Feed to the latest filings at the SEC
Date Filed : Apr 29, 2019
Asfiled with the Securities and Exchange Commission on April 26, 2019.
SECURITIESAND EXCHANGE COMMISSION
REGISTRATIONSTATEMENT UNDER THE SECURITIES ACT OF 1933
(ExactName of Registrant as Specified in its Charter)
25371Commercentre Drive, Suite 200
LakeForest, CA 92630
(Address,including zip code, and telephone number,
includingarea code, of principal executive offices)
includingarea code, of agent for service)
Jolie Kahn, Esq.
33 Edgewood Locust Valley, NY 11560
Telephone: (516) 217-6379
Facsimile: (866) 705-3071
Approximatedate of proposed sale to public: As soon as practicable on or after the effective date of this registration statement.
Ifany of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 underthe Securities Act of 1933 check the following box. [X]
Ifthis Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, pleasecheck the following box and list the Securities Act registration statement number of the earlier effective registration statementfor the same offering. [ ]
Ifthis Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and listthe Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
Ifthis Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and listthe Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
Indicateby check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smallerreporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicateby check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
CALCULATIONOF REGISTRATION FEE
Title of each class of
securities to be registered
Theregistrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date untilthe registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter becomeeffective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shallbecome effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
Theinformation in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and ExchangeCommission declares our registration statement effective. This prospectus is not an offer to sell these securities and is notsoliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subjectto Completion, dated April 26, 2019
5,582,560Shares of Common Stock
Thisprospectus relates to the offer and sale of up to 5,582,560 shares (based upon a closing price of $1.07 per shareon April 25, 2019) shares of common stock of ToughBuilt Industries, Inc., a Nevada corporation, issuable to a certain sellingstockholder, of 864,560 shares owned by the selling stockholder, upon exercise of 183,102 Series B warrants into450,000 shares of common stock of the Company and 4,268,000 shares of common stock of the Company underlying 4,268shares of Series C Convertible Preferred Stock of the Company issued to the selling stockholder as a result of an April 11,2019 exchange of 1,189,560 Series A warrants and 1,005,760 Series B warrants of the Company into shares of SeriesC Converbile Preferred Stock of the Company.
Thisprospectus covers any additional shares of common stock that may become issuable by reason of stock splits, stock dividends, andother events described therein.
Unlessotherwise noted, the terms “the Company,” “our Company,” “Delcath,” “we,” “us”and “our” refer to ToughBuilt Industries, Inc. and its subsidiaries.
Theselling stockholder may offer its shares from time to time directly or through one or more underwriters, broker-dealers or agents,in the over-the-counter market at market prices prevailing at the time of sale, in one or more privately negotiated transactionsat prices acceptable to the selling stockholder, or otherwise, so long as our common stock is trading on the Nasdaq Capital Marketor the OTCQB, and if it is not trading on the OTCQB, OTCQX or a listed exchange, sales may only take place at fixed prices.
Weare registering these shares of our common stock for resale by the selling stockholder named in this prospectus, or its transferees,pledgees, donees or assigns or other successors-in-interest that receive any of the shares as a gift, distribution, or other non-salerelated transfer. We will not receive any proceeds from the sale of shares by the selling stockholder. These shares are beingregistered to permit the selling stockholder to sell shares from time to time, in amounts, at prices and on terms determined atthe time of offering. The selling stockholder may sell this common stock through ordinary brokerage transactions, directly tomarket makers of our shares or through any other means described in the section entitled “PLAN OF DISTRIBUTION” beginningof page 53. In connection with any sales of the common stock offered hereunder, the selling stockholder, any underwriters, agents,brokers or dealers participating in such sales may be deemed to be “underwriters” within the meaning of the SecuritiesAct of 1933, as amended (the “Securities Act”).
Wewill pay the expenses related to the registration of the shares covered by this prospectus. The selling stockholder will pay anycommissions and selling expenses they may incur.
Ourcommon stock trades on the Nasdaq Capital Market under the symbol “TBLT”. The closing sale price on the Nasdaq CapitalMarket on April 25, 2019, was $1.07 per share.
Ourprincipal executive offices are located at 25371 Commercentre Drive, Suite 200, Lake Forest,California 92630.
Investingin the common stock offered by this prospectus is speculative and involves a high degree of risk. See “Risk Factors”beginning on page 4.
Neitherthe Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities orpassed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
Thedate of this prospectus is ,2019
Youshould rely only on the information contained in this prospectus. We have not authorized any person to provide you with differentinformation. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making anoffer to sell these securities in any jurisdiction where the offer or sale is not permitted. The information contained in thisprospectus is accurate only as of the date of this document, regardless of the time of delivery of this prospectus or the timeof issuance or sale of any securities. Our business, financial condition, results of operations and prospects may have changedsince that date. You should read this prospectus in its entirety before making an investment decision. You should also read andconsider the information in the documents to which we have referred you in the section of this prospectus entitled “WhereYou Can Find More Information.”
Forinvestors outside of the United States, neither we nor the placement agent have done anything that would permit this offeringor possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than inthe United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and thedistribution of this prospectus outside of the United States.
Industryand Market Data
Thisprospectus includes industry data and forecasts that we obtained from industry publications and surveys, public filings and internalcompany sources. Industry publications and surveys and forecasts generally state that the information contained therein has beenobtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of the includedinformation. Statements as to our market position and market estimates are based on independent industry publications, governmentpublications, third party forecasts, management’s estimates and assumptions about our markets and our internal research.While we are not aware of any misstatements regarding the market, industry or similar data presented herein, such data involverisks and uncertainties and are subject to change based on various factors, including those discussed under the headings “RiskFactors” and “Cautionary Statement Concerning Forward-Looking Statements” in this prospectus.
Thissummary highlights selected information contained in other parts of this prospectus. Because it is a summary, it does not containall of the information that you should consider in making your investment decision. Before investing in our securities, you shouldread the entire prospectus carefully, including our financial statements and the related notes included in this prospectus andthe information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysisof Financial Condition and Results of Operations.” When used herein, unless the context requires otherwise, references to“ToughBuilt,” the “Company,” “we,” “our” and “us” refer to ToughBuiltIndustries, Inc., a Nevada corporation.
Unlessotherwise expressly provided herein, all share and per share numbers set forth herein relating to our common stock (i) assumeno exercise of (a) any warrants and/or options, (b) the representatives’ common stock purchase warrants and/or (c) the representatives’over-allotment option, and (ii) reflect a 1 for 6 reverse stock split of our common stock, which became effective on October 5,2016 and a 1 for 2 reverse stock split of our preferred stock, common stock and all equity instruments convertible into commonstock, which became effective on September 13, 2018.
Wemarket and distribute various home improvement and construction product lines for both the do-it-yourself (DIY) and professionalmarkets under TOUGHBUILT® brand name, within the global multi-billion dollar per year tool market industry. All of our productsare designed by our in-house design team.
ToughBuiltdesigns and manages its product life cycles through a controlled and structured process. We involve customers and industry expertsfrom our target markets in the definition and refinement of our product development. Product development emphasis is placed onmeeting industry standards and product specifications, ease of integration, ease of use, cost reduction, design-for manufacturability,quality and reliability.
SinceAugust 2013, pursuant to a Service Agreement with Belegal Industrial Co., Ltd. (“Belegal”), we have been collaboratingwith Belegal, whose team of experts has provided ToughBuilt additional engineering and sourcing services and quality control supportfor our operations in China. Belegal assists us with supply-chain issues for our operations in China by, among other things, facilitatingthe 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.
Ourbusiness is based on development of innovative and state of the art products, primarily in tools and hardware category, with particularfocus on the building and construction industry with the ultimate goal of making life easier and more productive for the contractorsand workers alike.
Ourcurrent product line includes major categories related to this field, with several additional categories, in various stages ofdevelopment, consisting of Soft Goods & Kneepads and Sawhorses & Work Products, each of which is described below. Additionally,we have developed a line of ruggedized mobile devices with proprietary applications designed to maximize the productivity of ourtarget customers in the field. We anticipate launching sales of our mobile products during 2019.
Themission of our Company includes, but is not limited to, providing products to the building and home improvement communities thatare 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.
Risksand Challenges That We Face
Aninvestment in our securities involves a high degree of risk. You should carefully consider the risks summarized below and theother risks that are discussed more fully in the “Risk Factors” section of this prospectus immediately following thisprospectus summary. These risks include, but are not limited to, the following:
Implicationsof being an Emerging Growth Company
Weare an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, or the Securities Act,as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we are eligible to take advantage ofcertain exemptions from various reporting requirements applicable to other public companies that are not “emerging growthcompanies” including, but not limited to:
●being permitted to present only two years of audited financial statements and only two years of related disclosure in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” in this prospectus;
●being permitted to provide less extensive narrative disclosure than other public companies including not being required to complywith the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosure obligationsregarding executive compensation in our periodic reports, proxy statements and registration statements;
●being permitted to utilize exemptions from the requirements of holding a nonbinding advisory vote on executive compensation andstockholder approval of any golden parachute payments not previously approved;
●being permitted to defer complying with certain changes in accounting standards; and
●being permitted to use test-the-waters communications with qualified institutional buyers and institutional accredited investors.
Weintend to take advantage of these and other exemptions available to “emerging growth companies.” We could remain an“emerging growth company” until the earliest of (a) the last day of our fiscal year following the fifth anniversaryof the closing of this offering, (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-2under the Securities Exchange Act of 1934, or Exchange Act (which would occur if the market value of our equity securities thatis 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.
TheJOBS Act permits an “emerging growth company” like us to take advantage of an extended transition period to complywith new or revised accounting standards applicable to public companies. This means that an “emerging growth company”can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We haveelected to delay such adoption of new or revised accounting standards.
OurCompany was incorporated on April 9, 2012 as Phalanx, Inc., under the laws of the State of Nevada and changed its name to ToughBuiltIndustries, Inc. on December 29, 2015. The address of our principal office is 25371 Commercentre Drive, Suite 200, Lake Forest,California 92630 and our telephone number is (949) 528-3100. Our corporate website is www.toughbuilt.com. Our website andthe information contained in, or accessible through, our website will not be deemed to be incorporated by reference into thisprospectus and does not constitute part of this prospectus.
SUMMARYOF THE OFFERING
Thenumber of shares of common stock that will be outstanding after this offering set forth above is based on 15,582,153 shares ofcommon stock outstanding as of April 21, 2019, and excludes the following:
875,000 shares of common stock reserved for issuance under our 2016 Stock Option Plan, and 1,000,000 shares of common stock reserved for issuance under our 2018 Equity Incentive Plan;
7,920,051 shares of common stock issuable upon exercise of warrants to be issued to the investors and representatives at an exercise price per share ranging from $5.00 to $12.00; and
Unlessspecifically stated otherwise, all information in this prospectus assumes:
Aninvestment in our common stock involves a high degree of risk. You should carefully consider the risks described below, togetherwith all of the other information included in this prospectus, before making an investment decision. If any of the following risksactually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of ourshares of common stock could decline and you may lose all or part of your investment. See “Cautionary Note Regarding Forward-LookingStatements” below for a discussion of forward-looking statements and the significance of such statements in the contextof this prospectus.
RisksRelated to Our Company
Wehave a limited operating history on which to judge our business prospects and management.
Ourcompany was incorporated and commenced operations in April 2012. Accordingly, we have only a limited operating history upon whichto base an evaluation of our business and prospects. Operating results for future periods are subject to numerous uncertaintiesand we cannot assure you that we will achieve or sustain profitability. Our prospects must be considered in light of the risksencountered by companies in the early stage of development, particularly companies in new and rapidly evolving markets. Futureoperating results will depend upon many factors, including increasing the number of affiliates, our success in attracting andretaining motivated and qualified personnel, our ability to establish short term credit lines, our ability to develop and marketnew products, control costs, and general economic conditions. We cannot assure you that we will successfully address any of theserisks.
Certainprovisions of our Articles of Incorporation could allow concentration of voting power in one individual, which may, among otherthings, delay or frustrate the removal of incumbent directors or a takeover attempt, even if such events may be beneficial toour shareholders.
Provisionsof our articles of incorporation adopted by our Board of Directors, such as our ability to designate and issue a class of preferredstock, may delay or frustrate the removal of incumbent directors and may prevent or delay a merger, tender offer or proxy contestinvolving our Company that is not approved by our Board of Directors, even if those events may be perceived to be in the bestinterests of our shareholders. For example, one or more of our affiliates could theoretically be issued a newly authorized anddesignated class of shares of our preferred stock. Such shares could have significant voting power, among other terms. Consequently,anyone to whom these shares were issued could have sufficient voting power to significantly influence if not control the outcomeof all corporate matters submitted to the vote of our common shareholders. Those matters could include the election of directors,changes in the size and composition of the Board of Directors, and mergers and other business combinations involving our Company.In addition, through any such person’s control of the Board of Directors and voting power, the affiliate may be able tocontrol certain decisions, including decisions regarding the qualification and appointment of officers, dividend policy, accessto capital (including borrowing from third-party lenders and the issuance of additional equity securities), and the acquisitionor disposition of assets by our Company. In addition, the concentration of voting power in the hands of an affiliate could havethe effect of delaying or preventing a change in control of our Company, even if the change in control would benefit our shareholdersand may adversely affect the future market price of our common stock should a trading market therefor develop.
Wemay need, but be unable, to obtain additional funding on satisfactory terms, which could dilute our shareholders or impose burdensomefinancial restrictions on our business.
Wehave relied upon cash from financing activities and in the future, we hope to rely on revenues generated from operations to fundthe cash requirements of our activities. However, there can be no assurance that we will be able to generate any significant cashfrom our operating activities in the future. Future financing may not be available on a timely basis, in sufficient amounts oron terms acceptable to us, if at all. Any debt financing or other financing of securities senior to the common stock will likelyinclude financial and other covenants that will restrict our flexibility. Any failure to comply with these covenants would havea material adverse effect on our business, prospects, financial condition and results of operations because we could lose ourexisting sources of funding and impair our ability to secure new sources of funding.
Wehave recorded a net loss for the years ended December 31. We may not be able to generate any profit in the foreseeable future.
Forthe year ended December 31, 2018, we realized a net loss of $27,651,412 compared to a net loss of $5,941,457 for the year endedDecember 31, 2017. Although we reported losses for the years ended December 31, 2018 and 2017, there is no assurance that theprofits will be realized in fiscal 2019 or thereafter. We believe that our current cash balances coupled with anticipated cashflow from operating activities will be sufficient to meet our working capital requirements for at least one year from the dateof the issuance of the accompanying financial statements. We continue to control our cash expenses as a percentage of expectedrevenue on an annual basis and thus may use our cash balances in the short-term to invest in revenue growth. Based on currentinternal projections, we believe that we have or /will have or will generate sufficient cash for our operational needs, includingany required debt payments, for at least one year from the date of issuance of the accompanying financial statements. Managementis focused on growing the Company’s existing product offering, as well as its customer base, to increase its revenues. Wecannot give assurance that we can increase our cash balances or limit our cash consumption and thus maintain sufficient cash balancesfor our planned operations or future acquisitions. Future business demands may lead to cash utilization at levels greater thanrecently experienced. We may need to raise additional capital in the future. However, we cannot assure that we will be able toraise additional capital on acceptable terms, or at all. Subject to the foregoing, management believes that the Company has sufficientcapital and liquidity to fund its operations for at least one year from the date of issuance of the accompanying financial statements.
Technologychanges rapidly in our business, and if we fail to anticipate new technologies, the quality, timeliness and competitiveness ofour products will suffer.
Rapidtechnology changes in our industry require us to anticipate, sometimes years in advance, which technologies our products musttake advantage of in order to make them competitive in the market at the time they are released. Therefore, we usually start ourproduct development with a range of technical development goals that we hope to be able to achieve. We may not be able to achievethese goals, or our competition may be able to achieve them more quickly than we can. In either case, our products may be technologicallyinferior to competitive products, or less appealing to consumers, or both. If we cannot achieve our technology goals within theoriginal development schedule of our products, then we may delay products until these technology goals can be achieved, whichmay delay or reduce revenue and increase our development expenses. Alternatively, we may increase the resources employed in researchand development in an attempt to accelerate our development of new technologies, either to preserve our product launch scheduleor to keep up with our competition, which would increase our development expenses and adversely affect our operations and financialcondition.
Wemust effectively manage the growth of our operations, or our Company will suffer.
Oursignificant increase in the scope and the scale of our mobile product launch, including the hiring of additional personnel, hasresulted in significantly higher operating expenses. As a result, we anticipate that our operating expenses will continue to increase.Expansion of our operations may also cause a significant demand on our management, finances and other resources. Our ability tomanage the anticipated future growth, should it occur, will depend upon a significant expansion of our accounting and other internalmanagement systems and the implementation and subsequent improvement of a variety of systems, procedures and controls. There canbe no assurance that significant problems in these areas will not occur. Any failure to expand these areas and implement and improvesuch systems, procedures and controls in an efficient manner at a pace consistent with our business could have a material adverseeffect on our business, financial condition and results of operations. There can be no assurance that our attempts to expand ourmarketing, sales, manufacturing and customer support efforts will be successful or will result in additional sales or profitabilityin any future period. As a result of the expansion of our operations and the anticipated increase in our operating expenses, aswell as the difficulty in forecasting revenue levels, we expect to continue to experience significant fluctuations in our resultsof operations.
Becausewe have transactions with companies in China, we may have limited legal recourse under Chinese law if disputes arise with thirdparties.
TheChinese government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreigninvestment, mergers and acquisitions, intellectual property, commerce, taxation and trade. However, the PRC’s experiencein implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claimsor to resolve commercial disputes is unpredictable. If any new business ventures in which we may become involved are unsuccessful,or other adverse circumstances arise from these transactions, we face the risk that the parties to these ventures may seek waysto terminate the transactions, or, may hinder or prevent us from accessing important information regarding the financial and businessoperations of any acquired companies. The resolution of these matters may be subject to the exercise of considerable discretionby agencies and other instrumentalities of the Chinese government or those acting on its behalf, and forces unrelated to the legalmerits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, orto seek an injunction under Chinese law, in either of these cases, are severely limited, and without a means of recourse by virtueof the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events couldhave a material adverse effect on our business, financial condition and results of operations.
Relianceon foreign suppliers could adversely affect our business.
Wesource our products from suppliers located in Asia and the United States. Our Asian vendors are located primarily in China, whichsubjects us to various risks within the region including regulatory, political, economic and foreign currency changes. Our abilityto select and retain reliable vendors and suppliers who provide timely deliveries of quality products efficiently will impactour success in meeting customer demand for timely delivery of quality products. Our sourcing operations and our vendors are impactedby labor costs in China. Labor historically has been readily available at low cost relative to labor costs in North America. However,as China is experiencing rapid social, political and economic changes, labor costs have risen in some regions and there can beno assurance that labor will continue to be available to us in China at costs consistent with historical levels or that changesin labor or other laws will not be enacted which would have a material adverse effect on our ability to source our products fromChina. Interruption of supplies from any of our vendors, or the loss of one or more key vendors, could have a negative effecton our business and operating results.
Changesin currency exchange rates might negatively affect the profitability and business prospects of our Company and our overseas vendors.In particular, although the Chinese Renminbi has recently depreciated against the U.S. Dollar, if the Chinese Renminbi appreciateswith respect to the U.S. Dollar in the future, we may experience cost increases on such purchases, and this can adversely impactprofitability. Future interventions by China may result in further currency appreciation and increase our product costs over time.We may not be successful at implementing customer pricing or other actions in an effort to mitigate the related effects of theproduct cost increases.
Additionalfactors that could adversely affect our business include increases in transportation costs, new or increased import duties, transportationdelays, work stoppages, capacity constraints and poor quality.
Contractdrafting, interpretation and enforcement in China involve significant uncertainty.
Wehave entered into numerous contracts governed by PRC law, many of which are material to our business. As compared with contractsin the United States, contracts governed by PRC law tend to contain less detail and to not be as comprehensive in defining contractingparties’ rights and obligations. As a result, contracts in China are more vulnerable to disputes and legal challenges. Inaddition, contract interpretation and enforcement in China is not as developed as in the United States, and the result of anycontract dispute is subject to significant uncertainties. Therefore, we cannot assure you that we will not be subject to disputesunder our material contracts, and if such disputes arise, we cannot assure you that we will prevail.
Wemay be unable to successfully expand our production capacity, which could result in material delays, quality issues, increasedcosts and loss of business opportunities, which may negatively impact our product margins and profitability.
Partof our future growth strategy is to increase our production capacity to meet increasing demand for our existing goods. Assumingwe obtain sufficient funding to increase our production capacity, any projects that we undertake to increase such capacity maynot be constructed on the anticipated timetable or within budget. We may also experience quality control issues as we implementthese production upgrades. Any material delay in completing these projects, or any substantial increase in costs or quality issuesin connection with these projects, could materially delay our ability to bring our products to market and adversely affect ourbusiness, reduce our revenue, income and available cash, all of which could result in harming our financial condition.
Werely on highly skilled personnel and the continuing efforts of our executive officers and, if we are unable to retain, motivateor hire qualified personnel, our business may be severely disrupted.
Ourperformance largely depends on the talents, knowledge, skills and know-how and efforts of highly skilled individuals and in particular,the expertise held by our Chief Executive Officer, Michael Panosian. His absence, were it to occur, could materially and adverselyimpact the development and implementation of the projects and businesses. Our future success depends on our continuing abilityto identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. Our continued abilityto compete effectively depends on our ability to attract new technology developers and to retain and motivate our existing contractors.If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able toreplace them readily, if at all. Therefore, our business may be severely disrupted, and we may incur additional expenses to recruitand retain new officers. In addition, if any of our executives joins a competitor or forms a competing company, we may lose someof our customers.
RisksRelated to Our Business
Wehave limited manufacturing capabilities and we are dependent upon third parties to manufacture our product.
Weare dependent upon our relationships with independent manufacturers to fulfill most of our product needs. While we have severalmanufacturing facilities available to us, we currently are using only one manufacturer for each of our products besides our limitedcapabilities. Accordingly, we are dependent on the uninterrupted and efficient operation of these manufacturers’ facilities.Our ability to market and sell our products requires that our product be manufactured in commercial quantities, without significantdelay and in compliance with applicable federal and state regulatory requirements. In addition, we must be able to have our productsmanufactured at a cost that permits us to charge a price acceptable to the customer while also accommodating any distributioncosts or third-party sales compensation. If our current manufacturers are unable for any reason to fulfill our requirements, orseek to impose unfavorable terms, we will have to seek out other contract manufacturers, which could disrupt our operations andhave a material adverse effect on our results of operation and financial condition. Competitors who perform their own manufacturingmay have an advantage over us with respect to pricing, availability of products, and in other areas through their control of themanufacturing process.
Weface significant competition and continuous technological change, and developments by competitors may render our licensed technologiesobsolete or non-competitive. If we cannot successfully compete with new or existing products, our marketing and sales will sufferand we may not ever be profitable.
Ifwe are able to fund and implement our business plan we will likely compete against fully integrated technology companies and smallercompanies that are collaborating with larger technology companies. In addition, many of these prospective competitors, eitheralone or together with their collaborative partners, operate larger research and development programs than we do, and have substantiallygreater financial resources than we do.
Ifour prospective competitors develop and commercialize technologies faster than we do or develop and commercialize technologiesthat are superior to our technology candidates, our commercial opportunities will be reduced or eliminated. The extent to whichany of our technology candidates achieve market acceptance will depend on competitive factors, many of which are beyond our control.Competition in the technology industry is intense and has been accentuated by the rapid pace of development. Almost all of theseentities have substantially greater research and development capabilities and financial, scientific, manufacturing, marketingand sales resources than we do. These organizations also compete with us to:
Ourcompetitors may succeed in developing and commercializing products earlier than we do. Our competitors may also develop productsor technologies that are superior to those we are developing and render our technology candidates or technologies obsolete ornon-competitive. If we cannot successfully compete with new or existing products and technologies, our marketing and sales willsuffer and we may not ever be profitable.
Ourdevelopment of innovative features for current products is critical to sustaining and growing our sales.
Historically,our ability to provide value-added custom engineered products that address requirements of technology and space utilization hasbeen a key element of our success. We spend a significant amount of time and effort to refine, improve and adapt our existingproducts for new customers and applications. The introduction of new product features requires the coordination of the design,manufacturing and marketing of the new product features with current and potential customers. The ability to coordinate theseactivities with current and potential customers may be affected by factors beyond our control. While we will continue to emphasizethe introduction of innovative new product features that target customer-specific opportunities, we do not know if any new productfeatures we introduce will achieve the same degree of success that we have achieved with our existing products. Introduction ofnew product features typically requires us to increase production volume on a timely basis while maintaining product quality.Manufacturers often encounter difficulties in increasing production volumes, including delays, quality control problems and shortagesof qualified personnel or raw materials. As we attempt to introduce new product features in the future, we do not know if we willbe able to increase production volume without encountering these or other problems, which might negatively impact our financialcondition or results of operations.
Ourproducts may never achieve market acceptance by customers in markets necessary for commercial success and the market opportunitymay be smaller than we estimate.
Therecan be no assurance that the market will continue the acceptance of our products we introduced in recent years or will acceptnew products, such as our mobile device products and our proposed clothing line for the construction industry scheduled for introductionin 2019. There can also be no assurance that the level of sales generated from these new products (including the introductionof products into new geographic markets) relative to our expectations will materialize. Market acceptance of any product candidatedepends on a number of factors including, but not limited to:
Anyfailure by any of our product candidates to achieve market approval or commercial success would adversely affect our businessprospects.
Weare just commencing commercialization of our new mobile device products.
Evenif we are successful in developing these new products that reach commercialization, we will not be successful unless these productsgain market acceptance. The degree of market acceptance of these products will depend on a number of factors, including:
Evenif we successfully develop one or more of these products, we may not become profitable.
Risksassociated with the disruption of manufacturing operations could adversely affect profitability or competitive position.
Wemanufacture a limited portion of the products we sell. Any prolonged disruption in the operations of our or our manufacturers’existing manufacturing facilities, whether due to technical or labor difficulties, facility consolidation or closure actions,lack of raw material or component availability, destruction of or damage to any facility (as a result of natural disasters, useand storage of hazardous materials or other events), or other reasons, could have a material adverse effect on our business, financialcondition, results of operations and cash flows.
Theinability to continue to introduce new products that respond to customer needs and achieve market acceptance could result in lowerrevenues and reduced profitability.
Salesfrom new products represent a significant portion of our net sales and are expected to continue to represent a significant componentof our future net sales. We may not be able to compete effectively unless we continue to enhance existing products or introducenew products to the marketplace in a timely manner. Product improvements and new product introductions require significant financialand other resources, including significant planning, design, development, and testing at the technological, product and manufacturingprocess levels. Our competitors’ new products may beat our products to market, be more effective with more features, beless expensive than our products, and/or render our products obsolete. Any new products that we develop may not receive marketacceptance or otherwise generate any meaningful net sales or profits for us relative to our expectations based on, among otherthings, existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotionalprograms and research and development.
Theglobal tool, equipment, and diagnostics and repair information industries are competitive.
Weface strong competition in all of our market segments. Price competition in our various industries is intense and pricing pressuresfrom competitors and customers are increasing. In general, as a manufacturer and marketer of premium products and services, theexpectations of our customers are high and continue to increase. Any inability to maintain customer satisfaction could diminishour premium image and reputation and could result in a lessening of our ability to command premium pricing. We expect that thelevel of competition will remain high in the future, which could limit our ability to maintain or increase market share or profitability.
Productliability claims and other kinds of litigation could affect our business, reputation, financial condition, results of operationsand cash flows.
Theproducts that we design and/or manufacture, and/or the services we provide, can lead to product liability claims or other legalclaims being filed against us. To the extent that plaintiffs are successful in showing that a defect in a product’s design,manufacture or warnings led to personal injury or property damage, or that our provision of services resulted in similar injuryor damage, we may be subject to claims for damages. Although we are insured for damages above a certain amount, we bear the costsand expenses associated with defending claims, including frivolous lawsuits, and are responsible for damages below the insuranceretention amount. In addition to claims concerning individual products, as a manufacturer, we can be subject to costs, potentialnegative publicity and lawsuits related to product recalls, which could adversely impact our results and damage our reputation.
Wemay from time to time become subject to legal proceedings other than those relating to product liability claims.
OnAugust 16, 2016, Edwin Minassian filed a complaint against the Company and Michael Panosian, our Chief Executive Officer, in theSuperior Court of California, County of Los Angeles. The complaint alleges breach of oral contracts to pay Mr. Minassian for consultingand finder’s fees, and to hire him as an employee. The complaint further alleges, among other things, fraud and misrepresentationrelating to the alleged tender of $100,000 to the Company in exchange for “a 2% stake in ToughBuilt” of which only$20,000 was delivered. The complaint seeks unspecified monetary damages, declaratory relief concerning the plaintiff’s contentionthat he has an unresolved 9% ownership stake in ToughBuilt and other relief according to proof. On April 12, 2018, the Court enteredjudgments against the Company and Mr. Panosian in the amounts of $7,080 and $235,542, plus awarding Mr. Minassian a 7% ownershipinterest in the Company (the “Judgments”). Mr. Minassian served notice of entry of the judgments on April 17, 2018and the Company and Mr. Panosian received notice of the entry of the default judgments on April 19, 2018. On April 25, 2018, theCompany and Mr. Panosian filed a motion to have the April 12, 2018 default judgment on Plaintiff’s Complaint, the February13, 2018 defaults, and April 14, 2017 Order for terminating sanctions striking Defendants’ Answer set aside on the basisof their former attorney’s declaration that his negligence resulted in the default judgment, default, and terminating sanctionsbeing entered against the Company and Mr. Panosian. The motion was denied. On September 13, 2018, the Company and Panosian satisfiedthe Judgments by the Company making a payment of $252,950 (which included $10,303 post judgment interest) to Minassian and byMr. Panosian issuing him shares reflecting a 7% ownership stake in the Company from management owned shares. On October 18, 2018,the Company and Mr. Panosian filed a Notice of Appeal in the Superior Court of the State of California, Los Angeles County, withrespect to the Order denying their motion for relief from the above referenced default judgment. The appeal is still pending.
Ourproducts could be recalled.
TheConsumer Product Safety Commission or other applicable regulatory bodies may require the recall, repair or replacement of ourproducts if those products are found not to be in compliance with applicable standards or regulations. A recall could increasecosts and adversely impact our reputation.
Weplan to expand our international operations, which will subject us to risks inherent with operations outside of the United States.
Althoughwe do not have significant foreign operations at this time other than selling our products through retailers, we intend to seekand expand upon opportunities in foreign markets that we anticipate will constitute significant operations. However, even withthe cooperation of a commercialization partner, conducting product development in foreign countries involves inherent risks, including,but not limited to difficulties in staffing, funding and managing foreign operations; unexpected changes in regulatory requirements;export restrictions; tariffs and other trade barriers; difficulties in protecting, acquiring, enforcing and litigating intellectualproperty rights; fluctuations in currency exchange rates; and potentially adverse tax consequences. If we were to experience anyof the difficulties listed above, or any other difficulties, any international development activities and our overall financialcondition may suffer and cause us to reduce or discontinue our international development efforts.
Ourmanagement team has limited experience managing a public company, and regulatory compliance may divert our attention from theday-to-day management of our business.
Ourmanagement team has limited experience managing a publicly-traded company and limited experience complying with the increasinglycomplex laws pertaining to public companies. These obligations typically require substantial attention from our senior managementand could divert our attention away from the day-to-day management of our business.
Ourinternal control over financial reporting does not currently meet the standards required by Section 404 of the Sarbanes-OxleyAct of 2002, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.
Wehave not maintained internal control over financial reporting in a manner that meets the standards of publicly traded companiesrequired by Section 404 of the Sarbanes-Oxley Act of 2002. The rules governing the standards that must be met for our managementto assess our internal control over financial reporting are complex and require significant documentation, testing and possibleremediation. We expect to begin the process of reviewing, documenting and testing our internal control over financial reportingafter completion of this initial public offering. We might encounter problems or delays in completing the implementation of anychanges necessary to make a favorable assessment of our internal control over financial reporting. If we cannot favorably assessthe effectiveness of our internal control over financial reporting, investors could lose confidence in our financial informationand the price of our common stock could decline.
Underthe supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer,we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e)and 15d15(e) of the Exchange Act) as of the end of the period covered by this Annual Report.
Basedon such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, ourdisclosure controls and procedures are not effective in recording, processing, summarizing and reporting, on a timely basis, informationrequired to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring thatinformation required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicatedto our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosure.
Wehave a material weakness in our internal controls over financial reporting, which if left unremediated could materially and adverselyeffect the market price of our common stock.
Asof December 31, 2018, we did not maintain effective controls over the control environment, including our internal control overfinancial reporting due to the following material weaknesses. Because we are a small company with only two full time employeesin our finance department, we lacked the ability to have adequate segregation of duties in the financial statement preparationprocess. In addition, lack of adequate review resulted in audit adjustments. Further, the Company did not maintain adequate documentationfor review and approval of matters impacting financial reporting. Lastly, until November 14, 2018, our Board of Directors didnot have any independent members or a director who qualified as an audit committee financial expert as defined in Item 407(d)(5)(ii)of Regulation S-K, there was no independent oversight until the last half of the fourth quarter of our 2018 fiscal year.
Planfor Remediation of Material Weaknesses
Since these entity level controls have a pervasive effect across the organization, managementhas determined that these circumstances constitute a material weakness. We believe that, since the date that we were made awareof our material weakness, we have improved our internal control over financial reporting by taking certain corrective steps thatwe believe minimize the likelihood of a recurrence. We have designed a disclosure controls and procedures regime pursuant to whichour management has, among other things: (a) identified the definition, objectives, application and scope of our internal controlover financial reporting; (b) delineated the duties of each member of the group responsible for maintaining the adequacy of ourinternal control over financial reporting. This group consists of: (i) our Chief Executive Officer; and (ii) our Chief FinancialOfficer who was engaged to prepare and assure compliance with both our internal control over financial reporting as well as ourdisclosure controls and procedures and review our disclosure controls and procedures on a regular basis, subject to our management’ssupervision.
Wemay need to increase the size of our organization and we may experience difficulties in managing growth.
Weintend to rapidly expand operations to implement our business strategy. We also may acquire other companies or technologies. Anyexpansion or acquisitions are expected to place a significant strain on our managerial, operational, and financial resources.To manage the expected growth of operations, we may need to develop and maintain operational and financial systems and proceduresand controls, which may cause us to incur significant expenses. As we may incur many of these expenses before receiving any significantrevenues from our efforts, it may be more difficult to achieve or maintain profitability.
Aninvestment in our securities is extremely speculative and there can be no assurance of any return on any such investment.
Aninvestment in our securities is extremely speculative and there can be no assurance that investors will obtain any return on theirinvestment. Investors may be subject to substantial risks involved in an investment us, including the risk of losing their entireinvestment.
RisksRelated to Our Intellectual Property
Ifwe are unable to protect our intellectual property, our business may be adversely affected.
Wemust protect the proprietary nature of the intellectual property used in our business. There can be no assurance that trade secretsand other intellectual property will not be challenged, invalidated, misappropriated or circumvented by third parties. Currently,our intellectual property includes issued patents, patent applications, trademarks, trademark applications and know-how relatedto business, product and technology development. We plan on taking the necessary steps, including but not limited to the filingof additional patents as appropriate. There is no assurance any additional patents will issue or that when they do issue theywill include all of the claims currently included in the applications. Even if they do issue, those new patents and our existingpatents must be protected against possible infringement. Nonetheless, we currently rely on contractual obligations of our employeesand contractors to maintain the confidentiality of our products. To compete effectively, we need to develop and continue to maintaina proprietary position with respect to our technologies, and business. The risks and uncertainties that we face with respect tointellectual property rights principally include the following:
Itis also possible that others may obtain issued patents that could prevent us from commercializing certain aspects of our productsor require us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business.If we license patents, our rights will depend on maintaining its obligations to the licensor under the applicable license agreement,and we may be unable to do so. Furthermore, there can be no assurance that the work-for-hire, intellectual property assignmentand confidentiality agreements entered into by our employees and consultants, advisors and collaborators will provide meaningfulprotection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosureof such trade secrets, know- how or other proprietary information. The scope and enforceability of patent claims are not systematicallypredictable with absolute accuracy. The strength of our own patent rights depends, in part, upon the breadth and scope of protectionprovided by the patent and the validity of our patents, if any.
Weoperate in an industry with the risk of intellectual property litigation. Claims of infringement against us may hurt our business.
Oursuccess depends, in part, upon non-infringement of intellectual property rights owned by others and being able to resolve claimsof intellectual property infringement without major financial expenditures or adverse consequences. Participants that own, orclaim to own, intellectual property may aggressively assert their rights. From time to time, we may be subject to legal proceedingsand claims relating to the intellectual property rights of others. Future litigation may be necessary to defend us or our clientsby determining the scope, enforceability, and validity of third-party proprietary rights or to establish its proprietary rights.Some competitors have substantially greater resources and are able to sustain the costs of complex intellectual property litigationto a greater degree and for longer periods of time. In addition, patent holding companies that focus solely on extracting royaltiesand settlements by enforcing patent rights may target us. Regardless of whether claims that we are infringing patents or otherintellectual property rights have any merit, these claims are time-consuming and costly to evaluate and defend and could:
Inaddition to liability for monetary damages, which may be tripled and may include attorneys’ fees, or, in some circumstances,damages against clients, we may be prohibited from developing, commercializing, or continuing to provide some or all of our productsunless we obtain licenses from, and pay royalties to, the holders of the patents or other intellectual property rights, whichmay not be available on commercially favorable terms, or at all.
Wehave limited foreign intellectual property rights and may not be able to protect our intellectual property rights throughout theworld.
Wehave limited intellectual property rights outside the United States. Filing, prosecuting and defending patents on devices in allcountries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outsidethe United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do notprotect intellectual property to the same extent as laws in the United States. Consequently, we may not be able to prevent thirdparties from practicing our inventions in all countries outside the United States, or from selling or importing products madeusing our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictionswhere we have not obtained patents to develop their own products and further, may export otherwise infringing products to territorieswhere we have patents, but enforcement is not as strong as that in the United States.
Manycompanies have encountered significant problems in protecting and defending intellectual property in foreign jurisdictions. Thelegal systems of certain countries, particularly China and certain other developing countries, do not favor the enforcement ofpatents, trade secrets and other intellectual property, which could make it difficult for us to stop the infringement of our patentsor marketing of competing products in violation of our proprietary rights generally. To date, we have not sought to enforce anyissued patents in these foreign jurisdictions. Proceedings to enforce our patent rights in foreign jurisdictions could resultin substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk ofbeing invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties toassert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any,may not be commercially meaningful. The requirements for patentability may differ in certain countries, particularly developingcountries. Certain countries in Europe and developing countries, including China and India, have compulsory licensing laws underwhich a patent owner may be compelled to grant licenses to third parties. In those countries, we and our licensors may have limitedremedies if patents are infringed or if we or our licensors are compelled to grant a license to a third party, which could materiallydiminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our efforts to enforceour intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectualproperty that we develop or license.
Ourpatent position is highly uncertain and involves complex legal and factual questions.
Accordingly,we cannot predict the breadth of claims that may be allowed or enforced under our patents or in third-party patents. For example,we might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;we might not have been the first to file patent applications for these inventions; others may independently develop similar oralternative technologies or duplicate any of our technologies; it is possible that none of our pending patent applications willresult in issued patents; our issued patents may not provide a basis for commercially viable technologies, or may not provideus with any competitive advantages, or may be challenged and invalidated by third parties; and, we may not develop additionalproprietary technologies that are patentable.
Asa result, our owned and licensed patents may not be valid and we may not be able to obtain and enforce patents and to maintaintrade secret protection for the full commercial extent of our technology. The extent to which we are unable to do so could materiallyharm our business.
Wehave applied for and will continue to apply for patents for certain products. Such applications may not result in the issuanceof any patents, and any patents now held or that may be issued may not provide us with adequate protection from competition. Furthermore,it is possible that patents issued or licensed to us may be challenged successfully. In that event, if we have a preferred competitiveposition because of such patents, such preferred position would be lost. If we are unable to secure or to continue to maintaina preferred position, we could become subject to competition from the sale of generic products. Failure to receive, inabilityto protect, or expiration of our patents would adversely affect our business and operations.
Patentsissued or licensed to us may be infringed by the products or processes of others. The cost of enforcing our patent rights againstinfringers, if such enforcement is required, could be significant, and we do not currently have the financial resources to fundsuch litigation. Further, such litigation can go on for years and the time demands could interfere with our normal operations.We may become a party to patent litigation and other proceedings. The cost to us of any patent litigation, even if resolved inour favor, could be substantial. Many of our competitors may be able to sustain the costs of such litigation more effectivelythan we can because of their substantially greater financial resources. Litigation may also absorb significant management time.
Unpatentedtrade secrets, improvements, confidential know-how and continuing technological innovation are important to our scientific andcommercial success. Although we attempt to and will continue to attempt to protect our proprietary information through relianceon trade secret laws and the use of confidentiality agreements with our partners, collaborators, employees and consultants, aswell as through other appropriate means, these measures may not effectively prevent disclosure of our proprietary information,and, in any event, others may develop independently, or obtain access to, the same or similar information.
Internationalintellectual property protection is particularly uncertain, and if we are involved in opposition proceedings in foreign countries,we may have to expend substantial sums and management resources.
Patentand other intellectual property law outside the United States is more uncertain and is continually undergoing review and revisionsin many countries. Further, the laws of some foreign countries may not protect intellectual property rights to the same extentas the laws of the United States. For example, certain countries do not grant patent claims that are directed to business methodsand processes. In addition, we may have to participate in opposition proceedings to determine the validity of its foreign patentsor its competitors’ foreign patents, which could result in substantial costs and diversion of its efforts and loss of credibilitywith customers.
Ifwe are found to be infringing on patents or trade secrets owned by others, we may be forced to cease or alter our product developmentefforts, obtain a license to continue the development or sale of our products, and/or pay damages.
Ourmanufacturing processes and potential products may violate proprietary rights of patents that have been or may be granted to competitors,universities or others, or the trade secrets of those persons and entities. As our industry expands and more patents are issued,the risk increases that our processes and potential products may give rise to claims that they infringe the patents or trade secretsof others. These other persons could bring legal actions against us claiming damages and seeking to enjoin manufacturing and marketingof the affected product or process. If any of these actions are successful, in addition to any potential liability for damages,we could be required to obtain a license in order to continue to manufacture or market the affected product or use the affectedprocess. Required licenses may not be available on acceptable terms, if at all, and the results of litigation are uncertain. Ifwe become involved in litigation or other proceedings, it could consume a substantial portion of our financial resources and theefforts of our personnel.
Werely on confidentiality agreements to protect our trade secrets. If these agreements are breached by our employees or other parties,our trade secrets may become known to our competitors.
Werely on trade secrets that we seek to protect through confidentiality agreements with our employees and other parties. If theseagreements are breached, our competitors may obtain and use our trade secrets to gain a competitive advantage over us. We maynot have any remedies against our competitors and any remedies that may be available to us may not be adequate to protect ourbusiness or compensate us for the damaging disclosure. In addition, we may have to expend resources to protect our interests frompossible infringement by others.
RisksRelated to this Offering and the Ownership of Our Common Stock
Ourshares will be subject to potential delisting if we do not maintain the listing requirements of the NASDAQ Capital Market.
NASDAQhas rules for continued listing, including, without limitation, minimum market capitalization and other requirements. Failureto maintain our listing, or de-listing from NASDAQ, would make it more difficult for shareholders to dispose of our common stockand more difficult to obtain accurate price quotations on our common stock. This could have an adverse effect on the price ofour common stock. Our ability to issue additional securities for financing or other purposes, or otherwise to arrange for anyfinancing we may need in the future, may also be materially and adversely affected if our common stock is not traded on a nationalsecurities exchange.
Therequirements of being a public company may strain our resources, divert management’s attention and affect our results ofoperations.
Asa public company in the United States, we will face increased legal, accounting, administrative and other costs and expenses.After the consummation of this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934,as amended, or the Exchange Act, and the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. The Exchange Act requires, amongother things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-OxleyAct requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financialreporting. For example, Section 404 of the Sarbanes-Oxley Act requires that our management report on the effectiveness of ourinternal controls structure and procedures for financial reporting. Section 404 compliance may divert internal resources and willtake a significant amount of time and effort to complete. If we fail to maintain compliance under Section 404, or if in the futuremanagement determines that our internal control over financial reporting are not effective as defined under Section 404, we couldbe subject to sanctions or investigations by NASDAQ should we in the future be listed on this market, the SEC, or other regulatoryauthorities. Furthermore, investor perceptions of our Company may suffer, and this could cause a decline in the market price ofour common stock. Any failure of our internal control over financial reporting could have a material adverse effect on our statedresults of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it couldharm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls fromour independent auditors. We may need to hire a number of additional employees with public accounting and disclosure experiencein order to meet our ongoing obligations as a public company, particularly if we become fully subject to Section 404 and its auditorattestation requirements, which will increase costs. We expect these rules and regulations to increase our legal and financialcompliance costs and to make some activities more time consuming and costly, although we are currently unable to estimate thesecosts with any degree of certainty. A number of those requirements will require us to carry out activities we have not done previously.Our management team and other personnel will need to devote a substantial amount of time to new compliance initiatives and tomeeting the obligations that are associated with being a public company, which may divert attention from other business concerns,which could have a material adverse effect on our business, financial condition and results of operations.
Additionally,the expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. Theseincreased costs will require us to divert a significant amount of money that we could otherwise use to develop our business. Ifwe are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctionsand other regulatory action and potentially civil litigation.
Newlaws, regulations, and standards relating to corporate governance and public disclosure may create uncertainty for public companies,increasing legal and financial compliance costs and making some activities more time consuming.
Theselaws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, asa result, may evolve over time as new guidance is provided by the courts and other bodies. This could result in continuing uncertaintyregarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. If ourefforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodiesdue to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against usand our business may be adversely affected.
Asa public company subject to these rules and regulations, we may find it more expensive for us to obtain director and officer liabilityinsurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factorscould also make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serveon its audit committee and compensation committee, and qualified executive officers.
Themarket price of our common stock and warrants may be volatile.
Themarket price for our common stock and warrants may be volatile and subject to wide fluctuations in response to factors includingthe following:
Inaddition, if we fail to reach an important research, development or commercialization milestone or result by a publicly expecteddeadline, even if by only a small margin, there could be significant impact on the market price of our common stock. Additionally,as we approach the announcement of anticipated significant information and as we announce such information, we expect the priceof our common stock to be particularly volatile and negative results would have a substantial negative impact on the price ofour common stock and warrants.
Inaddition, in recent years, the stock market in general has experienced extreme price and volume fluctuations. This volatilityhas had a significant effect on the market price of securities issued by many companies, including for reasons unrelated to theiroperating performance. These broad market fluctuations may adversely affect our stock price, notwithstanding our operating results.The market price of our common stock and warrants will fluctuate and there can be no assurances about the levels of the marketprices for our common stock and warrants.
Insome cases, following periods of volatility in the market price of a company’s securities, shareholders have often institutedclass action securities litigation against those companies. Such litigation, if instituted, could result in substantial costsand diversion of management attention and resources, which could significantly harm our business operations and reputation.
Asan “emerging growth company” under applicable law, we will be subject to lessened disclosure requirements, which couldleave our shareholders without information or rights available to shareholders of more mature companies.
Foras long as we remain an “emerging growth company” as defined in the JOBS Act, we have elected to take advantage ofcertain exemptions from various reporting requirements that are applicable to other public companies that are not “emerginggrowth companies” including, but not limited to:
Weexpect to take advantage of these reporting exemptions until we are no longer an “emerging growth company.” Becauseof these lessened regulatory requirements, our shareholders would be left without information or rights available to shareholdersof more mature companies. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions.If some investors find our common stock less attractive as a result, there may be a less active trading market for our commonstock and our stock price may be more volatile.
Weare also a “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act and have elected to follow certainscaled disclosure requirements available to smaller reporting companies.
Becausewe have elected to use the extended transition period for complying with new or revised accounting standards for an “emerginggrowth company” our financial statements may not be comparable to companies that comply with public company effective dates.
Wehave elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1)of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effectivedates for public and private companies until those standards apply to private companies. While we are not currently delaying theimplementation of any relevant accounting standards, in the future we may avail ourselves of this right, and as a result of thiselection, our financial statements may not be comparable to companies that comply with public company effective dates. Becauseour financial statements may not be comparable to companies that comply with public company effective dates, investors may havedifficulty evaluating or comparing our business, performance or prospects in comparison to other public companies, which may havea negative impact on the value and liquidity of our common stock.
FINRAsales practice requirements may also limit your ability to buy and sell our common stock, which could depress the price of ourshares.
FinancialIndustry Regulatory Authority, Inc. (FINRA) rules require broker-dealers to have reasonable grounds for believing that an investmentis suitable for a customer before recommending that investment to the customer. Prior to recommending speculative low-priced securitiesto their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’sfinancial status, tax status and investment objectives, among other things. Under interpretations of these rules, FINRA believesthat there is a high probability such speculative low-priced securities will not be suitable for at least some customers. Thus,FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which maylimit your ability to buy and sell our shares, have an adverse effect on the market for our shares, and thereby depress our shareprice.
Ourcompliance with complicated U.S. regulations concerning corporate governance and public disclosure is expensive. Moreover, ourability to comply with all applicable laws, rules and regulations is uncertain given our management’s relative inexperiencewith operating U.S. public companies.
Asa publicly reporting company, we are faced with expensive and complicated and evolving disclosure, governance and compliance laws,regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and the Dodd-FrankAct, and, following this offering, the rules of the NASDAQ Stock Market. New or changing laws, regulations and standards are subjectto varying interpretations in many cases due to their lack of specificity, and, as a result, their application in practice mayevolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertaintyregarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result,our efforts to comply with evolving laws, regulations and standards of a U.S. public company are likely to continue to resultin increased general and administrative expenses and a diversion of management time and attention from revenue-generating activitiesto compliance activities.
Moreover,our executive officers have little experience in operating a U.S. public company, which makes our ability to comply with applicablelaws, rules and regulations uncertain. Our failure to comply with all laws, rules and regulations applicable to U.S. public companiescould subject us or our management to regulatory scrutiny or sanction, which could harm our reputation and stock price.
Ifresearch analysts do not publish research about our business or if they issue unfavorable commentary or downgrade our common stock,our stock price and trading volume could decline.
Thetrading market for our securities may depend in part on the research and reports that research analysts publish about us and ourbusiness. If we do not maintain adequate research coverage, or if any of the analysts who cover us downgrade our stock or publishinaccurate or unfavorable research about our business, the price of our common stock and warrants could decline. If one or moreof our research analysts ceases to cover our business or fails to publish reports on us regularly, demand for our securities coulddecrease, which could cause the price of our common stock and warrants or trading volume to decline.
Wemay issue additional equity securities, or engage in other transactions that could dilute our book value or relative rights ofour common stock, which may adversely affect the market price of our common stock and warrants.
OurBoard of Directors may determine from time to time that it needs to raise additional capital by issuing additional shares of ourcommon stock or other securities. Except as otherwise described in this prospectus, we will not be restricted from issuing additionalshares of common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive,shares of our common stock. Because our decision to issue securities in any future offering will depend on market conditions andother factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any future offerings, or theprices at which such offerings may be affected. Additional equity offerings may dilute the holdings of existing shareholders orreduce the market price of our common stock and warrants, or both. Holders of our securities are not entitled to pre-emptive rightsor other protections against dilution. New investors also may have rights, preferences and privileges that are senior to, andthat adversely affect, then-current holders of our securities. Additionally, if we raise additional capital by making offeringsof debt or preference shares, upon our liquidation, holders of our debt securities and preference shares, and lenders with respectto other borrowings, may receive distributions of its available assets before the holders of our common stock.
Wedo not currently intend to pay dividends on our common stock in the foreseeable future, and consequently, your ability to achievea return on your investment will depend on appreciation in the price of our common stock.
Wehave never declared or paid cash dividends on our common stock and do not anticipate paying any cash dividends to holders of ourcommon stock in the foreseeable future. Consequently, investors must rely on sales of their common stock after price appreciation,which may never occur, as the only way to realize any future gains on their investments. There is no guarantee that shares ofour common stock will appreciate in value or even maintain the price at which our shareholders have purchased their shares.
CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS
Thisprospectus contains “forward-looking statements,” which include information relating to future events, future financialperformance, 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 indicationsof when such performance or results will be achieved. Forward-looking statements are based on information we have when those statementsare made or management’s good faith belief as of that time with respect to future events and are subject to significantrisks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggestedby the forward-looking statements. Important factors that could cause such differences include, but are not limited to:
Theforegoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained hereinor risk factors that we are faced with that may cause our actual results to differ from those anticipate in our forward-lookingstatements. Please see “Risk Factors” for additional risks which could adversely impact our business and financialperformance.
Moreover,new risks regularly emerge and it is not possible for our management to predict or articulate all risks we face, nor can we assessthe impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results todiffer from those contained in any forward-looking statements. All forward-looking statements included in this prospectus arebased on information available to us on the date of this prospectus. 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 onour behalf are expressly qualified in their entirety by the cautionary statements contained above and throughout this prospectus.
Weare not selling any of the shares of common stock being offered by this prospectus and will receive no proceeds from the saleof the shares by the selling stockholder. All of the proceeds from the sale of common stock offered by this prospectus will goto the selling stockholder at the time they offer and sell such shares. We will bear all costs associated with registering theshares of common stock offered by this prospectus.
Asof April 21, 2019, we had approximately 98 shareholders of record of our common stock.
Ourcommon stock trades on The NASDAQ Capital Market under the symbol “TBLT.” In conjunction therewith, our warrantsare listed on The NASDAQ Capital Market under the symbol “TBLTW” and Class A Units under the symbol “TBLTU”.
Wehave never paid any cash dividends on our common stock. We anticipate that we will retain funds and future earnings to supportoperations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in theforeseeable future following this offering. Any future determination to pay dividends will be at the discretion of our Board ofDirectors and will depend on our financial condition, results of operations, capital requirements and other factors that our Boardof Directors deems relevant. In addition, the terms of any future debt or credit financings may preclude us from paying dividends.
MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TheManagement’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2018,is hereby incorporated by reference in their entirety from our Form 10-K filed with the SEC on March 29, 20191.
FINANCIALSTATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2018 AND DECEMBER 31, 2017
Ouraudited financial statements for the years ended December 31, 2018 and December 31, 2017, respectively, are hereby incorporatedby reference in their entirety from our Form 10-K for the year ended December 31, 2018, filed with the SEC on March 29, 2019.
Ourcompany was formed on April 9, 2012 as Phalanx, Inc., under the laws of the State of Nevada and changed its name to ToughBuiltIndustries, Inc. on December 29, 2015. We were formed to design, manufacture and distribute innovative tools and accessories tothe 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 yeartool market. All of our products are designed by our in-house design team. Since our initial launch of product sales six yearsago, we have experienced significant annual sales growth from approximately $1,000,000 in 2013 to $15,289,400 in 2018.
SinceAugust 2013, pursuant to a Service Agreement, we have been collaborating with Belegal, a Chinese firm, whose team of experts hasprovided ToughBuilt with additional engineering, sourcing services and quality control support for our operations in China. Belegalassists us with supply-chain management (process and operations in China) for our operations in China, among other things, facilitatingthe 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 themonthly costs for payroll, overhead and other operation expenses associated with the Belegal’s activities on behalf of ToughBuilt.
Ourbusiness 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 forthe contractors and workers alike. Our current product line includes two major categories related to this field, with severaladditional categories in various stages of development, consisting of Soft Goods and Kneepads and Sawhorses and Work Products.
ToughBuiltdesigns and manages its product life cycles through a controlled and structured process. We involve customers and industry expertsfrom our target markets in the definition and refinement of our product development. Product development emphasis is placed onmeeting and exceeding industry standards and product specifications, ease of integration, ease of use, cost reduction, design-formanufacturability, quality and reliability.
Ourmission consists, of providing products to the building and home improvement communities that are innovative, of superior qualityderived in part from enlightened creativity for our end users while enhancing performance, improving well-being and building highbrand loyalty.
Thefollowing highlights recent developments in our business over the past four years:
Wecreate innovative products that help our customers build faster, build stronger and work smarter. We accomplish this by listeningto what our customers wants and need and researching how professionals work, then we create tools that help them save time, savehassle 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 toolsand material support products consists of a full line of miter-saw and table saw stands and saw horses/job site tables and rollerstands. All of our products are designed and engineered in the United States and manufactured in China and India under our qualitycontrol supervision. We do not need government approval for any of our products.
Oursoft sided tool storage line is designed for a wide range of do-it-yourself and professional needs. This line of pouches and tooland accessories bags is designed to organize your tools faster and easier. Interchangeable pouches clip on and off any belt, bagladder wall or vehicle. Our products let you carry what you want so you have it when you want it.
ToughBuilt’swide mouth tool carry-all bags come in sizes from 12 inches to 30 inches. They all have steel reinforced handles and padded shoulderstraps which allow for massive loads to be carried with ease. Rigid plastic hard-body lining protects everything inside. Doublemesh pockets included inside provide complete visibility for stored items. They include a lockable zipper for added security andsafety and secondary side handles for when it takes more than one to carry the load.
Allof 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 areunique 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.
Theflagship of the product line is the Soft Goods line that consists of over 100 variations of tool pouches, tool rigs, tool beltsand 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 professionalsfrom all sectors of the industry including plumbers, electricians, framers, builders and more.
Wehave a selection of over 10 models of kneepads, some with revolutionary and patented design features that allow the usersto interchange components to suit particular conditions of use. Management believes that these kneepads are among the best performingkneepads in the industry. Our “all terrain” knee pad protection with snapshell technology is part of our interchangeablekneepad 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.
Sawhorsesand Work Products
Thesecond major category consists of Sawhorses and Work Support products with their unique designs and robust construction targetedfor the most discerning users in the industry. The innovative designs and construction of the more than 15 products in this categoryhave led to the sawhorses becoming the best sellers of category everywhere they are sold. The newest additions in this categoryinclude several stands and work support products that are quickly gaining recognition in the industry and are expected to positionthemselves in the top tier products in a short time. Our sawhorse line, miter saw, table saw & roller stands are built tovery high standards. Our sawhorse/jobsite table is fast to set up, holds 2,400 pounds, has adjustable heights, is made of allmetal construction and has a compact design. These lines of products are slowly becoming the standard in the construction industry.
Allof our products are designed in house with unending innovation and the highest standards to achieve features and benefits fornot only the professional construction worker but also for the do-it-yourself person.
Ourproduct strategy is to develop product lines in a number of categories rather than focus on a single line of goods. This approachallows for rapid growth, wider brand recognition, and may ultimately result in increased sales and profits within an acceleratedtime period. We believe that building brand awareness of our current ToughBuilt lines of products will expand our share of thepertinent markets. Our business strategy includes the following key elements:
Wewill continue to consider other market opportunities while focusing on our customers’ specific requirements to increasesales.
Accordingto “Statista & Statistic Brain” the annual revenue in the construction industry was $1.731 trillion for 2016.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 with tools and hardware alone totaling over $60 billion for thatsame time period. In 2016, there were approximately 729,000 construction companies in the United States employing more than 7.3million employees. In addition to the construction market, our products are marketed to the “do it yourself” and homeimprovement market place. The home improvement industry has fared much better in the aftermath of the Great Recession then thehousing 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 improvementsto their current homes. Meanwhile, federal and state stimulus programs encouraged homeowners and rental property owners to investin energy-efficient upgrades that they might otherwise have deferred. Finally, many rental property owners, responding to a surgein demand from households either facing foreclosure or nervous about buying amid the housing market uncertainty, reinvested intheir units.
Asa result, improvement and repair spending held up well compared to residential construction spending. According to “HomeImprovement – 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.”
Totalhome improvement products sales are expected to increase 5.5% in 2018 to $420 billion in total sales. The Professional Marketis 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 servicesstores to major online outlets. Currently, we have strong 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 andCentral Europe, Russia and Eastern Europe, South America and the Middle East.
Retailersby region include:
UnitedStates: Home Depot, Menards, GM products, Fire Safety, Hartville Hardware, ORR, Pooley, YOW, Wesco, Buzzi, and Western PacificBuilding Materials.
UnitedKingdom: Toolbank (distribution throughout the U.K. and online selling for Europe).
SouthKorea: Dong Shin Tool PIA Co., Ltd.
Weare actively expanding into markets in Mexico and Latin American Countries the Middle East, the UAE and South Africa.
Weare currently in product line reviews and discussions with Lowe’s, Home Depot Canada, Do It Best, True Value and other majorretailers both domestically and internationally. A product line review requires the supplier to submit a comprehensive proposalwhich includes product offerings, prices, competitive market studies and relevant industry trends and other information. Managementanticipates, within the near term, adding to its customer base up to three major retailers, along with several distributors andprivate retailers within six sectors and among 56 targeted countries.
Innovationand Brand Strength
Managementbelieves that the robust capabilities at ToughBuilt eclipse those of most competitors as not every distributor or factory hasthe 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 reachmajor retailers globally to position their products and brands. We believe that we are able to take a design from concept to marketwithin a very short period of time.
Productand 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 ToughBuiltwith 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, equipmentrentals and maintenance services.
In2018, we have ordered and launched a new line of gloves and 28 SKUs of tool belt and pouches. We also intend to launch the followingtools in the fourth quarter of 2019:
Since2013, we have been planning, designing, engineering and sourcing the development of a new line of ToughBuilt mobile devices andaccessories to be used in the construction industry and by building enthusiasts. We are planning to have our mobile device productsready to market by mid to late 2019, at which time we intend to commence marketing and selling our mobile device products to ourcurrent global customer base. We believe that increasing numbers of companies in the construction industry are requiring theiremployees to utilize mobile devices not just to communicate with others but to utilize the special apps that will allow the constructionworkers to do their job better and more efficiently. All of our mobile devices are designed and built in accordance with IP-68and military standards level of durability and with the cooperation of Foxconn Manufacturing.
Ourruggedized mobile line of products was created to place customized technology and wide varieties of data in the palm of the buildingprofessionals and enthusiasts such as contractors, subcontractors, foreman, general laborers etc. The devices, accessories andcustom apps allow the users to plan with confidence, organize faster, find labor and products faster, estimate accurately, purchasewisely, protect themselves, workers and their business, create and track invoicing faster and easier.
Bythe fourth quarter of 2019, 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 2019, we also intend to launchthe following accessories: car charger, QI charger, car mounts and earbud pack, and we will look at sales in the following industries:construction, industrial, military and law enforcement and “.coms”.
Inthe fourth quarter of 2019, we intend to launch the following applications for our mobile phones:
OnOctober 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 usa certain rugged mobile telephone (the “Product”). The Company will pay to Foxconn all fees and costs required todevelop 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 partiesand upon written approval by the parties such new or revised specifications will become part of the SOW. The SOW also providesdates for completion of deliverables, such as prototypes, “Beta” testing of the Product, sample assembly of the prototypeand commencement of mass production of the Product. We may terminate the SOW at any time, in which case we must pay the costsfor those portions of the development work completed by Foxconn up to the date of termination. The SOW is governed, construedand enforced in accordance with the laws of the State of California.
Basedupon an annual white paper published by the Mobile and Wireless Practice of Venture Development Corporation, we believe that anincreasing number of companies are requiring their employees to transact business in the field and/or other non-traditional officeenvironments. 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 toaddress the need for greater collaboration among a highly mobile and distributed workforce.
Webelieve that mobility is one of the top technology trends that construction companies are focusing on in 2018 and beyond. Mobiletechnology continues to have a significant impact on business, specifically with regard to business communication as this technologyenhances the ability for colleagues at different locations to easily communicate, enhances customer experience through the improvementof applications and websites available to consumers to do business through their devices “at their fingertips”, andoptimizes business operations as there is instant access to business functions at any time and from any location. (“Impactof Mobile Technology in Business Communication”, by John Smith, dated November 19, 2016 (https://www.business2community.com/tech-gadgets/impact-mobile-technology-business-communication-01704702).
Whilethe construction industry has widely adopted solutions such as push to talk (PTT) telephony applications, the use of mobile andwireless data applications has been limited. IT solutions in general and mobile and wireless solutions specifically have beenadopted at varying degrees within organizations and to support the various phases of construction projects. Currently the businessplanning, engineering and procurement operations have more effectively deployed IT solutions while actual construction operationshave fallen behind in IT infrastructure and field automation solutions. The construction and engineering workforce is inherentlymobile. However, construction sites have never effectively leveraged (wireless) communications networks to connect these distributedand often remote workers and their assets. Nevertheless, construction project managers require real time access to a variety ofinformation, including real time tool inventory management, raw materials deliveries, job costing, time stamping and general projectmanagement information. The challenge, however, is the lack of network access on construction sites resulting in an informationbottleneck on the job site. Buoyed by advances in wireless technologies – including coverage, performance, security andcost of ownership – we believe this is becoming an issue of the past for construction operations.
Weintend 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 developedinclude:
Thedevices, accessories and bolt on digital tools will be sold through relevant home improvement big box stores, direct marketingto thousands of construction companies, direct marketing to thousands of trade/ wholesale outlets and to professional outlets.
Wehold 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 creatinga market for our goods, in identifying our brands and our Company, and in distinguishing our goods from the goods of others. Weconsider our ToughBuilt®, Cliptech®, and Fearless® trademarks to be among ourmost valuable intangible assets. Trademarks registered both in and outside the U.S. are generally valid for ten years, dependingon the jurisdiction, and are generally subject to an indefinite number of renewals for a like period on appropriate application.
Inthe first quarter of 2019, the United States Patent and Trademark Office (USPTO) granted two new design patents (US D840,961 Sand US D841,635 S) that cover ToughBuilt’s ruggedized mobile devices, which are valid for a period of 15 years.
Wealso rely on trade secret protection for our confidential and proprietary information relating to our design and processes forour products. We have entered into and will continue to enter into confidentiality, non-competition and proprietary rights assignmentagreements with our employees and independent contractors. We have entered into and will continue to enter into confidentialityagreements with our suppliers to protect our intellectual property.
Thetool equipment and accessories industry is highly competitive on a worldwide basis. We compete with a significant number of othertool equipment and accessories manufacturers and suppliers to the construction, home improvement and Do-It-Yourself industry,many of which have the following:
Ourcompetitors’ greater capabilities in the above areas enable them to better differentiate their products from ours, gainstronger 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.
OnNovember 14, 2018, the Company completed its initial public offering (“IPO”), pursuant to which it sold 2,670,000Class A Units (“Class A Unit”), each Unit consisting of one share of common stock, par value $0.0001 per share, oneSeries A Warrant to purchase one share of common stock (“Series A Warrant”) and one Series B Warrant to purchase oneshare of common stock (“Series B Warrant”) at a purchase price of $5.00 per Class A Unit. The Company received netproceeds from the IPO of $12,415,500 after deducting underwriting discounts and commission of $934,500. The Company incurred $743,765in expenses related to the IPO.
Concurrentwith the closing of the IPO on November 14, 2018, the following private transactions were consummated in accordance with the relatedagreements (see Notes 6, 7, 8 and 9 to the financial statements), all in transactions exempt from registration under Section 4(a)(2)of the Securities Act of 1933, as amended:
OnDecember 17, 2018, pursuant to the Underwriting Agreement dated November 8, 2018, by and between the Company and the underwritersnamed therein (the “Representative”), the Representative, on behalf of the underwriters, agreed to partially exercisethe over-allotment option to purchase an additional 25,000 shares of Common Stock, par value $0.0001, at a price of $4.98 pershare, 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 expensesof $10,601.
Asof March 27, 2019, we have 15 full-time employees and 13 independent contractors and consultants. We also engage consultants onan as-needed basis to supplement existing staff. All of our employees, consultants and contractors that are involved with sensitiveand/or proprietary information have signed non-disclosure agreements.
Wecurrently lease office space at 25371 Commercentre Drive, Suite 200, Lake Forest, CA 92630 as our principal offices. We believethese facilities are in good condition and satisfy our operational requirements. We intend to seek additional leased space, whichwill include some warehouse facilities, as our business efforts increase.
OnAugust 16, 2016, Edwin Minassian filed a complaint against the Company and Michael Panosian, our Chief Executive Officer, in theSuperior Court of California, County of Los Angeles. The complaint alleges breach of oral contracts to pay Mr. Minassian for consultingand finder’s fees, and to hire him as an employee. The complaint further alleges, among other things, fraud and misrepresentationrelating to the alleged tender of $100,000 to the Company in exchange for “a 2% stake in ToughBuilt” of which only$20,000 was delivered. The complaint seeks unspecified monetary damages, declaratory relief concerning the plaintiff’s contentionthat he has an unresolved 9% ownership stake in ToughBuilt and other relief according to proof.
OnApril 12, 2018, the Court entered judgments against the Company and Mr. Panosian in the amounts of $7,080 and $235,542, plus awardingMr. Minassian a 7% ownership interest in the Company (the “Judgments”). Mr. Minassian served notice of entry of thejudgments on April 17, 2018 and the Company and Mr. Panosian received notice of the entry of the default judgments on April 19,2018.
OnApril 25, 2018, the Company and Mr. Panosian filed a motion to have the April 12, 2018 default judgment on Plaintiff’sComplaint, the February 13, 2018 defaults, and April 14, 2017 Order for terminating sanctions striking Defendants’Answer set aside on the basis of their former attorney’s declaration that his negligence resulted in the defaultjudgment, default, and terminating sanctions being entered against the Company and Mr. Panosian. The motion was denied. OnSeptember 13, 2018, the Company and Panosian satisfied the Judgments by the Company making a payment of $252,950 (whichincluded $10,303 post judgment interest) to Minassian and by Mr. Panosian issuing him shares reflecting a 7% ownership stakein the Company from management-owned shares. On October 18, 2018, the Company and Mr. Panosian filed a Notice of Appeal inthe Superior Court of the State of California, Los Angeles County, with respect to from the Order denying their motion forrelief from the above referenced default judgment. The appeal is still pending.
Directorsand Executive Officers
Thenames, positions and ages of our directors and executive officers as of the date of this proxy statement are as follows:
Directorsserve until the next annual meeting and until their successors are elected and qualified. Officers are appointed to serve forone year until the meeting of the Board of Directors following the annual meeting of shareholders and until their successors havebeen elected and qualified.
MichaelPanosian, 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-foundedPandun, Inc., a manufacturer and distributor of tools and tool accessories in Asia, and served as its CEO until 2012. Mr. Panosianhas 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 spanningseveral fields. Mr. Panosian has deep knowledge of doing business in China where he managed a team of over 350 engineers, industrialdesigners and marketing professionals while stationed in Suzhou with his team for 4 years. Mr. Panosian is a graduate of NorthropUniversity in Aerospace engineering with numerous specializations; he holds numerous patents and trademarks that are shared withsome of his colleagues at our Company and other development teams.
JoshuaKeeler, Co-Founder, Vice-President Research & Development
Asthe Vice-President Research & Development at our Company, Mr. Keeler is responsible for all product development. Mr. Keelerco-founded our Company in 2012 and works directly with Mr. Panosian in bringing innovative ideas to market. Mr. Keeler is a graduateof 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 oftools. From 1999 to 2000 he was co-owner and vice-president of Oracle Industrial Design, Co., a private company specializing inindustrial design and product development. From August 2000 to April 2004, Mr. Keeler worked for Positec Power Tool Co., a privatecompany in Suzhou, China, designing and creating a large innovation library of numerous power tool concepts. From August 2005to April 2008, Mr. Keeler was the chief designer for Harbinger International, Inc. From August 2008 to April 2012, he was chiefdesigner for Pandun Inc, specializing in innovative tools and supporting products. He has lived in China and has extensive experienceworking directly with manufacturers to get designs into production. Mr. Keeler has been nominated by the Board as a Director tostand for election at our 2019 Annual Meeting to take the seat currently held by our Chief Financial Officer, Manu Ohri.
ZarehKhachatoorian, 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 employeesand departments involved in the areas of procurement and purchasing, inventory management, product development, engineering, controland quality assurance, and other related areas. Mr. Khachatoorian holds a Bachelor of Science degree in Industrial Systems Engineeringfrom the University of Southern California. Additionally, Mr. Khachatoorian has been credited as the inventor or co-inventor ofmore 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.
ManuOhri, Chief Financial Officer and Director
Mr.Ohri has over 30 years of hands-on experience in financial management and business leadership and working with board of directorsand financial institutions. Mr. Ohri has assisted several public companies in the areas of compliance with US and internationalfinancial accounting and reporting standards, investor relations, mergers and acquisitions, strategic planning, team-buildingand project management. Since January 2017, Mr. Ohri has been our Chief Financial Officer and a member of our Board of Directors.From January 2010 to December 2016, Mr. Ohri worked as a management consultant and independent business advisor providing consultingservices to privately-held and publicly traded companies. From January 2007 to December 2009, Mr. Ohri served as the Chief FinancialOfficer and a member of the Board of Directors of a publicly listed full service financial media company, focused on developingtools and applications that enabled retail investors to collaborate directly with publicly traded companies. From May 2002 toDecember 2006, Mr. Ohri served as the Chief Financial Officer and a member of the Board of Directors of a publicly traded internationaltelecom operator and enabler/systems integrator to the multi-media industry in the USA, Europe, Asia Pacific and the Middle East,providing traditional telecom, voice over internet protocol, media streaming services, including billing and collections primarilyto the business-to-business community within the global telecommunications market. Mr. Ohri is a Certified Public Accountant andChartered Global Management Accountant with over seven years of experience with Deloitte, LLP and PriceWaterhouseCoopers, LLP.Mr. Ohri earned Master’s Degree in Business Administration from the University of Detroit. Mr. Ohri is not restanding forelection as a Director at our 2019 Annual Meeting.
Thenames, positions and ages of our independent directors (as defined by NASDAQ and SEC rules), all became directors as of November14, 2019, are as follows:
Asa 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 telephonydistribution channels and their customers. In these leadership roles, he led the development and implementation of the strategicvision throughout the organization, recruited senior talent, led leadership development and oftentimes, oversaw a realignmentof senior roles where some executives were outplaced. At Faught Associates, he offers consulting, executive search, leadershipdevelopment 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 itsBoard since January 2016. The Board has determined that Mr. Faught is suitable as a director due to his long standing leadershiproles with Fortune 500 companies.
PaulM. Galvin was appointed as a director and the Chief Executive Officer of SG Blocks, Inc. upon consummation of the reverse mergeramong CDSI Holdings Inc., CDSI Merger Sub, Inc., SG Blocks, and certain stockholders of SG Blocks on November 4, 2011 (the “Merger”).Mr. Galvin is a founder of SGBlocks, LLC, the predecessor entity of SGB. He has served as the Chief Executive Officer of SGB andits predecessor entity since 2008. Mr. Galvin has been a managing member of TAG Partners, LLC (“TAG”), an investmentpartnership formed for the purpose of investing in SGB, since October 2007. Mr. Galvin brings over 20 years of experience developingand managing real estate, including residential condominiums, luxury sales, and market rate and affordable rental projects. Priorto 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 emergencyfood 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 FordhamUniversity. He was formerly an adjunct professor at Fordham University’s Graduate School of Welfare. Mr. Galvin previouslyserved 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 Companybelieves he is well suited to sit on its Board due to Mr. Galvin’s pertinent experience, qualifications, attributes, andskills which include his managerial experience and the knowledge and experience he has attained in the real estate industry.
FrederickD. 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 foreignenterprise 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 directlyin 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.
From1998 to 2010, Mr. Furry was at Windes, a regional public accounting firm based in Southern California, where he served as an AuditPartner and worked with over 25 public and private companies in the middle market with revenues ranging from $20 million to $600million.
Duringhis 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 fromthe University of California, Riverside and is a Certified Public Accountant (inactive). Mr. Furry’s long experience withpublic companies and as a financial executive are qualifications which make him an ideal Board member for the Company.
Involvementin Legal Proceedings
Tothe best of our knowledge, during the past ten years, none of the following occurred with respect to a present or former directoror executive officer of our Company: (1) any bankruptcy petition filed by or against such person or any business of which suchperson was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;(2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations andother minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, ofany court of any competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvementin any type of business, securities or banking activities; (4) being found by a court of competent jurisdiction (in a civil action),the Securities and Exchange Commission (the “Commission”) or the Commodities Futures Trading Commission to have violateda federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated; and (5) beingthe subject of, or a party to, any federal or state judicial or administrative order, judgment, decree or finding, not subsequentlyreversed, suspended or vacated, relating to an alleged violation of any federal or state securities or commodities law or regulation,law or regulation respecting financial institutions or insurance companies or law or regulation prohibiting mail or wire fraudor fraud in connection with any business entity; or (6) being the subject of, or a party to, any sanction or order, not subsequentlyreversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities ExchangeAct of 1934, as amended), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act, as amended), orany equivalent exchange, association, entity or organization that has disciplinary authority over its members or associated persons.
Thebusiness and affairs of our Company are managed under the direction of the Board of Directors.
Weuse 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 otherindividual having a relationship which, in the opinion of the Board of Directors, would interfere with the exercise of independentjudgment in carrying out the responsibilities of a director. The NASDAQ rules provide that a director cannot be considered independentif:
Underthe following three NASDAQ director independence rules a director is not considered independent: (a) NASDAQ Rule 5605(a)(2)(A),a director is not considered to be independent if he or she also is an executive officer or employee of the corporation, (b) NASDAQRule 5605(a)(2)(B), a director is not consider independent if he or she accepted any compensation from our Company in excess of$120,000 during any period of twelve consecutive months within the three years preceding the determination of independence, and(c) NASDAQ Rule 5605(a)(2)(D), a director is not considered to be independent if he or she is a partner in, or a controlling shareholderor an executive officer of, any organization to which our Company made, or from which our Company received, payments for propertyor services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenuesfor that year, or $200,000. Under such definitions, Messrs. Faught, Furry and Galvin are independent directors.
Thereare no family relationships among any of our officers or directors.
OurBoard of Directors has an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee, eachcomprised entirely of independent directors and none of which met in 2018, except our Audit Committee which met once in 2018.
OurAudit Committee is comprised of three individuals, each of whom is an independent director and at least one of whom is an “auditcommittee financial expert,” as defined in Item 407(d)(5)(ii) of Regulation S-K.
OurAudit Committee oversees our corporate accounting, financial reporting practices and the audits of financial statements. For thispurpose, the Audit Committee does have a charter (which is reviewed annually) and perform several functions. The Audit Committeeperforms the following:
OurCompensation Committee is comprised of three individuals, each of whom is an independent director, all effective as of the dateof our initial listing on NASDAQ.
TheCompensation Committee does review or recommend the compensation arrangements for our management and employees and also assistour Board of Directors in reviewing and approving matters such as company benefit and insurance plans, including monitoring theperformance thereof. The Compensation Committee has a charter (which is reviewed annually) and perform several functions.
TheCompensation Committee does have the authority to directly engage, at our expense, any compensation consultants or other advisersas it deems necessary to carry out its responsibilities in determining the amount and form of employee, executive and directorcompensation.
Nominatingand Corporate Governance Committee
OurNominating and Corporate Governance Committee is comprised of three individuals, each of whom is an independent director.
TheNominating and Corporate Governance Committee is charged with the responsibility of reviewing our corporate governance policiesand with proposing potential director nominees to the Board of Directors for consideration. This committee has the authority tooversee 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.
OurBoard of Directors has reviewed the materiality of any relationship that each of our directors has with us, either directly orindirectly. Based on this review, our Board of Directors has determined that Frederick Furry, Paul Galvin 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 three independent directors serves on all three of our standing Board committees, with Frederick Furry as Chair ofthe Audit Committee, Paul Galvin as Chair of the Compensation Committee and Robert Faught as Chair of the Nominating and CorporateGovernance Committee.
Wehave adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including ourprincipal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similarfunctions. Following the consummation of this offering, we will post a current copy of the code on our website, www.toughbuilt.com.In addition, we intend to post on our website all disclosures that are required by law or the listing standards of NASDAQ concerningany amendments to, or waivers from, any provision of the code. The reference to our website address does not constitute incorporationby reference of the information contained at or available through our website, and you should not consider it to be a part ofthis prospectus.
Indemnificationof Officers and Directors
Chapter78 of the Nevada Revised Statutes (NRS) provides that a corporation may indemnify any person who was or is a party or is threatenedto be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrativeor 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 believedto be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, hadno reasonable cause to believe his conduct was unlawful. NRS Chapter 78 further provides that a corporation similarly may indemnifyany such person serving in any such capacity who was or is a party or is threatened to be made a party to any threatened, pendingor completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact thathe is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporationas a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, againstexpenses (including attorneys’ fees) actually and reasonably incurred in connection with the defense or settlement of suchaction or suit if he is not liable pursuant to NRS Section 78.138 or acted in good faith and in a manner he reasonably believedto be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect ofany claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only tothe extent that the court or other court of competent jurisdiction in which such action or suit was brought shall determine uponapplication that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairlyand reasonably entitled to indemnity for such expenses which the court or other court of competent jurisdiction shall deem proper.
Ourbylaws provide that we may indemnify our officers, directors, employees, agents and any other persons to the maximum extent permittedby the NRS.
Insofaras indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controllingus pursuant to the foregoing provisions, we have been informed that in the opinion of the Commission such indemnification is againstpublic policy as expressed in the Securities Act and is therefore unenforceable.
Section16(a) Beneficial Ownership Reporting Compliance
Wedo not intend to report compliance thereunder in our proxy statement.
Thefollowing table summarizes compensation of our named executive officers, as of December 31, 2017 and 2018.
(1)Includes $116,000 of salary deferred
(2)Includes $109,600 of salary deferred
(3)Includes $18,000 of salary deferred
(4)Includes $25,000 of salary deferred
(5)Comprised of car allowance.
(6)Stock compensation in lieu of salary deferred outside of Equity Incentive Plans.
Employmentand Related Agreements
Exceptas set forth below, we currently have no other written employment agreements with any of our officers and directors. The followingis a description of our current executive employment agreements:
Agreementswith Our Named Executive Officers
Wehave entered into written employment agreements with each of our named executive officers, as described below. Each of our namedexecutive officers has also executed our standard form of confidential information and invention assignment agreement.
EmploymentAgreement with Michael Panosian
Weentered into an employment agreement with Mr. Panosian on January 3, 2017 that governs the terms of his employment with us asPresident 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 beginningon January 1, 2017 and increasing by 10% each year commencing on January 1, 2018. Mr. Panosian was also granted a stock optionto purchase 125,000 shares of the Company’s common stock at an exercise price of $10.00 per share. The employment agreementalso entitles Mr. Panosian to, among other benefits, the following compensation: (i) eligibility to receive an annual cash bonusat the sole discretion of the Board and as determined by the Compensation Committee commensurate with the policies and practicesapplicable to other senior executive officers of the Company; (ii) an opportunity to participate in any stock option, performanceshare, performance unit or other equity based long-term incentive compensation plan commensurate with the terms and conditionsapplicable to other senior executive officers and (iii) participation in welfare benefit plans, practices, policies and programsprovided 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 othersenior executive officers.
EmploymentAgreement with Josh Keeler
Weentered into an employment agreement with Mr. Keeler on January 3, 2017 that governs the terms of his employment with us as VicePresident 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 beginningon January 1, 2017 and increasing by 10% each year commencing on January 1, 2018. The employment Agreement also entitles Mr. Keelerto, among other benefits, the following compensation: (i) eligibility to receive an annual cash bonus at the sole discretion ofthe Board and as determined by the Compensation Committee commensurate with the policies and practices applicable to other seniorexecutive officers of the Company; (ii) an opportunity to participate in any stock option, performance share, performance unitor other equity based long-term incentive compensation plan commensurate with the terms and conditions applicable to other seniorexecutive officers and (iii) participation in welfare benefit plans, practices, policies and programs provided by the Companyand 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.
PotentialPayments to Messrs. Panosian and Keeler upon Termination or Change in Control
Pursuantto the employment agreements, regardless of the manner in which Messrs. Panosian and Mr. Keeler’s service terminates, eachexecutive 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.
TheCompany 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.
Eachsuch officer is permitted Termination for Good Reason (as defined below) of such officer’s employment. In addition, eachsuch officer may terminate his or her employment upon written notice to the Company 90 days prior to the effective date of suchtermination.
Inthe 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 timesthe officer’s then prevailing base salary and (b) the bonus that would have been payable to such officer subject to anyperformance conditions and (c) certain other benefits provided for in the employment agreement.
Inthe event of such officer’s Termination for Cause by the Company or the termination of such officer’s employment asa result of such officer’s resignation other than a Termination for Good Reason, such officer shall be provided certainbenefits provided in the employment agreement and payment of all accrued and unpaid compensation and wages, but such officer shallhave no right to compensation or benefits for any period subsequent to the effective date of termination.
Underthe employment agreements, “Cause” means: such officer willfully engages in an act or omission which is in bad faithand to the detriment of the Company, engages in gross misconduct, gross negligence, or willful malfeasance, in each case thatcauses material harm to the Company, breaches this Agreement in any material respect, habitually neglects or materially failsto perform his duties (other than any such failure resulting solely from such officer’s physical or mental disability orincapacity) after a written demand for substantial performance is delivered to such officer which identifies the manner in whichthe Company believes that such officer has not performed his duties, commits or is convicted of a felony or any crime involvingmoral turpitude, uses drugs or alcohol in a way that either interferes with the performance of his duties or compromises the integrityor reputation of the Company, or engages in any act of dishonesty involving the Company, disclosure of Company’s confidentialinformation not required by applicable law, commercial bribery, or perpetration of fraud; provided, however, that such officershall have at least forty-five (45) calendar days to cure, if curable, any of the events which could lead to his termination forCause.
Underthe employment agreements, “Termination for Good Reason” means any of the following that are undertaken without theofficer’s express written consent: (i) the assignment to such officer of principal duties or responsibilities, or the substantialreduction of such officer’s duties and responsibilities, either of which is materially inconsistent with such officer’sposition as President and Chief Executive Officer of the Company and Director of design and Development, respectively; (ii) amaterial reduction by the Company in such officer’s annual Base Salary, except to the extent the salaries of other executiveemployees of the Company and any other controlled subsidiary of the Company are similarly reduced; (iii) such officer’sprincipal place of business is, without his consent, relocated by a distance of more than thirty (30) miles from the center ofGlendale, California; or (iv) any material breach by the Company of any provision of this Agreement.
InvoluntaryTermination 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 bythe 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 acceptableto the Company, then the Company shall provide such officer with, among other benefits, a lump sum payment in the amount equalto four times such officer’s then prevailing base salary in the case of Mr. Panosian and three times such officer’sthen prevailing base salary in the case of Mr. Keeler, plus the officer’s target for the annual short term incentive portionof the corporate bonus program for such year as in effect immediately prior to such termination, in addition to any other earnedbut unpaid base salary or vacation pay due through the date of such termination, as well as a pro rata portion of the executive’sannual short term incentive portion of the corporate bonus program for such year (if any) and a pro rata portion of the executive’slong term incentive portion of the corporate bonus program (if any).
EmploymentAgreement with Zareh Khachatoorian
Weentered into an employment agreement with Mr. Khachatoorian on January 3, 2017 that governs the terms of his employment with usas Chief Operating Officer and Secretary. The term of the agreement is for three years and Mr. Khachatoorian is entitled to anannual base salary of $180,000 beginning on January 1, 2017 and increasing by 10% each year commencing on January 1, 2018. Theemployment Agreement also entitles Mr. Khachatoorian to, among other benefits, the following compensation: (i) eligibility toreceive an annual cash bonus at the sole discretion of the Board and as determined by the Compensation Committee commensuratewith the policies and practices applicable to other senior executive officers of the Company; (ii) an opportunity to participatein any stock option, performance share, performance unit or other equity based long-term incentive compensation plan commensuratewith 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.
TheCompany 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 entitledto payment for all accrued and unpaid compensation and wages and in addition pay to Mr. Khachatoorian a sum equivalent to onemonth’s salary, but shall have no right to compensation or benefits for any period subsequent to the effective date of hisdeath or disability.
Inthe event of the termination of Mr. Khachatoorian’s employment for Good Reason, he shall be provided certain benefits listedin the employment agreement and payment of all accrued and unpaid compensation and wages, but executive shall have no right tocompensation or benefits for any period subsequent to the effective date of termination.
EmploymentAgreement with Manu Ohri
Weentered into an employment agreement with Mr. Ohri on January 3, 2017 that governs the terms of his employment with us as ChiefFinancial Officer of the Company. The term of the agreement is for three years and Mr. Ohri is entitled to an annual base salaryof $250,000 beginning on January 1, 2017 and increasing by 10% each year commencing on January 1, 2018. The employment agreementalso entitles Mr. Ohri to, among other benefits, the following compensation: (i) eligibility to receive an annual cash bonus atthe sole discretion of the Board and as determined by the Compensation Committee commensurate with the policies and practicesapplicable to other senior executive officers of the Company; (ii) an opportunity to participate in any stock option, performanceshare, performance unit or other equity based long-term incentive compensation plan commensurate with the terms and conditionsapplicable to other senior executive officers and (iii) participation in welfare benefit plans, practices, policies and programsprovided 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 othersenior executive officers.
TheCompany is permitted to terminate the employment of Mr. Ohri for the following reasons: (1) death or disability, (2) Terminationfor Cause (as defined above) or (3) for no reason. In the event of Mr. Ohri’s (i) death or disability, or (ii) Terminationfor Cause by the Company, Mr. Ohri or his beneficiaries or legal representatives shall be entitled to payment for all accruedand unpaid compensation and wages and in addition pay to Mr. Ohri a sum equivalent to one month’s salary, but shall haveno right to compensation or benefits for any period subsequent to the effective date of his death or disability.
Inthe event of the termination of Mr. Ohri’s employment for Good Reason, he shall be provided certain benefits listed in theemployment agreement and payment of all accrued and unpaid compensation and wages, but executive shall have no right to compensationor benefits for any period subsequent to the effective date of termination.
OutstandingEquity Awards at December 31, 2018
2016Equity Incentive Plan - Grant of options
2018Equity Incentive Plan - Grant of options
2016Stock Option Plan
OnJuly 16, 2016, our Board of Directors and a majority of the holders of our then outstanding shares of our common stock adoptedour 2016 Equity Incentive Plan, which we refer to as the Plan. There are currently 875,000 shares of common stock issued or reservedfor issuance under the Plan. There are no options or other awards issued which do not fall under the Plan.
Thepurpose of our Plan is to attract and retain directors, officers, consultants, advisors and employees whose services are consideredvaluable, to encourage a sense of proprietorship and to stimulate an active interest of such persons in our development and financialachievements. The Plan will be administered by the Compensation Committee of our Board of Directors, once established, or by thefull 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 rightsand (c) the number of shares to be subject to each option and stock purchase right. The types of equity awards that may be grantedunder the Plan are: (i) incentive stock options (“ISOs”) and non-incentive stock options (“Non-ISOs”);(ii) share appreciation rights (“SARs”); (iii) restricted shares, restricted share units (which are shares grantedafter certain vesting conditions are met) and unrestricted shares; (iv) deferred share units; and (v) performance awards.
2018Equity Incentive Plan
EffectiveJuly 1, 2018, the Board of Directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”). This 2018 Plan wasadopted in addition to the existing 2016 Stock Equity Incentive. The awards per 2018 Plan may be granted through June 30, 2023to the Company’s employees, consultants, directors and non-employee directors. The maximum number of shares of our commonstock that may be issued under the 2018 Plan is 1,000,000 shares, which amount will be (a) reduced by awards granted under the2018 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 stockin any calendar year under the 2018 Plan pursuant to the grant of awards. On September 12, 2018, the Board of Directors approvedto increase the number of shares of common stock reserved for future issuance under this Plan from 1,000,000 shares to 2,000,000shares. On September 14, 2018, 1,000,000 shares of common stock underlying awards under the 2018 Plan have been granted to theemployees and officers 25% vesting immediately on the date of grant and 25% vesting each year thereafter on the anniversary ofthe grant date.
Inconnection with the administration of our Plans, our Compensation Committee will:
OurCompensation Committee will: (i) interpret our Plans; and (ii) make all other determinations and take all other action that maybe 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 acceleratethe vesting, exercise or payment of an award.
Inaddition, our Board of Directors may amend our Plans at any time. However, without shareholder approval, our Plan may not be amendedin a manner that would:
Awardspreviously granted under the Plans may not be impaired or affected by any amendment of the Plans, without the consent of the affectedgrantees.
Asof December 31, 2018
Non-EmployeeDirector Remuneration Policy
OurBoard of Directors has adopted the following non-employee director remuneration policy:
Stockand Option Awards
Eachof our non-employee directors may receive up to 50,000 options to purchase shares of common stock (which we refer to as the AnnualDirector Options) for each fiscal year. The Annual Director Options will be confirmed (together with the exercise price for suchoptions) at the first meeting of our Board of Directors for each fiscal year and shall vest quarterly in arrears. Annual DirectorOptions shall have ten year term and shall be issued under the Plan.
TheCompensation Committee shall, if it deems necessary or prudent in its discretion, reevaluate and approve in January of each suchyear (or in any event prior to the first board meeting of such fiscal year) the cash and equity awards (amount and manner or methodof payment) to be made to non-employee directors for such fiscal year. In making this determination, the Compensation Committeeshall utilize such market standard metrics as it deems appropriate, including, without limitation, an analysis of cash compensationpaid to independent directors of our peer group.
TheCompensation Committee shall also have the power and discretion to determine in the future whether non-employee directors shouldreceive annual or other grants of options to purchase shares of common stock or other equity incentive awards in such amountsand 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.
Participationof Employee Directors; New Directors
Unlessseparately and specifically approved by the Compensation Committee in its discretion, no employee director of our Company shallbe entitled to receive any remuneration for service as a director (other than expense reimbursement as per prevailing policy).
Newdirectors joining our Board of Directors shall be entitled to a prorated portion (based on months to be served in the fiscal yearin which they join) of cash and stock options or other equity incentive awards (if applicable) for the applicable fiscal yearat the time they join the board.
Ourindependent directors were compensated as follows in 2018. No policy has yet been set for 2019.
SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incomputing the number and percentage of shares beneficially owned by a person, shares that may be acquired by such person within60 days of the date of April 21, 2019 are counted as outstanding, while these shares are not counted as outstanding forcomputing the percentage ownership of any other person. Unless otherwise indicated, the principal address of each of the personsbelow is c/o ToughBuilt Industries, Inc., 25371 Commercentre Drive, Suite 200, Lake Forest, CA 92630.
(1)Based on 15,582,153 shares of common stock issued and outstanding on April 21, 2019.
(2)As a result of the 9.99% beneficial ownership blocker contained in the Certificate of Designation for the Series C Preferred Stock.
CERTAINRELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Wehave 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-partytransaction” 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.
Transactionsinvolving compensation for services provided to us as an employee, consultant or director are not considered related-person transactionsunder 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.
Atpresent, while the policy has been established, our Board of Directors does not yet include any independent members and thereforeno one has been appointed to the Nominating and Corporate Governance Committee. As a result, our Chief Financial Officer, ManuOhri, must present information regarding a proposed related-party transaction to our Board of Directors. Under the policy, wherea transaction has been identified as a related-party transaction, Mr. Ohri must present information regarding the proposed related-partytransaction to our Nominating and Corporate Governance Committee, once the same is established, for review. The presentation mustinclude a description of, among other things, the material facts, the direct and indirect interests of the related parties, thebenefits of the transaction to us and whether any alternative transactions are available. To identify related-party transactionsin advance, we rely on information supplied by our executive officers, directors and certain significant shareholders. In consideringrelated-party transactions, our Nominating and Corporate Governance Committee will take into account the relevant available factsand circumstances including, but not limited to:
TheNominating and Corporate Governance Committee shall then make a recommendation to the Board, which will determine whether or notto approve of the related party transaction, and if so, upon what terms and conditions. In the event a director has an interestin the proposed transaction, the director must recuse himself or herself from the deliberations and approval.
Otherthan as disclosed below, during the last two fiscal years, there have been no related party transactions.
OnMarch 4, 2014, Mr. Panosian made cash advances of $12,500 to the Company for its working capital requirements. Advances made byMr. Panosian were unsecured, non-interest bearing and due on demand without specific repayment terms. The advances were repaidin full by the Company in multiple payments during the three months ended March 31, 2016.
OnApril 26, 2016, September 1, 2016 and October 5, 2016, Mr. Ohri loaned our Company an aggregate of $130,000. Pursuant to the termsof 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 promissorynotes was extended to September 1, 2018. On August 30, 2018, the maturity date of these promissory notes was further extendedto September 30, 2018. On September 30, 2018, the maturity date of these notes was extended to the third business day followingthe date of consummation of the Company’s initial public offering at which time $200,000 of the principal amount of thenotes was paid in cash and the balance was paid in 42,105 unregistered be paid in shares of common stockof the Company at a conversion price equal to the per Unit price of the public offering.
Concurrentwith the closing of the IPO on November 14, 2018, the following private transaction was consummated in accordance with the relatedagreements (see Note 9 of the financial statements), all in transactions exempt from registration under Section 4(a)(2) of theSecurities Act of 1933, as amended: 136,863 unregistered shares of common stock were issued upon conversion of $650,100 of accruedand unpaid salaries to officers and directors at a conversion price of $4.75 per share.
OnMay 10, 2016, Mr. Khachatoorian loaned our Company an aggregate of $170,000. Pursuant to the terms of the Promissory Note, theloan was to be repaid on or before December 31, 2016, with interest at 10% per annum payable monthly. The loan was repaid on October18, 2016.
TheCompany engaged an independent consultant in December 2015 at $7,000 per month, for a one-year term, renewable annually, to consultwith the officers and employees of the Company concerning matters relating to the management, business development and marketingof the Company, and generally any matters arising out of the business affairs of the Company. This agreement has been extendedverbally on a month to month basis at $7,000 per month.
Ourgeneral counsel was engaged by the Company from February 2016 to March 2017 to manage our legal and corporate governance affairs,and he was paid $62,000 for his services.
CompensationCommittee Interlocks and Insider Participation
Noneof our executive officers serves as a member of the Board or compensation committee of any other entity that has one or more ofits executive officers serving as a member of our Board.
DESCRIPTIONOF OUR SECURITIES
Weare authorized to issue two classes of stock. The total number of shares of stock that we are authorized to issue is one hundredand five million (105,000,000) shares, consisting of one hundred million (100,000,000) shares of common stock, $0.0001 par valueand five million (5,000,000) shares of preferred stock, $0.0001 par value.
Asof the April 21, 2019 date of this prospectus, we had 15,582,153 shares of common stock issued and outstanding.
Theholders of the common stock are entitled to one vote for each share held at all meetings of shareholders (and written actionsin lieu of meeting). There is no cumulative voting. The holders of shares of common stock are entitled to dividends when and asdeclared by the Board of Directors from funds legally available therefor, and upon liquidation are entitled to share pro ratain any distribution to holders of common stock. There are no preemptive, conversion or redemption privileges, nor sinking fundprovisions with respect to the common stock.
Ourpreferred stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the numberof shares of any series of preferred stock and to determine the designation of any such series. The Board of Directors is alsoauthorized to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissuedseries of preferred stock and, within the limits and restrictions stated in any resolution or resolutions of the Board of Directorsoriginally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares ofsuch series than outstanding) the number of shares of any such series subsequent to the issue of shares of that series.
SeriesC Convertible PreferredStock
Weissued shares of Series C Convertible Preferred Stock in exchange for Series A Warrants and Series B Warrants withone institutional investor on April 11, 2019.
The4,268 shares of Company’s Series C Convertible Preferred Stock having the rights, preferences and privileges set forth inthe Certificate of Designation, filed by the Company with the Secretary of State of Nevada The shares of Series C ConvertiblePreferred Stock are convertible into 4,268,000 shares of the Company’s common stock, and rights to convert into common stockare subject to limitations on ownership at any one time of Company common stock up to 9.9% of the issued and outstanding sharesof common stock of the Company; otherwise, the Series C Convertible Preferred Stock has no rights not awarded to holders of commonstock of the Company.
Theconversion of the Series C Convertible Preferred Stock is subject to standard anti-dilution provisions in connection withany stock split, stock dividend, subdivision or similar reclassification of the common stock.
Otherthan the above, the Series C Preferred Stock has the same rights and privileges as Common Stock.
Weissued Class B Warrants in connection with the October 2016 Private Placement, March 2018 Private Placement, May 2018 PrivatePlacement and August 2018 Financing as described above.
EachClass B Warrant entitles the holder thereof to purchase one share of common stock at a price of $12.00 per share, through andincluding May 15, 2023.
Theexercise price and number of shares of common stock or other securities issuable on exercise of the Class B Warrants are subjectto adjustment in certain circumstances, including in the event of a stock dividend, recapitalization, reorganization, merger orconsolidation of our Company. The exercise price will also be subject to adjustment upon any dilutive event until and includingthe consummation of an offering, such that the exercise price then in effect shall be reduced to an exercise price equal to 120%of the as-adjusted Conversion Price. Simultaneously with any such adjustment to the exercise price, the number of securities thatmay be purchased upon exercise of the Class B Warrants shall be increased or decreased proportionately, so that after such adjustmentthe aggregate exercise price payable for the adjusted number of securities shall be the same as the aggregate exercise price ineffect immediately prior to such adjustment (without regard to any limitations on exercise).
Nofractional shares of Common Stock will be issued upon the exercise of the Class B Warrants, but rather the number of shares ofCommon Stock to be issued shall be rounded up to the nearest whole number.
Asof the date of this prospectus, 265,500 Class B Warrants are issued and outstanding.
Wehave issued warrants to the placement agent in our (i) October 2016 Private Placement, whereby each warrant entitled the holderthereof to purchase one share of common stock at a price of $12.00 per share, through and including October 17, 2021, and (ii)March 2018 Private Placement, May 2018 Private Placement and August 2018 Financing whereby each warrant entitled the holder thereofto purchase one share of common stock at a price of $12.00 per share, through and including September 4, 2023. The exercise priceand number of shares of common stock or other securities issuable on exercise of such warrants are subject to customary adjustmentin certain circumstances, including in the event of a stock dividend, recapitalization, reorganization, merger or consolidationof our Company. As of the date of this prospectus, 44,373 warrants have been issued to the placement agent as describedabove and are outstanding.
SeriesA Warrants and Series B Warrants
Inour November 2018 IPO and concurrent private placement, we issued units which included a total of 6,379,571 each of Series A Warrantsand Series B Warrants. As of April 21, 2019, 2,152,644 Series B Warrants had been exercised, and 1,189,560 Series A Warrants and1,005,760 Series B Warrants had been exchanged for 4,268 shares of Series C Preferred Stock. As of April 21, 2019, 5,190,011 SeriesA Warrants and 3,221,167 Series B Warrants remain outstanding. Except as otherwise specified below, the terms of both the SeriesA Warrants and the Series B Warrants are the same.
Exercisability.The warrants are exercisable at any time after their original issuance and at any time up to the date that is five years aftertheir original issuance for the Series A Warrants and one year after their original issuance for the Series B Warrants . The warrantswill be exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice and,at any time a registration statement registering the issuance of the shares of Common Stock underlying the warrants under theSecurities Act is effective and available for the issuance of such shares, or an exemption from registration under the SecuritiesAct is available for the issuance of such shares, by payment in full in immediately available funds for the number of shares ofCommon Stock purchased upon such exercise. If a registration statement registering the issuance of the shares of Common Stockunderlying the warrants under the Securities Act is not effective or available and an exemption from registration under the SecuritiesAct is not available for the issuance of such shares, the holder may, in its sole discretion, elect to exercise the warrant througha cashless exercise, in which case the holder would receive upon such exercise the net number of shares of Common Stock determinedaccording to the formula set forth in the warrant. No fractional shares of Common Stock will be issued in connection with theexercise of a warrant. In lieu of fractional shares, we will pay the holder an amount in cash equal to the fractional amount multipliedby the exercise price.
If,on any trading day after the three-month anniversary of the date of issuance of the Series B warrants, and ending on the 12-monthanniversary of the date of issuance of the Series B warrants, the “market price” of a share of our common stock isless than $5.00 (as adjusted for stock splits, stock dividends, extraordinary dividend recapitalization, reorganization, mergersand consolidation), then the holders of the Series B warrants may exercise the Series B warrants in a cashless exercise. Thiscashless exercise would permit such Series B warrant holder to obtain a number of shares of our common stock equal to:
Inthe event that the number of shares for which Series B Warrants are exercisable exceeds the number of shares of common stock authorizedfor issuance under our certificate of incorporation, we will call a meeting of our stockholders and take other appropriate actionto amend and restate our certificate of incorporation to increase the number of authorized shares to the level necessary to satisfyour obligations to the Series B warrant holders.
Thefollowing table shows the number of shares of common stock for which the Series B Warrants would be exercised in aggregate, basedon hypothetical declines in the market price for our common stock based upon an assumed per Class A Unit price of $5.00.
ExerciseLimitation. A holder will not have the right to exercise any portion of the warrant if the holder (together with its affiliates)would beneficially own in excess of 9.99% of the number of shares of our Common Stock outstanding immediately after giving effectto the exercise, as such percentage ownership is determined in accordance with the terms of the warrants.
ExercisePrice. The exercise price per whole share of Common Stock purchasable upon exercise of the warrants is $5.50 per share or110 % of the public offering price of the unit for the Series A Warrants and $5.00 per share or 100% of the public offering priceper unit for the Series B Warrants. The exercise price is subject to appropriate adjustment in the event of certain stock dividendsand distributions, stock splits, stock combinations, reclassifications or similar events affecting our Common Stock and also uponany distributions of assets, including cash, stock or other property to our stockholders.
Transferability.Subject to applicable laws, the warrants may be offered for sale, sold, transferred or assigned without our consent.
ExchangeListing. We have listed the Series A Warrants offered in this offering on The NASDAQ Capital Market under the symbol“TBLTW” , but the Series B Warrants will not trade . No assurance can be given that such listing will be approvedor that a trading market will develop.
WarrantAgent. The warrants will be issued in registered form under a warrant agency agreement between VStock Transfer, LLC, as warrantagent, and us. The warrants shall initially be represented only by one or more global warrants deposited with the warrant agent,as custodian on behalf of The Depository Trust Company (DTC) and registered in the name of Cede & Co., a nominee of DTC, oras otherwise directed by DTC.
FundamentalTransactions. In the event of a fundamental transaction, as described in the warrants and generally including any reorganization,recapitalization or reclassification of our Common Stock, the sale, transfer or other disposition of all or substantially allof our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of ouroutstanding Common Stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstandingCommon Stock, the holders of the warrants will be entitled to receive upon exercise of the warrants the kind and amount of securities,cash or other property that the holders would have received had they exercised the warrants immediately prior to such fundamentaltransaction.
Rightsas a Stockholder. Except as otherwise provided in the warrants or by virtue of such holder’s ownership of shares ofour Common Stock, the holder of a warrant does not have the rights or privileges of a holder of our Common Stock, including anyvoting rights, until the holder exercises the warrant.
GoverningLaw. The warrants and the warrant agency agreement are governed by New York law.
The2016 Equity Incentive Plan
The2016 Equity Incentive Plan (the “2016 Plan”) was adopted by the Board of Directors and approved by the shareholderson July 6, 2016. As of the date of this Prospectus, the Board approved and granted to the Chief Executive Officer an option topurchase 125,000 shares of the Company’s common stock under the 2016 Plan.
StockSubject to the 2016 Plan. The maximum number of shares of our common stock that may be issued under the 2016 Plan is 1,000,000shares, which amount will be (a) reduced by awards granted under the 2016 Plan, and (b) increased to the extent that awards grantedunder the 2016 Plan are forfeited, expire or are settled for cash (except as otherwise provided in the 2016 Plan). Substituteawards (awards made or shares issued by our Company in assumption of, or in substitution or exchange for, awards previously granted,or the right or obligation to make future awards, in each case by a company acquired by us or any subsidiary of ours or with whichwe or any subsidiary combines) will not reduce the shares authorized for grant under the 2016 Plan, nor will shares subject toa substitute award be added to the shares available for issuance or transfer under the 2016 Plan.
Weand Joseph Gunnar have agreed that for so long as any Class B Convertible Preferred Stock remain issued and outstanding, we mayissue no more than 375,000 shares of common stock (or awards that are convertible into or exercisable or exchangeable for sharesof common stock in such amount) under the 2016 Plan.
Awardsunder the Plan. The 2016 Plan includes a variety of forms of awards, including stock options, stock appreciation rights, restrictedstock, restricted stock units and dividend equivalents to allow us to adapt our incentive compensation program to meet our needsin the changing business environment in which we operate.
Eligibility.Incentive Stock Options may be granted only to our employees. All other awards may be granted to our employees, consultants, directorsand non-employee directors, provided that such consultants, directors and non-employee directors render good faith services notin connection with the offer and sale of securities in a capital-raising transaction. No employee will be eligible to receivemore than 125,000 shares of common stock in any calendar year under the 2016 Plan pursuant to the grant of awards.
Term.The 2016 Plan is effective July 6, 2016 and awards may be granted through July 5, 2026. No awards may be granted under the 2016Plan subsequent to that date. The Board may suspend or terminate the 2016 Plan without shareholder approval or ratification atany time or from time to time.
EffectiveJuly 1, 2018, the Board of Directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”). This 2018 Plan wasadopted in addition to the existing 2016 Stock Equity Incentive. The awards per 2018 Plan may be granted through June 30, 2023to the Company’s employees, consultants, directors and non-employee directors. The maximum number of shares of our commonstock that may be issued under the 2018 Plan is 2,000,000 shares, which amount will be (a) reduced by awards granted under the2018 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 stockin any calendar year under the 2018 Plan pursuant to the grant of awards. On September 12, 2018, the Board of Directors approvedto increase the number of shares of common stock reserved for future issuance under this Plan from 1,000,000 shares to 2,000,000shares. On September 14, 2018, 1,000,000 shares of common stock underlying awards under the 2018 Plan have been granted to theemployees and officers of the Company.
Thetransfer agent and registrar for our common stock is VStock Transfer, LLC. The transfer agent’s address is 18 LafayettePlace, Woodmere, NY 11598, and its telephone number is 855-9VSTOCK.
Ourcommon stock is listed on NASDAQ under the symbol “TBLT.” In conjunction therewith, we have also listed our warrantson The NASDAQ Capital Market under the symbol “TBLTW” and our Class A Units under the symbol “TBLTU”.No assurance can be given that our application will be approved.
THESELLING STOCKHOLDER AND PLAN OF DISTRIBUTION
Theshares of common stock being offered by the selling stockholder constitute common stock and common stock into which the SeriesC Convertible Preferred Stock is convertible as issued to it in the April 11, 2019 exchange transaction.
Thetable below lists the selling stockholder and other information regarding the beneficial ownership (as determined under Section13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder) of the shares of common stockheld by each of the selling stockholder. The second and third columns list the number of shares and percentage of common stockbeneficially owned by the selling stockholder, based on its ownership of shares of common stock, as of April 21, 2019.
Thefourth and fifth column list the number and percentage of shares of common stock being offered by this prospectus by the sellingstockholder.
Informationabout the selling stockholder may change over time. Any changed information will be set forth in an amendment to the registrationstatement or supplement to this prospectus, to the extent required by law.
Weare registering the shares of common stock described above under “Selling Stockholder” by the holder thereof. We willbear all fees and expenses incident to our obligation to register the shares of common stock.
Theselling stockholder may sell all or a portion of the shares of common stock held by them and offered hereby from time to timedirectly or through one or more underwriters, broker-dealers or agents. If the shares of common stock are sold through underwritersor broker-dealers, the selling stockholder will be responsible for underwriting discounts or commissions or agent’s commissions.The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time ofthe sale, at varying prices determined at the time of sale or at negotiated prices. These sales may be effected in transactions,which may involve crosses or block transactions, pursuant to one or more of the following methods:
Theselling stockholder may also sell shares of common stock under Rule 144 promulgated under the Securities Act of 1933, as amended,if available, rather than under this prospectus. In addition, the selling stockholder may transfer the shares of common stockby other means not described in this prospectus. If the selling stockholder effect such transactions by selling shares of commonstock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissionsin the form of discounts, concessions or commissions from the selling stockholder or commissions from purchasers of the sharesof common stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissionsas to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved).In connection with sales of the shares of common stock or otherwise, the selling stockholder may enter into hedging transactionswith broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positionsthey assume. The selling stockholder may also sell shares of common stock short and deliver shares of common stock covered bythis prospectus to close out short positions and to return borrowed shares in connection with such short sales. The selling stockholdermay also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.
Theselling stockholder may pledge or grant a security interest in some or all of the notes, warrants or shares of common stock ownedby them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sellthe shares of common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3)or other applicable provision of the Securities Act amending, if necessary, the list of selling stockholder to include the pledgee,transferee or other successors in interest as selling stockholder under this prospectus. The selling stockholder also may transferand donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successorsin interest will be the selling beneficial owners for purposes of this prospectus.
Tothe extent required by the Securities Act and the rules and regulations thereunder, the selling stockholder and any broker-dealerparticipating in the distribution of the shares of common stock may be deemed to be “underwriters” within the meaningof the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemedto be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the shares of commonstock is made, a prospectus supplement, if required, will be distributed, which will set forth the aggregate amount of sharesof common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, anydiscounts, commissions and other terms constituting compensation from the selling stockholder and any discounts, commissions orconcessions allowed or re-allowedor paid to broker-dealers.
Underthe securities laws of some states, the shares of common stock may be sold in such states only through registered or licensedbrokers or dealers. In addition, in some states the shares of common stock may not be sold unless such shares have been registeredor qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
Therecan be no assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to theregistration statement, of which this prospectus forms a part.
Theselling stockholder and any other person participating in such distribution will be subject to applicable provisions of the SecuritiesExchange Act of 1934, as amended, and the rules and regulations thereunder, including, without limitation, to the extent applicable,Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by theselling stockholder and any other participating person. To the extent applicable, Regulation M may also restrict the ability ofany person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to theshares of common stock. All of the foregoing may affect the marketability of the shares of common stock and the ability of anyperson or entity to engage in market-making activities with respect to the shares of common stock.
Wewill pay all expenses of the registration of the shares of common stock pursuant to the registration rights agreement, estimatedto be $25,000 in total, including, without limitation, Securities and Exchange Commission filing fees and expenses of compliancewith state securities or “blue sky” laws; provided, however, a selling stockholder will pay all underwriting discountsand selling commissions, if any. We will indemnify the selling stockholder against liabilities, including some liabilities underthe Securities Act in accordance with the registration rights agreements or the selling stockholder will be entitled to contribution.We may be indemnified by the selling stockholder against civil liabilities, including liabilities under the Securities Act thatmay arise from any written information furnished to us by the selling stockholder specifically for use in this prospectus, inaccordance with the related registration rights agreements or we may be entitled to contribution.
Oncesold under the registration statement, of which this prospectus forms a part, the shares of common stock will be freely tradablein the hands of persons other than our affiliates.
Thevalidity of the securities offered in this prospectus is being passed upon for us by Jolie Kahn, Esq.
Ourfinancial statements as of December 31, 2018 and 2017, and for each of the two years in the period ended December 31, 2018,incorporated in this prospectus and related registration statement by reference to the Annual Report on Form 10-K of ToughBuiltIndustries, Inc. for the year ended December 31, 2018, have been audited by Marcum, LLP, independent registered public accountingfirm, as set forth in its report thereon appearing elsewhere herein, and are included in reliance upon such report given on theauthority of such firm as experts in accounting and auditing.
WHEREYOU CAN FIND ADDITIONAL INFORMATION
Wehave filed with the Commission a registration statement on Form S-1 under the Securities Act with respect to the shares offeredhereby. This prospectus, which is part of such registration statement, omits certain information, exhibits, schedules and undertakingsset forth in the registration statement. For further information pertaining to us and our common stock, reference is made to theregistration statement and the exhibits and schedules to the registration statement. Statements contained in this prospectus asto the contents or provisions of any documents referred to in this prospectus are not necessarily complete, and in each instancewhere a copy of the document has been filed as an exhibit to the registration statement, reference is made to the exhibit fora more complete description of the matters involved.
Asa result of this offering, we will become subject to the information and reporting requirements of the Exchange Act and, in accordancewith this law, we will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxystatements and other information will be available for inspection and copying at the Public Reference Room maintained by the SECat 100 F Street, N.E., Washington, D.C. 20549 and the website of the SEC at www.sec.gov. We also maintain a website atwww.toughbuilt.com. After the closing of this offering, you may access our annual reports on Form 10-K, quarterly reports on Form10-Q, current reports on Form 8-K, and amendments to those reports filed of furnished pursuant to Section 13(a) or 15(d) of theExchange Act with the SEC free of charge at our website as soon as reasonably practicable after such material is electronicallyfiled with, or furnished to, the SEC.
INFORMATIONNOT REQUIRED IN PROSPECTUS
ITEM13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Thefollowing table sets forth the costs and expenses payable by us in connection with the issuance and distribution of the securitiesbeing registered hereunder. All of the amounts shown are estimates, except for the SEC Registration Fee.
*Tobe added in the final prospectus
ITEM14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Ourbylaws, as amended, provide to the fullest extent permitted by Nevada law, that our directors or officers shall not be personallyliable to us or our shareholders for damages for breach of such director’s or officer’s fiduciary duty. The effectof this provision of our bylaws, as amended, is to eliminate our right and our shareholders (through shareholders’ derivativesuits on behalf of our Company) to recover damages against a director or officer for breach of the fiduciary duty of care as adirector or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situationsdefined by statute. We believe that the indemnification provisions in our bylaws, as amended, are necessary to attract and retainqualified persons as directors and officers.
Insofaras indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling personsof the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of theSecurities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore,unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrantof expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action,suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered,the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a courtof appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the SecuritiesAct and will be governed by the final adjudication of such issue.
ITEM15. RECENT SALES OF UNREGISTERED SECURITIES
Weheld a closing of units in a private placement conducted in February of 2016. We sold an aggregate of 122,167 units at a priceof $3.00 per such unit for aggregate gross proceeds of $366,500. Each of the units contained one half of one share of our commonstock and one half of Class A Warrant to purchase one share of our common stock for an aggregate of 61,083 shares of our commonstock and 61,083 Class A Warrants to purchase our common stock.
Weheld a closing of units in the October 2016 Private Placement. We sold an aggregate of 229,000 units at a price of $5.00 per suchunit for aggregate gross proceeds of $1,145,000. Each of the units contained one half of share of Class B Convertible PreferredStock and one half of a Class B Warrant to purchase a share of our common stock for an aggregate of 114,500 shares of Class BConvertible Preferred Stock and 114,500 Class B Warrants. 30,725 placement agent warrants were issued in conjunction with thisoffering.
Contemporaneouslywith the October 2016 Private Placement, we consummated a debt financing whereby the investor purchased $5,000,000 in a seniorsecured convertible debenture from us. We issued the debenture in the aggregate principal face amount of $5,700,000. In additionto the original issue discount, the debenture carries an annual interest rate of 8%, payable quarterly in arrears. Under the termsof the debenture, we also issued 64,375 shares of Class B Convertible Preferred Stock to the investor. The debenture is securedby all of our and our subsidiaries’ assets. Effective August 31, 2017, the investor transferred a portion of the convertibledebenture to a third party. As a result of the transfer, the convertible debenture was bifurcated into two debentures in the principalamounts of $3,784,230 and $1,915,770, respectively. All the terms and conditions of convertible debentures remain the same inthe two replacement debentures. The maturity date of the debenture was extended to September 30, 2018 by issuance of an aggregateof 7,500 shares of the Company’s Class B Convertible Preferred Stock. The maturity date has been further extended to theearlier of the closing of the Company’s initial public offering and November 15, 2018 for the payment of an aggregate of30,000 shares of the Company’s Class B Convertible Preferred Stock.
OnJanuary 16, 2018, the Company and the holders of the convertible debentures agreed to amend the terms of their securities purchaseagreement originally executed in October 2016. The Company agreed to issue and deliver to (i) Hillair Capital an amended and restateddebenture in the principal amount of $4,182,709 with an interest rate increased to 10% per annum and an additional 46,805 sharesof Class B Convertible Preferred Stock, and to (ii) HSPL Holdings, LLC an amended and restated debenture in the principal amountof $2,117,501 with an interest rate increased to 10% per annum and an additional 23,695 shares of Class B Convertible PreferredStock. The amended debentures are comprised of the original debentures principal balance and all accrued but unpaid interest asof the date of the amendment. The original redemption dates have been removed under the amendment, with the entire principal andaccrued interest balances being due on September 30, 2018. On October 18, 2018, the holders of the convertible debentures andthe Company agreed to amend the terms of their securities purchase agreements by the holders agreeing to convert their debenturesinto common shares into the public offering, (i) a redemption amount equal to $685,148 and accrued but unpaid interest on debenturesof $814,852 ; (ii) an increase the principal amount of the debentures and the stated value of Class B Convertible Preferred Stockby 5% above of the current principal amount of the debentures and stated value; and (iii) the balance of debentures not subjectto redemption being automatically converted into unregistered Class A Units on a $1.00 principal amount of debenture for $1.20basis to the Company, provided; however, that to the extent that the holder’s right to receive securities would result inthe holder exceeding the beneficial ownership limitation, then the Company shall issue to the holder, to the extent such securitiescause the holder to exceed such beneficial ownership limitation (or in the beneficial ownership of any shares of Common Stockas a result of such issuance of public offering securities to such extent), shares of zero-coupon convertible preferred stockwith the same economic benefit as the Class A Units, which shall be in form and substance reasonably satisfactory to the holderand which would otherwise not result in the holder exceeding the beneficial ownership limitation.
Weheld a closing of units in the March 14, 2018 Private Placement. We sold an aggregate of 162,000 units at a price of $5.00 persuch unit for aggregate gross proceeds of $810,000. Each of the units contained one half of share of Class B Convertible PreferredStock 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 ConvertiblePreferred Stock and 81,000 Class B Warrants. In conjunction therewith, the placement agent was issued 4,050 warrants.
Weheld a closing of units in the May 15, 2018 Private Placement. We sold an aggregate of 140,000 units at a price of $5.00 per unitfor aggregate gross proceeds of $700,000. Each of the units contained one half of share of Class B Convertible Preferred Stockand one half of a Class B Warrant to purchase a share of our common stock for an aggregate of 70,000 shares of Class B ConvertiblePreferred Stock and 70,000 Class B Warrants. In conjunction therewith, the placement agent was issued 3,500 warrants.
OnSeptember 4, 2018, the Company entered into securities purchase agreements with six accredited investors for the sale to thoseinvestors of unsecured promissory notes, with an aggregate principal amount of $862,500. Those notes carry an original issue discountof 15%, and the purchase price was $750,000. On October 19, 2018 , the holders of the six (6) promissory notes agreed to acceptunregistered Class A Units at a per Unit conversion price equal to 80% of the per Unit purchase price in the Company’s initialpublic offering.
Thesecurities issued in these offering are exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2)of the Securities Act and/or Regulations D promulgated thereunder because, among other things, the transactions did not involvea public offering, the purchasers were accredited investors, the purchasers took the securities for investment and not resaleand we took appropriate measures to restrict the transfer of the securities.
OnNovember 14, 2018, the Company consummated its IPO whereby it sold a total of 2,670,000 Class A Units, each Unit consisting ofone share of common stock, par value $0.0001 per share, and a Series A Warrant to purchase one share of common stock and a SeriesB 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 anda Series B Warrant (“Class A Unit”). The Company received net proceeds from the IPO of $12,415,500 after deductingunderwriting discounts and commission of $934,500. The Company incurred $743,765 in expenses related to the IPO. $3,657,507 ofthe proceeds were allocated to warrant derivative on our balance sheet as a result of our Series B Warrant issuance which weredeemed to be a derivative liability.
November2018 Private Transactions
Concurrentwith the closing of the IPO on November 14, 2018, the following private transactions were consummated in accordance with the relatedagreements (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:
OnDecember 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 SeriesB Warrants, at a price of $0.01 per warrant. The Company received net proceeds from the exercise of over-allotment option $121,909after deducting commission and expenses of $10,601.
January2019 Warrant Exchange
OnJanuary 24, 2019, the Company entered into exchange agreements with two institutional investors pursuant to which these investorsexercised Series A Warrants to purchase 424,116 shares of its common stock, for total gross proceeds to the Company of $2,332,638.Those investors also exchanged Series A Warrants to purchase 508,940 shares of its common stock into 508,940 shares of its commonstock and received new warrants to purchase an aggregate of 933,056 shares of its common stock. These new warrants have termssubstantially similar to the terms of the Company’s Series A Warrants, except that the per share exercise price of the newwarrants is $3.67, and the warrants are not exercisable until the six-month anniversary of the date of issuance thereof.
OnApril 11, 2019, Hillair Capital Investment LP exchanged its ToughBuilt Industries, Inc. Series A Warrantto 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 ofCommon Stock, which Series B Warrants are subject to certain anti-dilution provisions imbedded in such Series B Warrants for 4,268shares of Company’s Series C Convertible Preferred Stock having the rights, preferences and privileges set forth in theCertificate of Designation, filed by the Company with the Secretary of State of Nevada The shares of Series C Convertible PreferredStock are convertible into 4,268,000 shares of the Company’s common stock, and rights to convert into common stock are subjectto limitations on ownership at any one time of Company common stock up to 9.9% of the issued and outstanding shares of commonstock of the Company; otherwise, the Series C Convertible Preferred Stock has no rights not awarded to holders of common stockof the Company. Hillair Capital’s right to convert into shares of common stock is subject to daily volume limitations asfollows:
Upto 500,000 shares of daily volume, may trade 15% of the volume
From500,001 shares through 1,000,000 shares of daily volume, may trade 20% of the volume
From1,000,01 shares of daily volume, may trade 25% of the volume.
ITEM16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Thefollowing exhibits are filed with this registration statement.
Opinion of Jolie Kahn, Esq.********
Service Agreement with Belegal Industrial Co., Ltd., dated August 19, 2013**
Form of Lock Up Agreement for Offering**
Form of Warrant Agency Agreement***
Consent of Jolie Kahn, Esq. (included in Exhibit 5.1)********
Audit Committee Charter**
Compensation Committee Charter**
Nominating and Corporate Governance Committee Charter**
Insofaras indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Act, may be permitted to directors,officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has beenadvised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressedin the Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other thanthe payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in thesuccessful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connectionwith the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled bycontrolling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is againstpublic policy as expressed in the Act and will be governed by the final adjudication of such issue.
(i)To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii)To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recentpost-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information setforth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (ifthe total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or highend of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregateoffering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
(iii)To include any material information with respect to the plan of distribution not previously disclosed in the registration statementor any material change to such information in the registration statement;
Theundersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registrationstatement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered orsold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaserand will be considered to offer or sell such securities to such purchaser:
(i)Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuantto Rule 424;
(ii)Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referredto by the undersigned registrant;
(iii)The portion of any other free writing prospectus relating to the offering containing material information about the undersignedregistrant or its securities provided by or on behalf of the undersigned registrant; and
(iv)Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(1)for determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as partof this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuantto Rule 424(b)(1) or (4), or 497(h) under the Securities Act as part of this registration statement as of the time the SEC declaredit effective.
(2)for determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectusas a new registration statement for the securities offered in the registration statement, and that offering of the securitiesat that time as the initial bona fide offering of those securities.
Pursuantto the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalfby the undersigned, thereunto duly authorized, in the City of Lake Forest, State of California on April 26, 2019.
Pursuantto the requirements of the Securities Act, this registration statement has been signed below by the following persons in the capacitiesand on the dates indicated.