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TOUGHBUILT INDUSTRIES, INC

Date Filed : Jan 17, 2020

S-11forms-1.htm

 

Asfiled with the Securities and Exchange Commission onJanuary 17, 2020.

RegistrationNo. 333-

 

 

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 10017

Telephone: (516) 217-6379

Facsimile: (866) 705-3071

Stephen E. Older

McGuireWoods LLP

1251 Avenue of the Americas, 20th Floor

New York, New York 10020

Telephone: (212) 548-2100

 

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 Securities

being Registered

 

Proposed

Maximum
Aggregate Offering
Price (1) (2) (3)

   Amount of
Registration Fee
 
Shares of common stock, $0.0001 par value per share  $9,200,000   $1,194.16 
Warrants to purchase shares of common stock(4)         
Shares of common stock issuable upon exercise of the Warrants  $10,120,000   $1,313.58 
Shares of common stock issuable upon exercise of underwriter’s warrants(5)  $809,600   $105.09 
Total  $20,129,600   $2,612.83 

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended, or the Securities Act.
(2) Pursuant to Rule 416, the securities being registered hereunder include such indeterminate number of additional securities as may be issuable to prevent dilution resulting from stock splits, stock dividends or similar transactions.
(3) Includes the offering price of any additional shares of common stock and warrants to purchase shares of common stock that the underwriter has the right to purchase from the Registrant. Includes shares the underwriter has the option to purchase to cover over-allotments, if any.
(4) No fee is required pursuant to Rule 457(i) under the Securities Act.
(5) Represents warrants to purchase a number of shares of common stock equal to 8% of the number of shares of common stock sold in this offering at an exercise price equal to 110% of the public offering price.

  

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 that 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 the 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.

 

Preliminary Prospectus Subject to completion, dated January 17, 2020

 

 

ToughBuiltIndustries, Inc.

 

 

Sharesof Common Stock

 

Warrantsto Purchase up to                 Shares of CommonStock

 

ToughBuiltIndustries, Inc. is offering           shares of common stock and warrants topurchase up to         shares of our common stock, at a combined offering price of $       per share of common stock and accompanying warrant. Each share of our common stock is being sold together with a warrant to purchaseone share of our common stock. Each warrant will have an exercise price per share of $        ,will be immediately exercisable and will expire on the fifth anniversary of the original issuance date. The shares of our commonstock and warrants are immediately separable and will be issued separately, but will be purchased together in this offering.

 

Ourcommon stock is listed on The Nasdaq Capital Market under the symbol “TBLT.” On January 15, 2020, the lastreported sale price of our common stock on The Nasdaq Capital Market was $0.3476 per share. There is no established tradingmarket for the warrants and we do not expect a market to develop. In addition, we do not intend to apply for the listing of thewarrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the warrantswill be limited.

 

Youshould read this prospectus, together with additional information described under the heading “Where You Can Find MoreInformation,” carefully before you invest in any of our securities.

 

Investingin our securities involves a high degree of risk. See “Risk Factors” beginning on page 6 of this prospectusfor a discussion of information that should be considered in connection with an investment in our securities.

 

Neitherthe Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities ordetermined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

    

Per Share

and Warrant

    

Total (No

Exercise) (2)

    

Total (Full

Exercise) (2)

 
Public offering price(1)  $   $   $ 
Underwriting discounts and commissions(2)     $   $ 
Proceeds, before expenses, to us  $   $   $ 

 

(1)

The public offering price and underwriting discount corresponds to a public offering price per share of common stock and accompanying warrant of $          (or $          after deducting the underwriting discount).

 

(2)

Does not include additional compensation payable to the underwriter. We have also agreed to issue to the underwriter a warrant to purchase a number of shares of common stock equal to 8% of the number of shares of common stock sold in this offering at an exercise price of 110% of the public offering price. In addition, we have agreed to reimburse the underwriter for certain expenses. The registration statement of which this prospectus forms a part also covers the shares of stock issuable upon exercise of the underwriter’s warrant. See “Underwriting” on page 56 for additional disclosure regarding underwriting discounts and commissions and reimbursement of expenses.

 

Wehave granted the underwriter an option for a period of 45 days from the date of this prospectus to purchase up to an additional          shares of common stock and/or warrants to purchase          shares of common stock at the public offering price, less the underwriting discount.

 

Weanticipate that delivery of the shares and warrants against payment will be made on or about          ,2020.

 

Book-RunningManager

 

MaximGroup LLC

  

Thedate of this prospectus is               , 2020.

 

 ii 

 

 

 

 

 iii 

 

 

TABLEOF CONTENTS

 

  Page
Prospectus Summary 1
Risk Factors 6
Cautionary Note Regarding Forward-Looking Statements 23
Use of Proceeds 24
Market for Our Common Stock and Related Stockholder Matters 24
Dividend Policy 25
Capitalization 25
Dilution 26
Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
Financial Statements 27
Business 27
Management 35
Executive Compensation 41
Security Ownership of Certain Beneficial Owners and Management 47
Certain Relationships and Related Party Transactions 48
Description of Our Securities 49
Shares Eligible for Future Sale 55
Underwriting 56
Legal Matters 59
Experts 59
Where You Can Find Additional Information 59

 

Youshould rely only on information contained in this prospectus or in any free writing prospectus we may authorize to be deliveredor made available to you. Neither the delivery of this prospectus nor the sale of our securities means that the information containedin this prospectus or any free writing prospectus is correct after the date of this prospectus or such free writing prospectus.This prospectus is not an offer to sell or the solicitation of an offer to buy our securities in any circumstances under whichthe offer or solicitation is unlawful or in any state or other jurisdiction where the offer is not permitted. The informationcontained in this prospectus is accurate only as of its date regardless of the time of delivery of this prospectus or of any saleof common stock.

 

Noperson is authorized in connection with this prospectus to give any information or to make any representations about us, the securitiesoffered hereby or any matter discussed in this prospectus, other than the information and representations contained in this prospectusor in any free writing prospectus we may authorize to be delivered or made available to you. If any other information orrepresentation is given or made, such information or representation may not be relied upon as having been authorized by us.

 

Forinvestors outside the United States: Neither we nor the underwriter has done anything that would permit this offering or possessionor distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States.You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution ofthis prospectus.

 

Unlessotherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, includingour general expectations and market position, market opportunity and market share, is based on information from our own managementestimates and research, as well as from industry and general publications and research, surveys and studies conducted by thirdparties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions basedon such information and knowledge, which we believe to be reasonable. Our management’s estimates have not been verifiedby any independent source, and we have not independently verified any third-party information. In addition, assumptions and estimatesof our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a varietyof factors, including those described in “Risk Factors.” These and other factors could cause our future performanceto differ materially from our assumptions and estimates. See “Cautionary Note Regarding Forward-Looking Statements.”

 

 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:

 

●   being permitted to present only two years of audited financial statements in this prospectus;

 

●   being permitted to provide less extensive narrative disclosure than other public companies including not beingrequired to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosureobligations regarding executive compensation in our periodic reports, proxy statements and registration statements;

 

●   being permitted to utilize exemptions from the requirements of holding a nonbinding advisory vote on executivecompensation and stockholder approval of any golden parachute payments not previously approved;

 

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

 

●   being permitted to use test-the-waters communications with qualified institutional buyers and institutionalaccredited 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.

 

 

 2 
 

 

 

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.

 

TheOffering

 

Common stock offered by us                         shares.
     
Warrants offered by us  

Warrants to purchase up to                 shares of our common stock. Each share of our common stock is being sold together with a warrant to purchase one half share of our common stock. Each warrant will have an exercise price per share of $             , will be immediately exercisable and will expire on the fifth anniversary of the original issuance date. In addition, beginning on the earlier of (i) thirty (30) days following the effective date of the Registration Statement (the “Effective Date”), and (ii) the Trading Day on which the aggregate trading volume of the Common Stock since the Effective Date is equal to more than three times (3x) the number of shares of Common Stock sold pursuant to the Underwriting Agreement (the “Cashless Period”), this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise”.  In such event, in lieu of the formula set forth above, the aggregate number of Warrant Shares issuable upon such cashless exercise pursuant to any given Notice of Exercise electing to effect a cashless exercise shall equal the product of (x) the aggregate number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise and (y) 1.0. This prospectus also relates to the offering of the shares of common stock issuable upon exercise of such warrants.

     
Offering price   $                per share and warrant
     
Option to purchase additional shares and/or warrants   We have granted the underwriter an option for a period of 45 days from the date of this prospectus to purchase up to an additional           shares of common stock and/or warrants to purchase           shares of common stock at the public offering price, less the underwriting discount.
     
Common stock outstanding after this offering             shares (or           shares if the warrants sold in this offering are exercised in full), assuming no exercise of the underwriter’s option to purchase additional shares of common stock and/or warrants.
     
Use of proceeds  

The net proceeds from our sale of shares of our common stock and warrants in this offering will be approximately $          million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriter exercises its option to purchase additional shares and warrants in full, our net proceeds from this offering will be approximately $          million, excluding the proceeds, if any, from the exercise of the warrants. We currently expect to use the net proceeds from this offering for general corporate purposes and to fund ongoing operations and expansion of our business.

 

For additional information please refer to the section entitled “Use of Proceeds” on page 24 of this prospectus.

     
Risk Factors   Investing in our securities involves a high degree of risk. You should carefully review and consider the “Risk Factors” section of this prospectus for a discussion of factors to consider before deciding to invest in shares of our common stock.
     
Underwriter’s Warrant   We are obligated to issue to Maxim Group LLC or its designees at the closing of this offering a warrant to purchase the number of shares of common stock equal to 8% of the aggregate number of shares of common stock sold in this offering. The underwriter’s warrant will be exercisable at any time beginning six months after the closing date of this offering, in whole or in part, and will expire five years after such date. The exercise price of the underwriter’s warrant will equal 110% of the public offering price. This prospectus, and the registration statement of which it forms a part, also relates to the offering and issuance of the shares of common stock issuable upon exercise of the underwriter’s warrant.
     
Market Symbol and trading   Our common stock is listed on The Nasdaq Capital Market under the symbol “TBLT”, and our Series A Warrants issued in November 2018 trade under the symbol “TBLTW”. We do not intend to apply for the listing of the warrants offered in this offering on any national securities exchange or other trading market. Without an active trading market, the liquidity of the warrants will be limited.

 

 

 3 
 

 

 

Thenumber of shares of common stock that will be outstanding after this offering set forth above is based on 36,460,923 sharesof common stock outstanding as of January 15, 2020, and excludes the following:

 

  125,000 shares of common stock issuable upon the exercise of stock options at a weighted average exercise price of $10.00 per share, all of which were issued under the 2016 Stock Option Plan;
     
  1,000,000 shares of common stock issuable upon the exercise of stock options at a weighted average price of $4.06 per share, all of which were issued under the 2018 Equity Incentive Plan;
     
  875,000 shares of common stock reserved for issuance under our 2016 Stock Option Plan, and 1,000,000 shares of common stock reserved for issuance under our 2018 Equity Incentive Plan;
     
  5,750,000 warrants issued to an institutional investor in August 2019 at an exercise price of $1.00 per share;
     
  3,856,455 Series A Warrants at an exercise price of $5.50 per share
     
  8,721,051 shares of common stock issuable upon exercise of warrants issued to the investors and representatives (in various previous private placement transactions consummated by us) at an exercise price per share ranging from $5.00 to $12.00; and
     
  5,755 shares of Series D Convertible Preferred Stock convertible into 5,755,000 shares of common stock.

 

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 its 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 underwriter’s warrant.

 

SUMMARYFINANCIAL DATA

 

Thefollowing table summarizes our financial data. We derived the summary financial statement data as of and for theyears ended December 31, 2018 and 2017 set forth below from our condensed audited financial statements and related notesappearing in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which is incorporated by reference inthis prospectus. We derived the summary financial statement data as of and for the nine months ended September 30, 2019set forth below from our condensed unaudited financial statements and related notes appearing in our Quarterly Reporton Form 10-Q for the fiscal period ended September 30, 2019, which is incorporated by reference in this prospectus.Share amounts, per share data, share prices exercise prices and conversion rates have been retroactively adjusted to reflectthe 1-for-2 reverse stock split of all of our classes of stock, effected on September 13, 2018. Our historical results are notnecessarily indicative of the results that may be expected in the future. You should read the information presented below togetherwith “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our financialstatements, the notes to those statements and the other financial information appearing in each of our Annual Report onForm 10-K for the fiscal year ended December 31, 2018 and our Quarterly Report on Form 10-Q for the fiscal periodended September 30, 2019, each of which is incorporated by reference in this prospectus.

 

Summaryof Operations in U.S. Dollars in thousands (except share and per share data)

 

   Nine Months ended September 30,   Years ended December 31, 
   2019   2018   2018   2017 
                 
Sales  $14,561   $11,926   $15,289   $14,202 
                     
Cost of goods sold   10,726    9,221    11,794    10,235 
                     
Gross profit   3,835    2,705    3,495    3,967 
                     
Operating Expenses                    
Selling, general and administrative   8,807    4,641    6,938    6,071 
Litigation expense   -    1,192    1,192    - 
Research and development   1,522    1,447    1,816    1,675 
Total operating expenses   10,329    7,281    9,946    7,746 
                     
Loss from operations   (6,494   (4,576   (6,451)   (3,779)
                     
Other expense   (4,312   (2,561   (21,200)   (2,162)
                     
Net loss  $(2,182  $(7,138  $(27,651)  $(5,941)
Accretion of Redeemable Convertible Preferred Stock Dividend   -    -    (3,667)   - 
Common Stock Deemed Dividend   -    -    (980)   - 
                     
Weighted average number of shares issued and outstanding   19,061,790    7,359,000    4,476,403    3,679,500 
                     
Loss per common share - basic and diluted  $(.11  $(.97  $(7.22)  $(1.61)

 

 

 4 
 

 

 

CondensedAudited Balance Sheet in U.S. Dollars in thousands

 

   As of   As of December 31, 
   September 30, 2019   2018   2017 
Cash  $2,455   $5,460   $44 
Total Current Assets   7,064    8,590    2,012 
Total Assets   12,665    8,851    2,402 
Total Current Liabilities   7,219    27,810    10,661 
Total Non-Current Liabilities   5,273    -    - 
Total Liabilities   12,493    27,810    10,661 
Additional paid in capital   41,463    20,152    1,771 
Working Capital (Deficit)   (5,429)    (19,220)   (8,649) 
Accumulated Deficit   (41,294)    (39,112)   (11,461) 
Total Stockholders’ Equity (Deficit)  $172   $(18,959)  $(9,749)

 

 

 5 
 

 

RISKFACTORS

 

Aninvestment in our securities involves a high degree of risk. You should carefully consider the risks described below, togetherwith all of the other information included in this prospectus, before making an investment decision. If any of the following risksactually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of ourshares of common stock could decline and you may lose all or part of your investment. See “Cautionary Note Regarding Forward-LookingStatements” below for a discussion of forward-looking statements and the significance of such statements in the contextof this prospectus.

 

RisksRelated to Our Company

 

Wehave a limited operating history on which to judge our business prospects and management.

 

Ourcompany was incorporated and commenced operations in April 2012. Accordingly, we have only a limited operating history upon whichto base an evaluation of our business and prospects. Operating results for future periods are subject to numerous uncertaintiesand we cannot assure you that we will achieve or sustain profitability. Our prospects must be considered in light of the risksencountered by companies in the early stage of development, particularly companies in new and rapidly evolving markets. Futureoperating results will depend upon many factors, including increasing the number of affiliates, our success in attracting andretaining motivated and qualified personnel, our ability to establish short term credit lines, our ability to develop and marketnew products, control costs, and general economic conditions. We cannot assure you that we will successfully address any of theserisks.

 

Certainprovisions of our Articles of Incorporation could allow concentration of voting power in one individual, which may, among otherthings, delay or frustrate the removal of incumbent directors or a takeover attempt, even if such events may be beneficial toour shareholders.

 

Provisionsof our articles of incorporation adopted by our Board of Directors, such as our ability to designate and issue a class of preferredstock, without shareholder approval, may delay or frustrate the removal of incumbent directors and may prevent or delay a merger,tender offer or proxy contest involving our company that is not approved by our Board of Directors, even if those events may beperceived to be in the best interests of our shareholders. For example, one or more of our affiliates could theoretically be issueda newly authorized and designated class of shares of our preferred stock. Such shares could have significant voting power, amongother terms. Consequently, anyone to whom these shares were issued could have sufficient voting power to significantly influenceif not control the outcome of all corporate matters submitted to the vote of our common shareholders. Those matters could includethe election of directors, changes in the size and composition of the Board of Directors, and mergers and other business combinationsinvolving our company. In addition, through any such person’s control of the Board of Directors and voting power, the affiliatemay be able to control certain decisions, including decisions regarding the qualification and appointment of officers, dividendpolicy, access to capital (including borrowing from third-party lenders and the issuance of additional equity securities), andthe acquisition or disposition of assets by our company. In addition, the concentration of voting power in the hands of an affiliatecould have the effect of delaying or preventing a change in control of our company, even if the change in control would benefitour shareholders and may adversely affect the future market price of our common stock should a trading market therefor develop.

 

Wemay need, but be unable, to obtain additional funding on satisfactory terms, which could dilute our shareholders or impose burdensomefinancial restrictions on our business.

 

Wehave relied upon cash from financing activities and in the future, we hope to rely on revenues generated from operations to fundthe cash requirements of our activities. However, there can be no assurance that we will be able to generate any significant cashfrom our operating activities in the future. Future financing may not be available on a timely basis, in sufficient amounts oron terms acceptable to us, if at all. Any debt financing or other financing of securities senior to the common stock will likelyinclude financial and other covenants that will restrict our flexibility. Any failure to comply with these covenants would havea material adverse effect on our business, prospects, financial condition and results of operations because we could lose ourexisting sources of funding and impair our ability to secure new sources of funding.

 

 6 
 

 

Wehave recorded a net loss for the years ended December 31, 2018 and 2017 and for the nine months ended September 30, 2019 and2018.

 

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. For the nine months ended September30, 2019 and 2018, we realized a net loss of $2,181,707 and $7,137,615, respectively. 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 and the funds raised in this offering will be sufficient to meet our working capital requirementsfor at least one year from the date of the issuance of the financial statements incorporated by reference herein. We continueto control our cash expenses as a percentage of expected revenue on an annual basis and thus may use our cash balances in theshort-term to invest in revenue growth. Management is focused on growing the Company’s existing product offering, as wellas its customer base, to increase its revenues. We cannot give assurance that we can increase our cash balances or limit our cashconsumption and thus maintain sufficient cash balances for our planned operations or future acquisitions. Future business demandsmay lead to cash utilization at levels greater than recently experienced. We may need to raise additional capital in the future.However, we cannot assure that we will be able to raise additional capital on acceptable terms, or at all. Our inability to generateprofits could have an adverse effect on our financial condition, results of operations and cash flows.

 

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.

 

 7 
 

 

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 certain laws and regulations dealing with matters such as corporate organization and governance,foreign investment, mergers and acquisitions, intellectual property, commerce, taxation and trade. However, the experience ofthe Peoples’ Republic of China (the “PRC” or “China”) in implementing, interpreting and enforcingthese laws and regulations is limited, and our ability to enforce commercial claims or 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 thesetransactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions, or, may hinderor prevent us from accessing important information regarding the financial and business operations of any acquired companies.The resolution of these matters may be subject to the exercise of considerable discretion by agencies and other instrumentalitiesof the Chinese government or those acting on its behalf, and forces unrelated to the legal merits of a particular matter or disputemay 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 by virtue of the Chinese legal system, we maybe unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect onour business, financial condition and results of operations.

 

Relianceon foreign suppliers could adversely affect our business.

 

Wesource our products from suppliers located in Asia and the United States. Our Asian vendors are located primarily in China, whichsubjects us to various risks within the region including regulatory, political, economic and foreign currency changes. Our abilityto select and retain reliable vendors and suppliers who provide timely deliveries of quality products efficiently will impactour success in meeting customer demand for timely delivery of quality products. Our sourcing operations and our vendors are impactedby labor costs in China. Labor historically has been readily available at low cost relative to labor costs in North America. However,as China is experiencing rapid social, political and economic changes, labor costs have risen in some regions and there can beno assurance that labor will continue to be available to us in China at costs consistent with historical levels or that changesin labor or other laws will not be enacted which would have a material adverse effect on our ability to source our products fromChina. Interruption of supplies from any of our vendors, or the loss of one or more key vendors, could have a negative effecton our business and operating results.

 

Changesin currency exchange rates might negatively affect the profitability and business prospects of our company and our overseas vendors.In particular, although the Chinese Renminbi has recently depreciated against the U.S. Dollar, if the Chinese Renminbi appreciateswith respect to the U.S. Dollar in the future, we may experience cost increases on such purchases, and this can adversely impactprofitability. Future interventions by China may result in further currency appreciation and increase our product costs over time.We may not be successful at implementing customer pricing or other actions in an effort to mitigate the related effects of theproduct cost increases.

 

Additionalfactors that could adversely affect our business include increases in transportation costs, new or increased import duties, transportationdelays, work stoppages, capacity constraints and poor quality.

 

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 administrationproposed tariffs of as much as $60 billion against Chinese goods in mid-March 2018, which remained partially in effect at theend of 2019. It is difficult to anticipate the impact on our business caused by the proposed tariffs or whether the proposedchanges in tariffs will materialize in the future. Given the relatively fluid regulatory environment in China and the United States,there could be additional tax, tariffs or other regulatory changes in the future. Any such changes could directly and materiallyadversely impact our financial results and general business condition.

 

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.

 

 8 
 

 

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 and determine in the future to construct our own facility, anyprojects that we undertake to increase such capacity may not be manufactured on the anticipated timetable or within budget. Wemay also experience quality control issues as we implement these production upgrades. Any material delay in completing these projects,or any substantial increase in costs or quality issues in connection with these projects, could materially delay our ability tobring our products to market and adversely affect our business, reduce our revenue, income and available cash, all of which couldresult in harming our financial condition.

 

Werely on highly skilled personnel and the continuing efforts of our executive officers and, if we are unable to retain, motivateor hire qualified personnel, our business may be severely disrupted.

 

Ourperformance largely depends on the talents, knowledge, skills and know-how and efforts of highly skilled individuals and in particular,the expertise held by our Chief Executive Officer, Michael Panosian. His absence, were it to occur, could materially and adverselyimpact the development and implementation of the projects and businesses. Our future success depends on our continuing abilityto identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. Our continued abilityto compete effectively depends on our ability to attract new technology developers and to retain and motivate our existing contractors.If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able toreplace them readily, if at all. Therefore, our business may be severely disrupted, and we may incur additional expenses to recruitand retain new officers. In addition, if any of our executives joins a competitor or forms a competing company, we may lose someof our customers.

 

RisksRelated to Our Business

 

Wehave limited manufacturing capabilities and we are dependent upon third parties to manufacture our product.

 

Weare dependent upon our relationships with independent manufacturers to fulfill most of our product needs. While we have severalmanufacturing facilities available to us, we currently are using only one manufacturer for each of our products besides our limitedcapabilities. Accordingly, we are dependent on the uninterrupted and efficient operation of these manufacturers’ facilities.Our ability to market and sell our products requires that our product be manufactured in commercial quantities, without significantdelay and in compliance with applicable federal and state regulatory requirements. In addition, we must be able to have our productsmanufactured at a cost that permits us to charge a price acceptable to the customer while also accommodating any distributioncosts or third-party sales compensation. If our current manufacturers are unable for any reason to fulfill our requirements, orseek to impose unfavorable terms, we will have to seek out other contract manufacturers, which could disrupt our operations andhave a material adverse effect on our results of operation and financial condition. Competitors who perform their own manufacturingmay have an advantage over us with respect to pricing, availability of products, and in other areas through their control of themanufacturing process.

 

Weface significant competition and continuous technological change, and developments by competitors may render our licensed technologiesobsolete or non-competitive. If we cannot successfully compete with new or existing products, our marketing and sales will sufferand we may not ever be profitable.

 

Ifwe are able to fund and implement our business plan we will likely compete against fully integrated technology companies and smallercompanies that are collaborating with larger technology companies. In addition, many of these prospective competitors, eitheralone or together with their collaborative partners, operate larger research and development programs than we do, and have substantiallygreater financial resources than we do.

 

Ifour prospective competitors develop and commercialize technologies faster than we do or develop and commercialize technologiesthat are superior to our technology candidates, our commercial opportunities will be reduced or eliminated. The extent to whichany of our technology candidates achieve market acceptance will depend on competitive factors, many of which are beyond our control.Competition in the technology industry is intense and has been accentuated by the rapid pace of development. Almost all of theseentities have substantially greater research and development capabilities and financial, scientific, manufacturing, marketingand sales resources than we do. These organizations also compete with us to:

 

 9 
 

 

  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 coordinate existing and new technologywith the requirements of efficient space utilization has been a key element of our success. We spend a significant amount of timeand effort to refine, improve and adapt our existing products for new customers and applications. The introduction of new productfeatures requires the coordination of the design, manufacturing and marketing of the new product features with current and potentialcustomers. The ability to coordinate these activities with current and potential customers may be affected by factors beyond ourcontrol. While we will continue to emphasize the introduction of innovative new product features that target customer-specificopportunities, we do not know if any new product features we introduce will achieve the same degree of success that we have achievedwith our existing products. Introduction of new product features typically requires us to increase production volume on a timelybasis while maintaining product quality. Manufacturers often encounter difficulties in increasing production volumes, includingdelays, quality control problems and shortages of qualified personnel or raw materials. As we attempt to introduce new productfeatures in the future, we do not know if we will be able to increase production volume without encountering these or other problems,which might negatively impact our financial condition 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 2020. 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.

 

Anyfailure by any of our product candidates to achieve market approval or commercial success would adversely affect our businessprospects.

 

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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 quarterfor mobile device products and our ruggedized mobile phones in the fourth quarter of 2020. Even if we are successful indeveloping these new products that reach commercialization, we will not be successful unless these products gain market acceptance.The degree of market acceptance 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.

 

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.

 

Wehave in the past, and may in the future, be subject to legal proceedings other than those relating to product liability claims.

 

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, and thereby negatively impact our financial condition, results of operations and cashflows.

 

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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 markets for our products. However,even with the cooperation of a commercialization partner, conducting product development in foreign countries involves inherentrisks, including, but not limited to difficulties in staffing, funding and managing foreign operations; unexpected changes inregulatory requirements; export restrictions; tariffs and other trade barriers; difficulties in protecting, acquiring, enforcingand litigating intellectual property rights; fluctuations in currency exchange rates; and potentially adverse tax consequences.If we were to experience any of the difficulties listed above, or any other difficulties, any international development activitiesand our overall financial condition may suffer and cause us to reduce or discontinue our international development efforts.

 

Purchasersof home improvement goods may not choose to shop online, which could create barriers from our growing our business.

 

Wesell our products both through brick and mortar stores and online. The online market for home improvement goods in the UnitedStates is less developed than the online market for apparel, consumer electronics and other consumer products and, we believe,only accounts for a small portion of the market as a whole. If the online market for home improvement goods does not gain acceptance,our business may suffer. Our success will depend, in part, on our ability to attract consumers who have historically purchasedhome improvement goods through traditional retailers. Furthermore, we may have to incur significantly higher and more sustainedadvertising and promotional expenditures in order to attract additional online consumers to our sites and convert them into purchasingcustomers. Specific factors that could impact consumers’ willingness to purchase home improvement goods from us include:

 

concerns about buying products, and in particular larger products, without a physical storefront, face-to-face interaction with sales personnel and the ability to physically examine products;
   
delivery time associated with online orders;
   
actual or perceived lack of security of online transactions and concerns regarding the privacy of personal information;
   
delayed shipments or shipments of incorrect or damaged products;
   
inconvenience associated with returning or exchanging items purchased online; and
   
usability, functionality and features of our sites.

 

Ifthe shopping experience we provide does not appeal to consumers or meet the expectations of existing customers, we may not acquirenew customers at rates consistent with historical periods, and existing customers’ buying patterns and levels may be lessthan historical rates.

 

Theloss of, or reduced purchases from, any retailers could have a material adverse effect on our operating results.

 

Wedo not have long-term contracts with any of our retailers and all of our retailers generally purchase from us on a purchase orderbasis. As a result, retailers generally may, with no notice or penalty, cease ordering and selling our products, or materiallyreduce their orders. If certain retailers, individually or in the aggregate, choose to no longer sell our products, to slow theirrate of purchase of our products, to move our products from prime spacing on shelving and other prominent displays or to decreasethe number of products they purchase, our results of operations would be adversely affected.

 

Wemay be adversely affected by the financial condition of our retailers and distributors.

 

Someof our retailers and distributors may have experienced financial difficulties in the past. A retailer or distributor experiencingsuch difficulties generally will not purchase and sell as many of our products as it would under normal circumstances and maycancel orders. In addition, a retailer or distributor experiencing financial difficulties generally increases our exposure touncollectible receivables. We extend credit to our retailers and distributors based on our assessment of their financial condition,generally without requiring collateral, and sometimes are not able to obtain information regarding their current financial status.Failure of these retailers or distributors to remain current on their obligations to us could result in losses that exceed thereserves we set aside in anticipation of this risk. Additionally, while we have credit insurance against some of our larger retailers,there is no assurance that such insurance will sufficiently cover any losses. We are also exposed to the risk of our customersdeclaring bankruptcy, exposing us to claims of preferential payment claims. Financial difficulties on the part of our retailersor distributors could have a material adverse effect on our results of operations and financial condition.

 

Wecould be the subject of breaches in our cybersecurity.

 

Thecompany’s products, services and systems may be used in critical company, customer or third-party operations, or involvethe storage, processing and transmission of sensitive data, including valuable intellectual property, other proprietary or confidentialdata, regulated data, and personal information of employees, customers and others. Successful breaches, employee malfeasance,or human or technological error could result in, for example, unauthorized access to, disclosure, modification, misuse, loss,or destruction of company, customer, or other third party data or systems; theft of sensitive, regulated, or confidential dataincluding personal information and intellectual property; the loss of access to critical data or systems through ransomware, destructiveattacks or other means; and business delays, service or system disruptions or denials of service.

 

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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 speculative and there can be no assurance of any return on any such investment.

 

Aninvestment in our securities is speculative and there can be no assurance that investors will obtain any return on their investment.Investors may be subject to substantial risks involved in an investment us, including the risk of losing their entire investment.

 

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;

 

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  other companies may challenge patents licensed or issued to us;
     
  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. As all of our products are manufactured in China, and we maynot have the same strength of intellectual property protection and enforcement in China as in North America or Europe, we areat a greater risk of a third party appropriating our intellectual property. The scope and enforceability of patent claims arenot systematically predictable with absolute accuracy. The strength of our own patent rights depends, in part, upon the breadthand scope of protection provided 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;
     
  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.

 

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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.

 

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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.

 

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,or others, or the trade secrets of those persons and entities. As our industry expands and more patents are issued, the risk increasesthat our processes and potential products may give rise to claims that they infringe the patents or trade secrets of others. Theseother persons could bring legal actions against us claiming damages and seeking to enjoin manufacturing and marketing of the affectedproduct or process. If any of these actions are successful, in addition to any potential liability for damages, we could be requiredto obtain a license in order to continue to manufacture or market the affected product or use the affected process. Required licensesmay not be available on acceptable terms, if at all, and the results of litigation are uncertain. If we become involved in litigationor other proceedings, it could consume a substantial portion of our financial resources and the efforts 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.

 

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RisksRelated to the Offering of our August 2019 Convertible Notes and Subsequent Exchange into Series D Preferred Stock

 

Asubstantial number of shares of our common stock may be issued pursuant to the terms of convertible notes we issued in August2019 (the “Convertible Notes”) and Series D Preferred Stock, into which $5.5 million principal amount of our ConvertibleNotes were exchanged, which could cause the price of our common stock to decline.

 

TheConvertible Notes are convertible into shares of our common stock at an initial conversion price of $1.00 per share, for an aggregateof 11,500,000 shares, or approximately 31% of our outstanding common stock as of January 17, 2020 (without taking into accountthe limitations on the conversion of the Convertible Notes as described elsewhere in this prospectus).

 

Furthermore,the number of shares of common stock to be issued may be substantially greater if the Convertible Notes and Series D PreferredStock are converted into shares of common stock in accordance with the installment conversion process or the warrants issued inconjunction with the Convertible Notes and Series D Preferred Stock are exercised, each as described elsewhere in this prospectus.In such cases the number of shares issued will be determined based on the then-current market price. We cannot predict the marketprice of our common stock at any future date, and therefore, we are unable to accurately forecast or predict the total amountof shares that ultimately may be issued under the Convertible Notes. The number of shares of common stock to be issued also maybe substantially greater if we voluntarily reduce the conversion price of the Convertible Notes as permitted under Section 7(d)of the Convertible Notes.

 

TheConvertible Notes and Series D Preferred Stock likely will be converted only at times when it is economically beneficially forthe holder to do so, and we are entitled to pay interest in shares and make installment conversions only at a price per sharethat is at a discount to the then-current market price. In any event, the issuance of these shares will dilute our other equityholders, which could cause the price of our common stock to decline.

 

Salesof substantial amounts of our common stock by the selling stockholder of the Convertible Notes or the Series D Preferred Stock,or the perception that these sales could occur, could adversely affect the price of our common stock.

 

Thesale by the selling stockholder of the Convertible Notes or the Series D Preferred Stock of a significant number of shares ofcommon stock could have a material adverse effect on the market price of our common stock. In addition, the perception in thepublic markets that the selling stockholders may sell all or a portion of their shares could also in and of itself have a materialadverse effect on the market price of our common stock. We cannot predict the effect, if any, that market sales of those sharesof common stock or the availability of those shares of common stock for sale will have on the market price of our common stock.On October 15, 2019, our resale registration statement for 17,250,000 shares of our common stock (to be issued upon conversionof the Convertible Notes) on Form S-1 was declared effective.

 

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Therequirement that we repay the Convertible Note and interest thereon and redeem the Series D Preferred Stock in cash under certaincircumstances, and the restrictive covenants contained in the Convertible Note and Series D Preferred Stock, could adversely affectour business plan, liquidity, financial condition, and results of operations.

 

Wemay be required to repay the Convertible Note and interest thereon and/or redeem the Series D Preferred Stock in cash, if we donot meet certain customary equity conditions (including minimum price and volume thresholds) or in certain other circumstances.For example, we will be required to repay the outstanding principal balance and accrued but unpaid interest and/or redeem theSeries D Preferred Stock, along with a premium, upon the occurrence of a Change of Control (as defined in the Convertible Note).In addition, the Convertible Note and Series D Preferred Stock contain restrictive covenants, including financial covenants. Theseobligations 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 and/or redemption of the Series D Preferred Stock;
     
  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 and/or Series D Preferred Stock;
     
  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 and/or redeem the Series D Preferred Stock in cash, we may seek to refinancethe remaining balance, by either refinancing with the holder of the Convertible Note and/or Series D Preferred Stock, by raisingsufficient funds through a sale of equity or debt securities or by obtaining a credit facility. No assurances can be given thatwe will be successful in making the required payments under the Convertible Note and/or Series D Preferred Stock, or in refinancingour obligations on favorable terms, or at all. Should we determine to refinance, it could be dilutive to shareholders.

 

Ifwe are unable to make the required cash payments, there could be a default under the Convertible Note and/or Series D PreferredStock. In such event, or if a default otherwise occurs under the Convertible Note, including as a result of our failure to complywith the financial or other covenants contained therein, the holders of the Convertible Note and/or Series D Preferred Stock couldrequire us to immediately repay 115% of the outstanding principal and interest on the Convertible Note and/or redeem the SeriesD Preferred Stock in cash.

 

RisksRelated to this Offering and the Ownership of Our Securities

 

Wehave broad discretion in the use of the net proceeds from this offering and may use the net proceeds in ways with which you disagree.

 

Ourmanagement will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds inways that do not improve our results of operations or enhance the value of our securities. You will be relying on the judgmentof our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investmentdecision, to assess whether the net proceeds are being used appropriately. The failure by our management to apply these fundseffectively could result in financial losses that could have a material adverse effect on our business, financial condition andresults of operations and cause the price of our securities to decline. Pending the application of these funds, we may investthe net proceeds from this offering in a manner that does not produce income or that loses value.

 

Investorsin this offering will experience immediate and substantial dilution in net tangible book value (deficit).

 

Youwill incur immediate and substantial dilution as a result of this offering. After giving effect to the sale by us of up to                             shares of common stock and warrants to purchase                    sharesof common stock at a public offering price of $               per share, and after deducting the underwriter’s discounts and commissions and estimated offering expenses payable by us,investors in this offering can expect an immediate dilution of $                     per share.

 

Wehave also issued options in the past to acquire common stock at prices significantly below the offering price. As of January17, 2020, there were 1,125,000 shares of common stock subject to outstanding options with a weighted-average exerciseprice of $4.72 per share. To the extent that these outstanding options are ultimately exercised, you will incur furtherdilution, and our stock price may decline. To the extent that additional or outstanding options or warrants are granted and/orexercised you will experience further dilution. See “Dilution” for a more complete description of how the valueof your investment in our common stock will be diluted upon the completion of this offering.

 

Ourshares will be subject to potential delisting if we do not maintain the listing requirements of the NASDAQ Capital Market.

 

NASDAQhas rules for continued listing, including, without limitation, minimum market capitalization and other requirements. Failureto maintain our listing, or de-listing from NASDAQ, would make it more difficult for shareholders to dispose of our common stockand more difficult to obtain accurate price quotations on our common stock. This could have an adverse effect on the price ofour common stock. Our ability to issue additional securities for financing or other purposes, or otherwise to arrange for anyfinancing we may need in the future, may also be materially and adversely affected if our common stock is not traded on a nationalsecurities exchange. As of the date of this prospectus, we are not in compliance with NASDAQ’s $1.00 per share minimumbid price rule, and the Company has an extended deadline to regain compliance until June 22, 2020.

 

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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 face increased legal, accounting, administrative and other costs and expenses. We aresubject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Sarbanes-OxleyAct of 2002, or the Sarbanes-Oxley Act. The Exchange Act requires, among other things, that we file annual, quarterly and currentreports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintaineffective disclosure controls and procedures and internal control over financial reporting. For example, Section 404 of the Sarbanes-OxleyAct requires that our management report on the effectiveness of our internal controls structure and procedures for financial reporting.Section 404 compliance may divert internal resources and will take a significant amount of time and effort to complete. If wefail to maintain compliance under Section 404, or if in the future management determines that our internal control over financialreporting are not effective as defined under Section 404, we could be subject to sanctions or investigations by NASDAQ, the SEC,or other regulatory authorities. Furthermore, investor perceptions of our company may suffer, and this could cause a decline inthe market price of our common stock. Any failure of our internal control over financial reporting could have a material adverseeffect on our stated results of operations and harm our reputation. If we are unable to implement these changes effectively orefficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion oninternal controls from our independent auditors. We may need to hire a number of additional employees with public accounting anddisclosure experience in order to meet our ongoing obligations as a public company, particularly if we become fully subject toSection 404 and its auditor attestation requirements, which will increase costs. We expect these rules and regulations to increaseour legal and financial compliance costs and to make some activities more time consuming and costly, although we are currentlyunable to estimate these costs with any degree of certainty. A number of those requirements will require us to carry out activitieswe have not done previously. Our management team and other personnel will need to devote a substantial amount of time to new complianceinitiatives and to meeting the obligations that are associated with being a public company, which may divert attention from otherbusiness concerns, which could have a material adverse effect on our business, financial condition and results of operations.

 

Additionally,the expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. Theseincreased costs will require us to divert a significant amount of money that we could otherwise use to develop our business. Ifwe are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctionsand other regulatory action and potentially civil litigation.

 

Newlaws, regulations, and standards relating to corporate governance and public disclosure may create uncertainty for public companies,increasing legal and financial compliance costs and making some activities more time consuming.

 

Theselaws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, asa result, may evolve over time as new guidance is provided by the courts and other bodies. This could result in continuing uncertaintyregarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. If ourefforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodiesdue to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against usand our business may be adversely affected.

 

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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 in the future for us to attract and retain qualified members of our Board of Directors, particularlyto serve on its audit committee and compensation committee, and qualified executive officers.

 

Themarket price of our common stock and warrants may be volatile, and you may not be able to resell your shares and warrants at orabove the initial public offering price.

 

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.

 

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Inaddition, if we fail to reach an important development, commercialization or sales milestone or result by a publiclyexpected deadline, 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 expectthe price of our common stock to be particularly volatile and negative results would have a substantial negative impact on theprice of our common stock and warrants.

 

Inaddition, in recent years, the stock market in general has experienced extreme price and volume fluctuations. This volatilityhas had a significant effect on the market price of securities issued by many companies, including for reasons unrelated to theiroperating performance. These broad market fluctuations may adversely affect our stock price, notwithstanding our operating results.The market price of our common stock and warrants will fluctuate and there can be no assurances about the levels of the marketprices for our common stock and warrants.

 

Insome cases, following periods of volatility in the market price of a company’s securities, shareholders have often institutedclass action securities litigation against those companies. Such litigation, if instituted, could result in substantial costsand diversion of management attention and resources, which could significantly harm our business operations and reputation.

 

Asan “emerging growth company” under applicable law, we will be subject to lessened disclosure requirements, which couldleave our shareholders without information or rights available to shareholders of more mature companies.

 

Foras long as we remain an “emerging growth company” as defined in the JOBS Act, we have elected to take advantage ofcertain exemptions from various reporting requirements that are applicable to other public companies that are not “emerginggrowth companies” including, but not limited to:

 

  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 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 shareholder 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 shareholders are not provided information or rights available to shareholders ofmore 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.

 

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Becausewe have elected to use the extended transition period for complying with new or revised accounting standards for an “emerginggrowth company” our financial statements may not be comparable to companies that comply with public company effective dates.

 

Wehave elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1)of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effectivedates for public and private companies until those standards apply to private companies. While we are not currently delaying theimplementation of any relevant accounting standards, in the future we may avail ourselves of this right, and as a result of thiselection, our financial statements may not be comparable to companies that comply with public company effective dates. Becauseour financial statements may not be comparable to companies that comply with public company effective dates, investors may havedifficulty evaluating or comparing our business, performance or prospects in comparison to other public companies, which may havea negative impact on the value and liquidity of our common stock.

 

FINRAsales practice requirements may limit your ability to buy and sell our common stock, which could depress the price of our shares.

 

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 the rules of the NASDAQ Stock Market. New or changing laws, regulations and standards are subject to varying interpretationsin many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidanceis provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters andhigher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply withevolving laws, regulations and standards of a U.S. public company are likely to continue to result in increased general and administrativeexpenses and a diversion of management time and attention from revenue-generating activities to 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.

 

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SpeculativeNature of Warrants.

 

Thewarrants offered in this offering do not confer any rights of common stock ownership on their holders, such as voting rights orthe right to receive dividends, but rather merely represent the right to acquire shares of our common stock at a fixed price fora limited period of time. Specifically, commencing on the date of issuance, holders of the warrants may exercise their right toacquire the common stock and pay an exercise price of $                 per share, prior to               years from the date ofissuance, after which date any unexercised warrants will expire and have no further value. Moreover, following this offering,the market value of the warrants is uncertain and there can be no assurance that the market value of the warrants will equal orexceed their public offering price. There can be no assurance that the market price of the common stock will ever equal or exceedthe exercise price of the warrants, and consequently, whether it will ever be profitable for holders of the warrants to exercisethe warrants.

 

Thereis no public market for our warrants, which could limit your ability to sell our warrants.

 

Thereis currently no public market for our warrants and we do not expect a market to develop. In addition, we do not plan to have ourwarrants quoted or traded on any market, including the NASDAQ Stock Market. Without an active market, the liquidity of the warrantsmay be limited.

 

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 shareholders have purchased their shares.

 

CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Thisprospectus contains “forward-looking statements,” which include information relating to future events, future financialperformance, financial projections, strategies, expectations, competitive environment and regulation. Words such as “may”,“should”, “could”, “would”, “predicts”, “potential”, “continue”,“expects”, “anticipates”, “future”, “intends”, “plans”, “believes”,“estimates”, “will”, and similar expressions, as well as statements in future tense, identify forward-lookingstatements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurateindications of when such performance or results will be achieved. Forward-looking statements are based on information we havewhen those statements are made or management’s good faith belief as of that time with respect to future events and are subjectto significant risks and uncertainties that could cause actual performance or results to differ materially from those expressedin or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limitedto:

 

  Our limited operating history;
     
  our ability to manufacture, market and sell our products;
     
  our ability to maintain or protect the validity of our U.S. and other patents and other intellectual property;
     
  our ability to launch and penetrate markets;
     
  our ability to retain key executive members;
     
  our ability to internally develop new inventions and intellectual property;
     
  interpretations of current laws and the passages of future laws; and
     
  acceptance of our business model by investors.

 

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.

 

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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

 

Weestimate that the net proceeds from the sale of the           shares of common stockand warrants to purchase                   share of common stock will be approximately $                         , or approximately $                    if the underwriter exercises in full its option to purchase additional shares and/or warrants, after deducting the estimated underwritingdiscounts and commissions and estimated offering expenses payable by us. This estimate excludes the proceeds, if any, from theexercise of warrants sold in this offering. If all of the warrants sold in this offering were to be exercised in cash at the exerciseprice of $           per share, we would receive additional net proceeds ofapproximately $               . We cannot predict whenor if these warrants will be exercised. It is possible that these warrants may expire and may never be exercised.

 

Theexpected use of net proceeds of this offering represents our current intentions based upon our present plan and business conditions.As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be receivedupon the completion of this offering. The amounts and timing of our actual use of net proceeds will vary depending on numerousfactors. As a result, management will have broad discretion in the application of the net proceeds, and investors will be relyingon our judgment regarding the application of the net proceeds of this offering. We currently estimate that we will use the netproceeds from this offering as follows: (i) $                        to the production of new tool products, (ii) $               to the development of mobile technology including accessories and attachments, (iii) $                to sales and marketing and (iv) $                            for working capital needs.

 

Theuse of the proceeds represents management’s estimates based upon current business and economic conditions. We reserve theright to use the net proceeds we receive in the offering in any manner we consider to be appropriate. Although our company doesnot contemplate changes in the proposed use of proceeds, to the extent we find that adjustment is required for other uses by reasonof existing business conditions, the use of proceeds may be adjusted. The actual use of the proceeds of this offering could differmaterially from those outlined above as a result of several factors including those set forth under “Risk Factors”and elsewhere in this prospectus.

 

Pendingthe use of the net proceeds of this offering, we intend to invest the net proceeds in short-term investment-grade, interest-bearingsecurities.

 

MARKETFOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

 

Asof January 17, 2020, we had approximately 100 shareholders of record of our common stock.

 

Ourcommon stock is listed on the NASDAQ Capital Market under the symbol “TBLT” and our Series A Warrants arelisted on The NASDAQ Capital Market under the symbol “TBLTW”.

 

 24 
 

 

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.

 

CAPITALIZATION

 

Thefollowing table sets forth our capitalization as of September 30, 2019:

 

  on an actual basis; and
     
 

on a pro forma as adjusted basis to reflect the sale by us of                       shares of common stock and warrants at the public offering price of $              per share of common stock and warrant, after deducting (i) underwriting discounts and commissions of approximately $              and (ii) estimated offering costs of $175,000 payable by us.

 

Youshould read this table together with “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and our financial statements and the related notes appearing in each of our Annual Report on Form10-K for the fiscal year ended December 31, 2018 and our Quarterly Report on Form 10-Q for the fiscal period ended September30, 2020, each of which is incorporated by reference in this prospectus.

 

Numbersare expressed in thousands (U.S. dollars) except share and per share data.

 

   As of September 30, 2019 
Capitalization in U.S. Dollars in thousands  Actual   As Adjusted 
       (Unaudited) 
Cash  $2,455,323   $  
Convertible notes payable  $8,898,913      
Common stock, par value $0.0001 per share, 200,000,000 shares authorized; 28,120,293 shares issued and outstanding actual;           shares issued and outstanding pro forma as adjusted  $

2,800

   $ 
Additional paid in capital   

41,463,387

      
Accumulated deficit    

(41,294,108

)     
Total stockholders’ deficiency   

172,079

                  
Total Capitalization  $

9,070,992

   $ 

 

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Thenumber of shares of common stock that will be outstanding after this offering set forth above is based on 36,460,923 sharesof common stock outstanding as of January 17, 2020, and excludes the following:

 

  125,000 shares of common stock issuable upon the exercise of stock options at a weighted average exercise price of $10.00 per share, all of which were issued under the 2016 Stock Option Plan;
     
  1,000,000 shares of common stock issuable upon the exercise of stock options at a weighted average price of $4.06 per share, all of which were issued under the 2018 Equity Incentive Plan;
     
  875,000 shares of common stock reserved for issuance under our 2016 Stock Option Plan, and 1,000,000 shares of common stock reserved for issuance under our 2018 Equity Incentive Plan;
     
  5,750,000 warrants issued to an institutional investor in August 2019 at an exercise price of $1.00 per share;
     
  8,721,051 shares of common stock issuable upon exercise of warrants issued to the investors and representatives (in various previous private placement transactions consummated by us) at an exercise price per share ranging from $5.00 to $12.00; and
     
  5,755 shares of Series D Convertible Preferred Stock convertible into 5,755,000 shares of common stock.

 

DILUTION

 

Ifyou invest in our common stock in this offering, your ownership interest will be diluted to the extent of the differencebetween the initial public offering price per share of our common stock in this offering and the as adjusted net tangiblebook value (deficit) per share immediately after this offering. We calculate net tangible book value per share by dividingour net tangible book value (deficit), which is tangible assets less total liabilities less debt discounts, by the number ofoutstanding shares of our common stock as of September 30, 2019, assuming no value is attributed to the warrants and suchwarrants are accounted for and classified as equity. Our historical net tangible book value (deficit) as of September 30,2019, was approximately ($0.02 million) or $ (.0002) per share of our common stock.

 

Aftergiving effect to the sale of           shares of our common stock and accompanyingwarrants at an the public offering price of $          per share of common stockand accompanying warrant, after deducting the underwriting discounts and commissions and estimated offering costs payableby us, our as adjusted net tangible book value (deficit) as of September 30, 2019, would have been approximately $         million, or $          per share of common stock and accompanying warrant. This representsan immediate increase in as adjusted net tangible book value of $          per shareto existing shareholders and an immediate dilution of $          per share to investorspurchasing shares of common stock in this offering at the public offering price, attributing none of the assumed combined publicoffering price to the warrants offered hereby.

 

Thefollowing table illustrates per share dilution as of September 30, 2019:

 

Public offering price per share of common stock           $    
Net tangible book value (deficit) per share   $ (0.0002 )        
Increase in net tangible book value (deficit) per share attributable to this offering   $            
Net tangible book value (deficit) per share after this offering           $    
Dilution per share to investors participating in this offering           $    

 

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Ifthe underwriter exercises in full its option to purchase up to                         additional shares of common stock at the public offering price of $                per share, the as adjusted net tangible book value (deficit) after this offering would be $               pershare, representing an increase in net tangible book value (deficit) of $            per share to existing shareholders and immediate dilution in net tangible book value (deficit) of $            pershare to investors purchasing our common stock in this offering at the assumed public offering price.

 

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTSOF OPERATIONS

 

TheManagement’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2018and nine months ended September 30, 2019 are hereby respectively incorporated by reference in its entirety from our Form 10-Kfiled with the SEC on March 29, 2019 and our Form 10-Q filed with the SEC on November 19, 2019.

 

FINANCIALSTATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2018 AND DECEMBER 31, 2017 AND THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019

 

Ouraudited financial statements as of and for the years ended December 31, 2018 and December 31, 2017, respectively, and ourunaudited condensed financial statements as of and for the three and nine months ended September 30, 2019 and September 30,2018, respectively, are hereby respectively incorporated by reference in their entirety from our Form 10-K for the year endedDecember 31, 2018, filed with the SEC on March 29, 2019 and our Form 10-Q for the nine months ended September 30, 2019, filedwith the SEC on November 19, 2019, respectively.

 

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 sevenyears ago, 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.

 

RecentBusiness Developments

 

Thefollowing highlights recent developments in our business over the past five 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 our initial public offering, pursuant to which we received net proceeds of $12,415,500 after deducting underwriting discounts and commissions of $934,500. The Company incurred $743,765 in expenses related to the initial public offering.

     
 

On August 19, 2019, the Company entered into a Securities Purchase Agreement with an institutional investor pursuant to which it sold $11.5 million aggregate principal amount of promissory notes (at an aggregate original issue discount of 15%) to the investor in a transaction exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.

     
    On January 13, 2020, the “Company announced that its total gross sales for 2019 exceeded $20.0 million.
     
 

We have not yet closed our books for our year ended December 31, 2019. Our independent registered public accounting firm has not yet completed its audit of our results for the year ended December 31, 2019. Set forth below are our preliminary estimate of revenue that we expect to report for our year ended December 31, 2019. Our actual results may differ materially from these estimates due to the completion of our financial closing procedures, final adjustments and other developments that may arise between now and the time the financial results for our year ended December 31, 2019 are finalized. Our sales increased by 25% during the year ended December 31, 2019 compared to the same period in 2018.

 

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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.

 

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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 was expected to increase 5.5% in 2018 to $420 billion in total sales. The ProfessionalMarket was expected to increase 6.0% in 2019 over 2018 and the Consumer Market will see a sales increase of 5.3%.

 

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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 major retailers both domestically and internationally. A product line reviewrequires the supplier to submit a comprehensive proposal which includes product offerings, prices, competitive market studiesand relevant industry trends and other information. Management anticipates, within the near term, adding to its customer baseup to three major retailers, along with several distributors and private 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.

 

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NewProducts

 

Tools

 

In2018, we ordered and launched a new line of gloves and 28 SKUs of tool belt and pouches. We also intend to launchthe following tools in the first half 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 mobiledevice products ready to market by late 2020 at which time we intend to commence marketing and selling our mobile deviceproducts to our current global customer base. We believe that increasing numbers of companies in the construction industry arerequiring their employees to utilize mobile devices not just to communicate with others but to utilize the special apps that willallow the construction workers to do their job better and more efficiently. All of our mobile devices are designed and built inaccordance with IP-68 and 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 2020, we also intendto launch the following accessories: car charger, QI charger, car mounts and earbud pack, and we will focus on sales in the followingindustries: construction, industrial, military and law enforcement and “.coms”.

 

Bythe fourth quarter of 2020, we intend to launch applicationsfor 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

 

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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 2020 and beyond.Mobile technology continues to have a significant impact on business, specifically with regard to business communication as thistechnology enhances the ability for colleagues at different locations to easily communicate, enhances customer experience throughthe improvement of applications and websites available to consumers to do business through their devices “at their fingertips”,and optimizes business operations as there is instant access to business functions at any time and from any location.

 

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.

 

 32 
 

 

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.

 

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In2019, the United States Patent and Trademark Office (USPTO)granted two new design patents (US D840,961 S and US D841,635 S) that cover ToughBuilt’s ruggedized mobile devices, whichare 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.

 

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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.

 

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 August 29, 2018 as a result of a courthearing held on August 3, 2018. On September 13, 2018, the Company and Mr. Panosian satisfied the Judgments by payment of $252,924.69(which includes $10,303.48 post judgment interest) to Mr. Minassian and by transferring to him a number of management-owned sharesreflecting a 7% ownership stake in the Company. On October 18, 2018, the Company and Mr. Panosian filed a Notice of Appeal inthe Superior Court of the State of California, Los Angeles County, with respect to the Order denying their motion for relief fromthe above-referenced judgment.

 

OnOctober 1, 2019, the Second Appellate District of the California Court of Appeal issued its opinion reversing the trial court’sorder denying the Company’s motion for relief from the default judgment and directing the trial court to grant the Company’smotion for relief, including allowing the Company to file an Answer and contest Minassian’s claims. We expect the appellatecourt to issue a remittitur officially transferring the matter from the appellate court back to the trial court for further proceedingsconsistent with its ruling. Upon return to the trial court, the Company intends to vigorously contest Minassian’s claims.

 

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   55   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 of directors (the “Board”) due to his depth of R&D knowledge inthe industry.

 

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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 of whom became directors as ofNovember 14, 2018, are as follows:

 

Name   Age   Position
Robert Faught   70   Director
Paul Galvin   55   Director
Frederick D. Furry   50   Director
Linda Moossaian   53  

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.

 

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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. Mr. Galvinis a founder of SGBlocks, LLC, the predecessor entity of SGB. He has served as the Chief Executive Officer of SGB and its predecessorentity since 2008. Mr. Galvin has been a managing member of TAG Partners, LLC), an investment partnership formed for the purposeof investing in SGB, since October 2007. Mr. Galvin brings over 20 years of experience developing and managing real estate, includingresidential condominiums, luxury sales, and market rate and affordable rental projects. Prior to his involvement in real estate,he founded a non-profit organization that focused on public health, housing, and child survival, where he served for over a decadein a leadership position. During that period, Mr. Galvin designed, developed, and managed emergency food and shelter programsthrough New York City’s Human Resources Administration and other federal and state entities. Mr. Galvin holds a Bachelorof Science in Accounting from LeMoyne College and a Master’s Degree in Social Policy from Fordham University. He was formerlyan adjunct professor at Fordham University’s Graduate School of Welfare. Mr. Galvin previously served for 10 years on theSisters of Charity Healthcare System Advisory Board and six years on the board of directors of SentiCare, Inc. In 2011, the Councilof Churches of New York recognized Mr. Galvin with an Outstanding Business Leadership Award. The Company believes he is well suitedto sit on its Board due to Mr. Galvin’s pertinent experience, qualifications, attributes, and skills which include his managerialexperience 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.

 

LindaMoossaian, Director

 

LindaMoossaian is an achievement-oriented financial strategist with an exceptional record of successful initiatives in financial planning,profit optimization, joint venture accounting, and treasury management. She has a strong history of forging strategic partnershipswith senior management, including CEOs and CFOs as well as key stakeholders to drive financial objectives, make strategic decisions,and analyze value-added analytics. Ms. Moossaian has a sophisticated understanding of long-range budget preparation, GAAP accounting,M&A, planning models, financial forecasting & analysis, decision support, accounting procedures, and continuous processimprovement. Her advanced critical thinking, analytical, qualitative, and quantitative analysis skills have been developed throughpositions in corporate andpublic accounting and consulting. She currently is the Director, Audit & Controls-WBTV FinancialAdministration for Warner Bros. in Burbank, CA, a position she has held since July 2019. Ms. Moossaian has previously acted asDirector, Theatrical Production Finance (from July 2009 to April 2018) and Director, Financial Planning & Analysis (from April2018 to July 2019) for Warner Bros. The ToughBuilt Board has determined that Ms. Moossaian’s expertise in finance is wellsuited to ToughBuilt’s Board’s support of the Company during this phase of rapid growth.

 

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 shareholders 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:

 

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  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 shareholder of, or an executive officer of an entity to which our company made, or from which our company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
     
  the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of our company served on the compensation committee of such other entity; or
     
  the director or a family member of the director is a current partner of our company’s outside auditor, or at any time during the past three years was a partner or employee of our company’s outside auditor, and who worked on our company’s audit.

 

Undersuch definition, Messrs. Faught, Furry and Galvin and Ms. Moossaian are independent directors.

 

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. The Audit Committee met four times in 2019.

 

AuditCommittee

 

OurAudit Committee is comprised of three individuals, each of whom is an independent director and at least one of whom, Mr. Furry,is an “audit committee financial expert,” as defined in Item 407(d)(5)(ii) of Regulation S-K.

 

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:

 

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

 

CompensationCommittee

 

OurCompensation Committee is comprised of three individuals, each of whom is an independent director.

 

TheCompensation Committee reviews or recommends the compensation arrangements for our management and employees and also assists ourBoard of Directors in reviewing and approving matters such as company benefit and insurance plans, including monitoring the performancethereof. The Compensation Committee has a charter (which is reviewed annually) and performs several functions.

 

TheCompensation Committee has the authority to directly engage, at our expense, any compensation consultants or other advisers asit deems necessary to carry out its responsibilities in determining the amount and form of employee, executive and director compensation.

 

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, Linda Moossaianand Robert Faught are “independent directors” as defined in the NASDAQ Listing Rules and Rule 10A-3 promulgatedunder the Exchange Act. As such, all independent directors other than Ms. Moossaian serve on all three of our standingBoard committees, with Frederick Furry as Chair of the Audit Committee, Paul Galvin as Chair of the Compensation Committee andRobert Faught as Chair of the Nominating and Corporate Governance Committee.

 

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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. We have posted a current copy of the code on our website, www.toughbuilt.com. In addition, we will post on our websiteall disclosures that are required by law or the listing standards of NASDAQ concerning any amendments to, or waivers from, anyprovision of the code. The reference to our website address does not constitute incorporation by reference of the informationcontained at or available through our website, and you should not consider it to be a part of this prospectus.

 

Indemnificationof Officers and Directors

 

Chapter78 of the Nevada Revised Statutes (NRS) provides that a corporation may indemnify any person who was or is a party or is threatenedto be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrativeor investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director,officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer,employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action,suit or proceeding if he is not liable pursuant to NRS Section 78.138 or acted in good faith and in a manner he reasonably believedto be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, hadno reasonable cause to believe his conduct was unlawful. NRS Chapter 78 further provides that a corporation similarly may indemnifyany such person serving in any such capacity who was or is a party or is threatened to be made a party to any threatened, pendingor completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact thathe is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporationas a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, againstexpenses (including attorneys’ fees) actually and reasonably incurred in connection with the defense or settlement of suchaction or suit if he is not liable pursuant to NRS Section 78.138 or acted in good faith and in a manner he reasonably believedto be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect ofany claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only tothe extent that the court or other court of competent jurisdiction in which such action or suit was brought shall determine uponapplication that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairlyand reasonably entitled to indemnity for such expenses which the court or other court of competent jurisdiction shall deem proper.

 

Ourbylaws provide that we may indemnify our officers, directors, employees, agents and any other persons to the maximum extent permittedby the NRS.

 

Insofaras indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controllingus pursuant to the foregoing provisions, we have been informed that in the opinion of the Commission such indemnification is againstpublic policy as expressed in the Securities Act and is therefore unenforceable.

 

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EXECUTIVECOMPENSATION

 

Thefollowing table summarizes compensation of our named executive officers, as of December 31, 2019 and 2018.

 

SummaryCompensation Table

 

Name and position  Year   Salary ($)   Bonus ($)   Stock Compensation
($)(6)
   Option Awards ($)    All Other Compensation ($) (1)   Total ($) 
                              
Michael Panosian   2019    385,000(1)   -    -    -     44,423    429,423 
Chief Executive Officer   2018    276,250    150,000    224,750    221,336     17,798    890,134 
                                     
Joshua Keeler   2019    285,000(2)   -    -    -     32,884    317,884 
Vice President - R&D   2018    178,000    100,000    207,850    221,336     9,683    716,869 
                                     
Zareh Khachatoorian   2019    230,000(3)   -    -    -     -    230,000 
Chief Operating Officer   2018    139,500    -    72,000    146,437     -    357,937 

 

(1) Vacation Payout

(2) Payment of $7,500 per month for CFO Services

 

Employmentand Related Agreements

 

Exceptas set forth below, we currently have no other written employment agreements with any of our officers and directors. The followingis a description of our current executive employment agreements:

 

Agreementswith Our Named Executive Officers

 

Wehave entered into written employment agreements with each of our named executive officers, as described below. Each of our namedexecutive officers has also executed our standard form of confidential information and invention assignment agreement.

 

EmploymentAgreement with Michael Panosian

 

Weentered into an employment agreement with Mr. Panosian on January 3, 2017 that governs the terms of his employment with us asPresident and Chief Executive Officer. Under the terms of this agreement, Mr. Panosian received a “sign-on-bonus’of $50,000. The term of the agreement is for five years and Mr. Panosian is entitled to an annual base salary of $350,000 beginningon January 1, 2017 and increasing by 10% each year commencing on January 1, 2018. Mr. Panosian was also granted a stock optionto purchase 125,000 shares of the Company’s common stock at an exercise price of $10.00 per share. The employment agreementalso entitles Mr. Panosian to, among other benefits, the following compensation: (i) eligibility to receive an annual cash bonusat the sole discretion of the Board and as determined by the Compensation Committee commensurate with the policies and practicesapplicable to other senior executive officers of the Company; (ii) an opportunity to participate in any stock option, performanceshare, performance unit or other equity based long-term incentive compensation plan commensurate with the terms and conditionsapplicable to other senior executive officers and (iii) participation in welfare benefit plans, practices, policies and programsprovided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability,employee life, group life, accidental death and travel accident insurance plans and programs) to the extent available to our othersenior executive officers.

 

EmploymentAgreement with Josh Keeler

 

Weentered into an employment agreement with Mr. Keeler on January 3, 2017 that governs the terms of his employment with us as VicePresident of Research & Development. Under the terms of this agreement, Mr. Keeler received a “sign-on-bonus’of $35,000. The term of the agreement is for five years and Mr. Keeler is entitled to an annual base salary of $250,000 beginningon January 1, 2017 and increasing by 10% each year commencing on January 1, 2018. The employment Agreement also entitles Mr. Keelerto, among other benefits, the following compensation: (i) eligibility to receive an annual cash bonus at the sole discretion ofthe Board and as determined by the Compensation Committee commensurate with the policies and practices applicable to other seniorexecutive officers of the Company; (ii) an opportunity to participate in any stock option, performance share, performance unitor other equity based long-term incentive compensation plan commensurate with the terms and conditions applicable to other seniorexecutive officers and (iii) participation in welfare benefit plans, practices, policies and programs provided by the Companyand its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life,accidental death and travel accident insurance plans and programs) to the extent available to our other senior executive officers.

 

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PotentialPayments to Messrs. Panosian and Keeler upon Termination or Change in Control

 

Pursuantto the employment agreements, regardless of the manner in which Messrs. Panosian and Mr. Keeler’s service terminates, eachexecutive officer is entitled to receive amounts earned during his term of service, including salary and other benefits. In addition,each of them is eligible to receive certain benefits pursuant to his agreement with us described above.

 

TheCompany is permitted to terminate the employment of Mr. Panosian and Mr. Keeler for the following reasons: (1) death or disability,(2) Termination for Cause (as defined below) or (3) for no reason.

 

Eachsuch officer is permitted Termination for Good Reason (as defined below) of such officer’s employment. In addition, eachsuch officer may terminate his or her employment upon written notice to the Company 90 days prior to the effective date of suchtermination.

 

Inthe event of such officer’s death during the employment period or a termination due to such officer’s disability,such officer or his or her beneficiaries or legal representatives shall be provided the sum of (a) an amount equal to two timesthe officer’s then prevailing base salary and (b) the bonus that would have been payable to such officer subject to anyperformance conditions and (c) certain other benefits provided for in the employment agreement.

 

Inthe event of such officer’s Termination for Cause by the Company or the termination of such officer’s employment asa result of such officer’s resignation other than a Termination for Good Reason, such officer shall be provided certainbenefits provided in the employment agreement and payment of all accrued and unpaid compensation and wages, but such officer shallhave no right to compensation or benefits for any period subsequent to the effective date of termination.

 

Underthe employment agreements, “Cause” means: such officer willfully engages in an act or omission which is in bad faithand to the detriment of the Company, engages in gross misconduct, gross negligence, or willful malfeasance, in each case thatcauses material harm to the Company, breaches this Agreement in any material respect, habitually neglects or materially failsto perform his duties (other than any such failure resulting solely from such officer’s physical or mental disability orincapacity) after a written demand for substantial performance is delivered to such officer which identifies the manner in whichthe Company believes that such officer has not performed his duties, commits or is convicted of a felony or any crime involvingmoral turpitude, uses drugs or alcohol in a way that either interferes with the performance of his duties or compromises the integrityor reputation of the Company, or engages in any act of dishonesty involving the Company, disclosure of Company’s confidentialinformation not required by applicable law, commercial bribery, or perpetration of fraud; provided, however, that such officershall have at least forty-five (45) calendar days to cure, if curable, any of the events which could lead to his termination forCause.

 

Underthe employment agreements, “Termination for Good Reason” means any of the following that are undertaken without theofficer’s express written consent: (i) the assignment to such officer of principal duties or responsibilities, or the substantialreduction of such officer’s duties and responsibilities, either of which is materially inconsistent with such officer’sposition as President and Chief Executive Officer of the Company and Director of design and Development, respectively; (ii) amaterial reduction by the Company in such officer’s annual base salary, except to the extent the salaries of otherexecutive employees 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).

 

 42 
 

 

EmploymentAgreement with Zareh Khachatoorian

 

Weentered into an employment agreement with Mr. Khachatoorian on January 3, 2017 that governs the terms of his employment with usas Chief Operating Officer and Secretary. The term of the agreement is for three years and Mr. Khachatoorian is entitled to anannual base salary of $180,000 beginning on January 1, 2017 and increasing by 10% each year commencing on January 1, 2018. Theemployment Agreement also entitles Mr. Khachatoorian to, among other benefits, the following compensation: (i) eligibility toreceive an annual cash bonus at the sole discretion of the Board and as determined by the Compensation Committee commensuratewith the policies and practices applicable to other senior executive officers of the Company; (ii) an opportunity to participatein any stock option, performance share, performance unit or other equity based long-term incentive compensation plan commensuratewith the terms and conditions applicable to other senior executive officers and (iii) participation in welfare benefit plans,practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical,prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs)to the extent available to our other senior executive officers.

 

TheCompany is permitted to terminate the employment of Mr. Khachatoorian for the following reasons: (1) death or disability, (2)Termination for Cause (as defined above) or (3) for no reason. In the event of Mr. Khachatoorian’s (i) death or disability,or (ii) Termination for Cause by the Company, Mr. Khachatoorian or his beneficiaries or legal representatives shall be entitledto payment for all accrued and unpaid compensation and wages and in addition pay to Mr. Khachatoorian a sum equivalent to onemonth’s salary, but shall have no right to compensation or benefits for any period subsequent to the effective date of hisdeath or disability.

 

Inthe event of the termination of Mr. Khachatoorian’s employment for Good Reason, he shall be provided certain benefits listedin the employment agreement and payment of all accrued and unpaid compensation and wages, but executive shall have no right tocompensation or benefits for any period subsequent to the effective date of termination.

 

EmploymentAgreement with Manu Ohri (resigned June 2019)

 

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.

 

 43 
 

 

OutstandingEquity Awards at December 31, 2019

 

2016Equity Compensation 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   1/03/2017    62,500    62,500    62,500    10.00    7/05/2026 
Joshua Keeler   -     -    -    -    -    - 
Zareh Khachatoorian   -     -    -    -    -    - 

 

  (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.

 

2019Equity Compensation 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     9/14/2018 (1)     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

 

  (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.

 

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 is administered by the Compensation Committee of our Board of Directors, or by the full board, which maydetermine, among other things, the (a) terms and conditions of any option or stock purchase right granted, including the exerciseprice and the vesting schedule, (b) persons who are eligible to receive options and stock purchase rights and (c) the number ofshares to be subject to each option and stock purchase right. The types of equity awards that may be granted under the Plan are:(i) incentive stock options and non-incentive stock options; (ii) share appreciation rights; (iii) restricted shares, restrictedshare units (which are shares granted after certain vesting conditions are met) and unrestricted shares; (iv) deferred share units;and (v) performance awards.

 

2018Equity Incentive Plan

 

EffectiveJuly 1, 2018, the Board of Directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”). This 2018 Plan wasadopted in addition to the existing 2016 Stock Equity Incentive. The awards per 2018 Plan may be granted through June 30, 2023to the Company’s employees, consultants, directors and non-employee directors. The maximum number of shares of our commonstock that may be issued under the 2018 Plan is 1,000,000 shares, which amount will be (a) reduced by awards granted under the2018 Plan, and (b) increased to the extent that awards granted under the 2018 Plan are forfeited, expire or are settled for cash(except as otherwise provided in the 2018 Plan). No employee will be eligible to receive more than 200,000 shares of common stockin any calendar year under the 2018 Plan pursuant to the grant of awards. On September 12, 2018, the Board of Directors approvedan increase in the number of shares of common stock reserved for future issuance under this Plan from 1,000,000 shares to 2,000,000shares. On September 14, 2018, 1,000,000 shares of common stock underlying awards under the 2018 Plan have been granted to theemployees and officers 25% vesting immediately on the date of grant and 25% vesting each year thereafter on the anniversary ofthe grant date.

 

 44 
 

 

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

 

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

 

OurCompensation Committee will: (i) interpret our Plans; and (ii) make all other determinations and take all other action that maybe necessary or advisable to implement and administer our Plans. The Plans provide that in the event of a change of control event,the Compensation Committee or our Board of Directors shall have the discretion to determine whether and to what extent to acceleratethe vesting, exercise or payment of an award.

 

Inaddition, our Board of Directors may amend our Plans at any time. However, without shareholder approval, our Plan may not be amendedin a manner that would:

 

  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.

 

Directors’Compensation Plan Information

December31, 2019

 

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 

 

 45 
 

 

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 2016 and 2018 Plans.

 

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

As ofDecember 31, 2019

 

Name  Fees Earned or Paid in Cash ($)  

Stock Awards

($)

  

Option Awards

($)

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

Total

($)

 
                        
Paul Galvin (1)   50,000    -    -    -    -    50,000 
Robert Faught (2)   50,000    -    -    -    -    50,000 
Frederick Fury (3)   50,000    -    -    -    -    50,000 

 

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

 

 46 
 

 

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 January 17, 2020 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
             
   Common Shares   within 60
days
of offering
   Series D Preferred Stock   Total   Percentage Beneficially Owned (1) 
Directors and Officers:                         
Michael Panosian   1,825,799    112,500    0    1,938,299    5.31%
Joshua Keeler   647,925    50,000    0    697,925    1.91%
Zareh Khachatoorian   55,991    27,500    0    83,491    0.2%

Fred Furry 

   0    0    0    0    0 

Paul Galvin

   0    0    0    0    0 

Linda Moossaian

   0    0    0    0    0 

Robert Faught

   0    0    0    0    0 

Jolie Kahn

   0    0    0    0    0 
All Officer and Directors as a Group (8 persons)   2,681,623    217,500         2,911,980    7.99%
                          
5% or Greater Beneficial Owners:                         
Michael Panosian   1,825,799    112,500    0    1,938,299    %
                          

Alto Opportunity Master Fund SPC – Segregated Master Portfolio B

             3,609,631    

3,609,631

(3)   

8.9

%

 

(1)Based on 36,460,923shares of common stock issued and outstanding on January 17, 2020.

(2)As a result of the 9.99% beneficial ownership blocker contained in the Certificate of Designation for the Series D PreferredStock.

(3) Issuable uponconversion of Series D Preferred Stock upon exercise based upon 9.9% blocker provision.

 

 47 
 

 

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 or director are not considered related-person transactions underthis policy. A related party is any executive officer, director or a holder of more than five percent of our common stock, includingany of their immediate family members and any entity owned or controlled by such persons.

 

OurChief Financial Officer, Jolie Kahn, must present information regarding a proposed related-party transaction to our Board of Directors.Under the policy, where a transaction has been identified as a related-party transaction, Ms. Kahn must present informationregarding the proposed related-party transaction to our Nominating and Corporate Governance Committee, once the same is established,for review. The presentation must include a description of, among other things, the material facts, the direct and indirect interestsof the related parties, the benefits of the transaction to us and whether any alternative transactions are available. To identifyrelated-party transactions in advance, we rely on information supplied by our executive officers, directors and certain significantshareholders. In considering related-party transactions, our Nominating and Corporate Governance Committee will take into accountthe relevant available facts and circumstances including, but not limited to:

 

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

 

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.

 

OnApril 26, 2016, September 1, 2016 and October 5, 2016, our former chief financial officer, Manu Ohri loaned our Companyan aggregate of $130,000. Pursuant to the terms of the promissory notes, the loans were to be repaid on or before December 31,2016, with interest at 10% per annum payable monthly. The loans were repaid on October 18, 2016. In May 2017, we executed threeunsecured promissory notes with Mr. Ohri totaling $400,000, bearing an interest rate of 10% per annum, due on demand or beforeJune 1, 2018. On June 1, 2018, the maturity date of these promissory notes was extended to September 1, 2018. On August 30, 2018,the maturity date of these promissory notes was further extended to September 30, 2018. On September 30, 2018, the maturity dateof these notes was extended to the third business day following the date of consummation of the Company’s initial publicoffering at which time $200,000 of the principal amount of the notes was paid in cash and the balance was paid in 42,105 unregisteredbe paid in shares of common stock of the Company at a conversion price equal to the per Unit price of the public offering.

 

Concurrentwith the closing of the IPO on November 14, 2018, the following private transaction was consummated in accordance with the relatedagreements (see Note 9 of the financial statements), all in transactions exempt from registration under Section 4(a)(2) of theSecurities Act of 1933, as amended: 136,863 unregistered shares of common stock were issued upon conversion of $650,100 of accruedand unpaid salaries to officers and directors at a conversion price of $4.75 per share.

 

 48 
 

 

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 (205,000,000) shares, consisting of one hundred million (200,000,000) shares of common stock, $0.0001par value and five million (5,000,000) shares of preferred stock, $0.0001 par value. On January 17, 2020, we filed an amendmentto our articles of incorporation with the State of Nevada to increase our authorized shares of common stock to 200,000,000.

 

CommonStock

 

Asof January 17, 2020, we have 36,460,923 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 shareholders (and written actionsin lieu of meeting). There is no cumulative voting. The holders of shares of common stock are entitled to dividends when and asdeclared by the Board of Directors from funds legally available therefor, and upon liquidation are entitled to share pro ratain any distribution to holders of common stock. There are no preemptive, conversion or redemption privileges, nor sinking fundprovisions with respect to the common stock.

 

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 our Convertible Notes (at an aggregate original issue discount of 15%) to theinvestor in a transaction exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. The firstConvertible Note (the “Series A Note”) has a face amount of $6.72 million for which the investor paid $5 million incash. The second Convertible Note (the “Series B Note”) has a principal amount of $4.78 million for which the investorpaid $4.78 million in the form of a full recourse promissory note issued by the investor to the Company (the “Investor Note”)secured by $4.78 million in cash or cash equivalents of the investor (i.e., an original issue discount of approximately 15% tothe face amount of the Series B Note). No portion of the Series B Note may be converted into shares of our common stock untilthe corresponding portion of the Investor Note has been prepaid to the Company in cash, at which point in time such portion ofthe Series B Note shall be deemed “unrestricted”. The Investor Note is subject to optional prepayment at any timeat the option of the investor and mandatory prepayment, at the Company’s option, subject to certain equity conditions, atany time 45 Trading Days after the effectiveness of a resale registration statement (or otherwise the applicability of Rule 144promulgated under the Securities Act of 1933, as amended). Notwithstanding the foregoing, the Company may not effect a mandatoryprepayment if the shares underlying the Series A Note and the portion of the Series B Note that has become unrestricted exceeds35% of the market capitalization of the Company.

 

TheConvertible Notes are senior secured obligations of the Company secured by a lien on all assets of the Company, bear no interest(unless an event default has occurred and is continuing) and mature on December 31, 2020. The Convertible Notes are convertibleat $1.00 into a fixed number of shares (the “Conversion Shares”). The Notes are convertible at the Holder’soption, in whole or in part, at any time. The Conversion Price will be subject to adjustment for stock dividends, stock splits,anti-dilution and other customary adjustment events.

 

 49 
 

 

TheCompany shall repay the Principal Amount of the Convertible Notes in 12 installments, with the first installment starting on February1, 2020 (each, an “Installment Date”). Installments 1-3 shall be 1/36th of the Principal Amount, Installments 4-6shall be 1/18th of the Principal Amount and Installments 7-12 shall be 1/8th of the Principal Amount. The repayment amount shallbe payable in cash, or, subject to the satisfaction of equity conditions, at the option of the Company, in Common Stock or a combinationof cash and Common Stock. However, if the 30-day volume weighted average price of the Common Stock (the “VWAP”) ofthe Company falls below 50% of the market price of one share of the Company’s common stock or the Company fails to satisfycertain other equity conditions, the repayment amount is payable in shares of Common Stock only unless the Investor(s) waive anyapplicable equity condition. If the Company elects to satisfy all or any portion of an installment in shares of Common Stock,the Company will predeliver such shares of Common Stock to the investor on the 23rd trading day prior to the applicable InstallmentDate, 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 will be valued at a conversion price calculated as the lesser of (i) 85% of the arithmeticaverage of the three lowest daily VWAPs of the 20 trading days prior to the payment date or (ii) 85% of the VWAP of the tradingday 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 (as defined in the Convertible Notes), the Holders may require the Company to purchase any outstandingConvertible Notes in cash at 125% of par plus accrued but unpaid interest. The Company shall have the right to redeem any andall amounts of the outstanding Convertible Note at 125% of the greater of (a) Principal Amount plus accrued but unpaid interest(if any), or (b) Conversion Value plus accrued but unpaid interest (if any) provided the Company has satisfied certain equityconditions. The Company must give the Investor(s) ninety (90) business days’ prior notice of any such redemption.

 

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

 

 50 
 

 

Inconnection with the granting of the Convertible Notes, the Company issued detachable warrants to the Investor, exercisablein whole or in part at any time during the five years from the date of issuance, an in amount equal to 50% of the conversion sharesunderlying the Convertible Notes and have an exercise price of $1.00 per share. To the extent the Company has a changeof control or a spinoff, the warrants provide 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.

 

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.

 

Theterms of the Series D Preferred Stock are as follows:

 

Stated Value   $1,000 per share, subject to increase for (a) any capitalized dividends and (b) on June 30, 2020 (and each six month anniversary thereafter), the Stated Value shall increase by 5%.
     
Dividends:   The Series D Preferred Stock shall participate with any dividends paid to the holders of Common Stock. In addition, from now until June 30, 2020, shall accrue dividends at a rate of 8% per annum and from June 30, 2020 and thereafter, at 12% per annum, which shall capitalize to the stated value of the Series D Preferred Stock on a monthly basis. Upon the occurrence of certain triggering events, the Series D Preferred Stock shall accrue additional dividends at a default rate set forth in the definitive documentation.
     
Conversion Price:   The Investor may elect to convert the Series D Preferred Stock into shares of Common Stock at a conversion price (the “Conversion Price”) equal to $1.00 per share. The Conversion Price of the Series D Preferred Stock shall be subject to customary adjustments for stock splits, dividends, recapitalizations and similar events. The Series D Preferred Stock shall be alternatively convertible at the Alternate Conversion Price (as defined in our previously outstanding notes (the “Existing Notes”).
     
Voting Rights  

Series D Preferred Stock vote together on all matters as a class, with the approval of a majority of the Series D Preferred Stock required to amend or waive any term or condition of the Series D Preferred Stock. Series D Preferred Stock shall vote on an as-converted basis with the holders of Common Stock on all matters (subject to applicable ownership blockers, including not exceeding 19.9% in any event).

 

Company Exchange Right  

The Company shall have the right to exchange the Series D Preferred Stock, at its option back into senior secured convertible notes in the form of the Existing Notes, at any time, with such New Exchange Notes having an initial outstanding amount equal to the stated value, accrued and unpaid dividends and any other amounts outstanding with respect to such Series D Preferred Stock subject to such exchange.

 

Limitations on Beneficial Ownership:  

Notwithstanding anything herein to the contrary, no Preferred Stock of any Investor shall be issued or shall be convertible if after such conversion such Investor would beneficially own more than 4.99% of the shares of Common Stock then outstanding (as defined under Section 13(d) of the Securities Act of 1933, as amended).

 

Exchange Cap   The Series D Preferred Stock shall share the Exchange Cap of the August 19, 2019 Series A Note and Series B Note and, to the extent the Existing Notes have been converted into 19.9% of the Common Stock, shall not be convertible until such time as stockholder approval has been obtained and/or additional shares of Common Stock are eligible to be converted thereunder in compliance with the rules and regulations of the Principal Market.

 

SeriesA 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. The Series B Warrants have expired.

 

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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 The warrants will be exercisable, at the option of each holder, in whole orin part by delivering to us a duly executed exercise notice and, at any time a registration statement registering the issuanceof the shares of Common Stock underlying the warrants under the Securities Act is effective and available for the issuance ofsuch shares, or an exemption from registration under the Securities Act is available for the issuance of such shares, by paymentin full in immediately available funds for the number of shares of Common Stock purchased upon such exercise. If a registrationstatement registering the issuance of the shares of Common Stock underlying the warrants under the Securities Act is not effectiveor available and an exemption from registration under the Securities Act is not available for the issuance of such shares, theholder may, in its sole discretion, elect to exercise the warrant through a cashless exercise, in which case the holder wouldreceive upon such exercise the net number of shares of Common Stock determined according to the formula set forth in the warrant.No fractional shares of Common Stock will be issued in connection with the exercise of a warrant. In lieu of fractional shares,we will pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price

 

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 forthe Series A Warrants. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and distributions,stock splits, stock combinations, reclassifications or similar events affecting our Common Stock and also upon any distributionsof assets, including cash, stock or other property to our stockholders.

 

Transferability.Subject to applicable laws, the warrants may be offered for sale, sold, transferred or assigned without our consent.

 

ExchangeListing. We have listed the Series A Warrants offered in this offering on The NASDAQ Capital Market under the symbol “TBLTW”.

 

WarrantAgent. The warrants were issued in registered form under a warrant agency agreement between VStock Transfer, LLC, as warrantagent, and us. The warrants are initially represented only by one or more global warrants deposited with the warrant agent, ascustodian on behalf of The Depository Trust Company (DTC) and registered in the name of Cede & Co., a nominee of DTC, or asotherwise 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 are 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.

 

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Asof the date of this prospectus, 200,000 warrants have been issued to the placement agent and are outstanding.

 

SecuritiesOffered in this Offering

  

Weare offering           shares of our common stock together with warrants to purchaseup to an aggregate of          shares of our common stock. Each share of our commonstock is being sold together with a warrant to purchase one share of common stock. The shares of our common stock and relatedwarrants will be issued separately. We are also registering the issuance of shares of our common stock issuable from time to timeupon exercise of the warrants offered hereby.

 

Thefollowing description of our capital stock is not complete and is subject to and qualified in its entirety by our amended articlesof incorporation and amended and restated bylaws, which are filed as exhibits to the registration statement of which this prospectusis a part, and by the relevant provisions of the Delaware General Corporation Law.

 

CommonStock

 

Theholders of our common stock are entitled to the following rights:

 

VotingRights. Holders of our common stock are entitled to one vote per share in the election of directors and on all other matterson which stockholders are entitled or permitted to vote. Holders of our common stock are not entitled to cumulative voting rights.

 

DividendRights. Subject to the terms of any then outstanding series of preferred stock, the holders of our common stock are entitledto dividends in the amounts and at times as may be declared by the board of directors out of funds legally available therefor.

 

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LiquidationRights. Upon liquidation or dissolution, holders of our common stock are entitled to share ratably in all net assets availablefor distribution to stockholders after we have paid, or provided for payment of, all of our debts and liabilities, and after paymentof any liquidation preferences to holders of any then outstanding shares of preferred stock.

 

OtherMatters. Holders of our common stock have no redemption, conversion or preemptive rights pursuant to our amended articlesof incorporation or amended and restated bylaws. There are no sinking fund provisions applicable to our common stock. The rights,preferences and privileges of the holders of our common stock are subject to the rights of the holders of shares of any seriesof preferred stock that we may issue in the future.

 

Warrants

 

Thefollowing summary of certain terms and provisions of the warrants offered hereby is not complete and is subject to, and qualifiedin its entirety by, the provisions of the warrant, the form of which has been filed as an exhibit to the registration statementof which this prospectus is a part. Prospective investors should carefully review the terms and provisions of the form of warrantfor a complete description of the terms and conditions of the warrants.

 

Form.The warrants will be issued as individual warrant agreements to the investors.

 

Exercisability.The warrants are exercisable at any time after their original issuance, expected to be                   ,2020, and at any time up to the date that is                 years after their original issuance. The warrants will be exercisable, at the option of each holder, in whole or in part by deliveringto us a duly executed exercise notice and, at any time a registration statement registering the issuance of the shares of commonstock underlying the warrants under the Securities Act is effective and available for the issuance of such shares, or an exemptionfrom registration under the Securities Act is available for the issuance of such shares, by payment in full in immediately availablefunds for the number of shares of common stock purchased upon such exercise. If a registration statement registering the issuanceof the shares of common stock underlying the warrants under the Securities Act is not effective or available and an exemptionfrom registration under the Securities Act is not available for the issuance of such shares, the holder may, in its sole discretion,elect to exercise the warrant through a cashless exercise, in which case the holder would receive upon such exercise the net numberof shares of common stock determined according to the formula set forth in the warrant. No fractional shares of common stock willbe issued in connection with the exercise of a warrant. In lieu of fractional shares, we will pay the holder an amount in cashequal to the fractional amount multiplied by the exercise price.

 

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 4.99% (or, upon election of the holder, 9.99%) of the number of shares of our common stockoutstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with theterms of the warrants. However, any holder may increase or decrease such percentage, provided that any increase will notbe effective until the 61st day after such election.

 

ExercisePrice. The warrants will have an exercise price of $            per share. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and distributions,stock splits, stock combinations, reclassifications or similar events affecting our common stock and also upon any distributionsof assets, including cash, stock or other property to our stockholders.

 

Transferability.Subject to applicable laws, the warrants may be offered for sale, sold, transferred or assigned without our consent.

 

CashlessExercise. In addition, beginning on the earlier of (i) thirty (30) days following the effective date of the Registration Statement(the “Effective Date”), and (ii) the Trading Day on which the aggregate trading volume of the Common Stocksince the Effective Date is equal to more than three times (3x) the number of shares of Common Stock sold pursuantto the Underwriting Agreement (the “Cashless Period”), this Warrant may also be exercised, in whole or in part,at such time by means of a “cashless exercise”.  In such event, in lieu of the formula set forth above,the aggregate number of Warrant Shares issuable upon such cashless exercise pursuant to any given Notice of Exerciseelecting to effect a cashless exercise shall equal the product of (x) the aggregate number of Warrant Shares that would be issuableupon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise ratherthan a cashless exercise and (y) 1.0.

 

ExchangeListing. There is no established trading market for the warrants and we do not expect a market to develop. In addition, wedo not intend to apply for the listing of the warrants on any national securities exchange or other trading market. Without anactive trading market, the liquidity of the warrants will be limited.

 

FundamentalTransactions. If a fundamental transaction occurs, then the successor entity will succeed to, and be substituted for us, andmay exercise every right and power that we may exercise and will assume all of our obligations under the warrants with the sameeffect as if such successor entity had been named in the warrant itself. If holders of our common stock are given a choice asto the securities, cash or property to be received in a fundamental transaction, then the holder shall be given the same choiceas to the consideration it receives upon any exercise of the warrant following such fundamental transaction.

 

Rightsas a Shareholder. 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.

 

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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.

 

Listing

 

Ourcommon stock is listed on NASDAQ under the symbol “TBLT”, and our Series A Warrants under “TBLTW”.

 

SHARESELIGIBLE FOR FUTURE SALE

 

Futuresales of substantial amounts of our common stock in the public market, including shares issued upon exercise of outstanding optionsand warrants, or the anticipation of these sales, could adversely affect prevailing market prices from time to time and couldimpair our ability to raise equity capital in the future.

 

Basedon the number of shares of common stock outstanding as of January 17, 2020, upon the completion of this offering we willhave 100,000,000 shares of common stock outstanding, assuming (1) no exercise of the underwriter’s option to purchaseadditional shares of common stock and (2) no exercise of outstanding options or warrants, including the warrants issued in thisoffering. Of those shares, all of the shares sold in this offering will be freely tradable, except that any shares held by our“affiliates,” as that term is defined in Rule 144 under the Securities Act, or Rule 144, may only be sold in compliancewith the limitations described below.

 

Rule144 The availability of Rule 144 will vary depending on whether restricted shares are held by an affiliate or a non-affiliate.In general, under Rule 144 as in effect on the date of this prospectus, a person who has beneficially owned restricted sharesof common stock for at least six months would be entitled to sell such person’s securities provided that (i) such personis not deemed to have been one of our affiliates at the time of, or at any time during the three months preceding, a sale and(ii) our company is subject to the Exchange Act periodic reporting requirements for at least three months before the sale.

 

Personswho have beneficially owned restricted shares of common stock for at least six months but who are affiliates of our company atthe time of, or at any time during the three months preceding, a sale, would be subject to additional restrictions, by which suchpersons would be entitled to sell within any three-month period only a number of securities that does not exceed the greater ofeither of the following:

 

  1% of the number of shares of common stock then outstanding; and
     
  if the shares of common stock are then traded on a national securities exchange, the average weekly trading volume of shares of common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

 

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UNDERWRITING

 

Wehave entered into an underwriting agreement with Maxim Group LLC as underwriter (“Maxim” or the “underwriter”),with respect to the shares of our common stock and warrants to purchase shares of our common stock being offered. Maxim is thesole book running manager for the offering. Subject to the terms and conditions of an underwriting agreement between us and theMaxim, we have agreed to sell to the underwriter, and the underwriter has agreed to purchase, at the public offering price lessthe underwriting discounts set forth on the cover page of this prospectus, the number of shares of common stock and warrants topurchase common stock listed next to its name in the following table:

 

Name of Underwriter

 

Number of
Shares

  

Number of
Warrants

 
Maxim Group LLC          
Total          

 

Theunderwriter is committed to purchase all the securities offered by this prospectus. The underwriter is not obligated to purchasethe shares and/or related warrants covered by the underwriter’s over-allotment option described below. The underwriter isoffering the shares of our common stock and related warrants, subject to prior sale, when, as and if issued to and accepted byit, subject to approval of legal matters by its counsel, and other conditions contained in the underwriting agreement, such asthe receipt by the underwriter of officer’s certificates and legal opinions. The underwriter reserves the right to withdraw,cancel or modify offers to the public and to reject orders in whole or in part.

 

Over-AllotmentOption

 

Wehave granted to the underwriter an option, exercisable no later than 45 calendar days after the date of the underwriting agreement,to purchase up to                    additionalshares of common stock and/or warrants to purchase common stock at the public offering price listed on the cover page of thisprospectus, less underwriting discounts and commissions. The underwriter may exercise this option only to cover over-allotments,if any, made in connection with this