent on data entry, collating
information for reporting, or looking for paperwork that has been lost or filed away. Increasing back-office efficiency allows projects to be run leaner and to be
completed on time and on budget.
Improving accountability of field staff. Staff travel times, GPS locations and time spent on-site can all be consistently monitored with mobile apps. This improves
accountability and reduces labor costs. Costs can be also reduced with mobile timesheets that record clock-in/clock-out time to the minute.
Improving accuracy of project documentation. Using mobile apps to capture information at the job site improves accuracy and reduces issues that arise from illegible
handwriting, inconsistent data, and information gaps. Photos, GPS, time stamps and signatures captured on-site provide an accurate and indisputable audit trail for the
project, delivering accountability to clients or evidence in legal disputes.
Improving equipment management. Construction companies that use a database-driven mobile solution can maximize the use of equipment through better management
and tracking. Real-time information about maintenance schedules, availability, and equipment locations helps to improve inventory planning and use.
● Utilizing real-time mobile access to plans and bylaws. With apps that provide two-way access to information, construction companies can file electronic versions of
drawings, plans or bylaws for quick offline access by teams in the field. This improves productivity and reduces the need for re-work.
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Sales Strategy
The devices, accessories and bolt-on digital tools will be sold through relevant home improvement big box stores, direct marketing to construction companies, direct marketing
of trade/wholesale outlets and to professional outlets.
Intellectual Property
We hold several patents and trademarks of various durations and believe that we hold, have applied for or license all of the patent, trademark and other intellectual property
rights necessary to conduct our business. We utilize trademarks (licensed and owned) on nearly all of our products and believe having distinctive marks that are readily
identifiable is an important factor in creating a market for our goods, in identifying our brands and our company, and in distinguishing our goods from the goods of others. We
consider our ToughBuilt ®, Cliptech®, and Fearless® trademarks to be among our most valuable intangible assets. Trademarks registered both in and outside the U.S. are
generally valid for ten years, depending on the jurisdiction, and are generally subject to an indefinite number of renewals for a like period on appropriate application.
In 2019, the United States Patent and Trademark Office (USPTO) granted two new design patents (US D840,961 S and US D841,635 S) that cover ToughBuilt’s ruggedized
mobile devices, which are valid for a period of 15 years.
We also rely on trade secret protection for our confidential and proprietary information relating to our design and processes for our products. We have entered into and will
continue to enter into confidentiality, non-competition and proprietary rights assignment agreements with our employees and independent contractors. We have entered into and
will continue to enter into confidentiality agreements with our suppliers to protect our intellectual property.
Competition
The tool equipment and accessories industry is highly competitive on a worldwide basis. We compete with a significant number of other tool equipment and accessories
manufacturers and suppliers to the construction, home improvement and Do-It-Yourself industry, many of which have the following:
●
Significantly greater financial resources than we have;
● More comprehensive product lines;
●
Longer-standing relationships with suppliers, manufacturers, and retailers;
● Broader distribution capabilities;
●
●
Stronger brand recognition and loyalty; and
The ability to invest substantially more in product advertising and sales.
Our competitors’ greater capabilities in the above areas enable them to better differentiate their products from ours, gain stronger brand loyalty, withstand periodic downturns in
the construction and home improvement equipment and product industries, compete effectively on the basis of price and production, and more quickly develop new products.
These competitors include DeWalt, Caterpillar and Samsung Active.
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The markets for the Company’s mobile products and services are also highly competitive and the Company is confronted by aggressive competition in all areas of its business.
These markets are characterized by frequent product introductions and rapid technological advances that have substantially increased the capabilities and use of mobile
communication and media devices, personal computers and other digital electronic devices. The Company’s competitors who sell mobile devices and personal computers based
on other operating systems have aggressively cut prices and lowered their product margins to gain or maintain market share. The Company’s financial condition and operating
results can be adversely affected by these and other industry-wide downward pressures on gross margins. Principal competitive factors important to the Company include price,
product features, relative price/performance, product quality and reliability, design innovation, a strong third-party software and peripherals ecosystem, marketing and
distribution capability, service and support and corporate reputation.
The Company is focused on expanding its market opportunities related to mobile communication and media devices. These industries are highly competitive and include several
large, well-funded and experienced participants. The Company expects competition in these industries to intensify significantly as competitors attempt to imitate some of the
features of the Company’s products and applications within their own products or, alternatively, collaborate with each other to offer solutions that are more competitive than
those they currently offer. These industries are characterized by aggressive pricing practices, frequent product introductions, evolving design approaches and technologies, rapid
adoption of technological and product advancements by competitors, and price sensitivity on the part of consumers and businesses. Competitors include Apple, Samsung and
Qualcomm, among others.
Employees
As of March 27, 2020, we have 24 full-time employees and 21 independent contractors and consultants. We also engage consultants on an as-needed basis to supplement
existing staff. All of our employees, consultants and contractors that are involved with sensitive and/or proprietary information have signed non-disclosure agreements.
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Item 1A Risk Factors
As a smaller reporting company, we are not required to supply the information required by this item.
Item 1B Unresolved Staff Comments
The Company has no, and has not had since inception, unresolved comments with the Commission Staff.
Item 2 Properties
We currently lease approximately 8,300 square feet of office space at 25371 Commercentre Drive, Suite 200, Lake Forest, CA 92630 as our principal offices. We believe these
facilities are in good condition and satisfy our operational requirements. We intend to seek additional leased space, which will include some warehouse facilities, as our business
efforts increase.
We entered into a lease for office space at 8669 Research Drive, in Irvine, CA, which is to replace the current corporate headquarters. The lease commenced on December 1,
2019 with no rent due until April 1, 2020. From April 1, 2020 through March 31, 2025, base rent will be due on the first of each month in the amount of $25,200. The Company
paid an initatial amount of $68,128 compromising the rent for April 2020, a security deposit and the amount due for property taxes, insurance and association fees. The bases
rent shall be adjusted on the following dates as follows:
12/1/2020-11/30/2021
12/1/2021-11/30/2022
12/1/2022-11/30/2023
12/1/2023-11/30/2024
$
$
$
$
26,208
27,256
28,347
29,480
The lease otherwise contains commercially market terms as to events of default and termination and the like.
Item 3 Legal Proceedings
From time to time, we are involved in lawsuits, claims, investigations and proceedings, including pending opposition proceedings involving patents that arise in the ordinary
course of business. There are no matters pending that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows,
except as set forth below.
1.
Edwin Minassian v. Michael Panosian and ToughBuilt Industries, Inc., Los Angeles Superior Court Case No. EC065533.
On August 16, 2016, Plaintiff Edwin Minassian filed a complaint against Defendants ToughBuilt Industries, Inc. (the “Company”) and Michael Panosian in the
Superior Court of California, County of Los Angeles, Case No. EC065533. The complaint alleges breach of oral contracts to pay Plaintiff for consulting and finder’s fees, and to
hire him as an employee. The complaint further alleged claims of fraud and misrepresentation relating to an alleged payment in exchange for stock in the Company. The
complaint seeks unspecified monetary damages, declaratory relief, stock in the Company, and other relief according to proof.
On April 12, 2018, the Court entered judgments of default against the Company and Mr. Panosian in the amounts of $7,080 and $235,542, plus awarding Mr.
Minassian a 7% ownership interest in the Company (the “Judgments”). Mr. Minassian served notice of entry of the judgments on April 17, 2018 and the Company and Mr.
Panosian received notice of the entry of the default judgments on April 19, 2018.
The Company and Panosian satisfied the judgments on September 14, 2018 by payment of $252,949 to Plaintiff Minassian and by issuing Plaintiff Minassian 376,367
shares of common stock of the Company. On October 18, 2018, the Company and Panosian filed a Notice of Appeal from the Order denying their motion for relief from the
above-referenced default judgment.
On October 1, 2019, the Second Appellate District of the California Court of Appeal issued its opinion reversing the trial court’s order denying ToughBuilt’s motion
for relief from the default judgment and directing the trial court to grant ToughBuilt’s motion for relief, including allowing ToughBuilt to file an Answer and contest
Minassian’s claims.
The appellate court recently issued an remittitur officially transferring the matter from the appellate court back to the trial court for further proceedings consistent with
its ruling, and the Company and Panosian have filed an Answer to the Complaint. The trial court has not yet set a trial date, and discovery in this case is just now beginning. The
Company intends to vigorously defend the Complaint and seek to recover the compensation and stock previously paid to satisfy the now vacated default judgment. The
Company believes it has a strong position, but cannot quantify the likelihood that it will prevail in the above litigation, or any likely liability or recoveries, because of the current
status of the case and the unpredictability of litigation.
2. Design 1st v. ToughBuilt Industries, Inc., American Arbitration Association
On November 26, 2019, Claimant Design 1st filed a Demand for Arbitration against ToughBuilt Industries seeking $169,094.35 in damages, plus attorney’s fees and
costs. Claimaint contends the Company breached a written contract by failing to pay for design services. ‘The Company filed a Cross-Demand for Arbitration against Claimant
seeking $394,956.07 in damages, plus attorney’s and costs alleging Claimant breached the same contract by performing negligent services, failing to meets its obligations under
the contract, and fraudulent billing. An arbitration hearing has not yet been scheduled by the arbitrator, Grant Kim, and discovery has not yet commenced. The Company
intends to vigorously defend the Demand for Arbitration. The Company believes it has a strong position, but cannot quantify the likelihood that it will prevail in the above
litigation, or any likely liability or recoveries, because of the current status of the case and the unpredictability of litigation.
The Company has recorded the litigation expense of $0 and $1,192,488 for the years ended December 31, 2019 and 2018, respectively.
In the normal course of business, the Company incurs costs to hire and retain external legal counsel to advise it on regulatory, litigation and other matters. The Company
expenses these costs as the related services are received. If a loss is considered probable and the amount can be reasonable estimated, the Company recognizes an expense for
the estimated loss.
Item 4 Mine Safety Disclosures
None.
13
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market information
PART II
Our common stock is currently quoted on Nasdaq Capital Market under the symbol “TBLT”, and warrants under the symbol “TBLTW”. Trading in our common stock has
historically lacked consistent volume, and the market price has been volatile.
On March 27, 2020, the closing price for our common stock as reported on the Nasdaq Capital Market was $0.15 per share.
Securities outstanding and holders of record
On March 27, 2020, there were approximately 100 shareholders of record for our common stock and 109,990,257 shares of our common stock issued and outstanding.
Dividend Policy
We have never paid any cash dividends on our common stock. We anticipate that we will retain funds and future earnings to support operations and to finance the growth and
development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future following this offering. Any future determination to pay dividends will
be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements and other factors that our Board of Directors
deems relevant. In addition, the terms of any future debt or credit financings may preclude us from paying dividends.
Information respecting equity compensation plans
The 2016 Equity Incentive Plan
The 2016 Equity Incentive Plan (the “2016 Plan”) was adopted by the Board of Directors and approved by the shareholders on July 6, 2016. The awards per 2016 Plan may be
granted through July 5, 2026 to the Company’s employees, consultants, directors and non-employee directors provided such consultants, directors and non-employee directors
render good faith services not in connection with the offer and sale of securities in a capital-raising transaction. The maximum number of shares of our common stock that may
be issued under the 2016 Plan is 2,000,000 shares, which amount will be (a) reduced by awards granted under the 2016 Plan, and (b) increased to the extent that awards granted
under the 2016 Plan are forfeited, expire or are settled for cash (except as otherwise provided in the 2016 Plan). No employee will be eligible to receive more than 125,000
shares of common stock in any calendar year under the 2016 Plan pursuant to the grant of awards.
14
The 2018 Equity Incentive Plan
Effective July 1, 2018, the Board of Directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”). This 2018 Plan supplements, and does not replace, the existing 2016
Equity Incentive Plan. Awards may be granted under the 2018 Plan through June 30, 2023 to the Company’s employees, officers, consultants, and non-employee directors. The
maximum number of shares of our common stock that may be issued under the 2018 Plan is 1,000,000 shares, which amount will be (a) reduced by awards granted under the
2018 Plan, and (b) increased to the extent that awards granted under the 2018 Plan are forfeited, expire or are settled for cash (except as otherwise provided in the 2018 Plan). No
employee will be eligible to receive more than 200,000 shares of common stock in any calendar year under the 2018 Plan pursuant to the grant of awards. On September 12,
2018, the Board of Directors approved an increase in the number of shares of common stock reserved for future issuance under this Plan from 1,000,000 shares to 2,000,000
shares. On September 14, 2018, 1,000,000 options to purchase shares of common stock underlying awards under the 2018 Plan were granted to the employees and officers, 25%
vesting immediately on the date of grant and 25% vesting each year thereafter on the three subsequent anniversaries of the grant date. The Company estimated the fair value of
the options using the Black-Scholes option pricing model was $1,241,417. There were no further issuances in 2019.
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Prospective investors should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the
related notes and other financial information included elsewhere in this annual report. Some of the information contained in this discussion and analysis or set forth elsewhere
in this annual report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties.
See “Cautionary Note Regarding Forward-Looking Statements.” You should review the “Risk Factors” section of this prospectus 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. All
share and per share numbers have been retroactively adjusted to reflect the 1-for-2 reverse stock split effected on September 13, 2018.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements,” which include information relating to future events, future financial performance, financial
projections, strategies, expectations, competitive environment and regulation. Words such as “may”, “should”, “could”, “would”, “predicts”, “potential”, “continue”, “expects”,
“anticipates”, “future”, “intends”, “plans”, “believes”, “estimates”, and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-
looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved.
Forward-looking statements are based on information we have when those statements are made or management’s good faith belief as of that time with respect to future events
and are subject to significant risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-
looking statements. Important factors that could cause such differences include, but are not limited to:
●
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●
●
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our limited operating history;
our ability to manufacture, market and sell our products;
our ability to maintain or protect the validity of our U.S. and other patents and other intellectual property;
our ability to launch and penetrate markets;
our ability to retain key executive members;
our ability to internally develop new inventions and intellectual property;
interpretations of current laws and the passages of future laws; and
acceptance of our business model by investors.
15
The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that
may cause our actual results to differ from those anticipate in our forward-looking statements.
Moreover, new risks regularly emerge and it is not possible for our management to predict or articulate all risks we face, nor can we assess the impact of all risks on our
business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. All forward-looking
statements included in this Annual Report on Form 10-K are based on information available to us on the date of this Annual Report on Form 10-K. Except to the extent required
by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or
otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary
statements contained above and throughout this Annual Report on Form 10-K.
Company History
Our Company was formed on April 9, 2012 as Phalanx, Inc., under the laws of the State of Nevada and changed its name to ToughBuilt Industries, Inc. on December 29, 2015.
Business Overview
Our Company was formed to design, manufacture and distribute innovative tools and accessories to the building industry. The global tool market industry is a multibillion dollar
business.
ToughBuilt’s business is based on development of innovative and state of the art products, primarily in tools and hardware category, with particular focus on building and
construction industry with the ultimate goal of making life easier and more productive for the contractors and workers alike.
ToughBuilt’s current product line includes three major categories related to this field, with several additional categories in various stages of development, consisting of Soft
Goods & Kneepads and Sawhorses & Work Products.
Governments and health organizations have identified an outbreak of a respiratory illness caused by a new coronavirus which has been named COVID-19. The World Health
Organization has declared the outbreak a global pandemic. While the worst of the pandemic seems to have subsided in China, its country of original origin, we are seeing the
virus spread and start to peak in other parts of the globe, including in the U.S., which has caused massive closures of businesses and strain on shipping and freight systems
world wide. Since the outbreak, all of our Chinese facilities were temporarily closed for a period of time. Most of these facilities have been reopened. Depending on the
progression of the outbreak, our ability to obtain necessary supplies and ship finished products to customers may be partly or completely disrupted globally. Also, our ability to
maintain appropriate labor levels could be disrupted. If the coronavirus continues to progress, it could have a material negative impact on our results of operations and cash
flow.
JOBS Act
On April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company”
can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or
revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise
apply to private companies.
We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set
forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions from, without limitation, (i) providing an auditor’s attestation report
on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted
by the Public Company Accounting Oversight Board (PCAOB) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information
about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (a) the last day of
our fiscal year following the fifth anniversary of the IPO, (b) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (c) the last day of our
fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, or Exchange Act (which would occur if
the market value of our equity securities that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter), or
(d) the date on which we have issued more than $1 billion in nonconvertible debt during the preceding three-year period.
16
FOR THE YEAR ENDED DECEMBER 31, 2019
For the year ended December 31, 2019 compared to the year ended December 31, 2018
Revenues
Revenues, net of allowances, for the years ended December 31, 2019 and 2018 were $19,090,071 and $15,289,400, respectively, consisted of metal goods and soft goods sold to
customers. Revenues increased in 2019 over 2018 by $3,800,671, or 24.9%, primarily due to wide acceptance of our products in the tools industry and receipt of recurring sales
orders for metal goods and soft goods from our existing customers and new customers, and introduction and sale of new soft goods products to our customers.
Cost of Goods Sold
Cost of goods sold for the years ended December 31, 2019 and 2018 was $13,475,947 and $11,794,206, respectively. Cost of goods sold increased in 2019 over 2018 by
$1,681,741 or 14.3%, primarily due to the increase in materials cost of steel and plastics polyester to manufacture metal goods and soft goods and increase in labor cost in
China. Cost of goods sold as a percentage of revenues in 2019 was 70.6% as compared to cost of goods sold as a percentage of revenues in 2018 of 77.1%. We expect to reverse
the trend and reduce our cost of goods sold as a percentage of revenue as we achieve operational efficiencies in production and work with automated state of the art factories to
manufacture our product lines.
Operating Expenses
Operating expenses consist of selling, general and administrative expenses, litigation expense, and research and development costs. Selling, general and administrative expenses
(the “SG&A Expenses”) for the years ended December 31, 2019 and 2018 were $12,078,762 and $6,937,704, respectively. SG&A Expenses increased in 2019 over 2018 by
$5,141,058 or 74.1%, primarily due to hiring additional employees, independent contractors and consultants to grow the Company. SG&A expense in 2019 as a percentage of
revenues was 63.3% as compared to SG&A expense in 2018 as a percentage of revenues was 45.4%. We expect our SG&A expense will continue to increase as the Company
plans to bring professional management team and staff on board, expend cash to raise capital for new products development, and acquire a new warehouse/storage facility to
expand its operations and maintain finished products inventory on hand.
Research and development costs (the “R&D”) for the years ended December 31, 2019 and 2018 were $2,116,108 and $1,816,389, respectively. R&D costs increased in 2019
over 2018 by $299,629 or 16.5%, primarily due to the costs incurred in developing new tools, a ruggedized mobile device, software applications to run on the mobile device
related to construction industry, and stock-based compensation expense and bonuses to R&D management team. We expect R&D costs to continue to increase as the Company
embarks on developing new tools for the construction industry, and the attachments for the ruggedized mobile device with new software applications.
17
Net Loss
Due to factors set forth above, and the lack of a warrant derivative at the end of 2019, with a change of $19,588,277 from 2019 over 2018, we recorded a net loss of $4,300,968
for the year ended December 31, 2019 as compared to a net loss of $27,651,412 for the year ended December 31, 2018.
Liquidity and Capital Resources
Although our sales increased by approximately 25% during the year ended December 31, 2019 compared to the same period in 2018, we are continuing to focus our efforts on
increased marketing campaigns, and distribution programs to strengthen the demand for our products globally. Management anticipates that our capital resources will improve
and our products gain wider market recognition and acceptance resulting in increased product sales.
We had minimal cash at December 31, 2019 as compared to $5,459,884 at December 31, 2018, although we raised significant cash in January 2020 and February 2020, as
stated above.
As of December 31, 2019, the Company’s principal sources of liquidity consisted of minimal cash and future cash generated from operations and fundraising activities. The
Company does not believe that its current cash balances coupled with anticipated cash flow from operating activities will be sufficient to meet its working capital requirements
for at least one year from the date of issuance of the accompanying financial statements, and this raises doubts about its ability to continue as a going concern. The Company
continues to control its cash expenses as a percentage of expected revenue on an annual basis and thus may use its cash balances in the short-term to invest in revenue growth.
Based on current internal projections, the Company believes it has and/or will generate sufficient cash for its operational needs, including any required debt payments, for at
least one year from the date of issuance of the accompanying financial statements. Management is focused on growing the Company’s existing product offering, as well as its
customer base, to increase its revenues. The Company cannot give assurance that it can increase its cash balances or limit its cash consumption and thus maintain sufficient cash
balances for its planned operations or future acquisitions. Future business demands may lead to cash utilization at levels greater than recently experienced. The Company may
need to raise additional capital in the future. However, the Company cannot assure that it will be able to raise additional capital on acceptable terms, or at all. Due to the
uncertainty in the Company's ability to raise capital, management believes that there is substantial doubt in the Company's ability to continue as a going concern for twelve
months from the issuance of these condensed financial statements.
CASH FLOWS
Net cash flows used in operating activities for the year ended December 31, 2019 was $10,229,337, attributable to a net loss of $4,300,969, offset by depreciation expense of
$225,426, amortization of original issuance of debt discount and debt issuance cost and non-cash inducement cost for debt conversion of $626,546, change in the fair value of
warrant derivative of $(5,251,852), stock-based compensation expense of $336,637, and net increase in operating assets of $1,768,059, and net decrease in liabilities of $97,066.
The Company offered cash discounts to its customers and factors to accelerate payments of accounts receivable. In addition, the Company negotiated extended payment terms
with its suppliers, vendors and related parties to conserve its cash. Net cash flows used in operating activities for the year ended December 31, 2018 was $8,243,414, attributable
to a net loss of $27,651,412, offset by depreciation expense of $120,723, amortization of original issuance of debt discount and debt issuance cost and non-cash inducement cost
for debt conversion of $5,278,132, change in the fair value of warrant derivative of $14,336,425, stock-based litigation settlement expense of $939,538, stock-based
compensation expense of $557,042, stock issued in lieu of deferred salaries of $650,100 and net increase in operating assets of $1,154,073, and net decrease in liabilities of
$1,319,889. The Company offered cash discounts to its customers and factors to accelerate payments of accounts receivable. In addition, the Company negotiated extended
payment terms with its suppliers, vendors and related parties to conserve its cash.
18
There was net cash used by investing activities for the year ended December 31, 2019 of $1,031,115, attributable to cash paid for purchase of property and equipment. Net cash
used by investing activities for the year ended December 31, 2018 was $0.
Net cash provided by financing activities for the year ended December 31, 2019 was $5,825,631, primarily attributable to net cash proceeds from the sale of senior secured notes
to an investor in August 2019. Net cash provided by financing activities for the year ended December 31, 2018 was $13,658,951, primarily attributable to net cash proceeds
from sale of common stock of $11,671,735, proceeds from sale of convertible preferred stock of $1,201,157 and proceeds from notes payable of $752,579.
We recorded a net decrease in cash of $5,434,821 for the year ended December 31, 2019.
Recent Financings
March 2018 Private Placement
On January 8, 2018, the Company conducted a private placement of its securities in which the Company offered to sell a minimum of 160,000 units and a maximum of 300,000
units to certain accredited investors, with each such unit consisting of (i) one half of a share of the Company’s Class B Convertible Preferred Stock, par value of $0.0001 per
share, and (ii) one half of a warrant to purchase one half share of the Company’s common stock, par value $0.0001 per share. Each unit will be sold at a price of $5.00 per unit.
Each warrant has an initial exercise price of $12.00 per share, subject to adjustment, and is exercisable for a period of five years from the date of issuance. The Company sold
162,000 units at a price of $5.00 per unit for gross proceeds of $810,000, and received on March 14, 2018, cash proceeds of $613,200, net of commissions of $64,800 earned by
the placement agent on capital raise, $128,000 in legal fees, and $4,000 in escrow fees. Each of the units contained one half of a share of Class B Convertible Preferred Stock
and one half of a Class B Warrant to purchase a share of our common stock for an aggregate of 81,000 shares of Class B Convertible Preferred Stock and 81,000 Class B
Warrants. The placement agent received warrants to purchase up to 4,050 shares of our common stock at an exercise price of $12.00 per share.
May 2018 Private Placement
On May 2, 2018, the Company conducted a confidential private placement of its securities in which the Company offered to sell a maximum 140,000 units to certain accredited
investors, with each such unit consisting of (i) one half of a share of the Company’s Class B Convertible Preferred Stock, par value of $0.0001 per share, and (ii) one half of a
warrant to purchase one half of a share of the Company’s common stock, par value $0.0001 per share. Each unit will be sold at a price of $5.00 per unit. Each warrant has an
initial exercise price of $12.00 per share, subject to adjustment, and is exercisable for a period of five years from the date of issuance. The Company sold all 140,000 units for
gross proceeds of $700,000, and received cash proceeds of $587,957 on May 15, 2018, net of commissions and fees of $74,574 earned by the placement agent on capital raise,
$33,469 in legal fees, and $4,000 in escrow fees. The Company issued to the underwriter 3,500 Placement Agent Warrants at their fair value of $12,527.
19
August 2018 Financing
Pursuant to the terms of August 2018 financing, the Company executed six (6) promissory notes, unsecured, with original issuance debt discount of 15%, for a cumulative
principal sum of $862,500 on September 4, 2018. The Company promised to pay the note holders the principal sum of $862,500 on earlier of (i) the third trading day after the
closing of the Company’s initial public offering, and (ii) November 30, 2018 or such earlier date as these promissory notes are required or permitted to be repaid. On closing of
this offering, on September 5, 2018, the Company received cash proceeds of $652,579, net of commission and fees of $62,850 earned by the placement agent on capital raise,
$30,571 in legal fees, and $4,000 in escrow fees. In addition, the Company issued to the six note holders 18,750 shares of Class B Convertible Preferred Stock valued at
$120,394, and 7,500 warrants to the placement agent, valued at their fair value of $26,843. On October 19, 2018 , the holders of these notes agreed to convert all amounts due to
them into unregistered Class A Units at a per Unit conversion price equal to 80% of the per Unit purchase price of a Class A Unit in the Company’s initial public offering.
Initial Public Offering
On November 14, 2018, the Company consummated its IPO whereby it sold a total of 2,670,000 Class A Units, each Unit consisting of one share of common stock, par value
$0.0001 per share, and a Series A Warrant to purchase one share of common stock and a Series B Warrant to purchase one share of common stock, on an offer price of $5.00
for each unit of a share and a Series A Warrant and a Series B Warrant (“Class A Unit”). The Company received net proceeds from the IPO of $12,415,500 after deducting
underwriting discounts and commission of $934,500. The Company incurred $743,765 in expenses related to the IPO. $3,657,507 of the proceeds were allocated to warrant
derivative on our balance sheet as a result of our Series B Warrant issuance which were deemed to be a derivative liability.
November 2018 Private Transactions
Concurrent with the closing of the IPO on November 14, 2018, the following private transactions were consummated in accordance with the related agreements (see Notes 6, 7,
8 and 9 of the financial statements), all in transactions exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended:
(a) 1,366,768 unregistered Class A Units were issued upon the conversion of outstanding shares of Class B Convertible Preferred Stock at a conversion price of $3.50 per
Class A Unit.
(b) 42,105 unregistered shares of common stock were issued upon conversion of the $200,000 principal amount of a promissory note due to an officer at a conversion price
of $4.75 per share.
(c) 1,726,678 unregistered Class A Units were issued upon conversion of outstanding convertible debt instruments (consisting of all principal amounts and accrued and
unpaid interest through the date of the IPO) at a conversion price of $5.00 per Unit.
(d) 136,863 unregistered shares of common stock were issued upon conversion of $650,100 of accrued and unpaid salaries to officers and directors at a conversion price of
$4.75 per share.
(e) 215,625 unregistered Class A Units issued upon the conversion of outstanding principal amount of unsecured promissory notes at a conversion price of $4.00 per Unit.
On December 17, 2018, pursuant to the Underwriting Agreement dated November 8, 2018, by and between the Company and the underwriters, the underwriters agreed to
partially exercise the over-allotment option to purchase an additional 25,000 shares of common stock, par value $0.0001, at a price of $4.98 per share, 400,500 Series A
Warrants, at a price of $0.01 per warrant and 400,500 Series B Warrants, at a price of $0.01 per warrant. The Company received net proceeds from the exercise of over-
allotment option $121,909 after deducting commission and expenses of $10,601.
20
January 2019 Warrant Exchange
On January 24, 2019, the Company entered into exchange agreements with two institutional investors pursuant to which these investors exercised Series A Warrants to purchase
424,116 shares of its common stock, for total gross proceeds to the Company of $2,172,638. Those investors also exchanged Series A Warrants to purchase 508,940 shares of
its common stock into 508,940 shares of its common stock and received new warrants to purchase an aggregate of 933,056 shares of its common stock. These new warrants
have terms substantially similar to the terms of the Company’s Series A Warrants, except that the per share exercise price of the new warrants is $3.77, and the warrants are not
exercisable until the six-month anniversary of the date of issuance thereof.
August 2019 Convertible Note Financing
On August 19, 2019, the Company entered into a Securities Purchase Agreement with an institutional investor pursuant to which it sold $11.5 million aggregate principal
amount of promissory notes (at an aggregate original issue discount of 15%) to the investor in a transaction exempt from registration under Section 4(a)(2) of the Securities Act
of 1933, as amended. The first note (the “Series A Note”) has a face amount of $6.72 million for which the investor paid $5 million in cash. The second note (the “Series B
Note” and with the Series A Note, collectively referred to as the “Notes”) has a principal amount of $4.78 million for which the investor paid $4.78 million in the form of a full
recourse promissory note issued by the investor to the Company (the “Investor Note”) secured by $4.78 million in cash or cash equivalents of the investor (i.e :an original issue
discount of approximately 15% to the face amount of the Series B Note). No portion of the Series B Note may be converted into shares of our common stock (the “Common
Stock”) until the corresponding portion of the Investor Note has been prepaid to the Company in cash, at which point in time such portion of the Series B Note shall be deemed
“unrestricted”. The Investor Note is subject to optional prepayment at any time at the option of the investor and mandatory prepayment, at the Company’s option, subject to
certain equity conditions, at any time 45 Trading Days after the effectiveness of a resale registration statement (or otherwise the applicability of Rule 144 promulgated under the
Securities Act of 1933, as amended). Notwithstanding the foregoing, the Company may not effect a mandatory prepayment if the shares underlying the Series A Note and the
portion of the Series B Note that has become unrestricted exceeds 35% of the market capitalization of the Company.
The Notes are senior secured obligations of the Company secured by a lien on all assets of the Company, bear no interest (unless an event default has occurred and is
continuing) and mature on December 31, 2020. The Notes will be convertible at $1.00 into a fixed number of shares (the “Conversion Shares”). The Notes are convertible at the
Holder’s option, in whole or in part, at any time after closing. The Conversion Price will be subject to adjustment for stock dividends, stock splits, anti-dilution and other
customary adjustment events.
The Company shall repay the Principal Amount of the Notes in 12 installments, with the first installment starting on February 1, 2020 (each, an “Installment Date”).
Installments 1-3 shall be 1/36th of the Principal Amount, Installments 4-6 shall be 1/18th of the Principal Amount and Installments 7-12 shall be 1/8th of the Principal Amount.
The repayment amount shall be payable in cash, or, subject to the satisfaction of equity conditions, at the option of the Company, in registered Common Stock or a combination
of cash and registered Common Stock. However, if the 30-day volume weighted average price of the Common Stock (the “VWAP”) of the Company falls below 50% of the
[Market Price (as defined above)]1 or the Company fails to satisfy certain other equity conditions, the repayment amount is payable in shares of Common Stock only unless the
Investor(s) waive any applicable equity condition. If the Company elects to satisfy all or any portion of an installment in shares of Common Stock, the Company will predeliver
such shares of Common Stock to the investor on the 23rd trading day prior to the applicable Installment Date, with a true-up of shares (if necessary) on the Installment Date.
Any excess shares of Common Stock shall be applied to subsequent installments.
The shares used to meet a Principal Repayment (“Installment Shares”) would be valued at a conversion price calculated as the lesser of (i) 85% of the arithmetic average of the
three lowest daily VWAPs of the 20 trading days prior to the payment date or (ii) 85% of the VWAP of the trading day prior to payment date (“Installment Price”) with a floor
of $0.10.
21
All amortization payments shall be subject to the Investors’ right to (a) defer some or all of any Installment Payment to a subsequent Installment Date; and (b) at any time
during an installment period, convert up to four times the installment amount at the Installment Price; provided shares received pursuant to such accelerated conversions shall be
subject to a leak-out provision that solely limits sales of such shares received by the investor in such accelerated conversion (and not any other sales) to the greater of (a)
$500,000 per trading day or (b) 40% of the volume traded on a given day as reported by Bloomberg LP.
Upon completion of a Change of Control, the Holders may require the Company to purchase any outstanding Notes in cash at 125% of par plus accrued but unpaid interest. The
Company shall have the right to redeem any and all amounts of the outstanding Note at 125% of the greater of (a) Principal Amount plus accrued but unpaid interest (if any), or
(b) Conversion Value plus accrued but unpaid interest (if any) provided the Company has satisfied certain equity conditions. The Company must give the Investor(s) ninety
(90) business days’ prior notice of any such redemption.
Prior to all outstanding amounts under the Note being repaid in full, the Company will not create any new encumbrances on any of its or its subsidiaries’ assets without the
prior written consent of the Lender, with a carveout for a working capital facility of which the details are to be determined. The Notes shall also be subject to standard events of
default and remedies therefor.
The Company filed a registration statement in connection therewith, which was declared effective on October 15, 2019.
In connection with the granting of the Notes, the Company shall issue detachable warrants to the Investor, exercisable in whole or in part at any time during the five years from
the date of issuance, an in amount equal to 50% of the conversion shares underlying the Notes and have an exercise price of $1.00 per share. To the extent the Company has a
change of control or a spinoff, the warrants provide for a put for the warrants to the Company at their Black- Scholes Valuation.
Until the 3 year anniversary of the maturity date, the investor shall have the right (but not the obligation) to participate in 50% of any subsequent equity or debt issuance.
Consummation of the transaction has been subject to certain conditions precedent, including the Company agrees to procure an approval of this transaction at its annual
shareholder meeting scheduled no later than 180 days after the Closing Date and agrees to procure voting agreements from principal shareholders prior to closing of the
Company.
January 2020 Public Offering and February 2020 Greenshoe
On February 24, 2020, ToughBuilt Industries, Inc. (the “Company”) closed on the public offering of 4.45 million shares of its common stock, for gross proceeds of $934,500
based upon the overallotment option arising from the closing of its January 28, 2020 public offering. In the January 28, 2020 public offering, the Company sold 43 million
shares of its common stock and 47.45 million warrants (each exercisable into ½ of a share of common stock for a total of 23.725 million shares of common stock) from which it
received gross proceeds of $9,030,000.
Off Balance Sheet Arrangements
None.
Seasonality
Our business is a seasonal business as a result of our China-based production. For the first calendar quarter, we are not able to ship our products from China due to the hiatus as
a result of their New Year holidays. We make up the lost sales from the first calendar quarter in the subsequent quarters.
Significant Accounting Policies
See the footnotes to our audited financial statements for the year ended December 31, 2019, included with this annual report.
22
Item 8 Financial Statements and Supplementary Data
TOUGHBUILT INDUSTRIES, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2018 AND 2017
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2019 and 2018
Statements of Operations for the Years Ended December 31, 2019 and 2018
Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2019 and 2018
Statements of Cash Flows for the Years Ended December 31, 2019 and 2018
Notes to Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-7 to F-24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
ToughBuilt Industries, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of ToughBuilt Industries, Inc. (the “Company”) as of December 31, 2019 and 2018, the related statements of operations,
shareholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the
results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the
United States of America.
Explanatory Paragraph – Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has
incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum llp
We have served as the Company’s auditor since 2016.
Costa Mesa, California
March 30, 2020
F-2
TOUGHBUILT INDUSTRIES, INC.
BALANCE SHEETS
Assets
December 31, 2019
December 31, 2018
Current Assets
Cash
Accounts receivable, net
Factor receivables, net
Inventory
Prepaid assets
Note receivable
Total Current Assets
Other Assets
Property and equipment, net
Other assets
Total Assets
Liabilities and Shareholders’ Equity (Deficit)
Current Liabilities
Accounts payable
Accrued expenses
Deferred revenue
Factor loan payable
Warrant derivative
Convertible notes payable - current
Total Current Liabilities
Total Liabilities
Commitments and Contingencies (Note 7)
Shareholders’ Equity (Deficit)
Series D Preferred Stock, $1,000 par value, 5,775 and 0 shares authorized, issued, and outstanding at
December 31, 2019 and December 31, 2018, respectively. Liquidation preference of $5,775,000 plus
any off balance sheet accrued dividends.
Series C Preferred Stock, $.0001 par value, 1,268 and 0 shares authorized, issued, and outstanding at
December 31, 2019 and December 31, 2018, respectively. No liquidation preference.
Common stock, $0.0001 par value, 200,000,000 shares authorized, 33,000,151 and 9,870,873 shares
issued and outstanding at December 31, 2019 and December 31, 2018, respectively
Additional paid-in capital
Accumulated deficit
Total Shareholders’ Equity (Deficit)
Total Liabilities and Shareholders’ Equity (Deficit)
$
$
$
$
$
$
$
25,063
2,075,380
174,042
2,215,497
254,070
4,480,000
9,224,052
1,029,885
215,688
10,469,625
2,536,871
364,309
-
125,645
-
4,216,307
7,243,132
7,243,132
4,816,485
-
3,300
41,820,078
(43,413,370)
3,226,493
10,469,625
$
5,459,884
985,854
1,542,835
379,915
222,000
-
8,590,488
224,196
36,014
8,850,698
1,962,901
927,569
107,776
1,304,512
23,507,247
-
27,810,005
27,810,005
-
-
987
20,152,107
(39,112,401)
(18,959,307)
8,850,698
The accompanying notes are an integral part of these financial statements.
F-3
TOUGHBUILT INDUSTRIES, INC.
Statements of Operations
Revenues, net of allowances
Metal goods
Soft goods
Total revenues, net of allowances
Cost of Goods Sold
Metal goods
Soft goods
Total cost of goods sold
Gross profit
Operating expenses:
Selling, general and administrative expenses
Litigation expense
Research and development
Total operating expenses
Loss from operations
Other income (expense)
Inducement cost for debt conversions
Interest expense
Change in fair value of warrant derivative
Total other income (expense)
Loss before provision for income taxes
Provision for income taxes
Net loss
Accretion of Redeemable Convertible Preferred Stock Dividend
Common Stock Deemed Dividend
Net loss attributable to common stockholders
Basic and Diluted Net Loss Per Share
Weighted Average Number of Shares Outstanding - Basic and Diluted
For The Years Ended December 31,
2019
2018
$
$
8,987,088
10,102,983
19,090,071
6,285,750
7,190,197
13,475,947
7,174,618
8,114,782
15,289,400
5,897,354
5,896,852
11,794,206
5,614,124
3,495,194
12,078,762
-
2,116,018
14,194,780
6,937,704
1,192,488
1,816,389
9,946,581
(8,580,656 )
(6,451,387)
-
(972,165)
5,251,852
4,279,687
(3,542,161)
(3,321,439)
(14,336,425)
(21,200,025)
(4,300,969)
(27,651,412)
-
-
(4,300,969)
(27,651,412)
-
-
(4,300,969)
(0.14)
31,007,384
$
$
(3,667,620)
(980,375)
(32,299,407)
(7.22)
4,476,403
$
$
The accompanying notes are an integral part of these financial statements.
F-4
TOUGHBUILT INDUSTRIES, INC.
Statements of Shareholders’ Equity (Deficit)
Series C Preferred Stock
Shares
Amount
$
Series D Preferred
Stock
Amount
$
Total
Stockholders’
Equity
Accumulated
Deficit
$ (11,460,989) $
Balance - January 1, 2018
Stock-based compensation expense
Stock issued in settlement of litigation
Conversion of Class B convertible preferred stock
Issuance of warrants to third parties for capital raise
Conversion of deferred salaries
Conversion of convertible debentures
Conversion of advance from officer
Conversion of notes payable
Sale of common stock in public offering
Sale of common stock in over-allotment to underwriters
Common stock deemed dividend
Accretion of redeemable convertible preferred stock dividend
Net loss
Balance - January 1, 2019
Issuance of common stock upon exercise of Series A Warrants,
net of cost
Issuance of common stock as inducement to exercise Series A
Warrants
Issuance of common stock upon exercise of Series B warrants
Issuance of common stock upon exercise of Placement Agent
Warrants
Issuance of Series C preferred stock upon exchange of Series A
and Series B warrants
Issuance of common stock upon Series C preferred (conversion)
Stock based compensation expense
Warrants issued in connection with convertible notes payable
Issuance of common stock upon conversion of convertible note
payable
Issuance of Series D preferred stock upon exchange of
convertible note payable
Net loss
Balance - December 31, 2019
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Shares
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4,268
(3,000)
-
-
-
-
-
1,268
$
-
-
-
-
-
-
-
-
-
-
-
-
5,775
5,775
Common Stock
Additional
Paid-in
Amount Capital
Shares
3,679,500 $
8,334
-
1,366,768
-
136,863
1,726,678
42,105
215,625
2,670,000
25,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
368 $ 1,711,197
557,041
939,538
4,961,431
594,293
650,086
6,267,924
199,996
782,728
8,013,961
121,907
(980,375)
(3,667,620)
1
-
137
-
14
172
4
22
267
2
-
-
-
-
424,116
42
2,172,638
-
- 16,192,218
508,940
51
(51)
1,620 14,582,751
-
4,004
-
16,818
-
-
-
-
-
3,000,000
-
-
-
300
-
-
3,671,024
(300)
336,637
595,000
-
3,000,000
300
293,454
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(Deficit)
(9,749,424 )
557,042
939,538
4,961,568
594,293
650,100
6,268,096
200,000
782,750
8,014,228
121,909
(980,375 )
(3,667,620 )
(27,651,412 )
2,172,680
-
14,584,371
16,818
3,671,024
-
336,637
595,000
293,754
4,816,485
(4,300,969 )
3,226,493
-
$
-
$
- 9,870,873 $
987 $ 20,152,107
$ (39,112,401)
$ (18,959,307 )
-
(27,651,412)
4,816,485
-
-
$ 4,816,485 33,000,151 $
-
-
-
-
-
3,300 $ 41,820,078
(4,300,969)
$ (43,413,370) $
The accompanying notes are an integral part of these financial statements.
F-5
TOUGHBUILT INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net loss
Adjustments to reconcile from net loss to net cash used in operating activities:
Depreciation
Amortization of debt discount and debt issuance cost
Change in fair value of warrant derivative
Stock issued in settlement of litigation
Stock-based compensation expense
Stock issued in lieu of deferred salaries
Changes in operating assets and liabilities
Accounts receivable, net
Factor receivables, net
Inventory
Prepaid assets
Other assets
Accounts payable
Accrued expenses
Deferred revenue
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from sales of common stock, net of costs
Proceeds from sale of common stock of overallotment, net of costs
Proceeds from exercise of Series A warrants
Proceeds from exercise of Placement Agent warrants
Proceeds from sale of convertible preferred stock, net of costs
Cash repayments of notes payable
Payment from advance from officer
Proceeds from notes payable, net of costs
Proceeds (Repayments) of factor loan payable
Net cash provided by financing activities
Net increase (decrease) in cash
Cash, beginning of period
Cash, end of period
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest
Income taxes
Supplemental disclosure of non-cash investing and financing activities:
Conversion of deferred salaries into common stock
Conversion of notes payable of officer into common stock
Conversion of notes payable into Class A Units
Conversion of convertible debentures into Class A Units
Conversion of convertible preferred stock into Class A Units
Issuance of Class B Warrants for capital raise
Accretion of redeemable convertible preferred stock dividend
Common stock deemed dividend
Issuance of warrants to investors
Issuance of warrants as compensation for capital raise
Issuance of common stock upon Series C preferred stock conversion
Issuance of common stock upon convertible note conversion
Issuance of Class D preferred stock upon convertible note conversion
Restricted promissory note in connection with convertible notes payable
Original issue discount
Conversion of Series B warrants into common stock
For The Year Ended December 31,
2019
2018
$
(4,300,969)
$
(27,651,412)
225,426
626,546
(5,251,852)
-
336,637
-
(1,089,526)
1,368,793
(1,835,582)
(32,070)
(179,674)
573,970
(563,260)
(107,776)
(10,229,337)
(1,031,115)
(1,031,115)
-
-
2,172,680
16,818
-
-
-
4,815,000
(1,178,867)
5,825,631
(5,434,821)
5,459,884
25,063
-
800
-
-
-
-
-
-
-
-
575,000
20,000
3,671,024
293,754
4,816,485
4,780,000
1,720,000
14,584,371
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
120,723
5,278,132
14,336,425
939,538
557,042
650,100
(832,446)
120,563
(281,243)
(169,500)
8,553
(368,323)
(951,567)
-
(8,243,415)
-
-
11,671,735
121,909
-
-
1,201,157
(114,000)
(200,000)
752,579
225,571
13,658,951
5,415,536
44,348
5,459,884
638,693
-
650,100
200,000
862,500
8,633,390
6,833,839
594,293
3,667,620
980,375
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these financial statements.
F-6
TOUGHBUILT INDUSTRIES, INC.
Notes to Financial Statements
December 31, 2019 and 2018
NOTE 1: NATURE OF OPERATIONS
Nature of Operations
In these notes, the terms “us”, “we”, “it”, “its”, “ToughBuilt”, the “Company” or “our” refer to ToughBuilt Industries, Inc. ToughBuilt Industries, Inc. was incorporated under
the laws of the State of Nevada on April 9, 2012 under the name Phalanx, Inc.
The Company designs and distributes innovative and superior quality tools and accessories to the home improvement community and the building industry. The Company
aspires to augment brand loyalty in part from the enlightened creativity of its end users throughout the global tool market industry. The Company holds exclusive licenses to
develop, manufacture, market, and distribute various home improvement and construction product lines for both Do-it-Yourself (“DIY”) and professional trade markets under
the TOUGHBUILT® brand name.
TOUGHBUILT® distributes products in the following categories, all designed and engineered in the United States and manufactured by third party vendors in China:
●
●
●
tool belts, tool bags and other personal tool organizer products;
complete line of knee pads for various construction applications; and
job-site tools and material support products consisting of a full line of miter-saws and table saw stands, saw horses/job site tables and roller stands.
On November 14, 2018, the Company completed its initial public offering (“IPO”), pursuant to which it sold 2,670,000 Class A Units (“Class A Unit”), each Unit consisting of
one share of common stock, par value $0.0001 per share, one Series A Warrant to purchase one share of common stock (“Series A Warrant”) and one Series B Warrant to
purchase one share of common stock (“Series B Warrant”) at a purchase price of $5.00 per Class A Unit. The Company received net proceeds from the IPO of $12,415,500
after deducting underwriting discounts and commission of $934,500. The Company incurred $743,765 in expenses related to the IPO.
On December 17, 2018, pursuant to the Underwriting Agreement dated November 8, 2018, by and between the Company and the underwriters named therein (the
“Representative”), the Representative on behalf of the underwriters agreed to partially exercise the over-allotment option to purchase an additional 25,000 shares of common
stock, par value $0.0001, at a price of $4.98 per share, 400,500 Series A Warrants, at a price of $0.01 per warrant and 400,500 Series B Warrants, at a price of $0.01 per
warrant. The Company received net proceeds from the exercise of over-allotment option of $121,909 after deducting commission and expenses of $10,601.
On January 24, 2019, the Company entered into exchange agreements with two institutional investors pursuant to which these investors exercised Series A Warrants to purchase
424,116 shares of its common stock, for total cash proceeds to the Company of $2,172,680, net of costs of $159,958. Those investors also exchanged Series A Warrants to
purchase 508,940 shares of its common stock into 508,940 shares of its common stock and received new warrants to purchase an aggregate of 933,056 shares of its common
stock. These new warrants have terms substantially similar to the terms of the Company’s Series A Warrants, except that the per share exercise price of the new warrants is
$3.67, and the warrants became exercisable July 24, 2019 (see Note 6).
On April 11, 2019, an investor exchanged its Series A Warrant to purchase up to 1,189,560 shares of common stock of the Company and a Series B Warrant to purchase up to
1,005,760 shares of common stock, which Series B Warrants are subject to certain anti-dilution provisions embedded in such Series B Warrants for 4,268 shares of Company’s
Series C Convertible Preferred Stock having the rights, preferences and privileges set forth in the Certificate of Designation, filed by the Company with the Secretary of State of
Nevada. The shares of Series C Convertible Preferred Stock are convertible into 4,268,000 shares of the Company’s common stock, and rights to convert into common stock are
subject to limitations on ownership at any one time of Company common stock up to 9.9% of the issued and outstanding shares of common stock of the Company; otherwise,
the Series C Convertible Preferred Stock has no rights not awarded to holders of common stock of the Company.
On April 16, 2019, the Company formed a wholly-owned subsidiary named ToughBuilt Technologies, Inc. dedicated to the continued advancement, production and marketing
of Company’s mobile solutions.
F-7
On August 19, 2019, the Company entered into a Securities Purchase Agreement with an institutional investor pursuant to which it sold $11.5 million aggregate principal
amount of promissory notes (at an aggregate original issue discount of 15%) to the investor in a transaction exempt from registration under Section 4(a)(2) of the Securities Act
of 1933, as amended. The first note (the “Series A Note”) has a face amount of $6.72 million for which the investor paid $5 million in cash. The second note (the “Series B
Note” and with the Series A Note, collectively referred to as the “Notes”) has a principal amount of $4.78 million for which the investor paid $4.78 million in the form of a full
recourse promissory note issued by the investor to the Company (the “Investor Note”) secured by $4.78 million in cash or cash equivalents of the investor (i.e :an original issue
discount of approximately 15% to the face amount of the Series B Note). No portion of the Series B Note may be converted into shares of our common stock (the “Common
Stock”) until the corresponding portion of the Investor Note has been prepaid to the Company in cash, at which point in time such portion of the Series B Note shall be deemed
“unrestricted”. The Investor Note is subject to optional prepayment at any time at the option of the investor and mandatory prepayment, at the Company’s option, subject to
certain equity conditions, at any time 45 Trading Days after the effectiveness of a resale registration statement (or otherwise the applicability of Rule 144 promulgated under the
Securities Act of 1933, as amended). Notwithstanding the foregoing, the Company may not effect a mandatory prepayment if the shares underlying the Series A Note and the
portion of the Series B Note that has become unrestricted exceeds 35% of the market capitalization of the Company.
On December 23, 2019, ToughBuilt Industries, Inc. (the “Company”) entered into an exchange agreement with an institutional investor pursuant to which the investor is
exchanging $5.5 million principal amount of its August 19, 2019 Series A Senior Secured Note for 5,775 shares of its Series D Preferred Stock, which was authorized by the
Company’s Board of Directors on December 21, 2019.
On February 24, 2020, ToughBuilt Industries, Inc. (the “Company”) closed on the public offering of 4.45 million shares of its common stock, for gross proceeds of $934,500
based upon the overallotment option arising from the closing of its January 28, 2020 public offering. In the January 28, 2020 public offering, the Company sold 43 million
shares of its common stock and 47.45 million warrants (each exercisable into ½ of a share of common stock for a total of 23.725 million shares of common stock) from which it
received gross proceeds of $9,030,000.
Basis of Presentation and Preparation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include
the accounts of the Company. The financial statements and accompanying notes are the representations of the Company’s management, who is responsible for their integrity
and objectivity. In the opinion of the Company’s management, the financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair
financial statement presentation.
F-8
Going Concern
The Company has incurred substantial operating losses since its inception, and expects to continue to incur significant operating losses for the foreseeable future and may never
become profitable. As reflected in the financial statements, the Company had an accumulated deficit of approximately $43.4 million at December 31, 2019, a net loss of
approximately $4.3 million, and approximately $10.2 million of net cash used in operating activities for the year ended December 31, 2019. The accompanying financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that
might result from the outcome of this uncertainty. The Company anticipates incurring additional losses until such time, if ever, that it can obtain marketing approval to sell, and
then generate significant sales, of its technology that is currently in development. As such it is likely that additional financing will be needed by the Company to fund its
operations and to develop and commercialize its technology. These factors raise substantial doubt about the Company’s ability to continue as a going concern. For the next
twelve months from issuance of this Annual Report on Form 10-K. The Company will seek to obtain additional capital through the sale of debt or equity financings or other
arrangements to fund operations; however, there can be no assurance that the Company will be able to raise needed capital under acceptable terms, if at all. The sale of
additional equity may dilute existing stockholders and newly issued shares may contain senior rights and preferences compared to currently outstanding shares of common
stock. Issued debt securities may contain covenants and limit the Company's ability to pay dividends or make other distributions to stockholders. If the Company is unable to
obtain such additional financing, future operations would need to be scaled back or discontinued. Due to the uncertainty in the Company's ability to raise capital, management
believes that there is substantial doubt in the Company's ability to continue as a going concern for twelve months from the issuance of these condensed financial statements.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. The Company did not have any cash
equivalents at December 31, 2019 and 2018, respectively.
Accounts Receivable
Accounts receivable represent income earned from the sale of tools and accessories for which the Company has not yet received payment. Accounts receivable are recorded at
the invoiced amount and adjusted for amounts management expects to collect from balances outstanding at period-end. The Company estimates the allowance for doubtful
accounts based on an analysis of specific accounts and an assessment of the customer’s ability to pay, among other factors. At December 31, 2019 and 2018, no allowance for
doubtful accounts was recorded.
The Company accounts for the transfer of accounts receivable to a third party under a factoring type arrangement in accordance with Accounting Standards Codification
(“ASC”) 860, “Transfers and Servicing”. ASC 860 requires that several conditions be met in order to present the transfer of accounts receivable as a sale. Even though the
Company has isolated the transferred (sold) assets and has the legal right to transfer its assets (accounts receivable), it does not meet the third test of effective control since its
accounts receivable sales agreement with a third-party factor requires it to be liable in the event of default by one of its customers. Because it does not meet all three conditions,
it does not qualify for sale treatment of its accounts receivable, and its debt thus incurred is presented as a secured loan liability, entitled “Loan payable - factor”, on its balance
sheet. The Company recorded a sales discount of $13,000 at December 31, 2019 and 2018, respectively.
Inventory
Inventory is valued at the lower of cost or net realizable value using the first-in, first-out method. The reported net value of inventory includes finished saleable products that
will be sold or used in future periods. The Company reserves for obsolete and slow-moving inventory. At December 31, 2019 and 2018, there were no reserves for obsolete and
slow-moving inventory.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation. The Company provides for depreciation on a straight-line basis over the estimated useful lives of
the assets which range from three to seven years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related assets when
they are placed into service. The Company evaluates property and equipment for impairment periodically to determine if changes in circumstances or the occurrence of events
suggest the carrying value of the asset or asset group may not be recoverable. Maintenance and repairs are charged to operations as incurred. Expenditures which substantially
increase the useful lives of the related assets are capitalized.
Long-lived Assets
In accordance with ASC 360, “Property, Plant, and Equipment”, the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances
indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price
of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the
acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use
of the asset; and current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life. Recoverability is
assessed based on the carrying amount of the asset compared to the estimated future undiscounted cash flows expected to result from the use and the eventual disposal of the
asset, as well as specific appraisal in certain instances. An impairment loss equal to the excess of the carrying value over the assets fair market value is recognized when the
carrying amount exceeds the undiscounted cash flows. The impairment loss is recorded as an expense and a direct write-down of the asset. No impairment loss was recorded
during the years ended December 31, 2019 and 2018, respectively.
Debt Issuance Costs
Costs incurred in connection with the issuance of debt are capitalized and amortized to interest expense over the term of the related debt using the straight-line method which
approximates the effective interest method. The costs associated with the outstanding loans payable are amortized over the term of the respective loan. The unamortized amount
is presented as a reduction of debt on the accompanying balance sheets.
F-9
Fair Value of Financial Instruments and Fair Value Measurements
The Company adheres to ASC 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC
820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not
require any new fair value measurements of reported balances.
ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on
the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC
820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable
inputs classified within Level 3 of the hierarchy).
●
●
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may
include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as
interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
●
Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The Company had no derivative instruments as of December 31, 2019 requiring such valuation.
Level 3 Fair Value Sensitivity
Warrant derivative
From time to time, the Company sells common stock warrants that are derivative instruments. The Company does not enter into speculative derivative agreements and does not
enter into derivative agreements for the purpose of hedging risks.
The fair value of the warrant derivative includes the estimated volatility and risk-free rate. The higher/lower the estimated volatility, the higher/lower the value of the debt
conversion feature liability. The higher/lower the risk-free interest rate, the higher/lower the value of the debt conversion feature liability.
The table below provides a reconciliation of the beginning and ending balances for the warrant derivative which is measured at fair value using significant unobservable inputs
(Level 3):
Balance, January 1, 2019
Series B Warrants exercised or expired during the three months ended March 31, 2019
Series B Warrants exchanged for Series C Preferred Stock
Change in the fair value of warrant derivative
Balance, December 31, 2019
Balance, January 1, 2018
Fair value of warrant derivative at Issuance date
Change in the fair value of warrant derivative
Balance, December 31, 2018
Revenue Recognition
$
$
$
$
23,507,247
(14,584,371)
(3,671,024)
(5,251,852)
-
-
9,170,822
14,336,425
23,507,247
In May of 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09 – Revenue from Contracts with Customers
(Topic 606). The core principle of the new accounting guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new accounting guidance provides a five-step
analysis of transactions to determine when and how revenue is recognized and requires enhanced disclosures about revenue.
The Company adopted ASC 606, including all related amendments, with a date of initial application of January 1, 2019 using the modified retrospective approach. The
Company applied the guidance to contracts with customers that were not substantially complete as of January 1, 2019. The results for reporting periods beginning after January
1, 2019 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported with the Company’s historic accounting under ASC 605 –
Revenue Recognition. For contracts, which were modified before the adoption date, the Company has not restated the contract for those modifications. Instead, the Company
reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the
transaction price, if necessary. The cumulative effect of initially applying ASC 606 is to be applied as an adjustment to the opening balance of retained earnings. The Company
analyzed this effect and found the adoption of ASC 606 did not have a material impact on its financial statements and revenue recognition is consistent with the Company’s
historical accounting policies.
The Company recognizes revenues when product is delivered to the customer, and the ownership is transferred. The Company’s revenue recognition policy is based on the
revenue recognition criteria established under the FASB – Accounting Standards Codification 606 “Revenue From Contracts With Customers” which has established a five-step
process to govern contract revenue and satisfy each element is as follows: (1) Identify the contract(s) with a customer; (2) identify the performance obligations in the contract;
(3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as you satisfy a
performance obligation. The Company records the revenue once all the above steps are completed. See Note 10 for further information on revenue recognition.
F-10
Income Taxes
The Company accounts for income taxes following the asset and liability method in accordance with the ASC 740 “Income Taxes.” Under such method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. The Company applies the accounting guidance issued to address the accounting for uncertain tax positions. This guidance clarifies the
accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements as well as
provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company classifies interest
and penalty expense related to uncertain tax positions as a component of income tax expense. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years that the asset is expected to be recovered or the liability settled. A valuation allowance is provided when it is more likely than not that some
portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period in
which related temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in its assessment of a valuation allowance.
Stock Based Compensation
The Company accounts for employee stock-based compensation in accordance with ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock units, and employee stock
purchases based on estimated fair values.
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula. This fair value is then amortized on a straight-line basis over the
requisite service periods of the awards, which is generally the vesting period. The Company’s determination of fair value using an option-pricing model is affected by the stock
price as well as assumptions regarding the number of highly subjective variables.
The Company estimates volatility based upon the historical stock price of the comparable companies and estimates the expected term for employee stock options using the
simplified method for employees and directors and the contractual term. The risk-free rate is determined based upon the prevailing rate of United States Treasury securities with
similar maturities.
The Company recognizes forfeitures as they occur rather than applying a prospective forfeiture rate in advance.
Earnings (Loss) Per Share
The Company computes net earnings (loss) per share in accordance with ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted net earnings
per share (“EPS”) on the face of the statement of operations. Basic EPS is computed by dividing earnings (loss) available to common shareholders (numerator) by the weighted
average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the
treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the
number of shares assumed to be purchased from the exercise of Class A and B warrants, convertible preferred stock and convertible debentures. Diluted EPS excludes all
dilutive potential shares if their effect is anti-dilutive.
Potentially dilutive securities that are not included in the calculation of diluted net loss per share because their effect is anti-dilutive are as follows (in common equivalent
shares):
Preferred shares
Warrants
Options
Series A and Series B Notes
Total anti-dilutive weighted average shares
December 31, 2019
December 31, 2018
Year Ended
7,043,000
11,449,884
1,063,419
5,602,750
25,159,053
517,875
364,859
125,000
1,007,734
F-11
Segment Reporting
The Company operates one reportable segment referred to as the tools segment. A single management team that reports to the Chief Executive Officer comprehensively
manages the business. Accordingly, the Company does not have separately reportable segments.
Recent Accounting Pronouncements
As an emerging growth company, the Company has elected to use the extended transition period for complying with any new or revised financial accounting standards pursuant
to Section 13(a) of the Securities and Exchange Act of 1934, as amended.
In June 2018, the FASB issued Accounting Standards Update (“ASU”) ASU 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-
Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting
for employee share-based compensation. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early
adoption is permitted. The Company is currently in the process of evaluating the impact of this guidance on our condensed financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The objective of this update is to increase transparency and comparability among organizations by
recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning
after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020 and is to be applied utilizing a modified retrospective approach. The
Company is currently evaluating this guidance to determine the impact it may have on its financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (“Topic 326”)”. The ASU introduces a new accounting model, the Current Expected
Credit Losses model (“CECL”), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected
credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. ASU 2016-13 is effective for annual period
beginning after December 15, 2022, including interim reporting periods within those annual reporting periods. The Company is currently evaluating this guidance to determine
its impact it may have on its financial statements.
In December 2019, the FASB Issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting of Income Taxes”, which is intended to simplify various aspects
related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to
improve consistent application. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption
permitted. The Company is currently evaluating this guidance to determine its impact it may have on its financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities.” The main objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful
information. The new guidance addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This ASU is effective for fiscal
years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company is currently evaluating this guidance to
determine the impact it may have on its financial statements.
F-12
NOTE 3: FACTOR RECEIVABLES, LETTERS OF CREDIT PAYABLE AND LOAN PAYABLE
In April 2013, the Company entered into a financing arrangement with a third-party purchase order financing company (the “Factor”), whereby the Company assigned to the
Factor selected sales orders from its customers in exchange for opening a letter of credit (“LC”) with its vendors to manufacture its products. The Company paid an initial fixed
fee of 5% of the cost of products it purchased from the vendor upon opening the LC, and 1% each 30 days thereafter, after the LC is funded by the Factor until such time as the
Factor receives the payment from the Company’s customers. The factoring agreement provides for full recourse against the Company for factored accounts receivable that are
not collected by the Factor for any reason, and the collection of such accounts receivable is fully secured by substantially all of the receivables of the Company. Financial
information on factoring is set forth in the below table:
Factor payables, beginning balance
New factorings
Payments, net of returns and discounts
Factor loan payable, net
NOTE 4: INVENTORY
Inventory consists of the following:
For the Year Ended December 31,
2018
2019
$
$
1,304,512
-
2,891,727
(4,070,594)
125,645
$
$
1,078,941
-
5,532,225
(5,306,654)
1,304,512
Finished goods
$
2,215,497
$
379,915
Description
December 31, 2019
December 31, 2018
F-13
NOTE 5: PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
Furniture
Computers
Production equipment
Tooling and molds
Website design
Leasehold Improvements
Less: accumulated depreciation
Property and Equipment, net
December 31, 2019
December 31, 2018
$
$
111,490
254,243
182,446
605,485
360,943
42,249
(526,971)
1,029,885
$
$
61,722
88,615
75,233
249,690
9,850
37,899
(298,813)
224,196
Depreciation expense for the years ended December 31, 2019 and 2018, was $225,426 and $120,723, respectively.
NOTE 6 - NOTES PAYABLE
On June 19, 2018, the Company executed a promissory note in the principal amount of $114,000 with a third party which was initially due and payable on September 30, 2018.
The Company received cash proceeds of $100,000 from the promissory note. The promissory note is unsecured, bears an interest rate of 1.9% per month, and was issued with
an original issue discount of 14%. On September 30, 2018, the Company and the third party mutually agreed to extend the maturity date of the promissory note until the earlier
of three business days after the closing of the Company’s IPO and November 15, 2018. The holder of the promissory note was paid $7,500 as extension fee. The Company
recorded $14,000 as debt discount and a $7,500 extension expense as interest expense for the year ended December 31, 2018. In addition, the Company recorded $10,686 as
interest expense on the promissory note for the year ended December 31, 2018.
On August 31, 2018, the Company executed six (6) unsecured promissory notes, with an original issuance debt discount of 15%, for a cumulative principal sum of $862,500
and gross proceeds of $750,000. The Company promised to pay the promissory note holders the aggregate principal sum of $862,500 on the earlier of (i) the third trading day
after the closing of the Company’s IPO and (ii) November 30, 2018. At closing on September 4, 2018, the Company received cash proceeds of $652,579, which was the gross
proceeds of $750,000, net of placement agent fees of $62,850, legal fees of $30,571, and escrow fees if $4,000. In addition, the Company issued to the six note holders an
aggregate of 18,750 shares of Class B Convertible Preferred Stock, and 7,500 warrants to the placement agent (Note 10). On November 5, 2018, the holders of the six (6)
promissory notes agreed to accept unregistered Class A Units at a per Unit conversion price equal to 80% of the per Unit purchase price in the Company’s IPO, and at the IPO
closing, the Company issued 215,625 unregistered Class A Units upon the conversion of the aggregate amount of the notes at a Unit purchase price of $4.00 (see Note 10).
Included in Class A Units were 215,625 Series A Warrants and 215,625 Series B Warrants. The Series A Warrants were classified within equity and the Series B Warrants were
classified as a warrant derivative with a fair value determined to be $295,375 on the date of issuance. The Company recognized an expense of $215,625 as inducement payment
for this conversion. In addition, the Company recorded a debt issuance cost of $187,500 and a debt discount of $209,921 as interest expense for the year ended December 31,
2018.
F-14
SENIOR SECURED CONVERTIBLE NOTES
On August 19, 2019, the Company entered into a Securities Purchase Agreement with an institutional investor pursuant to which it sold $11.5 million aggregate principal
amount of promissory notes (at an aggregate original issue discount of 15%) to the investor in a transaction exempt from registration under Section 4(a)(2) of the Securities Act
of 1933, as amended. The first note (the “Series A Note”) has a face amount of $6.72 million for which the investor paid $5 million in cash. The second note (the “Series B
Note” and with the Series A Note, collectively referred to as the “Notes”) has a principal amount of $4.78 million for which the investor paid $4.78 million in the form of a full
recourse promissory note issued by the investor to the Company (the “Investor Note”) secured by $4.78 million in cash or cash equivalents of the investor (i.e :an original issue
discount of approximately 15% to the face amount of the Series B Note). No portion of the Series B Note may be converted into shares of our common stock (the “Common
Stock”) until the corresponding portion of the Investor Note has been prepaid to the Company in cash, at which point in time such portion of the Series B Note shall be deemed
“unrestricted”. The Investor Note is subject to optional prepayment at any time at the option of the investor and mandatory prepayment, at the Company’s option, subject to
certain equity conditions, at any time 45 Trading Days after the effectiveness of a resale registration statement (or otherwise the applicability of Rule 144 promulgated under the
Securities Act of 1933, as amended). Notwithstanding the foregoing, the Company may not effect a mandatory prepayment if the shares underlying the Series A Note and the
portion of the Series B Note that has become unrestricted exceeds 35% of the market capitalization of the Company. The Company incurred $485,000 in debt issuance costs on
these notes which has been recorded as a debt discount.
The Notes are senior secured obligations of the Company secured by a lien on all assets of the Company, bear no interest (unless an event default has occurred and is
continuing) and mature on December 31, 2020. The Notes will be convertible at $1.00 into a fixed number of shares (the “Conversion Shares”). The Notes are convertible at the
Holder’s option, in whole or in part, at any time after closing. The Conversion Price will be subject to adjustment for stock dividends, stock splits, anti-dilution and other
customary adjustment events.
The Company shall repay the Principal Amount of the Notes in 12 installments, with the first installment starting on February 1, 2020 (each, an “Installment Date”).
Installments 1-3 shall be 1/36th of the Principal Amount, Installments 4-6 shall be 1/18th of the Principal Amount and Installments 7-12 shall be 1/8th of the Principal Amount.
The repayment amount shall be payable in cash, or, subject to the satisfaction of equity conditions, at the option of the Company, in registered Common Stock or a combination
of cash and registered Common Stock. However, if the 30-day volume weighted average price of the Common Stock (the “VWAP”) of the Company falls below 50% of the
market price of a share of the Company’s common stock or the Company fails to satisfy certain other equity conditions, the repayment amount is payable in shares of Common
Stock only unless the Investor(s) waive any applicable equity condition. If the Company elects to satisfy all or any portion of an installment in shares of Common Stock, the
Company will predeliver such shares of Common Stock to the investor on the 23rd trading day prior to the applicable Installment Date, with a true-up of shares (if necessary)
on the Installment Date. Any excess shares of Common Stock shall be applied to subsequent installments.
The shares used to meet a Principal Repayment (“Installment Shares”) would be valued at a conversion price calculated as the lesser of (i) 85% of the arithmetic average of the
three lowest daily VWAPs of the 20 trading days prior to the payment date or (ii) 85% of the VWAP of the trading day prior to payment date (“Installment Price”) with a floor
of $0.10.
All amortization payments shall be subject to the Investors’ right to (a) defer some or all of any Installment Payment to a subsequent Installment Date; and (b) at any time
during an installment period, convert up to four times the installment amount at the Installment Price; provided shares received pursuant to such accelerated conversions shall be
subject to a leak-out provision that solely limits sales of such shares received by the investor in such accelerated conversion (and not any other sales) to the greater of (a)
$500,000 per trading day or (b) 40% of the volume traded on a given day as reported by Bloomberg LP.
F-15
Upon completion of a Change of Control, the Holders may require the Company to purchase any outstanding Notes in cash at 125% of par plus accrued but unpaid interest. The
Company shall have the right to redeem any and all amounts of the outstanding Note at 125% of the greater of (a) Principal Amount plus accrued but unpaid interest (if any), or
(b) Conversion Value plus accrued but unpaid interest (if any) provided the Company has satisfied certain equity conditions. The Company must give the Investor(s) ninety
(90) business days’ prior notice of any such redemption.
Prior to all outstanding amounts under the Note being repaid in full, the Company will not create any new encumbrances on any of its or its subsidiaries’ assets without the
prior written consent of the Lender, with a carveout for a working capital facility of which the details are to be determined. The Notes shall also be subject to standard events of
default and remedies therefor.
The Company filed a registration statement (“Effectiveness Date”) on Form S-1 covering the resale of the shares underlying the Series A Note, the Series B Note and Warrants
which was declared effective on October 15, 2019.
In connection with the granting of the Notes, the Company shall issue detachable warrants to the Investor, exercisable in whole or in part at any time during the five years from
the date of issuance, in amount equal to 50% of the conversion shares underlying the Notes and have an exercise price of $1.00 per share. To the extent the Company has a
change of control or a spinoff, the warrants provide for a put for the warrants to the Company at their Black- Scholes Valuation. The value of the warrants amounted to
$575,000 and was recoded as debt discount in the accompanying balance sheet.
Until the 3 year anniversary of the maturity date, the investor shall have the right (but not the obligation) to participate in 50% of any subsequent equity or debt issuance.
Consummation of the transaction has been subject to certain conditions precedent, including the Company agrees to procure an approval of this transaction at its annual
shareholder meeting scheduled no later than 180 days after the Closing Date and agrees to procure voting agreements from principal shareholders prior to closing of the
Company.
On December 23, 2019, ToughBuilt Industries, Inc. (the “Company”) entered into an exchange agreement with an institutional investor pursuant to which the investor is
exchanging $5.5 million principal amount of its August 19, 2019 Series A Senior Secured Note for 5,775 shares of its Series D Preferred Stock, which was authorized by the
Company’s Board of Directors on December 21, 2019.
As of December 31, 2019, the principal amount of notes payable - current was $5,602,750. Amortization of debt discount and debt issuance costs for the year ended December
31, 2019 amounted to $626,546. The unamortized amount of debt discount and debt issuance cost as of December 31, 2019 was $1,386,443.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Lease Commitments
On January 3, 2017, the Company executed a non-cancellable operating lease for its principal office with the lease commencing February 1, 2017 for a five (5) year term. The
Company paid a security deposit of $29,297, which is included in other assets on the accompanying balance sheets. The lease required the Company to pay its proportionate
share of direct costs estimated to be 22.54% of the total property, a fixed monthly direct cost of $6,201 for each month during the term of the lease, and monthly rental pursuant
to the lease terms.
We entered into a lease for office space at 8669 Research Drive, in Irvine, CA, which is to replace the current corporate headquarters. The lease commenced on December 1,
2019 with no rent due until April 1, 2020. From April 1, 2020 through March 31, 2025, base rent will be due on the first of each month in the amount of $25,200 escalating
annually on December 1 of each year to $29,480 beginning December 1, 2023. The Company paid an initial amount of $68,128 comprising the rent for April 2020, a security
deposit and the amount due for property taxes, insurance and association fees.
Future minimum lease commitments of the Company are as follows:
For the years ending December 31,
2020
2021
2022
2023
2024
2025
Total
Amount
383,601
502,872
343,821
341,293
353,765
88,411
2,013,793
$
$
The Company recorded rent expense of $201,540 and $164,626 for the years ended December 31, 2019 and 2018, respectively.
Other Commitments
On August 30, 2018, the Company entered into an agreement with a customer to pay a slotting allowance of $1,000,000 payable in three annual installments of $333,334 on
March 1, 2019, $333,333 on March 1, 2020 and $333,333 on March 1, 2021.
Employment Agreements with Officers
On January 3, 2017, the Company entered into an employment agreement with its President and Chief Executive Officer for a five-year term. The officer received a sign-on-
bonus of $50,000 and is entitled to an annual base salary of $350,000 to increase by 10% each year commencing on January 1, 2018. The officer was also granted a stock option
to purchase 125,000 shares of the Company’s common stock at an exercise price of $10.00 per share.
F-16
On January 3, 2017, the Company entered into an employment agreement with its Vice-President of Design and Development for a five-year term. Under the terms of this
agreement, the officer received a sign-on-bonus of $35,000 and is entitled to an annual base salary of $250,000 beginning on December 1, 2016 to increase by 10% each year
commencing on January 1, 2018.
On January 3, 2017, the Company entered into an employment agreement with its Chief Operating Officer and Secretary for a three-year term. Under the terms of this
agreement, the officer is entitled to an annual base salary of $180,000 beginning on January 1, 2017 to increase by 10% each year commencing on January 1, 2018.
On January 3, 2017, the Company entered into an employment agreement with its Chief Financial Officer for a three-year term. Under the terms of this agreement, the officer is
entitled to an annual base salary of $250,000 beginning on January 1, 2017 to increase by 10% each year commencing on January 1, 2018.
The employment agreements also entitle the officers to receive, among other benefits, the following compensation: (i) eligibility to receive an annual cash bonus at the sole
discretion of the Board and as determined by the Compensation Committee commensurate with the policies and practices applicable to other senior executive officers of the
Company; (ii) an opportunity to participate in any stock option, performance share, performance unit or other equity based long-term incentive compensation plan
commensurate with the terms and conditions applicable to other senior executive officers and (iii) participation in benefit plans, practices, policies and programs provided by the
Company (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs)
to the extent available to the Company’s other senior executive officers.
On September 30, 2017, the officers and an employee agreed to defer 30% of their salaries starting September 30, 2017 to September 30, 2018 for payment after the completion
of the IPO. On September 30, 2018, the officers and employees agreed to convert their deferred compensation of $650,100, owed as of September 30, 2018, into shares of the
Company’s common stock upon the consummation of an IPO. Concurrent with the closing of the IPO on November 14, 2018, the Company issued 136,863 unregistered shares
of common stock upon conversion of $650,100 of accrued and unpaid compensation of officers and directors at a conversion price of $4.75 per share (see Note 10).
On December 24, 2018, the Board approved $300,000 in cash bonuses for the two founders and an officer of the Company, payable by January 31, 2019. The Company has
accrued the bonus expense as of December 31, 2018.
Litigation Costs and Contingencies
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm business. Other than as set forth below, management is
currently not aware of any such legal proceedings or claims that could have, individually or in the aggregate, a material adverse effect on our business, financial condition, or
operating results.
1.
Edwin Minassian v. Michael Panosian and ToughBuilt Industries, Inc., Los Angeles Superior Court Case No. EC065533.
On August 16, 2016, Plaintiff Edwin Minassian filed a complaint against Defendants ToughBuilt Industries, Inc. (the “Company”) and Michael Panosian in the
Superior Court of California, County of Los Angeles, Case No. EC065533. The complaint alleges breach of oral contracts to pay Plaintiff for consulting and finder’s fees, and to
hire him as an employee. The complaint further alleged claims of fraud and misrepresentation relating to an alleged payment in exchange for stock in the Company. The
complaint seeks unspecified monetary damages, declaratory relief, stock in the Company, and other relief according to proof.
On April 12, 2018, the Court entered judgments of default against the Company and Mr. Panosian in the amounts of $7,080 and $235,542, plus awarding Mr.
Minassian a 7% ownership interest in the Company (the “Judgments”). Mr. Minassian served notice of entry of the judgments on April 17, 2018 and the Company and Mr.
Panosian received notice of the entry of the default judgments on April 19, 2018.
The Company and Panosian satisfied the judgments on September 14, 2018 by payment of $252,949 to Plaintiff Minassian and by issuing Plaintiff Minassian 376,367
shares of common stock of the Company. On October 18, 2018, the Company and Panosian filed a Notice of Appeal from the Order denying their motion for relief from the
above-referenced default judgment.
On October 1, 2019, the Second Appellate District of the California Court of Appeal issued its opinion reversing the trial court’s order denying ToughBuilt’s motion
for relief from the default judgment and directing the trial court to grant ToughBuilt’s motion for relief, including allowing ToughBuilt to file an Answer and contest
Minassian’s claims.
The appellate court recently issued an remittitur officially transferring the matter from the appellate court back to the trial court for further proceedings consistent with
its ruling, and the Company and Panosian have filed an Answer to the Complaint. The trial court has not yet set a trial date, and discovery in this case is just now beginning. The
Company intends to vigorously defend the Complaint and seek to recover the compensation and stock previously paid to satisfy the now vacated default judgment. The
Company believes it has a strong position, but cannot quantify the likelihood that it will prevail in the above litigation, or any likely liability or recoveries, because of the current
status of the case and the unpredictability of litigation.
2. Design 1st v. ToughBuilt Industries, Inc., American Arbitration Association
On November 26, 2019, Claimant Design 1st filed a Demand for Arbitration against ToughBuilt Industries seeking $169,094.35 in damages, plus attorney’s fees and
costs. Claimaint contends the Company breached a written contract by failing to pay for design services. ‘The Company filed a Cross-Demand for Arbitration against Claimant
seeking $394,956.07 in damages, plus attorney’s and costs alleging Claimant breached the same contract by performing negligent services, failing to meets its obligations under
the contract, and fraudulent billing. An arbitration hearing has not yet been scheduled by the arbitrator, Grant Kim, and discovery has not yet commenced. The Company
intends to vigorously defend the Demand for Arbitration. The Company believes it has a strong position, but cannot quantify the likelihood that it will prevail in the above
litigation, or any likely liability or recoveries, because of the current status of the case and the unpredictability of litigation.
The Company has recorded the litigation expense of $0 and $1,192,488 for the years ended December 31, 2019 and 2018, respectively.
In the normal course of business, the Company incurs costs to hire and retain external legal counsel to advise it on regulatory, litigation and other matters. The Company
expenses these costs as the related services are received. If a loss is considered probable and the amount can be reasonable estimated, the Company recognizes an expense for
the estimated loss.
NOTE 8: STOCKHOLDERS’ EQUITY
At December 31, 2019, the Company had 200,000,000 shares of common stock and 5,000,000 shares of Series C preferred stock authorized, both with a par value of $0.0001
per share. In addition, the Company had 5,775 shares of Series D preferred stock, authorized, with a par value of $1,000 per share.
On September 13, 2018, the Company effectuated a reverse stock split (the “Reverse Split”) of its issued and outstanding common stock, preferred stock, warrants and options
(collectively the “Equity Instruments”). As a result of the Reverse Split, each (2) units of Equity Instruments issued and outstanding prior to the Reverse Split were converted
into one (1) unit of Equity Instrument.
Common Stock and Class A Units
On August 22, 2018, the Company issued 8,334 restricted shares of its common stock valued at $42,801 to a consultant for providing business advisory and consulting
services, the expense was recorded as stock-based compensation expense.
On November 14, 2018, the Company consummated its IPO pursuant to which it sold a total of 2,670,000 Class A Units, each Unit consisting of one share of common stock,
par value $0.0001 per share, and a Series A Warrant to purchase one share of common stock and a Series B Warrant to purchase one share of common stock, on an offer price
of $5.00 for each unit of a share of common stock, a Series A Warrant and a Series B Warrant (“Class A Unit”). The Company received net proceeds from the IPO of
$12,415,500 after deducting underwriting discounts and commission of $934,500. The Company incurred $743,765 in expenses related to the IPO.
Concurrent with the closing of the IPO on November 14, 2018, the following private transactions were consummated in accordance with the related agreements (Notes 6, 7, 8
and 9), all in transactions exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended:
(a) 1,366,768 unregistered Class A Units were issued upon the conversion of outstanding shares of Class B Convertible Preferred Stock at a conversion price of $3.50
per Class A Unit.
(b) 42,105 unregistered shares of common stock were issued upon conversion of the $200,000 principal amount of a promissory note due to an officer at a conversion
price of $4.75 per share.
F-17
(c) 1,726,678 unregistered Class A Units were issued upon conversion of outstanding convertible debt instruments (consisting of all principal amounts and accrued and
unpaid interest through the date of the IPO) at a conversion price of $5.00 per Unit.
(d) 136,863 unregistered shares of common stock were issued upon conversion of $650,100 of accrued and unpaid salaries to officers and directors at a conversion price
of $4.75 per share.
(e) 215,625 unregistered Class A Units issued upon the conversion of outstanding principal amount of unsecured promissory notes at a conversion price of $4.00 per
Unit.
On December 17, 2018, pursuant to the Underwriting Agreement dated November 8, 2018, by and between the Company and the underwriters named therein (the
“Representative”), the Representative, on behalf of the underwriters, agreed to partially exercise the over-allotment option to purchase an additional 25,000 shares of common
stock, at a price of $4.98 per share, 400,500 Series A Warrants, at a price of $0.01 per warrant and 400,500 Series B Warrants, at a price of $0.01 per warrant. The Company
received net proceeds from the exercise of over-allotment option of $121,909 after deducting commission and expenses of $10,601.
As of December 31, 2019, the Company had 33,000,151 shares of common stock issued and outstanding. At December 31, 2018, the Company had 9,870,873 shares of
common stock issued and outstanding.
Warrants
Placement Agent Warrants
The Company has issued warrants to the placement agents to purchase one share of its common stock at an exercise price of $12.00 per share. The warrants issued in its
October 2016 Private Placement expire on October 17, 2021, and the warrants issued in its March 2018 Private Placement, May 2018 Private Placement and August 2018
Financing expire on September 4, 2023. The exercise price and number of shares of common stock or other securities issuable on exercise of such warrants are subject to
customary adjustment in certain circumstances, including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation of the Company. As of
December 31, 2019, and 2018, 44,373 warrants and 45,775 warrants, respectively, have been issued to the placement agents and are outstanding and are currently exercisable.
Class B Convertible Preferred Stock and Class B Warrants
On January 8, 2018, the Company offered for sale a minimum of 160,000 units and a maximum of 300,000 units to certain accredited investors, with each such unit consisting
of (i) one-half (1/2) share of Company’s Class B Convertible Preferred Stock Class B Preferred Stock, par value of $0.0001 per share, and (ii) one-half (1/2) of a Class B
Warrant to purchase one-half (1/2) share of the Company’s common stock, par value $0.0001 per share. On March 14, 2018, the Company sold 162,000 units at a $5.00 per
unit purchase price for gross proceeds of $810,000 and received cash proceeds of $613,200, net of commissions of $64,800 earned by the placement agent on the capital raise,
$128,000 in legal fees, and $4,000 in escrow fees. Each Class B Warrant has an initial exercise price of $12.00 per share, subject to adjustment, and was exercisable for a period
of five (5) years from the date of issuance. An aggregate of 81,000 shares of Class B Convertible Preferred Stock and 81,000 Class B Warrants were issued. As this transaction
met certain accounting criteria, the Class B Warrants were recorded in stockholders’ equity and were not accounted for as derivatives.
F-18
On May 2, 2018, the Company offered for sale 140,000 units with the same terms as the units sold in the earlier 2018 transaction, and on May 15, 2018, the Company sold all
140,000 for gross proceeds of $700,000, and received cash proceeds of $587,957, net of commissions and fees of $74,574 earned by the placement agent on capital raise,
$33,469 in legal fees, and $4,000 in escrow fees. As this transaction met certain accounting criteria, the Class B Warrants are recorded in stockholders’ equity and were not
accounted for as derivatives.
On August 28, 2018, the holders of the Company’s convertible debentures and the Company agreed to extend the maturity date of those debentures to September 30, 2018, and
the holders received on a pro rata basis, 7,500 shares of the Company’s Class B Convertible Preferred Stock valued at $75,000 (Note 6).
On September 4, 2018, the Company issued to the six (6) promissory note holders an aggregate of 18,750 shares of Class B Convertible Preferred Stock valued at $187,500
pursuant to the August 31, 2018 financing agreement (Note 7).
On October 15, 2018, the holders of the convertible debentures were issued 15,000 shares of Class B Convertible Preferred Stock valued at $150,000 in exchange for extension
of the maturity date of those debentures to October 15, 2018. This date was subsequently extended to the earlier of the closing of the Company’s IPO and November 15, 2018
for payment of an additional 15,000 shares of Class B Convertible Preferred Stock valued at $150,000 (Note 6).
The holders of the Class B Warrants did not exercise any of their warrants during the year ended December 31, 2018. Class B Warrants are exercisable at December 31, 2018 at
the exercise price of $12.00 per share and such warrants expire between October 17, 2021 and May 15, 2023.
Concurrent with the closing of the IPO on November 14, 2018, the Company issued 1,366,768 unregistered Class A Units upon the conversion of outstanding shares of Class B
Convertible Preferred Stock at a conversion price of $3.50 per Class A Unit. Included in Class A Units were 1,366,768 Series A Warrants and 1,366,768 Series B Warrants. The
Series A Warrants were classified within equity and the Series B Warrants were classified as a warrant derivative with a fair value determined to be $1,872,271 on the date of
issuance.
The Company had no shares of Class B Convertible Preferred Stock, 265,500 Class B Warrants, and 45,775 Placement Agent Warrants issued and outstanding as of December
31, 2018. The Company had no shares of Class B Convertible Preferred Stock, 265,500 Class B Warrants, and 44,373 Placement Agent Warrants issued and outstanding at
December 31, 2019.
The IPO and Series A Warrants and Series B Warrants issued thereunder
On November 14, 2018, the Company consummated its IPO whereby it sold a total of 2,670,000 Class A Units, each Unit consisting of one share of common stock, par value
$0.0001 per share, and a Series A Warrant to purchase one share of common stock and a Series B Warrant to purchase one share of common stock, on an offer price of $5.00
for each unit of a share and a Series A Warrant and a Series B Warrant. The Company issued 2,670,000 Series A Warrants and 2,670,000 Series B warrants upon consummation
of its IPO. The Series A Warrants were classified within equity and the Series B Warrants were classified as a warrant derivative with a fair value determined to be $3,657,507
on the date of issuance.
Concurrent with the closing of the IPO on November 14, 2018, the Company issued 1,366,768 Series A Warrants and 1,366,768 Series B Warrants upon the conversion of
outstanding shares of Class B Convertible Preferred Stock. In addition, the Company issued 1,726,678 Series A Warrants and Series B Warrants upon the conversion of
outstanding convertible debt instruments consisting of all principal amounts and accrued and unpaid interest through the date of the IPO (Note 6). The Company also issued
215,625 Series A Warrants and 215,625 Series B Warrants upon conversion of outstanding principal amount of the unsecured promissory notes (Note 7).
On December 17, 2018, pursuant to the Underwriting Agreement dated November 8, 2018, by and between the Company and the underwriters named therein (the
“Representative”), the Representative, on behalf of the underwriters, agreed to partially exercise the over-allotment option to purchase 400,500 Series A Warrants, at a price of
$0.01 per warrant and 400,500 Series B Warrants, at a price of $0.01 per warrant. The Series A Warrants were classified within equity and the Series B Warrants were classified
as a warrant derivative with a fair value determined to be $980,375 on the date of issuance.
April 2019 Exchange
On April 11, 2019, Hillair Capital Investment LP exchanged its ToughBuilt Industries, Inc. Series A Warrant to purchase up to 1,189,560 shares of common stock of the
Company and a Series B Warrant to purchase up to 1,005,760 shares of Common Stock, which Series B Warrants are subject to certain anti-dilution provisions imbedded in
such Series B Warrants for 4,268 shares of Company’s Series C Convertible Preferred Stock having the rights, preferences and privileges set forth in the Certificate of
Designation, filed by the Company with the Secretary of State of Nevada The shares of Series C Convertible Preferred Stock are convertible into 4,268,000 shares of the
Company’s common stock, and rights to convert into common stock are subject to limitations on ownership at any one time of Company common stock up to 9.9% of the issued
and outstanding shares of common stock of the Company; otherwise, the Series C Convertible Preferred Stock has no rights not awarded to holders of common stock of the
Company. Hillair Capital’s right to convert into shares of common stock is subject to daily volume limitations as follows:
F-19
Up to 500,000 shares of daily volume, may trade 15% of the volume
From 500,001 shares through 1,000,000 shares of daily volume, may trade 20% of the volume
From 1,000,001 shares of daily volume, may trade 25% of the volume.
All Series C Convertible Preferred Stock has been converted into common stock as of December 31, 2019.
Series D Preferred Stock
On December 23, 2019, we exchanged $5,500,000 principal amount of our Senior Secured Convertible Notes for 5,775 shares of our Series D Preferred Stock, all of which
remained issued and outstanding on December 31, 2019.
The terms of the Series D Preferred Stock are as follows:
Stated Value
Dividends:
$1,000 per share, subject to increase for (a) any capitalized dividends and (b) on June 30, 2020 (and each six month anniversary thereafter), the Stated
Value shall increase by 5%.
The Series D Preferred Stock shall participate with any dividends paid to the holders of Common Stock. In addition, from now until June 30, 2020, shall
accrue dividends at a rate of 8% per annum and from June 30, 2020 and thereafter, at 12% per annum, which shall capitalize to the stated value of the
Series D Preferred Stock on a monthly basis. Upon the occurrence of certain triggering events, the Series D Preferred Stock shall accrue additional
dividends at a default rate set forth in the definitive documentation.
Conversion Price:
The Investor may elect to convert the Series D Preferred Stock into shares of Common Stock at a conversion price (the “Conversion Price”) equal to
$1.00 per share. The Conversion Price of the Series D Preferred Stock shall be subject to customary adjustments for stock splits, dividends,
recapitalizations and similar events. The Series D Preferred Stock shall be alternatively convertible at the Alternate Conversion Price (as defined in our
previously outstanding notes (the “Existing Notes”).
Voting Rights
Series D Preferred Stock vote together on all matters as a class, with the approval of a majority of the Series D Preferred Stock required to amend or
waive any term or condition of the Series D Preferred Stock. Series D Preferred Stock shall vote on an as-converted basis with the holders of Common
Stock on all matters (subject to applicable ownership blockers, including not exceeding 19.9% in any event).
Company Exchange
Right
The Company shall have the right to exchange the Series D Preferred Stock, at its option back into senior secured convertible notes in the form of the
Existing Notes, at any time, with such New Exchange Notes having an initial outstanding amount equal to the stated value, accrued and unpaid
dividends and any other amounts outstanding with respect to such Series D Preferred Stock subject to such exchange.
Limitations on
Beneficial
Ownership:
Exchange Cap
Notwithstanding anything herein to the contrary, no Preferred Stock of any Investor shall be issued or shall be convertible if after such conversion such
Investor would beneficially own more than 4.99% of the shares of Common Stock then outstanding (as defined under Section 13(d) of the Securities
Act of 1933, as amended).
The Series D Preferred Stock shall share the Exchange Cap of the August 19, 2019 Series A Note and Series B Note and, to the extent the Existing Notes
have been converted into 19.9% of the Common Stock, shall not be convertible until such time as stockholder approval has been obtained and/or
additional shares of Common Stock are eligible to be converted thereunder in compliance with the rules and regulations of the Principal Market.
F-20
The 2016 Equity Incentive Plan
The 2016 Equity Incentive Plan (the “2016 Plan”) was adopted by the Board of Directors and approved by the shareholders on July 6, 2016. The awards per 2016 Plan may be
granted through July 5, 2026 to the Company’s employees, consultants, directors and non-employee directors provided such consultants, directors and non-employee directors
render good faith services not in connection with the offer and sale of securities in a capital-raising transaction. The maximum number of shares of our common stock that may
be issued under the 2016 Plan is 2,000,000 shares, which amount will be (a) reduced by awards granted under the 2016 Plan, and (b) increased to the extent that awards granted
under the 2016 Plan are forfeited, expire or are settled for cash (except as otherwise provided in the 2016 Plan). No employee will be eligible to receive more than 125,000
shares of common stock in any calendar year under the 2016 Plan pursuant to the grant of awards.
On January 3, 2017, the Board of Directors of the Company approved and granted to the President/Chief Executive Officer of the Company, an option to purchase One Hundred
and Twenty-Five Thousand (125,000) shares of the Company’s Common Stock (“Option”) under the Company’s 2016 Plan. The Option will have an exercise price that is no
less than $10.00 per share and will vest over four (4) years, with 25% of the total number of shares subject to the Option vesting on the one (1) year anniversary of the date of
grant and, the remainder vesting in equal installments on the last day of each of the thirty-six (36) full calendar months thereafter. Vesting will depend on the Officer’s
continued service as an employee with the Company and will be subject to the terms and conditions of the 2016 Plan and the written Stock Option Agreement governing the
Option. As of December 31, 2017, the Company estimated the fair value of the options using the Black-Scholes option pricing model was $448,861. The Company recorded
compensation expense of $112,215 for each of the years ended December 31, 2019 and 2018, respectively. The key valuation assumptions used consist, in part, of the price of
the Company’s common stock of $3.60 at the issuance date; a risk-free interest rate of 1.72% and the expected volatility of the Company’s common stock of 315.83%
(estimated based on the common stock of comparable public entities). As of December 31, 2019, there was no unrecognized compensation expense.
The 2018 Equity Incentive Plan
Effective July 1, 2018, the Board of Directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”). This 2018 Plan supplements, and does not replace, the existing 2016
Equity Incentive Plan. Awards may be granted under the 2018 Plan through June 30, 2023 to the Company’s employees, officers, consultants, and non-employee directors. The
maximum number of shares of our common stock that may be issued under the 2018 Plan is 1,000,000 shares, which amount will be (a) reduced by awards granted under the
2018 Plan, and (b) increased to the extent that awards granted under the 2018 Plan are forfeited, expire or are settled for cash (except as otherwise provided in the 2018 Plan). No
employee will be eligible to receive more than 200,000 shares of common stock in any calendar year under the 2018 Plan pursuant to the grant of awards. On September 12,
2018, the Board of Directors approved an increase in the number of shares of common stock reserved for future issuance under this Plan from 1,000,000 shares to 2,000,000
shares. On September 14, 2018, 1,000,000 shares of common stock underlying awards under the 2018 Plan were granted to the employees and officers, 25% vesting
immediately on the date of grant and 25% vesting each year thereafter on the three subsequent anniversaries of the grant date. The Company estimated the fair value of the
options using the Black-Scholes option pricing model was $1,241,417. During the year ending December 31, 2019, 61,581 options granted under the 2018 Plan have been
forfeited. The Company recorded compensation expense of $290,524 and $402,027 for the years ended December 31, 2019 and 2018, respectively. The key valuation
assumptions used consist, in part, of the price of the Company’s common stock ranging in price from $3.90 to $4.29 at the issuance date; a risk-free interest rate ranging from
2.86% to 2.92%, and the expected volatility of the Company’s common stock ranging from of 29.8% to 31.1% (estimated based on the common stock of comparable public
entities). As of December 31, 2019, the unrecognized compensation expense was $548,865 which will be recognized as compensation expense over 2.71 years.
F-21
NOTE 9: INCOME TAX
Income tax expense for the years ended December 31, 2019 and 2018 is summarized as follows.
Deferred:
Federal
State
Change in valuation allowance
Income tax expense (benefit)
December 31, 2019
December 31, 2018
$
$
(2,034,701)
(693,481)
2,728,182
-
$
$
(2,720,081)
(904,569)
3,624,650
-
The following is a reconciliation of the provision for income taxes at the U.S. federal income tax rate to the income taxes reflected in the Statement of Operations:
Book income (loss)
State taxes
Change in the fair value of warrant derivative
Other permanent items
Valuation allowance
Tax expense at actual rate
December 31, 2019
December 31, 2018
21.00%
6.98%
34.17%
2.57%
(64.72)%
-
21.00%
6.98%
-14.51%
-0.36%
-13.11%
-
The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 2019 and 2018 are as follows:
Deferred tax assets:
Net operating loss carryforward
Other
Total gross deferred tax assets
Less: valuation allowance
Net deferred tax assets
December 31, 2019
December 31, 2018
$
$
9,044,119
267,766
9,311,885
(9,311,885)
-
$
$
6,357,768
225,935
6,583,703
(6,583,703)
-
Deferred income taxes are provided for the tax effects of transactions reported in the financial statements and consist of deferred taxes related primarily to differences between
the bases of certain assets and liabilities for financial and tax reporting. The deferred taxes represent the future tax return consequences of those differences, which will either be
deductible or taxable when the assets and liabilities are recovered or settled.
F-22
Section 382 of the Internal Revenue Code (“Section 382”), imposes limitations on a corporation’s ability to utilize its Net Operating Losses ( “NOLs”), if it experiences an
“ownership change.” In general terms, an ownership change may result from transactions increasing the ownership percentage of certain stockholders in the stock of the
corporation by more than 50% over a three-year period. In the event of an ownership change, utilization of the NOLs would be subject to an annual limitation under Section 382
determined by multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate. The Company has not completed
a Section 382 study at this time; however, should a study be completed certain NOLs may be subject to such limitations. Any future annual limitation may result in the
expiration of NOLs before utilization.
At December 31, 2019 and 2018, the Company had net operating losses of approximately $32,100,000 and $22,500,000, respectively, for U.S. federal and California income tax
purposes available to offset future taxable income, expiring on various dates through 2037. Federal losses generated in 2018 and onward aggregating $22,000,000 do not expire.
The Company has recorded a 100% valuation allowance on the deferred tax assets due to the uncertainty of its realization. The net change in the valuation allowance for the
years ended December 31, 2019 and 2018 was an increase of $2,728,182 and $3,624,650, respectively.
In the ordinary course of business, the Company’s income tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and
interest assessment by these taxing authorities. Accordingly, the Company believes that it is more likely than not that it will realize the benefits of tax positions it has taken in its
tax returns or for the amount of any tax benefit that exceeds the cumulative probability threshold in accordance with FASB ASC 740. Differences between the estimated and
actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on the company’s financial position. The
Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits.
The Company is no longer subject to the U.S. federal and state income tax examination to the extent the net operating losses are carried forward and impact a year that is open to
examination by the authorities. The Company’s income tax returns for the years 2016-2018 are subject to examination.
NOTE 10: REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS AND ALLOWANCES
The Company’s contracts with customers only include one performance obligation (i.e., sale of the Company’s products). Revenue is recognized in the gross amount at a point
in time when delivery is completed and control of the promised goods is transferred to the customers. Revenue is measured as the amount of consideration the Company expects
to be entitled to in exchange for those goods. The Company’s contracts do not involve financing elements as payment terms with customers are less than one year. Further,
because revenue is recognized at the point in time goods are sold to customers, there are no contract asset or contract liability balances. The Company does not disclose
remaining performance obligations related to contracts with durations of one year or less as allowed by the practical expedient applicable to such contracts.
The Company disaggregates its revenues by major geographic region. See Note 11, Concentrations, Geographic Data, and Sales by Major Customers, for further information.
The Company accounts for fees paid to Amazon for products sold through its Amazon Stores as operating expense.
The Company offers various discounts, pricing concessions, and other allowances to customers, all of which are considered in determining the transaction price. Certain
discounts and allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenue. Other discounts and allowances can vary
and are determined at management’s discretion (variable consideration). Specifically, the Company occasionally grants discretionary credits to facilitate markdowns and sales
of slow-moving merchandise, and consequently accrues an allowance based on historic credits and management estimates. Further, the Company allows sales returns,
consequently records a sales return allowance based upon historic return amounts and management estimates. These allowances (variable consideration) are estimated using the
expected value method and are recorded at the time of sale as a reduction to revenue. The Company adjusts its estimate of variable consideration at least quarterly or when facts
and circumstances used in the estimation process may change. The variable consideration is not constrained as the Company has sufficient history on the related estimates and
does not believe there is a risk of significant revenue reversal.
The Company also participates in cooperative advertising arrangements with some customers, whereby it allows a discount from invoiced product amounts in exchange for
customer purchased advertising that features the Company’s products. Generally, these allowances range from 2% to 5% of gross sales and are generally based upon product
purchases or specific advertising campaigns. Such allowances are accrued when the related revenue is recognized. These cooperative advertising arrangements provide a
distinct benefit and fair value, and are accounted for as direct selling expenses.
Sales commissions are expensed when incurred as the related revenue is recognized at a point in time and therefore, the amortization period is less than one year. As a result,
these costs are recorded as direct selling expenses, as incurred.
The Company has also elected to adopt the practical expedient related to shipping and handling fees which allows the Company to account for shipping and handling activities
that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations. Therefore, shipping and handling
activities are considered part of the Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred
The Company’s reserve for sales returns and allowances amounted to $13,000 as of December 31, 2019, compared to $13,000 as of December 31, 2018.
NOTE 11: CONCENTRATIONS
Concentration of Purchase Order Financing
The Company used a third-party financing company for the years ended December 31, 2019 and 2018, respectively, which provided letters of credit to vendors for a fee against
the purchase orders received by the Company for sale of products to its customers. The letters of credit were issued to the vendors to manufacture Company’s products pursuant
to the purchase orders received by the Company (Note 3).
Concentration of Customers
The Company sold its products to four customers that accounted for approximately 69% and 74% of the total revenues for the years ended December 31, 2019 and 2018,
respectively. The same four customers accounted for 78% and 69% of the total accounts receivable balance due to the Company at December 31, 2019 and 2018, respectively.
F-23
Concentration of Suppliers
The Company purchased products from four vendors for the years ended December 31, 2019 that accounted for approximately 76% of its total cost of goods sold.
The Company purchased products from four vendors for the year ended December 31, 2018 that accounted for approximately 78% of its total cost of goods sold.
Concentration of Credit Risk
The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in
such accounts through December 31, 2019. The Company’s bank balances exceeded FDIC insured amounts at times during the years ended December 31, 2019 and 2018,
respectively. At December 31, 2019 and 2018, the Company’s bank balance exceeded the FDIC insured amounts by $0 and $5,209,884, respectively.
Geographic Concentration
Geographical distribution of net revenue consisted of the following for the years ended December 31, 2019 and 2018, respectively, as follows:
Australia
USA
Other
NOTE 12: SUBSEQUENT EVENTS
For the Year Ended December 31,
2019
2018
9%
66%
25 %
11%
75%
14 %
The Company evaluated subsequent events through March __, 2020, the date of the filing of this Annual Report on Form 10-K with the SEC, to ensure that this filing includes
appropriate disclosure of events both recognized in the financial statements as of December 31, 2019, and events which occurred subsequent to December 31, 2019 but were not
recognized in the financial statements. The Company has determined that there were no subsequent events which required recognition, adjustment to or disclosure in the
financial statements, except for the following:
● On February 24, 2020, ToughBuilt Industries, Inc. (the “Company”) closed on the public offering of 4.45 million shares of its common stock, for gross proceeds of
$934,500 based upon the overallotment option arising from the closing of its January 28, 2020 public offering. In the January 28, 2020 public offering, the Company
sold 43 million shares of its common stock and 47.45 million warrants (each exercisable into ½ of a share of common stock for a total of 23.725 million shares of
common stock) from which it received gross proceeds of $9,030,000.
F-24
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act.
Disclosure controls and procedures are controls and other procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange
Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives, and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on our management’s evaluation (with the participation of the individuals serving as our principal executive officer and principal financial officer) of our disclosure
controls and procedures as required by Rules 13a-15 and 15d-15 under the Exchange Act, each of the individuals serving as our principal executive officer and principal
financial officer has concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2019, the end of the period
covered by this report.
Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including the individuals serving as our
principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Management conducted an assessment of the
effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control-Integrated Framework (2013 Framework). Based on this assessment, our management concluded that, as of December 31, 2019, our internal control over
financial reporting was effective based on those criteria.
Attestation Report on Internal Control over Financial Reporting.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to the deferral allowed under the JOBS Act
for emerging growth companies.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers, and Corporate Governance.
Directors and Executive Officers
PART III
The names, positions and ages of our directors and executive officers as of the date of this proxy statement are as follows:
Name
Michael Panosian
Joshua Keeler
Zareh Khachatoorian
Jolie Kahn
Age
56
40
60
55
Position
President, CEO and Director
Vice-President - Research & Development and Director
COO and Secretary
Acting Chief Financial Officer
Directors serve until the next annual meeting and until their successors are elected and qualified. Officers are appointed to serve for one year until the meeting of the Board of
Directors following the annual meeting of stockholders and until their successors have been elected and qualified.
23
Michael Panosian, Co-Founder, President, CEO and Director
Mr. Panosian co-founded our Company in 2012 and has been our CEO, President and director since inception. In 2008, Mr. Panosian co-founded Pandun, Inc., a manufacturer
and distributor of tools and tool accessories in Asia, and served as its CEO until 2012. Mr. Panosian has over 16 years of extensive experience in innovation, design direction,
product development, brand management, marketing, merchandising, sales, supply chain and commercialization experience in the hardware industry. He has launched several
product projects spanning several fields. Mr. Panosian has deep knowledge of doing business in China where he managed a team of over 350 engineers, industrial designers and
marketing professionals while stationed in Suzhou with his team for 4 years. Mr. Panosian is a graduate of Northrop University in Aerospace engineering with numerous
specializations; he holds numerous patents and trademarks that are shared with some of his colleagues at our Company and other development teams. Mr. Panosian has been
deemed to be suitable as a director due to his intimate knowledge of the Company since inception and his business and engineering expertise.
Joshua Keeler, Co-Founder, Vice-President Research & Development and Director
As the Vice-President Research & Development at our Company, Mr. Keeler is responsible for all product development. Mr. Keeler co-founded our Company in 2012 and
works directly with Mr. Panosian in bringing innovative ideas to market. Mr. Keeler is a graduate of Art Center College of Design with a BS in Industrial Design. Mr. Keeler
has over 12 years of product development experience, working on projects spanning several fields, including: automotive, personal electronics, sporting goods and a wide
expanse of tools. From 1999 to 2000 he was co-owner and vice-president of Oracle Industrial Design, Co., a private company specializing in industrial design and product
development. From August 2000 to April 2004, Mr. Keeler worked for Positec Power Tool Co., a private company in Suzhou, China, designing and creating a large innovation
library of numerous power tool concepts. From August 2005 to April 2008, Mr. Keeler was the chief designer for Harbinger International, Inc. From August 2008 to April 2012,
he was chief designer for Pandun Inc, specializing in innovative tools and supporting products. He has lived in China and has extensive experience working directly with
manufacturers to get designs into production. Mr. Keeler became a Director at our 2019 Annual Meeting, and is deemed suitable as a director by our board of directors (the
“Board”) due to his depth of R&D knowledge in the industry.
Zareh Khachatoorian, Chief Operating Officer and Secretary
Mr. Khachatoorian has over 30 years of experience in the realms of corporate purchasing, product development, merchandising and operations. Prior to joining ToughBuilt in
January 2016, Mr. Khachatoorian was the President of Mount Holyoke Inc. in Northridge California, starting in May 2014. Mr. Khachatoorian led Mount Holyoke Inc. in the
servicing of its entire import and distribution operations. From August 2008 to April 2014, Mr. Khachatoorian served as the Vice President of Operations at Allied International
(“Allied”) in Sylmar, California. At Allied, Mr. Khachatoorian was responsible for the management of overseas and domestic office employees and departments involved in the
areas of procurement and purchasing, inventory management, product development, engineering, control and quality assurance, and other related areas. Mr. Khachatoorian
holds a Bachelor of Science degree in Industrial Systems Engineering from the University of Southern California. Additionally, Mr. Khachatoorian has been credited as the
inventor or co-inventor of more than twenty issued patents, as well as several pending patents with the United States Patent and Trademark Office (USPTO). Mr. Khachatoorian
is fluent in Armenian and Farsi.
Jolie Kahn, Acting Chief Financial Officer
Ms. Kahn, age 55, has an extensive background in corporate finance and corporate and securities law. She has been the proprietor of Jolie Kahn, Esq. since 2002. Ms. Kahn has
also acted in various corporate finance roles, including extensive involvement of preparation of period filings and financial statements and playing an integral part in public
company audits. She also works with companies and hedge funds in complex transactions involving the structuring and negotiation of multi-million dollar debt and equity
financings, mergers, and acquisitions. Ms. Kahn has practiced law in the areas of corporate finance, mergers & acquisitions, reverse mergers, and general corporate, banking,
and real estate matters. She represents both public and private companies, hedge funds, and other institutional investors in their role as investors in public companies.
24
Independent Directors
The names, positions and ages of our independent directors (as defined by NASDAQ and SEC rules), all of whom became directors as of November 14, 2018, are as follows:
Name
Robert Faught
Paul Galvin
Frederick D. Furry
Linda Moossaian
Robert Faught, Director
Age
70
55
50
53
Position
Director
Director
Director
Director
As a global senior executive and CEO, Mr. Faught held leadership positions for Fortune 500 companies including Comcast, and Phillips/Lucent. He was the founder and CEO
of SmartHome Ventures, a home automation company servicing retail, utility, insurance and telephony distribution channels and their customers. In these leadership roles, he
led the development and implementation of the strategic vision throughout the organization, recruited senior talent, led leadership development and oftentimes, oversaw a
realignment of senior roles where some executives were outplaced. At Faught Associates, he offers consulting, executive search, leadership development and outplacement to
bring an exceptional leadership and performance direction that provides growth and internal development. From January 2014 to January 2016 he was the President and Chief
Executive Officer of SmartHome Ventures and has served on its Board since January 2016. The Board has determined that Mr. Faught is suitable as a director due to his long
standing leadership roles with Fortune 500 companies.
Paul Galvin, Director
Paul M. Galvin was appointed as a director and the Chief Executive Officer of SG Blocks, Inc. upon consummation of the reverse merger among CDSI Holdings Inc., CDSI
Merger Sub, Inc., SG Blocks, and certain stockholders of SG Blocks on November 4, 2011. Mr. Galvin is a founder of SGBlocks, LLC, the predecessor entity of SGB. He has
served as the Chief Executive Officer of SGB and its predecessor entity since 2008. Mr. Galvin has been a managing member of TAG Partners, LLC), an investment
partnership formed for the purpose of investing in SGB, since October 2007. Mr. Galvin brings over 20 years of experience developing and managing real estate, including
residential condominiums, luxury sales, and market rate and affordable rental projects. Prior to his involvement in real estate, he founded a non-profit organization that focused
on public health, housing, and child survival, where he served for over a decade in a leadership position. During that period, Mr. Galvin designed, developed, and managed
emergency food and shelter programs through New York City’s Human Resources Administration and other federal and state entities. Mr. Galvin holds a Bachelor of Science
in Accounting from LeMoyne College and a Master’s Degree in Social Policy from Fordham University. He was formerly an adjunct professor at Fordham University’s
Graduate School of Welfare. Mr. Galvin previously served for 10 years on the Sisters of Charity Healthcare System Advisory Board and six years on the board of directors of
SentiCare, Inc. In 2011, the Council of Churches of New York recognized Mr. Galvin with an Outstanding Business Leadership Award. The Company believes he is well suited
to sit on its Board due to Mr. Galvin’s pertinent experience, qualifications, attributes, and skills which include his managerial experience and the knowledge and experience he
has attained in the real estate industry.
Frederick D. Furry, Director
Mr. Furry is currently the CFO at Luminance Holdco, Inc. and Subsidiaries. Luminance is a private-equity backed designer, custom manufacturer, and distributor of lighting
hardware, fixtures, lamps, ceiling fans, lamp parts, and plumbing parts. Headquartered in Los Angeles, California, Luminance has distribution centers located in California,
New York, Texas, and Illinois and a wholly-owned foreign enterprise located in Dongguan, China. Prior to Luminance, from 2016 to 2018, Mr. Furry was the CFO at Cunico
Corporation, a closely-held, mid-sized manufacturing company based in Long Beach, California. Cunico provides specialty fittings and parts to the US Navy, primarily for
nuclear submarines and aircraft carriers. From 2011 to 2015, Mr. Furry was the CFO and COO at Biolase (NASDAQ:BIOL). Biolase is a high-tech, medical device
manufacturer of dental lasers located in Irvine, California, that sells its products directly in North America and certain international markets and distributes its products in over
60 international markets. As COO, Mr. Furry initiated the turnaround of failing business and restructured several aspects of the business.
25
From 1998 to 2010, Mr. Furry was at Windes, a regional public accounting firm based in Southern California, where he served as an Audit Partner and worked with over 25
public and private companies in the middle market with revenues ranging from $20 million to $600 million.
During his 20-year tenure in public accounting, Mr. Furry helped his clients with countless complex technical issues and transactions, including four IPOs, three reverse
mergers, well over a dozen M&A transactions, and several leveraged ESOPs.
Mr. Furry has a Master’s of Business Administration degree and a Bachelor’s of Science in Business Administration from the University of California, Riverside and is a
Certified Public Accountant (inactive). Mr. Furry’s long experience with public companies and as a financial executive are qualifications which make him an ideal Board
member for the Company.
Linda Moossaian, Director
Linda Moossaian is an achievement-oriented financial strategist with an exceptional record of successful initiatives in financial planning, profit optimization, joint venture
accounting, and treasury management. She has a strong history of forging strategic partnerships with senior management, including CEOs and CFOs as well as key stakeholders
to drive financial objectives, make strategic decisions, and analyze value-added analytics. Ms. Moossaian has a sophisticated understanding of long-range budget preparation,
GAAP accounting, M&A, planning models, financial forecasting & analysis, decision support, accounting procedures, and continuous process improvement. Her advanced
critical thinking, analytical, qualitative, and quantitative analysis skills have been developed through positions in corporate and public accounting and consulting. She currently
is the Director, Audit & Controls-WBTV Financial Administration for Warner Bros. in Burbank, CA, a position she has held since July 2019. Ms. Moossaian has previously
acted as Director, Theatrical Production Finance (from July 2009 to April 2018) and Director, Financial Planning & Analysis (from April 2018 to July 2019) for Warner Bros.
The ToughBuilt Board has determined that Ms. Moossaian’s expertise in finance is well suited to ToughBuilt’s Board’s support of the Company during this phase of rapid
growth.
Corporate Governance
The business and affairs of our company are managed under the direction of the Board of Directors.
Term of Office
Directors serve until the next annual meeting and until their successors are elected and qualified. Officers are appointed to serve for one year until the meeting of the Board of
Directors following the annual meeting of shareholders and until their successors have been elected and qualified.
Director Independence
We use the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director”
is a person other than an officer or employee of our company or any other individual having a relationship which, in the opinion of the Board of Directors, would interfere with
the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ rules provide that a director cannot be considered independent if:
●
●
the director is, or at any time during the past three years was, an employee of our company;
the director or a family member of the director accepted any compensation from our company in excess of $120,000 during any period of 12 consecutive months within
the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee
service);
●
a family member of the director is, or at any time during the past three years was, an executive officer of our company;
26
●
●
●
the director or a family member of the director is a partner in, controlling shareholder of, or an executive officer of an entity to which our company made, or from which
our company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000,
whichever is greater (subject to certain exclusions);
the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive
officers of our company served on the compensation committee of such other entity; or
the director or a family member of the director is a current partner of our company’s outside auditor, or at any time during the past three years was a partner or employee
of our company’s outside auditor, and who worked on our company’s audit.
Under such definition, Messrs. Faught, Furry and Galvin and Ms. Moossaian are independent directors.
Family Relationships
There are no family relationships among any of our officers or directors.
Board Committees
Our Board of Directors has an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee, each comprised entirely of independent
directors and none of which met in 2018. The Audit Committee met four times in 2019.
Audit Committee
Our Audit Committee is comprised of three individuals, each of whom is an independent director and at least one of whom, Mr. Furry, is an “audit committee financial expert,”
as defined in Item 407(d)(5)(ii) of Regulation S-K.
Our Audit Committee oversees our corporate accounting, financial reporting practices and the audits of financial statements. For this purpose, the Audit Committee does have a
charter (which is reviewed annually) and perform several functions. The Audit Committee performs the following:
●
●
evaluates the independence and performance of, and assesses the qualifications of, our independent auditor and engage such independent auditor;
approves the plan and fees for the annual audit, quarterly reviews, tax and other audit-related services and approves in advance any non-audit service to be provided by
our independent auditor;
● monitors the independence of our independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law;
●
reviews the financial statements to be included in our future Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q and review with management and our
independent auditor the results of the annual audit and reviews of our quarterly financial statements; and
●
oversees all aspects our systems of internal accounting control and corporate governance functions on behalf of the Board of Directors.
27
Compensation Committee
Our Compensation Committee is comprised of three individuals, each of whom is an independent director.
The Compensation Committee reviews or recommends the compensation arrangements for our management and employees and also assists our Board of Directors in reviewing
and approving matters such as company benefit and insurance plans, including monitoring the performance thereof. The Compensation Committee has a charter (which is
reviewed annually) and performs several functions.
The Compensation Committee has the authority to directly engage, at our expense, any compensation consultants or other advisers as it deems necessary to carry out its
responsibilities in determining the amount and form of employee, executive and director compensation.
Nominating and Corporate Governance Committee
Our Nominating and Corporate Governance Committee is comprised of three individuals, each of whom is an independent director.
The Nominating and Corporate Governance Committee is charged with the responsibility of reviewing our corporate governance policies and with proposing potential director
nominees to the Board of Directors for consideration. This committee has the authority to oversee the hiring of potential executive positions in our company. The Nominating
and Corporate Governance Committee has a charter (which will be reviewed annually) and performs several functions.
Director Independence
Our Board of Directors has reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on this review, our Board of
Directors has determined that Frederick Furry, Paul Galvin, Linda Moossaian and Robert Faught are “independent directors” as defined in the NASDAQ Listing Rules and Rule
10A-3 promulgated under the Exchange Act. As such, all independent directors other than Ms. Moossaian serve on all three of our standing Board committees, with Frederick
Furry as Chair of the Audit Committee, Paul Galvin as Chair of the Compensation Committee and Robert Faught as Chair of the Nominating and Corporate Governance
Committee.
Code of Ethics
We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing similar functions. We have posted a current copy of the code on our website, www.toughbuilt.com. In
addition, we will post on our website all disclosures that are required by law or the listing standards of NASDAQ concerning any amendments to, or waivers from, any
provision of the code. The reference to our website address does not constitute incorporation by reference of the information contained at or available through our website, and
you should not consider it to be a part of this prospectus.
Indemnification of Officers and Directors
Chapter 78 of the Nevada Revised Statutes (NRS) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or proceeding if he is not liable pursuant to NRS Section 78.138 or acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. NRS Chapter 78 further provides that a corporation similarly may indemnify any such person serving in any such capacity who was or is a
party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason
of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred in connection with the
defense or settlement of such action or suit if he is not liable pursuant to NRS Section 78.138 or acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the court or other court of competent jurisdiction in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity
for such expenses which the court or other court of competent jurisdiction shall deem proper.
28
Our bylaws provide that we may indemnify our officers, directors, employees, agents and any other persons to the maximum extent permitted by the NRS.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions,
we have been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
We maintain a Code of Business Conduct and Ethics (Code) that applies to all employees, including our principal executive officer, principal financial officer, principal
accounting officer, controller and persons performing similar functions, and including our independent directors, who are not employees of the Company, with regard to their
ToughBuilt-related activities. The Code incorporates guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws,
rules and regulations. The Code also incorporates our expectations of our employees that enable us to provide accurate and timely disclosure in our filings with the SEC and
other public communications. In addition, the Code incorporates guidelines pertaining to topics such as complying with applicable laws, rules, and regulations; insider trading;
reporting Code violations; and maintaining accountability for adherence to the Code. The full text of our Code is published on our web site at www.toughbuilt.com and is
incorporated by reference herein. We intend to disclose future amendments to certain provisions of our Code, or waivers of such provisions granted to our principal executive
officer, principal financial officer, principal accounting officer or controller and persons performing similar functions on our web site. Except as expressly stated herein, the
information contained on our website does not constitute a part of this Annual Report on Form 10-K and is not incorporated by reference herein.
Item 11. Executive Compensation.
The following table summarizes compensation of our named executive officers, as of December 31, 2019 and 2018.
Summary Compensation Table
Name and position
Year
Salary ($) Bonus ($)
Stock
Compensation
($)
Option
Awards
($)
All Other
Compensation
($) (1)
Total ($)
Michael Panosian
Chief Executive Officer
Joshua Keeler
Vice President - R&D
Zareh Khachatoorian
Chief Operating Officer
(1) Vacation Payout and other
2019 385,000
-
2018 276,250 150,000
-
-
224,750 221,336
44,423
17,798
429,423
890,134
2019 285,000
-
2018 178,000 100,000
-
-
207,850 221,336
32,884
9,683
317,884
716,869
2019 230,000
2018 139,500
-
-
-
-
72,000 146,437
-
-
230,000
357,937
29
Employment and Related Agreements
Except as set forth below, we currently have no other written employment agreements with any of our officers and directors. The following is a description of our current
executive employment agreements:
Agreements with Our Named Executive Officers
We have entered into written employment agreements with each of our named executive officers, as described below. Each of our named executive officers has also executed
our standard form of confidential information and invention assignment agreement.
Employment Agreement with Michael Panosian
We entered into an employment agreement with Mr. Panosian on January 3, 2017 that governs the terms of his employment with us as President and Chief Executive Officer.
Under the terms of this agreement, Mr. Panosian received a “sign-on-bonus’ of $50,000. The term of the agreement is for five years and Mr. Panosian is entitled to an annual
base salary of $350,000 beginning on January 1, 2017 and increasing by 10% each year commencing on January 1, 2018. Mr. Panosian was also granted a stock option to
purchase 125,000 shares of the Company’s common stock at an exercise price of $10.00 per share. The employment agreement also entitles Mr. Panosian to, among other
benefits, the following compensation: (i) eligibility to receive an annual cash bonus at the sole discretion of the Board and as determined by the Compensation Committee
commensurate with the policies and practices applicable to other senior executive officers of the Company; (ii) an opportunity to participate in any stock option, performance
share, performance unit or other equity based long-term incentive compensation plan commensurate with the terms and conditions applicable to other senior executive officers
and (iii) participation in welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical,
prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent available to our other senior executive
officers.
Employment Agreement with Josh Keeler
We entered into an employment agreement with Mr. Keeler on January 3, 2017 that governs the terms of his employment with us as Vice President of Research & Development.
Under the terms of this agreement, Mr. Keeler received a “sign-on-bonus’ of $35,000. The term of the agreement is for five years and Mr. Keeler is entitled to an annual base
salary of $250,000 beginning on January 1, 2017 and increasing by 10% each year commencing on January 1, 2018. The employment Agreement also entitles Mr. Keeler to,
among other benefits, the following compensation: (i) eligibility to receive an annual cash bonus at the sole discretion of the Board and as determined by the Compensation
Committee commensurate with the policies and practices applicable to other senior executive officers of the Company; (ii) an opportunity to participate in any stock option,
performance share, performance unit or other equity based long-term incentive compensation plan commensurate with the terms and conditions applicable to other senior
executive officers and (iii) participation in welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without
limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent available to our
other senior executive officers.
Potential Payments to Messrs. Panosian and Keeler upon Termination or Change in Control
Pursuant to the employment agreements, regardless of the manner in which Messrs. Panosian and Mr. Keeler’s service terminates, each executive officer is entitled to receive
amounts earned during his term of service, including salary and other benefits. In addition, each of them is eligible to receive certain benefits pursuant to his agreement with us
described above.
The Company is permitted to terminate the employment of Mr. Panosian and Mr. Keeler for the following reasons: (1) death or disability, (2) Termination for Cause (as defined
below) or (3) for no reason.
Each such officer is permitted Termination for Good Reason (as defined below) of such officer’s employment. In addition, each such officer may terminate his or her
employment upon written notice to the Company 90 days prior to the effective date of such termination.
30
In the event of such officer’s death during the employment period or a termination due to such officer’s disability, such officer or his or her beneficiaries or legal representatives
shall be provided the sum of (a) an amount equal to two times the officer’s then prevailing base salary and (b) the bonus that would have been payable to such officer subject to
any performance conditions and (c) certain other benefits provided for in the employment agreement.
In the event of such officer’s Termination for Cause by the Company or the termination of such officer’s employment as a result of such officer’s resignation other than a
Termination for Good Reason, such officer shall be provided certain benefits provided in the employment agreement and payment of all accrued and unpaid compensation and
wages, but such officer shall have no right to compensation or benefits for any period subsequent to the effective date of termination.
Under the employment agreements, “Cause” means: such officer willfully engages in an act or omission which is in bad faith and to the detriment of the Company, engages in
gross misconduct, gross negligence, or willful malfeasance, in each case that causes material harm to the Company, breaches this Agreement in any material respect, habitually
neglects or materially fails to perform his duties (other than any such failure resulting solely from such officer’s physical or mental disability or incapacity) after a written
demand for substantial performance is delivered to such officer which identifies the manner in which the Company believes that such officer has not performed his duties,
commits or is convicted of a felony or any crime involving moral turpitude, uses drugs or alcohol in a way that either interferes with the performance of his duties or
compromises the integrity or reputation of the Company, or engages in any act of dishonesty involving the Company, disclosure of Company’s confidential information not
required by applicable law, commercial bribery, or perpetration of fraud; provided, however, that such officer shall have at least forty-five (45) calendar days to cure, if curable,
any of the events which could lead to his termination for Cause.
Under the employment agreements, “Termination for Good Reason” means any of the following that are undertaken without the officer’s express written consent: (i) the
assignment to such officer of principal duties or responsibilities, or the substantial reduction of such officer’s duties and responsibilities, either of which is materially
inconsistent with such officer’s position as President and Chief Executive Officer of the Company and Director of design and Development, respectively; (ii) a material
reduction by the Company in such officer’s annual base salary, except to the extent the salaries of other executive employees of the Company and any other controlled
subsidiary of the Company are similarly reduced; (iii) such officer’s principal place of business is, without his consent, relocated by a distance of more than thirty (30) miles
from the center of Glendale, California; or (iv) any material breach by the Company of any provision of this Agreement.
Involuntary Termination other than for Cause, Death or Disability or Voluntary Termination for Good Reason Following a Change of Control. If, within twenty-four (24)
months following a Change of Control, the officer’s employment is terminated involuntarily by the Company other than for Cause, death, or Disability or by such officer
pursuant to a Voluntary Termination for Good Reason, and such officer executes and does not revoke a general release of claims against the Company and its affiliates in a form
acceptable to the Company, then the Company shall provide such officer with, among other benefits, a lump sum payment in the amount equal to four times such officer’s then
prevailing base salary in the case of Mr. Panosian and three times such officer’s then prevailing base salary in the case of Mr. Keeler, plus the officer’s target for the annual short
term incentive portion of the corporate bonus program for such year as in effect immediately prior to such termination, in addition to any other earned but unpaid base salary or
vacation pay due through the date of such termination, as well as a pro rata portion of the executive’s annual short term incentive portion of the corporate bonus program for
such year (if any) and a pro rata portion of the executive’s long term incentive portion of the corporate bonus program (if any).
Employment Agreement with Zareh Khachatoorian
We entered into an employment agreement with Mr. Khachatoorian on January 3, 2017 that governs the terms of his employment with us as Chief Operating Officer and
Secretary. The term of the agreement is for three years and Mr. Khachatoorian is entitled to an annual base salary of $180,000 beginning on January 1, 2017 and increasing by
10% each year commencing on January 1, 2018. The employment Agreement also entitles Mr. Khachatoorian to, among other benefits, the following compensation: (i)
eligibility to receive an annual cash bonus at the sole discretion of the Board and as determined by the Compensation Committee commensurate with the policies and practices
applicable to other senior executive officers of the Company; (ii) an opportunity to participate in any stock option, performance share, performance unit or other equity based
long-term incentive compensation plan commensurate with the terms and conditions applicable to other senior executive officers and (iii) participation in welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life,
group life, accidental death and travel accident insurance plans and programs) to the extent available to our other senior executive officers.
31
The Company is permitted to terminate the employment of Mr. Khachatoorian for the following reasons: (1) death or disability, (2) Termination for Cause (as defined above) or
(3) for no reason. In the event of Mr. Khachatoorian’s (i) death or disability, or (ii) Termination for Cause by the Company, Mr. Khachatoorian or his beneficiaries or legal
representatives shall be entitled to payment for all accrued and unpaid compensation and wages and in addition pay to Mr. Khachatoorian a sum equivalent to one month’s
salary, but shall have no right to compensation or benefits for any period subsequent to the effective date of his death or disability.
In the event of the termination of Mr. Khachatoorian’s employment for Good Reason, he shall be provided certain benefits listed in the employment agreement and payment of
all accrued and unpaid compensation and wages, but executive shall have no right to compensation or benefits for any period subsequent to the effective date of termination.
Employment Agreement with Manu Ohri (resigned June 2019)
We entered into an employment agreement with Mr. Ohri on January 3, 2017 that governs the terms of his employment with us as Chief Financial Officer of the Company. The
term of the agreement is for three years and Mr. Ohri is entitled to an annual base salary of $250,000 beginning on January 1, 2017 and increasing by 10% each year
commencing on January 1, 2018. The employment agreement also entitles Mr. Ohri to, among other benefits, the following compensation: (i) eligibility to receive an annual
cash bonus at the sole discretion of the Board and as determined by the Compensation Committee commensurate with the policies and practices applicable to other senior
executive officers of the Company; (ii) an opportunity to participate in any stock option, performance share, performance unit or other equity based long-term incentive
compensation plan commensurate with the terms and conditions applicable to other senior executive officers and (iii) participation in welfare benefit plans, practices, policies
and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental
death and travel accident insurance plans and programs) to the extent available to our other senior executive officers.
The Company is permitted to terminate the employment of Mr. Ohri for the following reasons: (1) death or disability, (2) Termination for Cause (as defined above) or (3) for no
reason. In the event of Mr. Ohri’s (i) death or disability, or (ii) Termination for Cause by the Company, Mr. Ohri or his beneficiaries or legal representatives shall be entitled to
payment for all accrued and unpaid compensation and wages and in addition pay to Mr. Ohri a sum equivalent to one month’s salary, but shall have no right to compensation or
benefits for any period subsequent to the effective date of his death or disability.
In the event of the termination of Mr. Ohri’s employment for Good Reason, he shall be provided certain benefits listed in the employment agreement and payment of all accrued
and unpaid compensation and wages, but executive shall have no right to compensation or benefits for any period subsequent to the effective date of termination.
Outstanding Equity Awards at December 31, 2019
2016 Equity Compensation Plan - Grant of options
Name
Michael Panosian
Joshua Keeler
Zareh Khachatoorian
Number of
securities
underlying
unexercised
options (#)
exercisable
91,146
-
-
Number of
securities
underlying
unexercised
options (#)
unexercisable
33,854
-
-
Date of
grant (1)
1/03/2017
-
-
Equity
incentive plan
awards:
Number of
securities
underlying
unexercised
unearned
options (#)
Option
exercise
price ($)
-
-
-
10.00
-
-
Option
expiration
date
7/05/2026
-
-
(1) The shares subject to each stock option vest over a four (4) year period, with 25% of the total number of shares subject to the option vesting on the one (1) year
anniversary of the date of grant, and the remainder vesting in equal instalments on the last day of each of the thirty six (36) full calendar months thereafter.
32
2019 Equity Compensation Plan - Grant of options
Name
Michael Panosian
Joshua Keeler
Zareh Khachatoorian
Date of
grant
9/14/2018(1)
9/14/2018
9/14/2018
Number of
securities
underlying
unexercised
options (#)
exercisable
100,000
100,000
55,000
Number of
securities
underlying
unexercised options
(#) unexercisable
100,000
100,000
55,000
Equity incentive
plan awards:
Number of securities
underlying
unexercised
unearned options
(#)
Option exercise
price
($)
-
-
-
4.29
4.29
3.90
Option expiration
date
6/30/2023
6/30/2023
6/30/2028
(1) The shares subject to each stock option vest over a three (3) year period, with 25% of the shares subject to the option vested on the grant date and 25% of the shares
subject to the option vesting on each anniversary of the grant date.
2016 Stock Option Plan
On July 16, 2016, our Board of Directors and a majority of the holders of our then-outstanding shares of our common stock adopted our 2016 Equity Incentive Plan, which we
refer to as the Plan. There are currently 875,000 shares of common stock issued or reserved for issuance under the Plan.
The purpose of our Plan is to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of
proprietorship and to stimulate an active interest of such persons in our development and financial achievements. The Plan is administered by the Compensation Committee of
our Board of Directors, or by the full board, which may determine, among other things, the (a) terms and conditions of any option or stock purchase right granted, including the
exercise price and the vesting schedule, (b) persons who are eligible to receive options and stock purchase rights and (c) the number of shares to be subject to each option and
stock purchase right. The types of equity awards that may be granted under the Plan are: (i) incentive stock options and non-incentive stock options; (ii) share appreciation
rights; (iii) restricted shares, restricted share units (which are shares granted after certain vesting conditions are met) and unrestricted shares; (iv) deferred share units; and (v)
performance awards.
2018 Equity Incentive Plan
The 2018 Equity Incentive Plan
Effective July 1, 2018, the Board of Directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”). This 2018 Plan supplements, and does not replace, the existing 2016
Equity Incentive Plan. Awards may be granted under the 2018 Plan through June 30, 2023 to the Company’s employees, officers, consultants, and non-employee directors. The
maximum number of shares of our common stock that may be issued under the 2018 Plan is 1,000,000 shares, which amount will be (a) reduced by awards granted under the
2018 Plan, and (b) increased to the extent that awards granted under the 2018 Plan are forfeited, expire or are settled for cash (except as otherwise provided in the 2018 Plan). No
employee will be eligible to receive more than 200,000 shares of common stock in any calendar year under the 2018 Plan pursuant to the grant of awards. On September 12,
2018, the Board of Directors approved an increase in the number of shares of common stock reserved for future issuance under this Plan from 1,000,000 shares to 2,000,000
shares. On September 14, 2018, 1,000,000 shares of common stock underlying awards under the 2018 Plan were granted to the employees and officers, 25% vesting
immediately on the date of grant and 25% vesting each year thereafter on the three subsequent anniversaries of the grant date. The Company estimated the fair value of the
options using the Black-Scholes option pricing model was $1,241,417. The Company recorded compensation expense of $290,524 and $402,027 for the years ended December
31, 2019 and 2018, respectively. The key valuation assumptions used consist, in part, of the price of the Company’s common stock ranging in price from $3.90 to $4.29 at the
issuance date; a risk-free interest rate ranging from 2.86% to 2.92%, and the expected volatility of the Company’s common stock ranging from of 29.8% to 31.1% (estimated
based on the common stock of comparable public entities). As of December 31, 2019, the unrecognized compensation expense was $548,865 which will be recognized as
compensation expense over 2.71 years.
33
In connection with the administration of our Plans, our Compensation Committee:
●
●
●
●
determines which employees and other persons will be granted awards under our Plans;
grants the awards to those selected to participate;
determines the exercise price for options; and
prescribes any limitations, restrictions and conditions upon any awards, including the vesting conditions of awards.
Our Compensation Committee will: (i) interpret our Plans; and (ii) make all other determinations and take all other action that may be necessary or advisable to implement and
administer our Plans. The Plans provide that in the event of a change of control event, the Compensation Committee or our Board of Directors shall have the discretion to
determine whether and to what extent to accelerate the vesting, exercise or payment of an award.
In addition, our Board of Directors may amend our Plans at any time. However, without shareholder approval, our Plan may not be amended in a manner that would:
●
increase the number of shares that may be issued under the Plans;
● materially modify the requirements for eligibility for participation in the Plans;
● materially increase the benefits to participants provided by the Plans; or
●
otherwise disqualify the Plans for an exemption under Rule 16b-3 promulgated under the Exchange Act.
Awards previously granted under the Plans may not be impaired or affected by any amendment of the Plans, without the consent of the affected grantees.
Directors’ Compensation Plan Information
December 31, 2019
Plan category
2016 Equity Incentive Plan:
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
2018 Equity Incentive Plan:
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available
for future issuance
125,000
-
125,000
1,000,000
-
1,000,000
$
$
$
$
10.00
-
10.00
4.06
-
4.06
875,000
-
875,000
1,000,000
-
1,000,000
34
Non-Employee Director Remuneration Policy
Our Board of Directors has adopted the following non-employee director remuneration policy:
Stock and Option Awards
Each of our non-employee directors may receive up to 50,000 options to purchase shares of common stock (which we refer to as the Annual Director Options) for each fiscal
year. The Annual Director Options will be confirmed (together with the exercise price for such options) at the first meeting of our Board of Directors for each fiscal year and
shall vest quarterly in arrears. Annual Director Options shall have ten year term and shall be issued under the 2016 and 2018 Plans.
Compensation Committee Review
The Compensation Committee shall, if it deems necessary or prudent in its discretion, reevaluate and approve in January of each such year (or in any event prior to the first
board meeting of such fiscal year) the cash and equity awards (amount and manner or method of payment) to be made to non-employee directors for such fiscal year. In making
this determination, the Compensation Committee shall utilize such market standard metrics as it deems appropriate, including, without limitation, an analysis of cash
compensation paid to independent directors of our peer group.
The Compensation Committee shall also have the power and discretion to determine in the future whether non-employee directors should receive annual or other grants of
options to purchase shares of common stock or other equity incentive awards in such amounts and pursuant to such policies as the Compensation Committee may determine
utilizing such market standard metrics as it deems appropriate, including, without limitation, an analysis of equity awards granted to independent directors of our peer group.
Participation of Employee Directors; New Directors
Unless separately and specifically approved by the Compensation Committee in its discretion, no employee director of our company shall be entitled to receive any
remuneration for service as a director (other than expense reimbursement as per prevailing policy).
New directors joining our Board of Directors shall be entitled to a prorated portion (based on months to be served in the fiscal year in which they join) of cash and stock options
or other equity incentive awards (if applicable) for the applicable fiscal year at the time they join the board.
Director Compensation
Directors Compensation
As of December 31, 2019
Name
Paul Galvin (1)
Robert Faught (2)
Frederick Fury (3)
Fees Earned
or Paid in
Cash
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
All Other
Compensation
($)
Total
($)
50,000
50,000
50,000
-
-
-
-
-
-
-
-
-
-
-
-
50,000
50,000
50,000
(1) Appointed to the board on November 14, 2018 and currently serves as Chairman of the Compensation Committee
(2) Appointed to the board on November 14, 2018 and currently serves as Chairman of the Nominating and Corporate Governance Committee
(3) Appointed to the board on November 14, 2018 and currently serves as Chairman of the Audit Committee
35
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
In computing the number and percentage of shares beneficially owned by a person, shares that may be acquired by such person within 60 days of the date of March 27, 2020 are
counted as outstanding, while these shares are not counted as outstanding for computing the percentage ownership of any other person. Unless otherwise indicated, the principal
address of each of the persons below is c/o ToughBuilt Industries, Inc., 25371 Commercentre Drive, Suite 200, Lake Forest, CA 92630.
Directors and Officers:
Michael Panosian
Joshua Keeler
Zareh Khachatoorian
Fred Furry
Paul Galvin
Linda Moossaian
Robert Faught
Jolie Kahn
All Officer and Directors as a Group (8 persons)
5% or Greater Beneficial Owners:
Michael Panosian
Sabby Volatility Master Fund (2)
Options
Granted
vested
within 60
days
of offering
112,500
50,000
27,500
-
-
-
-
-
217,500
112,500
-
Common Shares
1,825,799
647,925
55,991
-
-
-
-
-
2,681,623
1,825,799
6,000,000
Series D
Preferred Stock
Total
Percentage
Beneficially
Owned (1)
-
-
-
-
-
-
-
-
-
-
1,938,299
697,925
83,491
-
-
-
-
-
2,911,980
1,938,299
6,000,000
1.76%
*
*
-
-
-
-
-
2.65%
1.76%
5.46%
(1) Based on 109,990,257 shares of common stock issued and outstanding on March 27, 2020.
(2) Based upon the Schedule 13G filed on January 28, 2020. As calculated in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended, (i) Sabby
Volatility Master Fund, Ltd. beneficially owns 6,000,000 shares of the Issuer’s common stock (common shares), representing approximately 7.37% of the Common Stock, and
(ii) Sabby Management, LLC and Hal Mintz each beneficially own 6,000,000 shares of the common shares, representing approximately 7.37% of the common shares. Sabby
Management, LLC and Hal Mintz do not directly own any common shares, but each indirectly owns 6,000,000 common shares. Sabby Management,LLC, a Delaware limited
liability company, indirectly owns 6,000,000 common shares because it serves as the investment manager of Sabby Volatility Warrant Master Fund, Ltd., a Cayman Islands
company. Mr. Mintz indirectly owns 6,000,000 common shares in his capacity as manager of Sabby Management,LLC.
* Less than 1%
Item 13. Certain Relationships and Related Transactions, and Director Independence.
We have adopted a written related-person transactions policy that sets forth our policies and procedures regarding the identification, review, consideration and oversight of
“related-party transactions.” For purposes of our policy only, a “related-party transaction” is a transaction, arrangement or relationship (or any series of similar transactions,
arrangements or relationships) in which we and any “related party” are participants involving an amount that exceeds $120,000.
Transactions involving compensation for services provided to us as an employee or director are not considered related-person transactions under this policy. A related party is
any executive officer, director or a holder of more than five percent of our common stock, including any of their immediate family members and any entity owned or controlled
by such persons.
36
Our Chief Financial Officer, Jolie Kahn, must present information regarding a proposed related-party transaction to our Board of Directors. Under the policy, where a
transaction has been identified as a related-party transaction, Ms. Kahn must present information regarding the proposed related-party transaction to our Nominating and
Corporate Governance Committee, once the same is established, for review. The presentation must include a description of, among other things, the material facts, the direct
and indirect interests of the related parties, the benefits of the transaction to us and whether any alternative transactions are available. To identify related-party transactions in
advance, we rely on information supplied by our executive officers, directors and certain significant shareholders. In considering related-party transactions, our Nominating and
Corporate Governance Committee will take into account the relevant available facts and circumstances including, but not limited to:
● whether the transaction was undertaken in the ordinary course of our business;
● whether the related party transaction was initiated by us or the related party;
● whether the transaction with the related party is proposed to be, or was, entered into on terms no less favorable to us than terms that could have been reached with an
unrelated third party;
the purpose of, and the potential benefits to us from the related party transaction;
the approximate dollar value of the amount involved in the related party transaction, particularly as it relates to the related party;
the related party’s interest in the related party transaction, and
any other information regarding the related party transaction or the related party that would be material to investors in light of the circumstances of the particular
transaction.
●
●
●
●
The Nominating and Corporate Governance Committee shall then make a recommendation to the Board, which will determine whether or not to approve of the related party
transaction, and if so, upon what terms and conditions. In the event a director has an interest in the proposed transaction, the director must recuse himself or herself from the
deliberations and approval.
Other than as disclosed below, during the last two fiscal years, there have been no related party transactions.
On April 26, 2016, September 1, 2016 and October 5, 2016, our former chief financial officer, Manu Ohri loaned our Company an aggregate of $130,000. Pursuant to the terms
of the promissory notes, the loans were to be repaid on or before December 31, 2016, with interest at 10% per annum payable monthly. The loans were repaid on October 18,
2016. In May 2017, we executed three unsecured promissory notes with Mr. Ohri totaling $400,000, bearing an interest rate of 10% per annum, due on demand or before June 1,
2018. On June 1, 2018, the maturity date of these promissory notes was extended to September 1, 2018. On August 30, 2018, the maturity date of these promissory notes was
further extended to September 30, 2018. On September 30, 2018, the maturity date of these notes was extended to the third business day following the date of consummation of
the Company’s initial public offering at which time $200,000 of the principal amount of the notes was paid in cash and the balance was paid in 42,105 unregistered be paid in
shares of common stock of the Company at a conversion price equal to the per Unit price of the public offering.
Concurrent with the closing of the IPO on November 14, 2018, the following private transaction was consummated in accordance with the related agreements (see Note 9 of the
financial statements), all in transactions exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended: 136,863 unregistered shares of common stock
were issued upon conversion of $650,100 of accrued and unpaid salaries to officers and directors at a conversion price of $4.75 per share.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the Board or compensation committee of any other entity that has one or more of its executive officers serving as
a member of our Board.
37
Item 14. Principal Accountant Fees and Services.
During the year ended December 31, 2019 and 2018, we engaged Marcum as our independent registered accounting firm. For the years ended December 31, 2019 and
2018, we incurred fees, as discussed below:
Audit fees
Audit-related fees (1)
Tax fees
All other fees
December 31, 2019
December 31, 2018
$
$
148,320
44,805
-
-
88,775
201,305
-
-
(1) Fees incurred in conjunction with consents for various registration statements filed in 2019.
Audit fees consist of fees related to professional services rendered in connection with the audit of our annual financial statements. All other fees relate to professional
services rendered in connection with the review of the quarterly financial statements.
Our policy is to pre-approve all audit and permissible non-audit services performed by the independent accountants. These services may include audit services, audit-
related services, tax services and other services. Under our audit committee’s policy, pre-approval is generally provided for particular services or categories of services,
including planned services, project based services and routine consultations. In addition, the audit committee may also pre-approve particular services on a case-by-case basis.
Our audit committee approved all services that our independent accountants provided to us in the past two fiscal years.
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this Annual Report on Form 10-K:
PART IV
1. Financial Statements: The following Financial Statements and Supplementary Data of ToughBuilt and the Report of Independent Registered Public Accounting
Firm included in Part II, Item 8:
Balance Sheets at December 31, 2019 and 2018
Statements of Operations for the years ended December 31, 2019 and 2018
Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2019 and 2018
Statements of Cash Flows for the years ended December 31, 2019 and 2018
Notes to Financial Statements
2. Exhibits :
Exhibit No.
1.1
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
4.4
4.5
4.6
4.7
Description
Form of Underwriting Agreement**********
Composite copy of Articles of Incorporation, as amended**
Bylaws**
Certificate of Designation of Class B Convertible Preferred Stock**
Certificate of Change Pursuant to NRS 78.209****
Form of Series C Convertible Zero Coupon Preferred Stock*******
Form of Subscription Agreement dated January 25, 2016**
Form of Class A Warrant dated January 25, 2016**
Form of Subscription Agreement dated October 17, 2016**
Form of Class B Warrant dated October 17, 2016**
Form of Securities Purchase Agreement dated October 17, 2016**
Form of Debenture dated October 17, 2016**
2016 Equity Incentive Plan**
38
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
14.1
21.1
31.1
31.2
32.1
32.2
99.1
99.2
99.3
99.4
99.5
101
*
**
***
****
*****
******
*******
********
*********
**********
**********
**********
+
Form of Joseph Gunnar Warrant**
Form of Placement Agency Warrant**
Form of Series A Warrant and Form of Series B Warrant**
2018 Equity Incentive Plan**
Form of Amended and Restated Debenture****
Securities Amendment Agreement****
Form of Securities Amendment Agreement and Waiver*******
Form of Warrant, Representative’s Warrant and Pre-funded Warrant**********
Service Agreement with Belegal Industrial Co., Ltd., dated August 19, 2013**
Form of Security Agreement dated October 17, 2016**
Employment Agreement dated as of January 3, 2017 by and between ToughBuilt Industries, Inc. and Michael Panosian**
Employment Agreement dated as of January 3, 2017 by and between ToughBuilt Industries, Inc. and Zareh Khachatoorian**
Employment Agreement dated as of January 3, 2017 by and between ToughBuilt Industries, Inc. and Manu Ohri**
Employment Agreement dated as of January 3, 2017 by and between ToughBuilt Industries, Inc. and Josh Keeler**
Project Statement of Work dated as of October 18, 2016 by and between ToughBuilt Industries, Inc. and Hon Hai Precision Ind. Co., Ltd. (“Foxconn”)******
Intentionally Omitted
Form of Warrant Agency Agreement**********
Form of Securities Purchase Agreement*********
Form of A and B Note*********
Form of Warrant*********
Form of Voting Agreement*********
Form of Security Agreement*********
Form of Registration Rights Agreement*********
Form of Master Netting Agreement*********
Form of Intellectual Property Security Agreement*********
Form of Investor Securities Purchase Agreement*********
Form of Investor Note*********
Form of Guaranty*********
Form of Exchange Agreement**********
Form of Certificate of Designation for Series D Preferred Stock**********
Form of Lease+
Code of Ethics**
List of Subsidiaries of the Company**
Certification of Principal Executive Officer pursuant to Securities Exchange Act rules 13a- 14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-
Oxley Act of 2002
Certification of Principal Financial Officer pursuant to Securities Exchange Act rules 13a- 14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-
Oxley Act of 2002
Certification of Principal Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Audit Committee Charter**
Compensation Committee Charter**
Nominating and Corporate Governance Committee Charter**
Whistleblower Policy**
Consents of New Independent Directors**
Interactive Data Files
Confidential treatment is being sought for this agreement, which is being filed separately with the SEC. The confidential portions of this Exhibit have been omitted
and are marked by an asterisk. Previously filed with Amendment No. 4 to Registration Statement on Form S-1 filed on October 10, 2018.
Filed with our Registration on Form S-1 dated July 9, 2018 and Current Report on Form 8-K dated January 17, 2020.
Filed with Amendment No. 1 to Registration Statement on Form S-1 dated July 19, 2018.
Filed with Amendment No. 2 to Registration Statement on Form S-1 dated September 17, 2018.
Filed herewith.
Filed with Amendment No. 4 to Registration Statement on Form S-1 filed on October 10, 2018.
Filed with Amendment No. 5 to Registration Statement on Form S-1 filed on October 22, 2018.
Filed with Amendment No 6 to Registration Statement on Form S-1 filed on November 5, 2018.
Filed with our Current Report on Form 8-K filed on August 19, 2019.
Filed with our Current Report on Form 8-K filed on December 23, 2019.
Filed with Amendment No. 1 to our Registration Statement on Form S-1 dated January 22, 2020.
Filed with Amendment No. 2 to our Registration Statement on Form S-1 dated January 23, 2020.
Filed herewith.
XBRL Instance Document
101.INS
101.SCH
XBRL Schema Document
101.CAL XBRL Calculation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
101.LAB XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
Item 16. Form 10-K Summary.
None.
39
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
TOUGHBUILT INDUSTRIES, INC.
/s/ Michael Panosian
Michael Panosian
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: March 30, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature
Title
Date
/s/ Michael Panosian
Michael Panosian
/s/ Jolie Kahn
Jolie Kahn
/s/ Robert Faught
Robert Faught
/s/ Frederick D. Furry
Frederick D. Furry
/s/ Paul Galvin
Paul Galvin
/s/ Linda Moosaian
Linda Moosaian
Chairman and Chief Executive Officer
(Principal Executive Officer)
March 30, 2020
Chief Financial Officer
March 30, 2020
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Director
Director
40
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Michael Panosian, certify that:
1. I have reviewed this Annual Report on Form 10-K of ToughBuilt Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 30, 2020
/s/ Michael Panosian
MICHAEL PANOSIAN
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
(PRINCIPAL EXECUTIVE OFFICER)
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Jolie Kahn, certify that:
1. I have reviewed this Annual Report on Form 10-K of ToughBuilt Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 30, 2020
/s/ Jolie Kahn
JOLIE KAHN
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of ToughBuilt Industries, Inc. (the “Registrant”) on Form 10-K for the twelve-month period ended December 31, 2019 as filed
with the Securities and Exchange Commission on the date hereof, I, Michael Panosian, Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Annual Report on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
2. The information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of
ToughBuilt Industries, Inc.
Dated: March 30, 2020
/s/ Michael Panosian
Michael Panosian
Chief Executive Officer
ToughBuilt Industries, Inc.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed
form within the electronic version of this written statement required by Section 906, has been provided to ToughBuilt Industries, Inc. and will be retained by ToughBuilt
Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report of ToughBuilt Industries, Inc. (the “Registrant”) on Form 10-K for the twelve-month period ended December 31, 2019 as filed
with the Securities and Exchange Commission on the date hereof, I, Manu Ohri, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Annual Report on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
2. The information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of
ToughBuilt Industries, Inc.
Dated: March 30, 2020
/s/ Jolie Kahn
Jolie Kahn
Chief Financial Officer
ToughBuilt Industries, Inc.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed
form within the electronic version of this written statement required by Section 906, has been provided to ToughBuilt Industries, Inc. and will be retained by ToughBuilt
Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.