Live Feed

Feed to the latest filings at the SEC

 

TOUGHBUILT INDUSTRIES, INC

Date Filed : Sep 06, 2019

S-11forms-1.htm

 

Asfiled with the Securities and Exchange Commission on September 6, 2019.

RegistrationNo.              

 

 

 

UNITEDSTATES

SECURITIESAND EXCHANGE COMMISSION

Washington,D.C. 20549

 

FORMS-1

REGISTRATIONSTATEMENT UNDER THE SECURITIES ACT OF 1933

 

ToughBuiltIndustries, Inc.

(ExactName of Registrant as Specified in its Charter)

 

Nevada   3420   46-0820877
(State or other jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer
incorporation or organization)   Classification Code Number)   Identification No.)

 

25371Commercentre Drive, Suite 200

LakeForest, CA 92630

Telephone:(949) 528-3100

(Address,including zip code, and telephone number,

includingarea code, of principal executive offices)

 

Mr.Michael Panosian

ChiefExecutive Officer

ToughBuiltIndustries, Inc.

25371Commercentre Drive, Suite 200

LakeForest, CA 92630

Telephone:(949) 528-3100

(Address,including zip code, and telephone number,

includingarea code, of agent for service)

 

Copiesto:

 

Jolie Kahn, Esq.

12 E. 49th Street, 11th floor

New York, NY 10019

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):

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company [X]

 

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).

 

[X] Emerging growth company

 

[  ] If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.

 

 

 

CALCULATIONOF REGISTRATION FEE

 

 

 

Title of each class of

securities to be registered

  Proposed maximum
aggregate offering
price(1)
   

Amount of

registration fee

 
Common stock, $.0001 par value(2)   $ 6,710,250     $ 813.28  
Total   $ 6,710,250     $ 813.28  

 

(1) Estimated solely for the purpose of calculating the registration fee under Rule 457(o) of the Securities Act. 17,250,000 shares are being registered at the $0.3890 closing sale price on September 4, 2019, for the selling stockholder, consisting of (i) 11,500,000 shares underlying $11,500,000 principal amount of Senior Secured Convertible Notes due December 31, 2020 and (ii) 5,750,000 shares underlying 5,750,000 warrants issued to the selling stockholder.
(2) Pursuant to Rule 416 under the Securities Act, the securities being registered hereunder include such indeterminate number of additional shares of common stock as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions.

 

 

 

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 September 6, 2019

 

17,250,000Shares of Common Stock

 

 

 

ToughBuiltIndustries, Inc.

 

Thisprospectus relates to the offer and sale of up to 17,250,000 shares of common stock of ToughBuilt Industries, Inc., a Nevada corporation,issuable to a certain selling stockholder, consisting of (i) 11,500,000 shares underlying $11,500,000 principal amount of SeniorSecured Convertible Notes due December 31, 2020 and (ii) 5,750,000 shares underlying 5,750,000 warrants issued to the sellingstockholder.

 

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,” “ToughBuilt,” “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”. Inconnection with any sales of the common stock offered hereunder, the selling stockholder, any underwriters, agents, brokers ordealers participating in such sales may be deemed to be “underwriters” within the meaning of the Securities Act of1933, 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 September 4, 2019, was $0.3890 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 3.

 

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

 

 

 

 

 

 iii 

 

 

TABLEOF CONTENTS

 

  Page
Prospectus Summary 1
Risk Factors 3
Cautionary Note Regarding Forward-Looking Statements 21
Use of Proceeds 22
Market for Our Common Stock and Related Stockholder Matters 22
Dividend Policy 22
Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
Financial Statements 23
Business 23
Management 33
Executive Compensation 39
Security Ownership of Certain Beneficial Owners and Management 46
Certain Relationships and Related Party Transactions 46
Description of Our Securities 48
Plan of Distribution 55
Legal Matters 57
Experts 57
Where You Can Find Additional Information 57

 

ABOUTTHIS PROSPECTUS

 

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.

 

 iv 

 

 

PROSPECTUSSUMMARY

 

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 underwriter’s common stock purchase warrants and/or (c) the underwriter’sover-allotment option, and (ii) reflect a 1-for-2 reverse stock split of our preferred stock, common stock and all equity instrumentsconvertible into common stock, which became effective on September 13, 2018.

 

OurCompany

 

Wemarket and distribute various home improvement and construction product lines for both the do-it-yourself (DIY) and professionalmarkets under the TOUGHBUILT® brand name, within the global multi-billion dollar per year tool market industry. All of ourproducts are 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 the fourth quarter of 2020.

 

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.

 

 1 

 

 

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:

 

●  beingpermitted 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;

 

●  beingpermitted to provide less extensive narrative disclosure than other public companies including not being required to comply withthe auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosure obligations regardingexecutive compensation in our periodic reports, proxy statements and registration statements;

 

●  beingpermitted to utilize exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholderapproval of any golden parachute payments not previously approved;

 

●  beingpermitted to defer complying with certain changes in accounting standards; and

 

●  beingpermitted 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) December 31, 2023, (b) the last day of the first fiscal year inwhich our annual gross revenues exceed $1.07 billion, (c) the last day of our fiscal year in which we are deemed to be a “largeaccelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, or Exchange Act (which would occurif the market value of our equity securities that is held by non-affiliates exceeds $700 million as of the last business day ofour most recently completed second fiscal quarter), or (d) the date on which we have issued more than $1 billion in nonconvertibledebt 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.

 

CorporateInformation

 

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.

 

 2 

 

 

SUMMARYOF THE OFFERING

 

Common stock offered by the selling stockholder:   Up to 17,250,000 shares of our common stock, par value $0.0001 per share, are being offered by the selling stockholder.
     
Offering prices:   The shares offered by this prospectus may be offered and sold at prevailing market prices or such other prices as the selling stockholder may determine.
     
Common stock outstanding:   27,804,254 shares as of September 4, 2019.
     
Nasdaq Capital Market:   TBLT for common stock.
     
Use of proceeds:   We are not selling any of the shares of common stock being offered by this prospectus and will receive no proceeds from the sale of the shares by the selling stockholder. All of the proceeds from the sale of common stock offered by this prospectus will go to the selling stockholder at the time it sells its shares.

 

Dividend policy   We have never declared or paid any dividends to the holders of our common stock and we do not expect to pay cash dividends in the foreseeable future. We currently intend to retain any earnings for use in connection with the expansion of our business and for general corporate purposes.
     
Risk factors   See “Risk Factors” and other information included in this prospectus for a discussion of the factors you should carefully consider before deciding to invest in our securities
     
Transfer agent and registrar   VStock Transfer, LLC

 

Thenumber of shares of common stock that will be outstanding after this offering set forth above is based on 27,804,254 shares ofcommon stock outstanding as of September 4, 2019, and excludes the following:

 

4,268shares of Series C Preferred Stock;

5,526,841warrants; and

1,063,419stock options.

 

Unlessspecifically stated otherwise, all information in this prospectus assumes:

 

  no exercise of the outstanding options or warrants described above;
     
  no exercise by the underwriter of their option to purchase additional shares of our common stock and/or warrants to purchase common stock to cover over-allotments, if any; and
     
  no exercise of the representatives’ warrant.

 

RISKFACTORS

 

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.

  

 3 

 

 

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 stockholders.

 

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 stockholders. 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 stockholders. 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 stockholdersand 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 stockholders 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, 2018 and 2017.

 

Wemay not be able to generate any profit in the foreseeable future. For the year ended December 31, 2018, we realized a net lossof $27,651,412 compared to a net loss of $5,941,457 for the year ended December 31, 2017. Accordingly, there is no assurance thatwe will realize profits 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 financial statements incorporated by reference herein. We continue to control our cash expenses as a percentageof expected revenue on an annual basis and thus may use our cash balances in the short-term to invest in revenue growth. 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. Our inability to generate profits could have an adverse effect on ourfinancial condition, results of operations and cash flows.

 

 4 

 

 

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 tothe legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance,or to seek an injunction under Chinese law, in either of these cases, are severely limited, and without a means of recourse byvirtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such eventscould have 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.

 

 5 

 

 

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.

 

Dueto our significant level of international operations, we are subject to international operational, financial, legal and politicalrisks, especially in China.

 

Asubstantial part of our operations are expected to be outside of the United States and some of our customers and our suppliershave some or all of their operations in countries other than the United States, more specifically in China. Risks associated withour doing business outside of the United States include:

 

  compliance with a wide variety of foreign laws and regulations, particularly labor, environmental, tariff and trade regulations and other laws and regulations that govern our operations in those countries;
     
  legal uncertainties regarding taxes, tariffs, quotas, export controls, export licenses, import controls and other trade barriers;
     
  economic instability in the countries of our suppliers and customers, particularly in the Asia-Pacific region, causing delays or reductions in orders for their products and therefore our sales;
     
  political instability in the countries in which our suppliers operate, particularly in China and Taiwan;
     
  difficulties in collecting accounts receivable and longer accounts receivable payment cycles; and
     
  potentially adverse tax consequences.

 

Anyof these factors could harm our own, our suppliers’ and our customers’ international operations and businesses andimpair our and their ability to continue expanding into international markets and obtaining supply of goods necessary to sellour products.

 

Changesin tariffs, import or export restrictions, Chinese regulations or other trade barriers may reduce gross margins.

 

Wemay incur increases in costs due to changes in tariffs, import or export restrictions, other trade barriers, or unexpected changesin regulatory requirements, any of which could reduce our gross margins. For example, the Trump administration proposed tariffsof as much as $60 billion against Chinese goods in mid-March 2018. It is difficult to anticipate the impact on our business causedby the proposed tariffs or whether the proposed changes in tariffs will materialize in the future. Given the relatively fluidregulatory environment in China and the United States, there could be additional tax, tariffs or other regulatory changes in thefuture. Any such changes could directly and materially adversely impact our financial results and general business condition.

 

 6 

 

 

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 suffer,and 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.

 

 7 

 

 

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:

 

  attract parties for acquisitions, joint ventures or other collaborations;
  license proprietary technology that is competitive with the technology we are developing;
  attract funding; and
  attract and hire talented and other qualified personal.

 

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:

 

  Vendor production delays;
  Difficulties encountered in shipping from overseas;
  Reliance upon third-party carriers for our product shipments from our distribution centers to customers;
  Product improvements and new product introductions require significant financial and other resources, including significant planning, design, development, and testing at the technological, product and manufacturing process levels;
  Our competitors’ new products may beat our products to market, be more effective with more features, be less expensive than our products, and/or render our products obsolete;
  Any new products that we develop may not receive market acceptance or otherwise generate any meaningful net sales or profits for us relative to our expectations based on, among other things, existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs and research and development;
  Changes in customs regulations in each of the markets around the world that might entail significant change in duty rate or other importation restrictions;
  Materials shortages and/or significant cost increases that might impact overall cost of the products; and
  Trade embargos or trade barriers between nations.

 

 8 

 

 

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.

 

Weare just commencing commercialization of our new mobile device products with apps being introduced in the second quarter for mobiledevice products and our ruggedized mobile phones in the first quarter of 2020. Even if we are successful in developing these newproducts that reach commercialization, we will not be successful unless these products gain market acceptance. The degree of marketacceptance of these products will depend on a number of factors, including:

 

  the competitive environment;
  our ability to enter into strategic agreements with manufacturers; and
  the adequacy and success of distribution, sales and marketing efforts.

 

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.

 

 9 

 

 

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.

 

 10 

 

 

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.

 

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:

 

  patent applications that we file may not result in issued patents or may take longer than expected to result in issued patents;
     
  we may be subject to interference proceedings;
     
  other companies may claim that patents applied for by, assigned or licensed to, us infringe upon their own intellectual property rights;
     
  we may be subject to opposition proceedings in the U.S. and in foreign countries;
     
  any patents that are issued to us may not provide meaningful protection;
     
  we may not be able to develop additional proprietary technologies that are patentable;
     
  other companies may challenge patents licensed or issued to us;

 

 11 

 

 

  other companies may independently develop similar or alternative technologies, or duplicate our technologies;
     
  other companies may design around technologies that we have licensed or developed;
     
  any patents issued to us may expire and competitors may utilize the technology found in such patents to commercialize their own products; and
     
  enforcement of patents is complex, uncertain and expensive.

 

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:

 

  adversely affect relationships with future clients;
     
  cause delays or stoppages in providing products;
     
  divert management’s attention and resources;
     
  require technology changes to our platform that would cause our Company to incur substantial cost
     
  subject us to significant liabilities; and
     
  require us to cease some or all of its activities.

 

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.

 

 12 

 

 

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.

 

 13 

 

 

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.

 

 14 

 

 

RisksRelated to the Note Transaction, this Offering and the Ownership of Our Common Stock

 

Asubstantial number of shares of our common stock may be issued pursuant to the terms of the Convertible Note, which could causethe price of our common stock to decline.

 

TheConvertible Note is convertible into shares of our common stock immediately after issuance at an initial conversion price of $1.00per share, for an aggregate of 11,500,000 shares, or approximately 41.4% of our outstanding common stock as of September 4, 2019(without taking into account the limitations on the conversion of the Convertible Note as described elsewhere in this prospectus).

 

Furthermore,the number of shares of common stock to be issued may be substantially greater, if the Convertible Note is converted into sharesof common stock in accordance with the installment conversion process or the warrants issued in conjunction with the ConvertibleNote are exercised, each as described elsewhere in this prospectus. In such cases the number of shares issued will be determinedbased on the then current market price. We cannot predict the market price of our common stock at any future date, and therefore,we are unable to accurately forecast or predict the total amount of shares that ultimately may be issued under the ConvertibleNote. The number of shares of common stock to be issued also may be substantially greater if we voluntarily reduce the conversionprice of the Convertible Note as permitted under Section 7(d) of the Convertible Note. For the purposes of this prospectus, wehave estimated the maximum number of shares of common stock that may ultimately be issued under the Convertible Note and warrantsto be 10,691,334 shares, although the actual amount may be greater.

 

TheConvertible Note likely will be converted only at times when it is economically beneficially for the holder to do so, and we areentitled to pay interest in shares and make installment conversions only at a price per share that is at a discount to the thencurrent market price. In any event, the issuance of these shares will dilute our other equity holders, which could cause the priceof our common stock to decline.

 

Salesof substantial amounts of our common stock by the selling stockholders, or the perception that these sales could occur, couldadversely affect the price of our common stock.

 

Thesale by the selling stockholders of a significant number of shares of common stock could have a material adverse effect on themarket price of our common stock. In addition, the perception in the public markets that the selling stockholders may sell allor a portion of their shares as a result of the registration of such shares pursuant to the Registration Statement could alsoin and of itself have a material adverse effect on the market price of our common stock. We cannot predict the effect, if any,that market sales of those shares of common stock or the availability of those shares of common stock for sale will have on themarket price of our common stock.

 

 15 

 

 

Therequirement that we repay the Convertible Note and interest thereon in cash under certain circumstances, and the restrictive covenantscontained in the Convertible Note, could adversely affect our business plan, liquidity, financial condition, and results of operations.

 

Wemay be required to repay the Convertible Note and interest thereon in cash, if we do not meet certain customary equity conditions(including minimum price and volume thresholds) or in certain other circumstances. For example, we will be required to repay theoutstanding principal balance and accrued but unpaid interest, along with a premium, upon the occurrence of a Change of Control(as defined in the Convertible Note). In addition, the Convertible Note contains restrictive covenants, including financial covenants.These obligations and covenants could have important consequences on our business. In particular, they could:

 

  require us to dedicate a substantial portion of our cash flow from operations to payments on the Convertible Note;
     
  limit, among other things, our ability to borrow additional funds and otherwise raise additional capital, and our ability to conduct acquisitions, joint, ventures or similar arrangements, as a result of our obligations to make such payments and comply with the restrictive covenants in the Convertible Note;
     
  limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;
     
  increase our vulnerability to general adverse economic and industry conditions; and
     
  place us at a competitive disadvantage compared to our competitors that have lower fixed costs.

 

Thedebt service requirements of any other outstanding indebtedness or preferred stock we incur or issue in the future, as well asthe restrictive covenants contained in the governing documents for any such indebtedness, could intensify these risks.

 

Inthe event we are required to repay the Convertible Note in cash, we may seek to refinance the remaining balance, by either refinancingwith the holder of the Convertible Note, by raising sufficient funds through a sale of equity or debt securities or by obtaininga credit facility. No assurances can be given that we will be successful in making the required payments under the ConvertibleNote, or in refinancing our obligations on favorable terms, or at all. Should we determine to refinance, it could be dilutiveto shareholders.

 

Ifwe are unable to make the required cash payments, there could be a default under the Convertible Note. In such event, or if adefault otherwise occurs under the Convertible Note, including as a result of our failure to comply with the financial or othercovenants contained therein, the holders of the Convertible Note could require us to immediately repay 115% of the outstandingprincipal and interest on the Convertible Note in cash.

 

 16 

 

 

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 stockholders 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.

 

 17 

 

 

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:

 

  actual or anticipated fluctuations in our quarterly or annual operating results;
     
  changes in financial or operational estimates or projections;
     
  conditions in markets generally;
     
  changes in the economic performance or market valuations of companies similar to ours;
     
  general economic or political conditions in the United States or elsewhere;
     
  any delay in development of our products or services;
     
  our failure to comply with regulatory requirements;
     
  our inability to commercially launch products and services and market and generate sales of our products and services,
     
  developments or disputes concerning our intellectual property rights;
     
  our or our competitors’ technological innovations;
     
  general and industry-specific economic conditions that may affect our expenditures;
     
  changes in market valuations of similar companies;
     
  announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, capital commitments, new technologies, or patents;
     
  future sales of our common stock or other securities, including shares issuable upon the exercise of outstanding warrants or convertible securities or otherwise issued pursuant to certain contractual rights;
     
  period-to-period fluctuations in our financial results; and
     
  low or high trading volume of our common stock due to many factors, including the terms of our financing arrangements.

 

 18 

 

 

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, stockholders 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 stockholders without information or rights available to stockholders 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:

 

  not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
     
  being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
     
  taking advantage of an extension of time to comply with new or revised financial accounting standards;
     
  reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and
     
  exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

Weexpect to take advantage of these reporting exemptions until we are no longer an “emerging growth company.” Becauseof these lessened regulatory requirements, our stockholders would be left without information or rights available to stockholdersof 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.

 

 19 

 

 

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.

 

 20 

 

 

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 stockholders 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.

 

Exerciseor conversion of outstanding warrants and convertible securities will dilute shareholders’ percentage of ownership.

 

Wehave issued convertible securities, options and warrants to purchase shares of our common stock to our officers, directors, consultantsand other shareholders in public and private transactions. In the future, we may grant additional options, warrants and convertiblesecurities. The exercise or conversion of options, warrants or convertible securities will dilute the percentage ownership ofour shareholders, which may have a negative effect on the trading price of our common stock. The dilutive effect of the exerciseor conversion of these securities may adversely affect our ability to obtain additional capital. The holders of these securitiesmay exercise or convert such options, warrants and convertible securities at a time when we would be able to obtain additionalequity capital on terms more favorable than such securities or when our common stock is trading at a price higher than the exerciseor conversion price of the securities. The exercise or conversion of outstanding warrants, options and convertible securitieswill have a dilutive effect on the securities held by our shareholders.

 

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 stockholders 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:

 

  Our limited operating history;
     
  our ability to manufacture, market and sell our products;
     
  our ability to maintain or protect the validity of our U.S. and other patents and other intellectual property;
     
  our ability to launch and penetrate markets;

 

 21 

 

 

  our ability to retain key executive members;
     
  our ability to internally develop new inventions and intellectual property;
     
  interpretations of current laws and the passages of future laws; and
     
  acceptance of our business model by investors.

 

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.

 

USEOF PROCEEDS

 

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.

 

RELATEDSTOCKHOLDER MATTERS

 

Asof September 4, 2019, we had approximately 100 stockholders of record of our common stock.

 

Ourcommon stock trades on The NASDAQ Capital Market under the symbol “TBLT.” In conjunction therewith, our warrants arelisted on The NASDAQ Capital Market under the symbol “TBLTW” and Class A Units under the symbol “TBLTU”.

 

DIVIDENDPOLICY

 

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.

 

 22 

 

 

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, 2018and the three and six months ended June 30, 2019, is hereby incorporated by reference in their entirety from our Form 10-K filedwith the SEC on March 29, 20191 and our Form 10-Q filed with the SEC on August 19, 2019.

 

1 The Company is eligible to incorporate by reference under General Instruction VII of Form S-1. Specifically, the Company notes that it has met the requirements of paragraphs A. – D. of General Instruction VII, and that it has not been, during the past three years, a registrant for an offering of “penny stock” as defined in Rule 3a51-1 as under Rule 3a51-1.g.1., it has had average revenue of more than $6 million in all five of its last fiscal years as set forth in its balance sheets for the years ended December 31, 2018 and December 31, 2017 as reported in its Form 10-K for the fiscal year ended December 31, 2018 as filed with the SEC on March 29, 2019, and its balance sheet for the year ended December 31, 2016, as reported in the Company’s registration statement on Form S-1, to which this prospectus is Post-Effective Amendment No. 1, and its balance sheet for the years ended December 31, 2014 and December 31, 2015 as reported internally by the Company.

 

FINANCIALSTATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2018 AND DECEMBER 31, 2017 AND THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND JUNE 30,2018

 

Ouraudited financial statements for the years ended December 31, 2018 and December 31, 2017, and our unaudited condensed financialstatements for the three and six months ended June 30, 2019 and June 30, 2018, respectively, are hereby incorporated by referencein their entirety from our Form 10-K for the year ended December 31, 2018, filed with the SEC on March 29, 2019, and from ourForm 10-Q for the three and six months ended June 30, 2019, filed with the SEC on August 19, 2019.

 

BUSINESS

 

Overview

 

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 forcontractors and workers alike. Our current product line includes two major categories related to this field, with several additionalcategories 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.

 

 23 

 

 

RecentBusiness Developments

 

Thefollowing highlights recent developments in our business over the past four years:

 

  In 2015, we entered into contractual agreements with 11 additional distributors and retailers.
     
  In 2016, we entered into contractual agreements with an additional 15 distributors and retailers, and our sales increased from $8,761,362 in 2015 to $9,216,863 in 2016.
     
  In 2017, we entered into contractual agreements with an additional six distributors and retailers, and our sales increased from $9,216,863 in 2016 to $14,201,836 in 2017.
     
  In March 2017, we leased approximately 8,300 square feet of office facility in Lake Forest, California for both corporate and sales and research and development purposes. 
     
  In 2018, we entered into contractual agreements with two additional distributors and retailers.
     
  We launched a new line of miter-saw stands with three different SKUs and a new line of gloves with 16 different SKUs. Our sales increased from $14,201,836 in 2017 to $15,289,400 in 2018.
     
 

In November 2018, we completed the November 2018 IPO, pursuant to which we received net proceeds of $12,415,500 after deducting underwriting discounts and commissions of $934,500. The Company incurred $743,765 in expenses related to the IPO.

 

Concurrent  with the closing of the IPO on November 14, 2018, the following private transactions were consummated in accordance with the related agreements (see Notes 6, 7, 8 and 9 of the financial statements), all in transactions exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended:

 

  (a) 1,366,768 unregistered Class A Units were issued upon the conversion of outstanding shares of Class B Convertible Preferred Stock at a conversion price of $3.50 per Class A Unit.
     
  (b) 42,105 unregistered shares of common stock were issued upon conversion of the $200,000 principal amount of a promissory note due to an officer at a conversion price of $4.75 per share.
     
  (c) 1,726,678 unregistered Class A Units were issued upon conversion of outstanding convertible debt instruments (consisting of all principal amounts and accrued and unpaid interest through the date of the IPO) at a conversion price of $5.00 per Unit.
     
  (d) 136,863 unregistered shares of common stock were issued upon conversion of $650,100 of accrued and unpaid salaries to officers and directors at a conversion price of $4.75 per share.
     
  (e) 215,625 unregistered Class A Units issued upon the conversion of outstanding principal amount of unsecured promissory notes at a conversion price of $4.00 per Unit.

 

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.

 

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 Warrant to purchase up to 1,189,560shares of common stock of the Company and a Series B Warrant to purchase up to 1,005,760 shares of Common Stock, which SeriesB Warrants are subject to certain anti-dilution provisions imbedded in such Series B Warrants for 4,268 shares of Company’sSeries C Convertible Preferred Stock having the rights, preferences and privileges set forth in the Certificate of Designation,filed by the Company with the Secretary of State of Nevada The shares of Series C Convertible Preferred Stock are convertibleinto 4,268,000 shares of the Company’s common stock, and rights to convert into common stock are subject to limitationson ownership at any one time of Company common stock up to 9.9% of the issued and outstanding shares of common stock of the Company;otherwise, the Series C Convertible Preferred Stock has no rights not awarded to holders of common stock of the Company.

 

OnAugust 19, 2019, the Company entered into a Securities Purchase Agreement with an institutional investor pursuant to which itsold $11.5 million aggregate principal amount of promissory notes (at an aggregate original issue discount of 15%) to the investorin a transaction exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. The first note (the“Series A Note”) has a face amount of $6.72 million for which the investor paid $5 million in cash. The second note(the “Series B Note” and with the Series A Note, collectively referred to as the “Notes”) has a principalamount of $4.78 million for which the investor paid $4.78 million in the form of a full recourse promissory note issued by theinvestor to the Company (the “Investor Note”) secured by $4.78 million in cash or cash equivalents of the investor(i.e :an original issue discount of approximately 15% to the face amount of the Series B Note). 

 

 24 

 

 

Products

 

Wecreate innovative products that help our customers build faster, build stronger and work smarter. We accomplish this by listeningto what our customers want 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 our customers’ tools faster and easier. Interchangeable pouches clip on andoff any belt, bag ladder wall or vehicle. Our products let our customers carry what they want so they have it when they want it.

 

ToughBuilt’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.

 

SoftGoods

 

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 unique designs and robust construction targeted forthe 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 among 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. We believe that these lines of products are slowly becoming the standard in the constructionindustry.

 

 25 

 

 

Allof our products are designed in house to achieve features and benefits for not only the professional construction worker but alsofor the do-it-yourself person.

 

BusinessStrategy

 

Ourproduct strategy is to develop product lines in a number of categories rather than focus on a single line of goods. We believethat this approach allows for rapid growth, wider brand recognition, and may ultimately result in increased sales and profitswithin an accelerated time period. We believe that building brand awareness of our current ToughBuilt lines of products will expandour share of the pertinent markets. Our business strategy includes the following key elements:

 

  A commitment to technological innovation achieved through consumer insight, creativity and speed to market;
  A broad selection of products in both brand and private labels;
  Prompt response;
  Superior customer service; and
  Value pricing.

 

Wewill continue to consider other market opportunities while focusing on our customers’ specific requirements to increasesales.

 

Market

 

Accordingto “Statista & Statistic Brain” the annual revenue in the construction industry (based on firm revenue) was $1.731trillion for 2016 in the United States. There was approximately $394.6 billion in home improvement sales in the U.S. in 2018 (https://www.statista.com/statistics/239759/predicted-sales-of-home-improvement-retailers-in-the-us/).The heavy and civil engineering industry is over $260 billion in sales with tools and hardware alone totaling over $60 billionfor that same time period. In 2016, there were approximately 729,000 construction companies in the United States employing morethan 7.3 million employees. In addition to the construction market, our products are marketed to the “do-it-yourself”and home improvement market place. The home improvement industry has fared much better in the aftermath of the Great Recessionthan the housing market. The U.S. housing stock of more than 130 million homes requires regular investment merely to offset normaldepreciation. And many households that might have traded up to more desirable homes during the downturn decided instead to makeimprovements to their current homes. Meanwhile, federal and state stimulus programs encouraged homeowners and rental propertyowners to invest in energy-efficient upgrades that they might otherwise have deferred. Finally, many rental property owners, respondingto a surge in demand from households either facing foreclosure or nervous about buying amid the housing market uncertainty, reinvestedin their 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%.

 

 26 

 

 

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 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.

 

Canada:Princess Auto

 

UnitedKingdom: Toolbank (distribution throughout the U.K. and online selling for Europe).

 

France:Birck

 

Australia:Bunnings

 

NewZealand: Bunnings

 

Russia:VSEInstrumenti.ru

 

SouthKorea: Dong Shin Tool PIA Co., Ltd.

 

Weare actively expanding into markets in Mexico and Latin American countries the Middle East 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 many 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.

 

 27 

 

 

NewProducts

 

Tools

 

In 2018, we ordered and launched a newline of gloves and 28 SKUs of tool belt and pouches. We also intend to launch the following tools in the secondquarter of: 2020

 

  Clamp line
     
  Hammer line
     
  Pliers line
     
  Screwdriver line
     
  Tape measure line
     
  Utility knife line

 

MobileDevice Products

 

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 to a military standard 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 and others. We are designing thedevices, accessories and custom apps to allow the users to plan with confidence, organize faster, find labor and products faster,estimate accurately, purchase wisely, protect themselves, workers and their business, create and track invoicing faster and easier.

 

Bythe fourth quarter of 2020, 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 focus on sales in the following industries:construction, industrial, military and law enforcement and “.coms”.

 

Inthe first quarter of 2020, we intend to launch applications for our mobile phones relating to the following topics:

 

  1. National building codes
  2. Inspection booking
  3. Labor ready
  4. Estimating apps & programs
  5. Structural engineers
  6. Architects
  7. Building plans
  8. Workers comp
  9. Equipment insurance
  10. Project insurance & bonds
  11. Vehicle insurance
  12. Liability insurance
  13. Umbrella insurance
  14. Collection agencies
  15. Construction loans
  16. Small business loans
  17. Job listings
  18. Tool exchange

 

 28 

 

 

Agreementwith Foxconn

 

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.

 

MobileDevice Market

 

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 2019 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.

 

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.

 

 29 

 

 

MobileApps

 

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 developedaddress:

 

  Reducing construction delays. Gathering real-time information at the job site about issues such as tradesmen and contractors present at the site, construction progress, or incidents, can reduce overall project delays. This critical information helps to bring issues to light that might put projects on hold, and keep construction on schedule.
     
  Improving communication with owners and project stakeholders. Completing daily reports at the job site on mobile devices and sending automated emails can tighten the communication loop with project stakeholders. When all parties involved in the project have access to the same information at the same time, errors are reduced and issues requiring attention can be addressed faster.
     
  Increasing back-office efficiency. By eliminating the use of paper and spreadsheets, construction companies can save hundreds of hours spent on data entry, collating information for reporting, or looking for paperwork that has been lost or filed away. Increasing back-office efficiency allows projects to be run leaner and to be completed on time and on budget.
     
  Improving accountability of field staff. Staff travel times, GPS locations and time spent on-site can all be consistently monitored with mobile apps. This improves accountability and reduces labor costs. Costs can be also reduced with mobile timesheets that record clock-in/clock-out time to the minute.
     
  Improving accuracy of project documentation. Using mobile apps to capture information at the job site improves accuracy and reduces issues that arise from illegible handwriting, inconsistent data, and information gaps. Photos, GPS, time stamps and signatures captured on-site provide an accurate and indisputable audit trail for the project, delivering accountability to clients or evidence in legal disputes.
     
  Improving equipment management. Construction companies that use a database-driven mobile solution can maximize the use of equipment through better management and tracking. Real-time information about maintenance schedules, availability, and equipment locations helps to improve inventory planning and use.
     
  Utilizing real-time mobile access to plans and bylaws. With apps that provide two-way access to information, construction companies can file electronic versions of drawings, plans or bylaws for quick offline access by teams in the field. This improves productivity and reduces the need for re-work.

 

SalesStrategy

 

Thedevices, accessories and bolt-on digital tools will be sold through relevant home improvement big box stores, direct marketingto construction companies, direct marketing of trade/wholesale outlets and to professional outlets.

 

IntellectualProperty

 

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.

 

 30 

 

 

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.

 

Competition

 

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:

 

  Significantly greater financial resources than we have;
     
  More comprehensive product lines;
     
  Longer-standing relationships with suppliers, manufacturers, and retailers;
     
  Broader distribution capabilities;
     
  Stronger brand recognition and loyalty; and
     
  The ability to invest substantially more in product advertising and sales.

 

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.

 

Themarkets for the Company’s mobile products and services are also highly competitive and the Company is confronted by aggressivecompetition in all areas of its business. These markets are characterized by frequent product introductions and rapid technologicaladvances that have substantially increased the capabilities and use of mobile communication and media devices, personal computersand other digital electronic devices. The Company’s competitors who sell mobile devices and personal computers based onother operating systems have aggressively cut prices and lowered their product margins to gain or maintain market share. The Company’sfinancial condition and operating results can be adversely affected by these and other industry-wide downward pressures on grossmargins. Principal competitive factors important to the Company include price, product features, relative price/performance, productquality and reliability, design innovation, a strong third-party software and peripherals ecosystem, marketing and distributioncapability, service and support and corporate reputation.

 

TheCompany is focused on expanding its market opportunities related to mobile communication and media devices. These industries arehighly competitive and include several large, well-funded and experienced participants. The Company expects competition in theseindustries to intensify significantly as competitors attempt to imitate some of the features of the Company’s products andapplications within their own products or, alternatively, collaborate with each other to offer solutions that are more competitivethan those they currently offer. These industries are characterized by aggressive pricing practices, frequent product introductions,evolving design approaches and technologies, rapid adoption of technological and product advancements by competitors, and pricesensitivity on the part of consumers and businesses. Competitors include Apple, Samsung and Qualcomm, among others.

 

August2019 Convertible Note Financing

 

OnAugust 19, 2019, the Company entered into a Securities Purchase Agreement with an institutional investor pursuant to which itsold $11.5 million aggregate principal amount of promissory notes (at an aggregate original issue discount of 15%) to the investorin a transaction exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. The first note (the“Series A Note”) has a face amount of $6.72 million for which the investor paid $5 million in cash. The second note(the “Series B Note” and with the Series A Note, collectively referred to as the “Notes”) has a principalamount of $4.78 million for which the investor paid $4.78 million in the form of a full recourse promissory note issued by theinvestor to the Company (the “Investor Note”) secured by $4.78 million in cash or cash equivalents of the investor(i.e :an original issue discount of approximately 15% to the face amount of the Series B Note). 

 

 31 

 

 

OnJune 7, 2019, we held an annual meeting of shareholders (the “Meeting”). At the Meeting, the Company’s stockholdersvoted as follows on the following proposals:

 

(i)Election of directors:

 

Name   Votes For   Votes Against     Abstentions  
Michael Panosian   6,147,375   -     252,463  
Robert Faught   6,062,503   -     337,335  
Frederick D. Furry   6,066,028   -     338,810  
Paul Galvin   6,051,927   -     347,911  
Joshua Keeler   6,152,153   -     247,685  

 

(ii)Increase in Authorized Shares of Common Stock:

 

Votes For   Votes Against   Abstentions
8,256,907   3,659,924   60,108

 

(iii)The authorization of the Board, without further action of the stockholders, to amend the Articles of Incorporation to implementa reverse stock split of our capital stock, at a ratio within the range of 1-for-2 to 1-for-10:

 

Votes For   Votes Against   Abstentions
8,826,357   3,098,905   51,675

 

(iv)To approve the issuance of securities in one or more non-public offerings where the maximum discount at which securities willbe offered will be equivalent to a discount of 20% below the market price of our common stock, as required by and in accordancewith Nasdaq Marketplace Rule 5635(d):

 

Votes For   Votes Against   Abstentions
5,131,183   1,235,086   26,569

 

(v)To approve any change of control in non-public offerings following approval of proposal 4:

 

Votes For   Votes Against   Abstentions
5,135,153   1,161,527   103,158

 

(vi)To approve amendments to the Company’s 2018 Equity Incentive Plan:

 

Votes For   Votes Against   Abstentions
5,273,028   1,064,678   62,132

 

(vii)The ratification of the appointment of Marcum, LLP, as the Company’s independent registered certified public accountantfor the fiscal year ended December 31, 2019. The appointment was ratified, and the votes were cast as follows:

 

Votes For   Votes Against   Abstentions
11,557,951   275,471   319,914

 

Employees

 

Asof September 4, 2019, we have 15 full-time employees and 13 independent contractors and consultants. We also engage consultantson an 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.

 

Descriptionof Property

 

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.

 

LegalProceedings

 

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.

 

 32 

 

 

OnApril 25, 2018, the Company and Mr. Panosian filed a motion to have the April 12, 2018 default judgment on Plaintiff’s Complaint,the February 13, 2018 defaults, and April 14, 2017 Order for terminating sanctions striking Defendants’ Answer set asideon the basis of their former attorney’s declaration that his negligence resulted in the default judgment, default, and terminatingsanctions being entered against the Company and Mr. Panosian. The motion was denied. On September 13, 2018, the Company and Panosiansatisfied the Judgments by the Company making a payment of $252,950 (which included $10,303 post judgment interest) to Minassianand by Mr. Panosian issuing him shares reflecting a 7% ownership stake in the Company from management-owned shares. On October18, 2018, the Company and Mr. Panosian filed a Notice of Appeal in the Superior Court of the State of California, Los AngelesCounty, with respect to from the Order denying their motion for relief from the above referenced default judgment. The appealis still pending.

 

MANAGEMENT

 

Directorsand Executive Officers

 

Thenames, positions and ages of our directors and executive officers as of the date of this proxy statement are as follows:

 

Name   Age   Position
Michael Panosian   56   President, CEO and Director
Joshua Keeler   40   Vice-President - Research & Development and Director
Zareh Khachatoorian   60   COO and Secretary
Jolie Kahn   54   Acting Chief Financial Officer

 

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 stockholders 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. Mr. Panosian has been deemed to be suitable as a director dueto his intimate knowledge of the Company since inception and his business and engineering expertise.

 

JoshuaKeeler, Co-Founder, Vice-President Research & Development and Director

 

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 became a Director at our 2019 Annual Meeting, andis deemed suitable as a director by our Board due to his depth of R&D knowledge in the industry.

 

 33 

 

 

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.

 

JolieKahn, Acting Chief Financial Officer

 

Ms.Kahn, age 54, has an extensive background in corporate finance and corporate and securities law. She has been the proprietor ofJolie Kahn, Esq. since 2002. Ms. Kahn has also acted in various corporate finance roles, including extensive involvement of preparationof period filings and financial statements and playing an interal part in public company audits. She also works with companiesand hedge funds in complex transactions involving the structuring and negotiation of multi-million dollar debt and equity financings,mergers, and acquisitions. Ms. Kahn has practiced law in the areas of corporate finance, mergers & acquisitions, reverse mergers,and general corporate, banking, and real estate matters. She represents both public and private companies, hedge funds, and otherinstitutional investors in their role as investors in public companies.

 

IndependentDirectors

 

Thenames, positions and ages of our independent directors (as defined by NASDAQ and SEC rules), all became directors as of November14, 2018, are as follows:

 

Name   Age   Position
Robert Faught   70   Director
Paul Galvin   55   Director
Frederick D. Furry   50   Director

 

RobertFaught, Director

 

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.

 

 34 

 

 

PaulGalvin, Director

 

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.

 

 35 

 

 

CorporateGovernance

 

Thebusiness and affairs of our Company are managed under the direction of the Board of Directors.

 

Termof Office

 

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 stockholders and until their successors havebeen elected and qualified.

 

DirectorIndependence

 

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:

 

the director is, or at any time during the past three years was, an employee of our Company;
   
the director or a family member of the director accepted any compensation from our Company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service);
   
a family member of the director is, or at any time during the past three years was, an executive officer of our Company;
   
the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which our Company made, or from which our Company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
 
the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of our Company served on the compensation committee of such other entity; or
   
the director or a family member of the director is a current partner of our Company’s outside auditor, or at any time during the past three years was a partner or employee of our Company’s outside auditor, and who worked on our Company’s audit.

 

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 stockholderor 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.

 

 36 

 

 

FamilyRelationships

 

Thereare no family relationships among any of our officers or directors.

 

BoardCommittees

 

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.

 

AuditCommittee

 

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:

 

evaluate the independence and performance of, and assess the qualifications of, our independent auditor and engage such independent auditor;
   
approve the plan and fees for the annual audit, quarterly reviews, tax and other audit-related services and approve in advance any non-audit service to be provided by our independent auditor;
   
monitor the independence of our independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law;
   
review the financial statements to be included in our future Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q and review with management and our independent auditor the results of the annual audit and reviews of our quarterly financial statements; and
   
oversee all aspects our systems of internal accounting control and corporate governance functions on behalf of the Board of Directors.

 

CompensationCommittee

 

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.

 

 37 

 

 

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.

 

DirectorIndependence

 

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 serve on all three of our standing Board committees, with Frederick Furry as Chairof the Audit Committee, Paul Galvin as Chair of the Compensation Committee and Robert Faught as Chair of the Nominating and CorporateGovernance Committee.

 

Codeof Ethics

 

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.

 

 38 

 

 

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.

 

EXECUTIVECOMPENSATION

 

Thefollowing table summarizes compensation of our named executive officers, as of December 31, 2017 and 2018.

 

SummaryCompensation Table

 

Name and position   Year     Salary ($)     Bonus ($)    

Stock Compensation

($)(6)

    Option Awards ($)     Non-equity Incentive Plan Compensation ($)     Non-qualified Incentive Plan Compensation ($)     Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)     All Other Compensation ($)(5)     Total ($)  
                                                             
Michael Panosian     2017       350,000 (1)     50,000       -       448,861       -       -       -       13,956       862,817  
Chief Executive Officer     2018       276,250       150,000       224,750       221,336       -       -       -       17,798       890,134  
                                                                                 
Joshua Keeler     2017       250,000 (2)     35,000       -       -       -       -       -       9,683       294,683  
Vice President - R&D     2018       178,000       100,000       207,850       221,336       -       -       -       9,683       716,869  
                                                                                 
Zareh Khachatoorian     2017       180,000 (3)     -       -       -       -       -       -       -       180,000  
Chief Operating Officer     2018       139,500       -       72,000       146,437       -       -       -       -       357,937  
                                                                                 
Manu Ohri     2017       250,000 (4)     -       -       -       -       -       -       -       250,000  
Chief Financial Officer     2018       188,750       50,000       100,000       146,437       -       -       -       -       485,187  

 

(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. Mr Ohri resigned as our CFO on June 14, 2019.

(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.

 

 39 

 

 

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.

 

 40 

 

 

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.

 

 41 

 

 

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

 

Name   Date of grant     Number of securities underlying unexercised options (#) exercisable     Number of securities underlying unexercised options (#) unexercisable     Equity incentive plan awards: Number of securities underlying unexercised unearned options (#)     Option exercise price ($)     Option expiration date  
Michael Panosian     1/03/2017 (1)     62,500       62,500       62,500       10.00       7/05/2026  
Joshua Keeler     -       -       -       -       -       -  
Zareh Khachatoorian     -       -       -       -       -       -  
Manu Ohri     -       -       -       -       -       -  

 

  (1) The shares subject to each stock option vest over a four (4) year period, with 25% of the total number of shares subject to the option vesting on the one (1) year anniversary of the date of grant, and the remainder vesting in equal instalments on the last day of each of the thirty six (36) full calendar months thereafter.

 

 42 

 

 

2018Equity Incentive Plan - Grant of options

 

Name   Date of grant (1)     Number of securities underlying unexercised options (#) exercisable     Number of securities underlying unexercised options (#) unexercisable     Equity incentive plan awards: Number of securities underlying unexercised unearned options (#)     Option exercise price ($)     Option expiration date
Michael Panosian   9/14/2018       50,000       150,000       150,000       4.29     6/30/2023
Joshua Keeler   9/14/2018       50,000       150,000       150,000       4.29     6/30/2023
Zareh Khachatoorian   9/14/2018       27,500       82,500       82,500       3.90     6/30/2028
Manu Ohri   9/14/2018       27,500       82,500       82,500       3.90     6/30/2028

 

  (1) The shares subject to each stock option vest over a three (3) year period, with 25% of the shares subject to the option vested on the grant date and 25% of the shares subject to the option vesting on each anniversary of the grant date.

 

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 was originally 1,000,000 shares, which amount will be (a) reduced by awards grantedunder the 2018 Plan, and (b) increased to the extent that awards granted under the 2018 Plan are forfeited, expire or are settledfor cash (except as otherwise provided in the 2018 Plan). No employee will be eligible to receive more than 200,000 shares ofcommon stock in any calendar year under the 2018 Plan pursuant to the grant of awards. On September 12, 2018, the Board of Directorsapproved to increase the number of shares of common stock reserved for future issuance under this Plan from 1,000,000 shares to2,000,000 shares. On September 14, 2018, 1,000,000 shares of common stock underlying awards under the 2018 Plan have been grantedto the employees and officers 25% vesting immediately on the date of grant and 25% vesting each year thereafter on the anniversaryof the grant date.

 

 43 

 

 

Inconnection with the administration of our Plans, our Compensation Committee will:

 

  determine which employees and other persons will be granted awards under our Plans;
     
  grant the awards to those selected to participate;
     
  determine the exercise price for options; and
     
  prescribe any limitations, restrictions and conditions upon any awards, including the vesting conditions of awards.

 

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 stockholder approval, our Plan may not be amendedin a manner that would:

 

  increase the number of shares that may be issued under the Plans;
     
  materially modify the requirements for eligibility for participation in the Plans;
     
  materially increase the benefits to participants provided by the Plans; or
     
  otherwise disqualify the Plans for an exemption under Rule 16b-3 promulgated under the Exchange Act.

 

Awardspreviously granted under the Plans may not be impaired or affected by any amendment of the Plans, without the consent of the affectedgrantees.

 

EquityCompensation Plan

Asof December 31, 2018

 

Plan category   Number of securities to be issued upon exercise of outstanding options, warrants and rights     Weighted average exercise price of outstanding options, warrants and rights    

Number of

securities

remaining

available for

future issuance

 
2016 Equity Incentive Plan:                        
Equity compensation plans approved by security holders     125,000     $ 10.00       875,000  
Equity compensation plans not approved by security holders     -       -       -  
Total     125,000     $ 10.00       875,000  
                         
2018 Equity Incentive Plan:                        
Equity compensation plans approved by security holders     1,000,000     $ 4.06       1,000,000  
Equity compensation plans not approved by security holders     -       -       -  
Total     1,000,000     $ 4.06       1,000,000  

 

 44 

 

 

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.

 

CompensationCommittee Review

 

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.

 

DirectorCompensation

 

Ourindependent directors were compensated as follows in 2018. No policy has yet been set for 2019.

 

DirectorsCompensation

December31, 2018

 

Name   Fees Earned or Paid in Cash ($)    

Stock Awards

($)

   

Option Awards

($)

    Non-Equity Incentive Plan Compansation ($)     All Other Compansation ($)    

Total

($)

 
                                     
Paul Galvin (1)     12,500       -       -       -       -       12,500  
Robert Faught (2)     12,500       -       -       -       -       12,500  
Frederick Fury (3)     12,500       -       -       -       -       12,500  

 

(1) Appointed to the board on November 14, 2018 and currently serves as Chairman of the Compensation Committee
(2) Appointed to the board on November 14, 2018 and currently serves as Chairman of the Nominating and Corporate Governance Committee
(3) Appointed to the board on November 14, 2018 and currently serves as Chairman of the Audit Committee

 

 45 

 

 

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 September 4, 2019 are counted as outstanding, while these shares are not counted as outstanding for computingthe percentage ownership of any other person. Unless otherwise indicated, the principal address of each of the persons below isc/o ToughBuilt Industries, Inc., 25371 Commercentre Drive, Suite 200, Lake Forest, CA 92630.

 

          Options
Granted

vested
    Series C                                
    Common Shares     within 60
days

of offering
    Convertible
Preferred
Stock
    Class A Units     Series A Warrants     Series B Warrants     Total      Percentage Beneficially Owned (1)  
Directors and Officers:                                                                
Michael Panosian     1,825,799       112,500               0       0       0       1,938,299       12.35 %
Joshua Keeler     647,925       50,000               0       0       0       697,925       4.46 %
Zareh Khachatoorian     55,991       27,500               0       0       0       83,491       0.53 %
Manu Ohri     151,908       27,500               4,286       4,286       4,286       192,265       1.23 %
All Officer and Directors as a Group (4 persons)     2,681,623       217,500               4,286       4,286       4,286       2,911,980       18.58 %
                                                                 
5% or Greater Beneficial Owners:                                                                
Michael Panosian     1,825,799       112,500               0       0       0       1,938,299       12.35 %
Joshua Keeler     647,925       50,000               0       0       0       697,925       4.46 %
                                                                 
Hillair Capital Investment     1,314,560       0       4,268       0       0       0       1,556,657 (2)     9.99 %
                                                                 
HSPL     1,416,742       0       0       0       0       0       1,416,742       9.09 %

 

(1)Based on 27,804,254 shares of common stock issued and outstanding on September 4, 2019. Mr. Ohri, our former CFO, resigned onJune 14, 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 stockholders. In consideringrelated-party transactions, our Nominating and Corporate Governance Committee will take into account the relevant available factsand circumstances including, but not limited to:

 

whether the transaction was undertaken in the ordinary course of our business;
   
whether the related party transaction was initiated by us or the related party;

 

 46 

 

 

whether the transaction with the related party is proposed to be, or was, entered into on terms no less favorable to us than terms that could have been reached with an unrelated third party;
   
the purpose of, and the potential benefits to us from the related party transaction;
   
the approximate dollar value of the amount involved in the related party transaction, particularly as it relates to the related party;
   
the related party’s interest in the related party transaction, and
   
any other information regarding the related party transaction or the related party that would be material to investors in light of the circumstances of the particular transaction.

 

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 stock of the Company at a conversionprice 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 unaudited condensed financial statements as and for the period ended June 30, 2019), all in transactionsexempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended: 136,863 unregistered shares of commonstock were issued upon conversion of $650,100 of accrued and unpaid salaries to officers and directors at a conversion price of$4.75 per share.

 

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.

 

 47 

 

 

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

 

General

 

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.

 

CommonStock

 

Asof September 4, 2019, we had 27,804,254 shares of common stock issued and outstanding.

 

Voting

 

Theholders of the common stock are entitled to one vote for each share held at all meetings of stockholders (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.

 

PreferredStock

 

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 Preferred Stock

 

Weissued shares of Series C Convertible Preferred Stock in exchange for Series A Warrants and Series B Warrants with one institutionalinvestor on April 11, 2019.

 

Conversion

 

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.

 

 48 

 

 

Anti-dilutionProvisions

 

Theconversion of the Series C Convertible Preferred Stock is subject to standard anti-dilution provisions in connection with anystock 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.

 

ClassB Warrants

 

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.

 

PlacementAgent Warrants

 

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 described aboveand 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.

 

 49 

 

 

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:

 

A*(B -C)/C

 

Where A =   the number of warrants being exercised, and
       
  B =   Warrant strike price, and
       
  C =   The greater of 20% of the per Unit price in this offering, and the market price of a share of our common stock

 

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.

 

Market Price   Number of Shares of Common Stock Issued Upon Exercise(1)  
4.50     283,333  
2.50     2,550,000  
1.00     10,200,000  

 

(1) Does not include shares of Common Stock issuable upon cashless exercise of approximately 3,003,963 Series B Warrants that are part of the Class A Units that will be issued to holders of our preferred stock and debentures that are being converted in connection with the closing of this offering, assuming an offering price of $5.00 per Class A Unit.

 

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.

 

 50 

 

 

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 approved or that a trading marketwill 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.

 

SENIORSECURED CONVERTIBLE NOTES

 

OnAugust 19, 2019, the Company entered into a Securities Purchase Agreement with an institutional investor pursuant to which itsold $11.5 million aggregate principal amount of promissory notes (at an aggregate original issue discount of 15%) to the investorin a transaction exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. The first note (the“Series A Note”) has a face amount of $6.72 million for which the investor paid $5 million in cash. The second note(the “Series B Note” and with the Series A Note, collectively referred to as the “Notes”) has a principalamount of $4.78 million for which the investor paid $4.78 million in the form of a full recourse promissory note issued by theinvestor to the Company (the “Investor Note”) secured by $4.78 million in cash or cash equivalents of the investor(i.e :an original issue discount of approximately 15% to the face amount of the Series B Note). No portion of the Series B Notemay be converted into shares of our common stock (the “Common Stock”) until the corresponding portion of the InvestorNote has been prepaid to the Company in cash, at which point in time such portion of the Series B Note shall be deemed “unrestricted”.The Investor Note is subject to optional prepayment at any time at the option of the investor and mandatory prepayment, at theCompany’s option, subject to certain equity conditions, at any time 45 Trading Days after the effectiveness of a resaleregistration statement (or otherwise the applicability of Rule 144 promulgated under the Securities Act of 1933, as amended).Notwithstanding the foregoing, the Company may not effect a mandatory prepayment if the shares underlying the Series A Note andthe portion of the Series B Note that has become unrestricted exceeds 35% of the market capitalization of the Company.

 

TheNotes are senior secured obligations of the Company secured by a lien on all assets of the Company, bear no interest (unless anevent default has occurred and is continuing) and mature on December 31, 2020. The Notes will be convertible at $1.00 into a fixednumber of shares (the “Conversion Shares”). The Notes are convertible at the Holder’s option, in whole or inpart, at any time after closing. The Conversion Price will be subject to adjustment for stock dividends, stock splits, anti-dilutionand other customary adjustment events.

 

 51 

 

 

TheCompany shall repay the Principal Amount of the Notes in 12 installments, with the first installment starting on February 1, 2020(each, an “Installment Date”). Installments 1-3 shall be 1/36th of the Principal Amount, Installments 4-6 shall be1/18th of the Principal Amount and Installments 7-12 shall be 1/8th of the Principal Amount. The repayment amount shall be payablein cash, or, subject to the satisfaction of equity conditions, at the option of the Company, in registered Common Stock or a combinationof cash and registered Common Stock. However, if the 30-day volume weighted average price of the Common Stock (the “VWAP”)of the Company falls below 50% of the [Market Price (as defined above)]1 or the Company fails to satisfy certainother equity conditions, the repayment amount is payable in shares of Common Stock only unless the Investor(s) waive any applicableequity condition. If the Company elects to satisfy all or any portion of an installment in shares of Common Stock, the Companywill predeliver such shares of Common Stock to the investor on the 23rd trading day prior to the applicable Installment Date,with a true-up of shares (if necessary) on the Installment Date. Any excess shares of Common Stock shall be applied to subsequentinstallments.

 

Theshares used to meet a Principal Repayment (“Installment Shares”) would be valued at a conversion price calculatedas the lesser of (i) 85% of the arithmetic average of the three lowest daily VWAPs of the 20 trading days prior to the paymentdate or (ii) 85% of the VWAP of the trading day prior to payment date (“Installment Price”) with a floor of $0.10.

 

Allamortization payments shall be subject to the Investors’ right to (a) defer some or all of any Installment Payment to asubsequent Installment Date; and (b) at any time during an installment period, convert up to four times the installment amountat the Installment Price; provided shares received pursuant to such accelerated conversions shall be subject to a leak-out provisionthat solely limits sales of such shares received by the investor in such accelerated conversion (and not any other sales) to thegreater of (a) $500,000 per trading day or (b) 40% of the volume traded on a given day as reported by Bloomberg LP.

  

Uponcompletion of a Change of Control, the Holders may require the Company to purchase any outstanding Notes in cash at 125% of parplus accrued but unpaid interest. The Company shall have the right to redeem any and all amounts of the outstanding Note at 125%of the greater of (a) Principal Amount plus accrued but unpaid interest (if any), or (b) Conversion Value plus accrued but unpaidinterest (if any) provided the Company has satisfied certain equity conditions. The Company must give the Investor(s) ninety (90)business days’ prior notice of any such redemption.

 

Priorto all outstanding amounts under the Note being repaid in full, the Company will not create any new encumbrances on any of itsor its subsidiaries’ assets without the prior written consent of the Lender, with a carveout for a working capital facilityof which the details are to be determined. The Notes shall also be subject to standard events of default and remedies therefor.

 

TheCompany shall file within 20 days of closing and have declared effective within 60 days of closing a registration statement (“EffectivenessDate”) on Form S-1 or S-3 covering the resale of the shares underlying the Series A Note, the Series B Note and Warrants.Beginning on the 21st day and 61st day, respectively, post closing, and for every subsequent 30-day period that such registrationstatement has not been filed or declared effective, as applicable, the Company shall pay Ayrton 2.0% of the Principal Amount outstandingin cash as liquidated damages provided no liquidated damages shall be applied if such delay is for reasons outside the Company’scontrol and not due to an action (or inaction) on the Company’s part.

 

Inconnection with the granting of the Notes, the Company shall issue detachable warrants to the Investor, exercisable in whole orin part at any time during the five years from the date of issuance, an in amount equal to 50% of the conversion shares underlyingthe Notes and have an exercise price of $1.00 per share. To the extent the Company has a change of control or a spinoff, the warrantsprovide for a put for the warrants to the Company at their Black- Scholes Valuation.

 

Untilthe 3 year anniversary of the maturity date, the investor shall have the right (but not the obligation) to participate in 50%of any subsequent equity or debt issuance. Consummation of the transaction has been subject to certain conditions precedent, includingthe Company agrees to procure an approval of this transaction at its annual shareholder meeting scheduled no later than 180 daysafter the Closing Date and agrees to procure voting agreements from principal shareholders prior to closing of the Company.

 

 52 

 

 

The2016 Equity Incentive Plan

 

The2016 Equity Incentive Plan (the “2016 Plan”) was adopted by the Board of Directors and approved by the stockholderson 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 stockholder approval or ratification atany time or from time to time.

 

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 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.

 

TransferAgent

 

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.

 

 53 

 

 

Listing

 

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.

 

    Shares of Common
Stock
Beneficially Owned
Prior to this Offering
    Maximum Number of
Shares of Common
Stock to be Sold
Pursuant to this
Prospectus
    Shares of Common
Stock
To Be Beneficially
Owned
Upon Completion of
this Offering (1)
 
Selling Stockholder   Number     Percentage           Number     Percentage  
Alto Opportunity Master Fund SPC – Segregated Master Portfolio B     17,416,816       9.99 %     17,250,000       161,816       *  

 

(1) Assumes the selling stockholder sells all of the shares of common stock included in this prospectus.
   
(2) Ownership of our common stock includes (i) Under the terms of the preferred stock, the holder does not have the right to convert the notes to the extent that after giving effect to such conversion, the holder (together with its affiliates and any other persons acting as a group together with the holder or any of the holder’s affiliates) would beneficially own in excess of 4.99% (the “Maximum Percentage”) of the shares of our common stock outstanding immediately after giving effect to such conversion. By written notice to us, however, the holder may waive the Maximum Percentage provision, which such notice will be effective sixty-one (61) calendar days after the date of such notice. Similarly, under the terms of the Warrants, the holder does not have the right to exercise the Warrants to the extent that after giving effect to such exercise, the holder (together with its affiliates and any other persons acting as a group together with the holder or any of the holder’s affiliates) would beneficially own in excess of the Maximum Percentage. However, by sixty-one (61) days’ prior notice to us the holder may from time to time increase or decrease the Maximum Percentage to any other percentage not in excess of 9.99%. The numbers in the second column reflect these limitations. The selling stockholder may sell all, some or none of their shares in this offering. See “Plan of Distribution.” Ayrton Capital LLC, the investment manager to Alto Opportunity Master Fund, SPC - Segregated Master Portfolio B, has discretionary authority to vote and dispose of the shares held by Alto Opportunity Master Fund, SPC - Segregated Master Portfolio B and may be deemed to be the beneficial owner of these shares. Waqas Khatri, in his capacity as Managing Member of Ayrton Capital LLC, may also be deemed to have investment discretion and voting power over the shares held by Alto Opportunity Master Fund, SPC - Segregated Master Portfolio B. Alto Opportunity Master Fund, SPC - Segregated Master Portfolio B and Mr. Khatri each disclaim any beneficial ownership of these shares. The address of Ayrton Capital LLC is 222 Broadway, 19th Fl, New York, NY 10038.  Mr. Khatri is not affiliated with any FINRA members. This selling stockholder acquired the securities in the ordinary course of business, and at the time of the purchase of the securities to be resold, the seller had no agreements or understandings, directly or indirectly, with any person to distribute the securities.
   
* Less than one percent.

 

 54 

 

 

PLANOF DISTRIBUTION

 

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:

 

  on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;
     
  in the over-the-counter market;
     
  in transactions otherwise than on these exchanges or systems or in the over-the-counter market;
     
  through the writing or settlement of options, whether such options are listed on an options exchange or otherwise;
     
  ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
     
  block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
     
  purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
     
  an exchange distribution in accordance with the rules of the applicable exchange;
     
  privately negotiated transactions;
     
  short sales made after the date the Registration Statement is declared effective by the SEC;
     
  broker-dealers may agree with a selling security holder to sell a specified number of such shares at a stipulated price per share;
     
  a combination of any such methods of sale; and
     
  any other method permitted pursuant to applicable law.

  

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.

 

 55 

 

 

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-allowed or 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.

 

 56 

 

 

LEGALMATTERS

 

Thevalidity of the securities offered in this prospectus is being passed upon for us by Jolie Kahn, Esq.

 

EXPERTS

 

Ourfinancial statements as of December 31, 2018 and 2017, and for each of the two years in the period ended December 31, 2018, incorporatedin this prospectus and related registration statement by reference to the Annual Report on Form 10-K of ToughBuilt Industries,Inc. for the year ended December 31, 2018, have been audited by Marcum, LLP, independent registered public accounting firm, asset forth in its report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authorityof 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.

 

INFORMATIONINCORPORATED BY REFERENCE

 

Therules of the SEC allow us to incorporate information into this prospectus by reference. The information incorporated by referenceis considered to be a part of this prospectus. This prospectus incorporates by reference the documents listed below:

 

  our Annual Report on Form 10-K for the year ended December 31, 2018, filed on March 29, 2019;

 

  our Quarterly Reports on Form 10-Q for the three months ended March 31, 2019 filed on May 13, 2019 and on Form 10-Q for the three and six months ended on June 30, 2019, filed on August 19, 2019;

 

  our Preliminary Proxy Statement on Schedule 14A, filed on April 17, 2019 and Definitive Proxy Statement on Schedule 14A, filed on May 2, 2019; and

 

  our Current Reports on Form 8-K, filed on April 17, May 13, June 13, June 14, July 1 and August 19, 2019.

 

Anystatement made in this prospectus or in a document incorporated by reference into this prospectus will be deemed to be modifiedor superseded for purposes of this prospectus to the extent that a statement contained in this prospectus modifies or supersedesthat statement. Any statement so modified or superseded will not be deemed, except as so modified, to constitute a part of thisprospectus.

 

Youcan obtain any of the filings incorporated by reference into this prospectus through us or from the SEC through the SEC’swebsite at http://www.sec.gov. We will provide, without charge, to each person, including any beneficial owner, towhom a copy of this prospectus is delivered, upon written or oral request of such person, a copy of any or all of the reportsand documents referred to above which have been or may be incorporated by reference into this prospectus. You should direct requestsfor those documents to:

 

ToughBuiltIndustries, Inc.

25371Commercentre Dr Suite 200

LakeForest, CA 92630

 

Ourreports and documents incorporated by reference into this prospectus may also be found in the “Investors Relations”section of our website at http://www.toughbuilt.com. Our website and the information contained in it or connectedto it shall not be deemed to be incorporated into this prospectus or any registration statement of which it forms a part.

 

 

 57 

 

 

PRELIMINARYPROSPECTUS

 

TOUGHBUILTINDUSTRIES, INC

 

   

 

 

PARTII

 

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.

 

SEC Registration Fee   $ 813.48  
NASDAQ Filing Fee   $   *
Printing Fees and Expenses   $   *
Accounting Fees and Expenses   $   *
Legal Fees and Expenses   $   *
Transfer Agent and Registrar Fees   $   *
Miscellaneous Fees and Expenses   $   *
Total   $ 813.48  *

 

*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 stockholders 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 stockholders (through stockholders’ 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.

 

 II-1 

 

 

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.

 

InitialPublic Offering

 

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:

 

  (a) 1,366,768 unregistered Class A Units were issued upon the conversion of outstanding shares of Class B Convertible Preferred Stock at a conversion price of $3.50 per Class A Unit.
     
  (b) 42,105 unregistered shares of common stock were issued upon conversion of the $200,000 principal amount of a promissory note due to an officer at a conversion price of $4.75 per share.
     
  (c) 1,726,678 unregistered Class A Units were issued upon conversion of outstanding convertible debt instruments (consisting of all principal amounts and accrued and unpaid interest through the date of the IPO) at a conversion price of $5.00 per Unit.
     
  (d) 136,863 unregistered shares of common stock were issued upon conversion of $650,100 of accrued and unpaid salaries to officers and directors at a conversion price of $4.75 per share.
     
  (e) 215,625 unregistered Class A Units issued upon the conversion of outstanding principal amount of unsecured promissory notes at a conversion price of $4.00 per Unit.

 

 II-2 

 

 

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