Notes
to the Condensed Financial Statements
September
30, 2020 and 2019
(Unaudited)
NOTE
1: NATURE OF OPERATIONS AND BASIS OF PRESENTATION
General
The
unaudited condensed financial statements of ToughBuilt Industries, Inc. (“ToughBuilt” or the “Company”)
as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 should be read in conjunction with
the financial statements for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2019, which was filed with the Securities Exchange Commission (“SEC”) on March 30, 2020 and
can also be found on the Company’s website (www.toughbuilt.com). ToughBuilt was incorporated under the laws of the State
of Nevada on April 9, 2012 under the name Phalanx, Inc., and on December 29, 2015, Phalanx, Inc. changed its name to ToughBuilt
Industries, Inc.
On
April 15, 2020, the Company effected a 1-for-10 reverse stock split (the “Reverse Split”) of its issued and outstanding
common stock. As a result of the Reverse Split, each ten shares of issued and outstanding prior to the Reverse Split were converted
into one share of common stock. All share and per share numbers in the unaudited condensed financial statements and notes below
have been revised retroactively to reflect the Reverse Split.
Nature
of Operations
In
these notes, the terms “we”, “our”, “ours”, “us”, “it”, “its”,
“ToughBuilt”, and the “Company” refer to ToughBuilt Industries, Inc.
The
Company designs and distributes tools and accessories to the home improvement community and the building industry. The Company
aspires to augment brand loyalty in part from the enlightened creativity of its end users throughout the global tool market industry.
The Company holds exclusive patents and licenses to develop, manufacture, market and distribute various home improvement and construction
product lines for both Do-it-Yourself (“DIY”) and professional trade markets under the TOUGHBUILT® brand name.
TOUGHBUILT
distributes products in the following categories, all designed and engineered in the United States and manufactured by third party
vendors in China, with manufacturing being brought online in India and the Philippines:
|
●
|
tool
belts, tool bags and other personal tool organizer products;
|
|
●
|
complete
line of knee pads for various construction applications; and
|
|
●
|
job-site
tools and material support products consisting of a full line of miter-saws and table saw stands, saw horses/job site tables
and roller stands.
|
On
February 24, 2020, the Company closed on the public offering of 0.445 million shares of its common stock, for gross proceeds of
$912,250 based upon the overallotment option arising from the closing of its January 28, 2020 public offering. In the January
28, 2020 public offering, the Company sold 4.5 million shares of its common stock and 49.45 million warrants (each exercisable
into 1/20 of a share of common stock for a total of 2.4725 million shares of common stock) from which it received gross proceeds
of $9,472,250.
On
June 12, 2020, the Company closed on the public offering of 1.7 million shares of its common stock, for gross proceeds of $1,683,000
based upon the overallotment option arising from the closing of its June 2, 2020 public offering. In the June 2, 2020 public offering,
the Company sold 19 million shares of its common stock and 20.7 million warrants from which it received gross proceeds of $19,017,000.
Risk
and Uncertainty Concerning Covid-19
In
March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic which continues
to spread throughout the United States and the World. We are currently monitoring the outbreak of COVID-19 and the related business
and travel restrictions and changes to behavior intended to reduce its spread. All of our Chinese facilities were temporarily
closed for a period of time. Most of these facilities have been reopened. Depending on the progression of the outbreak, our ability
to obtain necessary supplies and ship finished products to customers may be partly or completely disrupted globally. Also, our
ability to maintain appropriate labor levels could be disrupted. If the coronavirus continues to progress, it could have a material
negative impact on our results of operations and cash flow, in addition to the impact on its employees. We have concluded that
while it is reasonably possible that the virus could have a negative impact on the results of operations, the specific impact
is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Liquidity
As
of September 30, 2020, the Company’s principal sources of liquidity consisted of approximately $8.9 million of cash and
future cash generated from operations. The Company believes its current cash balances coupled with anticipated cash flow from
operating activities will be sufficient to meet its working capital requirements for at least one year from the date of the issuance
of the accompanying financial statements. The Company continues to control its cash expenses as a percentage of expected revenue
on an annual basis and thus may use its cash balances in the short-term to invest in revenue growth. Based on current internal
projections, the Company believes it has and/or will generate sufficient cash for its operational needs, including any required
debt payments, for at least one year from the date of issuance of the accompanying financial statements. Management is focused
on growing the Company’s existing product offering, as well as its customer base, to increase its revenues. The Company
cannot give assurance that it can increase its cash balances or limit its cash consumption and thus maintain sufficient cash balances
for its planned operations or future acquisitions. Future business demands may lead to cash utilization at levels greater than
recently experienced. The Company may need to raise additional capital in the future. However, the Company cannot assure that
it will be able to raise additional capital on acceptable terms, or at all. Subject to the foregoing, management believes that
the Company has sufficient capital and liquidity to fund its operations for at least one year from the date of issuance of the
accompanying financial statements.
Basis
of Presentation
These
interim condensed financial statements are unaudited and were prepared by the Company in accordance with generally accepted accounting
principles in the United States of America (GAAP) and with the SEC’s instructions to Form 10-Q and Article 10 of Regulation
S-X.
The
preparation of interim condensed financial statements requires management to make assumptions and estimates that impact the amounts
reported. These interim condensed financial statements, reflect all adjustments, consisting of normal recurring accruals, necessary
for a fair presentation of the Company’s results of operations, financial position and cash flows for the interim periods
ended September 30, 2020 and 2019; however, certain information and footnote disclosures normally included in our audited annual
financial statements, as included in the Company’s interim condensed financial statements on Form 10-Q, have been condensed
or omitted pursuant to such SEC rules and regulations and accounting principles applicable for interim periods. It is important
to note that the Company’s results of operations and cash flows for interim periods are not necessarily indicative of the
results of operations and cash flows to be expected for a full fiscal year or any other interim period. The information included
in this Quarterly Report on Form 10-Q should be read in connection with the financial statements and accompanying notes included
in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
preparation of condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed
financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates
estimates and assumptions related to the valuation of accounts and factored receivables, valuation of long-lived assets, accrued
liabilities, notes payable and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions
on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs
and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially
and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual
results, future results of operations will be affected.
Cash
The
Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
The Company did not have any cash equivalents at September 30, 2020 and December 31, 2019.
Accounts
Receivable
Accounts
receivable represent income earned from the sale of tools and accessories for which the Company has not yet received payment.
Accounts receivable are recorded at the invoiced amount and adjusted for amounts management expects to collect from balances outstanding
at period-end. The Company estimates the allowance for doubtful accounts based on an analysis of specific accounts and an assessment
of the customer’s ability to pay, among other factors. At September 30, 2020 and December 31, 2019, no allowance for doubtful
accounts was recorded.
The
Company accounts for the transfer of accounts receivable to a third party under a factoring type arrangement in accordance with
Accounting Standards Codification (“ASC”) 860, “Transfers and Servicing”. ASC 860 requires that
several conditions be met in order to present the transfer of accounts receivable as a sale. Even though the Company has isolated
the transferred (sold) assets and has the legal right to transfer its assets (accounts receivable), it does not meet the third
test of effective control since its accounts receivable sales agreement with a third-party factor requires it to be liable in
the event of default by one of its customers. Because it does not meet all three conditions, it does not qualify for sale treatment
of its accounts receivable, and its debt thus incurred is presented as a secured loan liability, entitled “Factor loan payable”,
on its balance sheet. The Company recorded a sales discount of $13,000 at September 30, 2020 and December 31, 2019.
Inventory
Inventory
is valued at the lower of cost or net realizable value using the first-in, first-out method. The reported net value of inventory
includes finished saleable products that will be sold or used in future periods. The Company reserves for obsolete and slow-moving
inventory. At September 30, 2020 and 2019, there were no reserves for obsolete and slow-moving inventory.
Property
and Equipment
Property
and equipment are recorded at cost, less accumulated depreciation. The Company provides for depreciation on a straight-line basis
over the estimated useful lives of the assets which range from three to seven years. Leasehold improvements are amortized over
the shorter of the lease term or the estimated useful life of the related assets when they are placed into service. The Company
evaluates property and equipment for impairment periodically to determine if changes in circumstances or the occurrence of events
suggest the carrying value of the asset or asset group may not be recoverable. Maintenance and repairs are charged to operations
as incurred. Expenditures which substantially increase the useful lives of the related assets are capitalized.
Long-lived
Assets
In
accordance with ASC 360, “Property, Plant, and Equipment”, the Company tests long-lived assets or asset groups
for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances
which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant
adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history
of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will
more likely than not be sold or disposed of significantly before the end of its estimated useful life. Recoverability is assessed
based on the carrying amount of the asset compared to the estimated future undiscounted cash flows expected to result from the
use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss equal to the
excess of the carrying value over the assets fair market value is recognized when the carrying amount exceeds the undiscounted
cash flows. The impairment loss is recorded as an expense and a direct write-down of the asset. No impairment loss was recorded
during the three and nine months ended September 30, 2020 and 2019, respectively.
Fair
Value of Financial Instruments and Fair Value Measurements
The
Company adheres to ASC 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. ASC 820 applies to reported balances that are required or permitted to be measured at fair value
under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported
balances.
ASC
820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement
should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis
for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes
between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable
inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market
participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
|
●
|
Level
1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the
ability to access.
|
|
|
|
|
●
|
Level
2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly
or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs
that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates,
and yield curves that are observable at commonly quoted intervals.
|
|
|
|
|
●
|
Level
3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions,
as there is little, if any, related market activity.
|
In
instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy,
the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input
that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The
Company had no instruments requiring such valuation as of September 30, 2020 and December 31, 2019.
Revenue
Recognition
The
Company recognizes revenues when product is delivered to the customer, and the ownership is transferred. The Company’s revenue
recognition policy is based on the revenue recognition criteria established under the Financial Accounting Standards Board –
Accounting Standards Codification 606 “Revenue From Contracts With Customers” which has established a five-step
process to govern contract revenue and satisfy each element is as follows: (1) Identify the contract(s) with a customer; (2) identify
the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance
obligations in the contract; and (5) recognize revenue when or as you satisfy a performance obligation. The Company records the
revenue once all the above steps are completed. See Note 7 for further information on revenue recognition.
Income
Taxes
The
Company accounts for income taxes following the asset and liability method in accordance with the ASC 740 “Income Taxes.”
Under such method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
The Company applies the accounting guidance issued to address the accounting for uncertain tax positions. This guidance clarifies
the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements as well as provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The Company classifies interest and penalty expense related
to uncertain tax positions as a component of income tax expense. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years that the asset is expected to be recovered or the liability settled.
A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be
realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period
in which related temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in its assessment of a valuation allowance.
During 2020, the Coronavirus Aid, Relief and Economic Security
Act (“CARES Act”) was passed, which temporarily removed 80% limitations on net operating loss carryforwards for the
years 2019 and 2020.
Stock
Based Compensation
The
Company accounts for stock-based compensation in accordance with ASC 718-10, “Share-Based Payment,” which requires
the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including
employee stock options, restricted stock units, and employee stock purchases based on estimated fair values. In addition, as of
January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2018-07, Compensation – Stock Compensation
(Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU simplified aspects of share-based compensation
issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. The adoption
of this guidance did not have a material impact on the financial statements.
The
Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula. This fair value is then
amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The
Company’s determination of fair value using an option-pricing model is affected by the stock price as well as assumptions
regarding the number of highly subjective variables.
The
Company estimates volatility based upon the historical stock price of the comparable companies and estimates the expected term
for employee stock options using the simplified method for employees and directors and the contractual term. The risk-free rate
is determined based upon the prevailing rate of United States Treasury securities with similar maturities.
The
Company recognizes forfeitures as they occur rather than applying a prospective forfeiture rate in advance.
Earnings
(Loss) Per Share
The
Company computes net earnings (loss) per share in accordance with ASC 260, “Earnings per Share”. ASC 260 requires
presentation of both basic and diluted net earnings per share (“EPS”) on the face of the statement of operations.
Basic EPS is computed by dividing earnings (loss) available to common shareholders (numerator) by the weighted average number
of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing
diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the
exercise of warrants, convertible preferred stock and convertible debentures. Diluted EPS excludes all dilutive potential shares
if their effect is anti-dilutive.
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net income (loss) computation
of basic and diluted net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
120,835
|
|
|
$
|
(2,689,342
|
)
|
|
$
|
(6,152,982
|
)
|
|
$
|
(2,181,707
|
)
|
Less: Redemption of
Series D Preferred Stock deemed dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,295,294
|
)
|
|
|
-
|
|
Less:
Common stock deemed dividend (inducement cost)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,137,190
|
)
|
Net
income (loss) attributable to common stockholders
|
|
$
|
120,835
|
|
|
$
|
(2,689,342
|
)
|
|
$
|
(7,448,276
|
)
|
|
$
|
(4,318,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss)
per common share
|
|
$
|
0.00
|
|
|
$
|
(0.87
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(2.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted
average common shares outstanding
|
|
|
38,414,631
|
|
|
|
3,084,456
|
|
|
|
23,154,481
|
|
|
|
1,906,179
|
|
Diluted
net income (loss) per common share
|
|
$
|
0.00
|
|
|
$
|
(0.87
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(2.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted
average common shares outstanding
|
|
|
38,414,631
|
|
|
|
3,084,456
|
|
|
|
23,154,481
|
|
|
|
1,906,179
|
|
Potentially
dilutive securities that are not included in the calculation of diluted net loss per share because their effect is anti-dilutive
are as follows as of September 30, (in common equivalent shares):
|
|
2020
|
|
|
2019
|
|
Warrants
|
|
|
21,925,102
|
|
|
|
1,183,877
|
|
Series A & B Notes
|
|
|
213,105
|
|
|
|
-
|
|
Options and restricted stock units
|
|
|
197,193
|
|
|
|
106,538
|
|
Total anti-dilutive weighted average shares
|
|
|
22,335,400
|
|
|
|
1,290,415
|
|
No
Segment Reporting
The
Company operates one reportable segment referred to as the tools segment. A single management team that reports to the Chief Executive
Officer comprehensively manages the business. Accordingly, the Company does not have separately reportable segments.
Recent
Accounting Pronouncements
As
an emerging growth company, the Company has elected to use the extended transition period for complying with any new or revised
financial accounting standards pursuant to Section 13(a) of the Securities and Exchange Act of 1934, as amended.
In
February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The objective of this update is to increase
transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and
disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2021,
and interim periods within fiscal years beginning after December 15, 2021 and is to be applied utilizing a modified retrospective
approach. The Company is currently evaluating this guidance to determine the impact it may have on its financial statements.
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (“Topic 326”)”. The ASU
introduces a new accounting model, the Current Expected Credit Losses model (“CECL”), which requires earlier recognition
of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement
objective for the recognition of credit losses at the time the financial asset is originated or acquired. ASU 2016-13 is effective
for annual period beginning after December 15, 2022, including interim reporting periods within those annual reporting periods.
The Company is currently evaluating this guidance to determine its impact it may have on its financial statements.
In
December 2019, the FASB Issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting of Income Taxes,”
which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to
the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance
is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption
permitted. The Company is currently evaluating this guidance to determine its impact it may have on its financial statements.
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts
in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required
under current GAAP. The ASU also removes certain settlement conditions that are required for equity contracts to qualify for the
derivative scope exception and simplifies the diluted earnings per share calculation in certain areas. The amendments in this
ASU are effective for annual and interim periods beginning after December 15, 2021, although early adoption is permitted. The
Company is in the process of evaluating the impact of this new guidance on its financial statements.
NOTE
3: FACTOR RECEIVABLES, LETTERS OF CREDIT PAYABLE AND LOAN PAYABLE
In
April 2013, the Company entered into a financing arrangement with a third-party purchase order financing company (the “Factor”),
whereby the Company assigned to the Factor selected sales orders from its customers in exchange for opening a letter of credit
(“LC”) with its vendors to manufacture its products. The Company paid an initial fixed fee of 5% of the cost of products
it purchased from the vendor upon opening the LC, and 1% each 30 days thereafter, after the LC is funded by the Factor until such
time as the Factor receives the payment from the Company’s customers. The factoring agreement provides for full recourse
against the Company for factored accounts receivable that are not collected by the Factor for any reason, and the collection of
such accounts receivable is fully secured by substantially all of the receivables of the Company. The factoring advances for the
LCs at September 30, 2020 and December 31, 2019 have been treated as a loan payable to third party in the accompanying balance
sheets, and total outstanding accounts receivable factored, net of allowance for sales returns, discounts and rebates of $13,000
as of September 30, 2020 and December 31, 2019, were $2,107,082 and $174,102, respectively.
NOTE
4: PROPERTY AND EQUIPMENT, NET
Property
and equipment consists of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Furniture
|
|
$
|
183,512
|
|
|
$
|
111,490
|
|
Computers
|
|
|
460,500
|
|
|
|
254,243
|
|
Production equipment
|
|
|
182,446
|
|
|
|
182,446
|
|
Automobile and transportation
|
|
|
412,509
|
|
|
|
-
|
|
Tooling and molds
|
|
|
1,515,400
|
|
|
|
605,485
|
|
Website design
|
|
|
477,238
|
|
|
|
360,943
|
|
Leasehold Improvements
|
|
|
42,249
|
|
|
|
42,249
|
|
Less: accumulated depreciation
|
|
|
(921,293
|
)
|
|
|
(526,971
|
)
|
Property and Equipment, net
|
|
$
|
2,352,561
|
|
|
$
|
1,029,885
|
|
Depreciation
and capitalized costs with respect thereto consists of the following:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Depreciation expense
|
|
$
|
176,691
|
|
|
$
|
55,741
|
|
|
$
|
394,322
|
|
|
$
|
157,652
|
|
NOTE
5 – COMMITMENTS AND CONTINGENCIES
On
January 3, 2017, the Company executed a non-cancellable operating lease for its principal office with the lease commencing February
1, 2017 for a five (5) year term. The Company paid a security deposit of $29,297. The lease required the Company to pay its proportionate
share of direct costs estimated to be 22.54% of the total property, a fixed monthly direct cost of $6,201 for each month during
the term of the lease, and monthly rental pursuant to the lease terms.
The
Company entered into a lease for office space at 8669 Research Drive, in Irvine, CA, which is to replace the current corporate
headquarters. The lease commenced on December 1, 2019 with no rent due until April 1, 2020. From April 1, 2020 through March 31,
2025, base rent will be due on the first of each month in the amount of $25,200 escalating annually on December 1 of each year
to $29,480 beginning December 1, 2023. The Company paid an initial amount of $68,128 comprising the rent for April 2020, a security
deposit and the amount due for property taxes, insurance and association fees.
On
August 30, 2018, the Company entered into an agreement with a customer to pay a slotting allowance of $1,000,000 payable in three
annual installments of $333,334 on March 1, 2019, $333,333 on March 1, 2020 and $333,333 on March 1, 2021.
Future
minimum lease and other commitments of the Company are as follows:
For the years ending
December 31,
|
|
Slotting Expenses
|
|
|
Building leases
|
|
|
Total
|
|
2020 (remaining)
|
|
|
-
|
|
|
|
121,984
|
|
|
|
121,984
|
|
2021
|
|
|
333,333
|
|
|
|
502,872
|
|
|
|
836,205
|
|
2022
|
|
|
-
|
|
|
|
371,077
|
|
|
|
371,077
|
|
2023
|
|
|
-
|
|
|
|
341,653
|
|
|
|
341,653
|
|
2024
|
|
|
-
|
|
|
|
358,085
|
|
|
|
358,085
|
|
Thereafter
|
|
|
-
|
|
|
|
89,521
|
|
|
|
89,521
|
|
|
|
$
|
333,333
|
|
|
$
|
1,785,192
|
|
|
$
|
2,118,525
|
|
The
Company recorded rent expense of $208,672 and $50,110 and $536,566 and $133,762 for the three and nine months ended September
30, 2020 and 2019, respectively. The Company recorded a slotting expense of $83,334 and $83,334 and $250,002 and $250,002 for
the three and nine months ended September 30, 2020 and 2019, respectively.
Employment
Agreements with Officers
On
January 3, 2017, the Company entered into an employment agreement with its President and Chief Executive Officer for a five-year
term. The officer received a sign-on-bonus of $50,000 and was entitled to an annual base salary of $350,000 to increase by 10%
each year commencing on January 1, 2018. The officer was also granted a stock option to purchase 125,000 shares of the Company’s
common stock at an exercise price of $10.00 per share.
On
January 3, 2017, the Company entered into an employment agreement with its Vice-President of Design and Development for a five-year
term. Under the terms of this agreement, the officer received a sign-on-bonus of $35,000 and is entitled to an annual base salary
of $250,000 beginning on December 1, 2016 to increase by 10% each year commencing on January 1, 2018.
On
January 3, 2017, the Company entered into an employment agreement with its Chief Operating Officer and Secretary for a three-year
term. Under the terms of this agreement, the officer is entitled to an annual base salary of $180,000 beginning on January 1,
2017 to increase by 10% each year commencing on January 1, 2018.
The
Company’s former Chief Financial Officer was appointed on June 14, 2019, with whom the Company entered into a verbal consulting
arrangement at $10,000 per month. Effective July 2, 2020 such former Chief Financial Officer resigned from the Company.
Effective
July 1, 2020, the Company and the interim Chief Financial Officer have agreed to a salary of $230,000 per annum.
The
employment agreements also entitle the officers to receive, among other benefits, the following compensation: (i) eligibility
to receive an annual cash bonus at the sole discretion of the Board and as determined by the Compensation Committee commensurate
with the policies and practices applicable to other senior executive officers of the Company; (ii) an opportunity to participate
in any stock option, performance share, performance unit or other equity based long-term incentive compensation plan commensurate
with the terms and conditions applicable to other senior executive officers and (iii) participation in benefit plans, practices,
policies and programs provided by the Company (including, without limitation, medical, prescription, dental, disability, employee
life, group life, accidental death and travel accident insurance plans and programs) to the extent available to the Company’s
other senior executive officers.
Litigation
Costs and Contingencies
From
time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of
business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time
to time that may harm business. Other than as set forth below, management is currently not aware of any such legal proceedings
or claims that could have, individually or in the aggregate, a material adverse effect on our business, financial condition, or
operating results.
Edwin
Minassian v. Michael Panosian and Toughbuilt Industries, Inc., Los Angeles Superior Court Case No. EC065533.
On
August 16, 2016, Plaintiff Edwin Minassian filed a complaint against Defendants ToughBuilt Industries, Inc. (the “Company”)
and Michael Panosian in the Superior Court of California, County of Los Angeles, Case No. EC065533. The complaint alleges breach
of oral contracts to pay Plaintiff for consulting and finder’s fees, and to hire him as an employee. The complaint further
alleged claims of fraud and misrepresentation relating to an alleged payment in exchange for stock in the Company. The complaint
seeks unspecified monetary damages, declaratory relief, stock in the Company, and other relief according to proof.
On
April 12, 2018, the Court entered judgments of default against the Company and Mr. Panosian in the amounts of $7,080 and $235,542,
plus awarding Mr. Minassian a 7% ownership interest in the Company (the “Judgments”). Mr. Minassian served notice
of entry of the judgments on April 17, 2018 and the Company and Mr. Panosian received notice of the entry of the default judgments
on April 19, 2018.
The
Company and Panosian satisfied the judgments on September 14, 2018 by payment of $252,949 to Plaintiff Minassian and by issuing
Plaintiff Minassian 376,367 shares of common stock of the Company. On October 18, 2018, the Company and Panosian filed a Notice
of Appeal from the Order denying their motion for relief from the above-referenced default judgment.
On
October 1, 2019, the Second Appellate District of the California Court of Appeal issued its opinion reversing the trial court’s
order denying Toughbuilt’s motion for relief from the default judgment and directing the trial court to grant Toughbuilt’s
motion for relief, including allowing Toughbuilt to file an Answer and contest Minassian’s claims.
The
appellate court recently issued a remittitur officially transferring the matter from the appellate court back to the trial court
for further proceedings consistent with its ruling, and the Company and Panosian have filed an Answer to the Complaint. The trial
court has not yet set a trial date, and discovery in this case is just now beginning. The Company intends to vigorously defend
the Complaint and seek to recover the compensation and stock previously paid to satisfy the now vacated default judgment. The
Company believes it has a strong position, but cannot quantify the likelihood that it will prevail in the above litigation, or
any likely liability or recoveries, because of the current status of the case and the unpredictability of litigation.
Minassian
seeks damages and stock based on a breach of an alleged oral agreement. Discovery is presently ongoing. In addition, Plaintiff
Minassaian is in violation of a court order for restitution and the Company is engaged in collection efforts to enforce that order.
A trial date has been set for June 8, 2021.
Design
1st v. Toughbuilt Industries, Inc., American Arbitration Association
On
November 26, 2019, Claimant Design 1st filed a Demand for Arbitration against Toughbuilt Industries seeking $169,094
in damages, plus attorney’s fees and costs. Claimaint contends the Company breached a written contract by failing to pay
for design services. ‘The Company filed a Cross-Demand for Arbitration against Claimant seeking $394,956 in damages, plus
attorney’s and costs alleging Claimant breached the same contract by performing negligent services, failing to meets its
obligations under the contract, and fraudulent billing. An arbitration hearing has not yet been scheduled by the arbitrator, Grant
Kim, and discovery has not yet commenced. The Company intends to vigorously defend the Demand for Arbitration. The Company believes
it has a strong position, but cannot quantify the likelihood that it will prevail in the above litigation, or any likely liability
or recoveries, because of the current status of the case and the unpredictability of litigation.
The
Company’s submission of its case brief outlining its claims and defense in full is due on December 11, 2020 . Design 1st’s
submission is due on January 9, 2021. The parties have the option to take depositions after January 9, 2021. The arbitration hearing
is scheduled for March 31-April 1, 2021.
Design
1st is seeking $169,094.35 based on a claim for breach of contract for failure to pay, and the Company seeks $394,956.07 on its
counter claim for breach of contract and fraud. The subject contract also contains an attorney’s fees clause providing that
the prevailing party is entitled to recover attorney’s fees and costs, the precise amount of which will not be known until
the prevailing party submits its attorney’s fees and costs during or following trial.
The
Company has recorded legal expense of $124,245 and $65,803 for the three months ended September 30, 2020 and 2019, respectively.
The Company has recorded legal expense of $299,869 and $136,024 for the nine months ended September 30, 2020 and 2019, respectively.
In
the normal course of business, the Company incurs costs to hire and retain external legal counsel to advise it on regulatory,
litigation and other matters. The Company expenses these costs as the related services are received. If a loss is considered and
the amount can be reasonable estimated, the Company recognizes an expense for the estimated loss.
NOTE
6: STOCKHOLDERS’ EQUITY (DEFICIT)
At
September 30, 2020 and December 31, 2019, the Company had 200,000,000 and 100,000,000 shares of common stock, respectively, and
5,000,000 shares of Series C preferred stock authorized, both with a par value of $0.0001 per share. In addition, as of September
30, 2020, the Company had 5,775 shares of Series D preferred stock, authorized, with a par value of $1,000 per share.
Common
Stock and Preferred Stock
On
January 24, 2019, the Company entered into an exchange agreement with two institutional investors pursuant to which these investors
exercised Series A Warrants to purchase 424,116 shares of its common stock for cash proceeds of $2,172,680 to the Company, net
of costs of $159,958. The two investors also exchanged Series A Warrants to purchase 508,940 shares of its common stock into 508,940
shares of its common stock and received new warrants to purchase an aggregate of 933,056 shares of its common stock. The Company
recognized an inducement cost of $0 and $2,137,190 for the Series A Warrants conversion for the nine months ended September 30,
2020 and 2019, respectively, as an offset against stockholders’ equity. The inducement cost was calculated as being the
difference between the fair value of equity instruments surrendered versus equity instruments issued pursuant to the terms of
the exchange agreement.
On
February 14, 2019, the Company received cash proceeds of $16,818 from three placement agent warrant holders upon their exercise
of 1,402 placement agent warrants to purchase 4,004 Class A Units, each Class A Unit consisting of one share of common stock and
a Series A Warrant and a Series B Warrant (“Class A Unit”). Each Series A Warrant is exercisable by the holder thereof
for one share of common stock at an exercise price of $36.70 for five years. The Series B Warrants have expired.
On
February 24, 2020, the Company closed on the public offering of 0.445 million shares of its common stock, for gross proceeds of
$912,250 based upon the overallotment option arising from the closing of its January 28, 2020 public offering. In the January
28, 2020 public offering, the Company sold 4.5 million shares of its common stock and 49.45 million warrants (each exercisable
into 1/20 of a share of common stock for a total of 2.4725 million shares of common stock) from which it received gross proceeds
of $9,472,250.
On
June 12, 2020, the Company closed on the public offering of 1.7 million shares of its common stock, for gross proceeds of $1,683,000
based upon the overallotment option arising from the closing of its June 2, 2020 public offering. In the June 2, 2020 public offering,
the Company sold 19 million shares of its common stock and 20.7 million warrants from which it received gross proceeds of $19,017,000.
During
the nine months ended September 30, 2020, 1,268 shares of Series C Preferred Stock converted into 126,800 shares of the Company’s
common stock and 3,563 shares of Series D Preferred Stock converted into 3,141,426 shares of the Company’s common stock.
During
the nine months ended September 30, 2020, $3,200,000 principal amount of Notes was converted into the Company’s
common Stock
During
2020, the Company granted 360,000 shares of common stock to consultants in consideration for services rendered.
As
of September 30, 2020 and December 31, 2019, the Company had 38,414,631 and 3,300,015 shares of common stock issued and outstanding,
respectively.
Warrants
Placement
Agent Warrants
The
Company has issued an aggregate of 24,758 warrants to the placement agents to purchase one share of its common stock per warrant
at an exercise price of $120 per share for 4,758 warrants and $10 for 20,000 warrants. The warrants issued in its October 2016
Private Placement shall expire on October 17, 2021, and the warrants issued in its March 2018 Private Placement, May 2018 Private
Placement and August 2018 Financing shall expire on September 4, 2023. The exercise price and number of shares of common stock
or other securities issuable on exercise of such warrants are subject to customary adjustment in certain circumstances, including
in the event of a stock dividend, recapitalization, reorganization, merger or consolidation of the Company.
As
of September 30, 2020, all placement agent warrants, issued prior to the August 19, 2019 financing had been exercised, and the
20,000 warrants issued in the August 19, 2019 financing are the only placement agent warrants which remain outstanding, which
have an exercise price of $10.
As
of September 30, 2020 and December 31, 2019, 20,000 warrants and 4,576 warrants, respectively, have been issued to the placement
agents and are outstanding and are currently exercisable.
Class
B Warrants
The
holders of the Class B Warrants did not exercise any of their warrants during the nine months ended September 30, 2020. Class
B Warrants have an exercise price of $120.00 per share and shall expire between October 17, 2021 and May 15, 2023.
As
of September 30, 2020 and December 31, 2019, the Company had 26,550 Class B Warrants issued and outstanding.
Series
A Warrants and Series B Warrants
On
January 24, 2019, the Company entered into an exchange agreement with two institutional investors pursuant to which these investors
exercised Series A Warrants to purchase 42,412 shares of the Company’s common stock for total cash proceeds of $2,172,680
to the Company, net of costs of $159,958. The two investors also exchanged Series A Warrants to purchase 50,894 shares of its
common stock into 50,894 shares of its common stock and received new warrants to purchase an aggregate of 933,056 shares of its
common stock. These new warrants have terms substantially similar to the terms of the Company’s Series A Warrants, except
that the per share exercise price of the new warrants is $36.70, and the warrants are not exercisable until July 24, 2019, the
six-month anniversary of the date of issuance. Each warrant expires on the fifth anniversary of the original issuance date.
As
of September 30, 2020 and December 31, 2019, the Company had 519,001 Series A Warrants issued and outstanding.
2020
Offering Warrants
In
the January 28, 2020 public offering, the Company sold 49.45 million warrants (each exercisable into 1/20 of a share of common
stock for a total of 2.4725 million shares of common stock).In the June 2, 2020 public offering, the Company sold 20.7 million
warrants (each exercisable into 1 share of common stock for a total of 20.7 million shares of common stock.) Each warrant expires
on the fifth anniversary of the original issuance date.
As
of September 30, 2020, the Company had 20,780,115 2020 Offering Warrants issued and outstanding.
The
2016 Equity Incentive Plan
The
2016 Equity Incentive Plan (the “2016 Plan”) was adopted by the Board of Directors and approved by the shareholders
on July 6, 2016. The awards per 2016 Plan may be granted through July 5, 2026 to the Company’s employees, consultants, directors
and non-employee directors provided such consultants, directors and non-employee directors render good faith services not in connection
with the offer and sale of securities in a capital-raising transaction. The maximum number of shares of our common stock that
may be issued under the 2016 Plan is 200,000 shares, which amount will be (a) reduced by awards granted under the 2016 Plan, and
(b) increased to the extent that awards granted under the 2016 Plan are forfeited, expire or are settled for cash (except as otherwise
provided in the 2016 Plan). No employee will be eligible to receive more than 12,500 shares of common stock in any calendar year
under the 2016 Plan pursuant to the grant of awards.
On January 3, 2017, the Board of Directors
of the Company approved and granted to the President/Chief Executive Officer of the Company, an option to purchase 12,500 shares
of the Company’s Common Stock (“Option”) under the Company’s 2016 Plan. The Option will have an exercise
price that is no less than $100.00 per share and will vest over four (4) years, with 25% of the total number of shares subject
to the Option vesting on the one (1) year anniversary of the date of grant and, the remainder vesting in equal installments on
the last day of each of the thirty-six (36) full calendar months thereafter. Vesting will depend on the Officer’s continued
service as an employee with the Company and will be subject to the terms and conditions of the 2016 Plan and the written Stock
Option Agreement governing the Option. As of December 31, 2018, the Company estimated the fair value of the options using the
Black-Scholes option pricing model was $448,861. The Company recorded compensation expense of $28,054 for each of the three months
ended September 30, 2020 and 2019, respectively. The Company recorded compensation expense of $84,161 for each of the nine
months ended September 30, 2020 and 2019. The key valuation assumptions used consist, in part, of the price of the Company’s
common stock of $3.060 at the issuance date; a risk-free interest rate of 1.72% and the expected volatility of the Company’s
common stock of 315.83% (estimated based on the common stock of comparable public entities). As of September 30, 2020, the unrecognized
compensation expense was $28,054 which will be recognized as compensation expense over 0.25 years.
The
2018 Equity Incentive Plan
Effective
July 1, 2018, the Board of Directors and the stockholders of the Company approved and adopted the Company’s 2018 Equity
Incentive Plan (the “2018 Plan”). The 2018 Plan supplements, and does not replace, the existing 2016 Equity Incentive
Plan. Awards may be granted under the 2018 Plan through June 30, 2023 to the Company’s employees, officers, consultants,
and non-employee directors. The maximum number of shares of our common stock that may be issued under the 2018 Plan is 3.5 million
(3,500,000) shares, which amount will be (a) reduced by awards granted under the 2018 Plan, and (b) increased to the extent that
awards granted under the 2018 Plan are forfeited, expire or are settled for cash (except as otherwise provided in the 2018 Plan).
Currently, no employee will be eligible to receive more than 350,000 shares of common stock (10% of authorized shares under the
2018 Plan) in any calendar year under the 2018 Plan pursuant to the grant of awards. When the Board first adopted the 2018 Plan
on July 1, 2018, there were 100,000 shares authorized for issuance under the 2018 Plan. On September 12, 2018, the Board of Directors
approved to increase the number of shares of common stock reserved for future issuance under the 2018 Plan from 100,000 shares
to 200,000 shares. On June 9, 2019, the Board of Directors approved to increase the authorized shares under the 2018 Plan to 2
million (2,000,000) shares. On February 14, 2020, the Board of Directors approved to increase the number of shares of common stock
reserved for future issuance under the 2018 plan to 3.5 million (3,500,000) shares. On September 14, 2018, 100,000 shares of common
stock underlying awards under the 2018 Plan were granted to the employees and officers, 25% vesting immediately on the date of
grant and 25% vesting each year thereafter on the three subsequent anniversaries of the grant date. The Company estimated the
fair value of the options using the Black-Scholes option pricing model was $1,241,417. The key valuation assumptions used consist,
in part, of the price of the Company’s common stock at $3.90 or $4.29 at the issuance date; a risk-free interest rate ranging
of 1.9% and the expected volatility of the Company’s common stock ranging from of 40% (estimated based on the common stock
of comparable public entities)
On
April 4, 2020, the Company granted 90,635 restricted stock units to two officers of the Company. These units have the following
vesting term: 33% on January 1, 2021, 34% on January 1, 2022 and 33% on January 1, 2023. The fair value of these units as of granted
date was $144,110 based upon the closing price of the Company’s stock.
The
Company recorded compensation expense of $(36,370) and $68,336 for the three months ended September 30, 2020 and 2019,
respectively. The Company recorded compensation expense of $231,512 and $222,089 for the nine months ended September 30,
2020 and 2019, respectively. As of September 30, 2020, the unrecognized compensation expense was $458,853 which will be recognized
as compensation expense over 2.28 years.
NOTE
7: REVENUE RECOGNITION AND RESERVE FOR SALES RETURNS AND ALLOWANCES
The
Company’s contracts with customers only include one performance obligation (i.e., sale of the Company’s products).
Revenue is recognized in the gross amount at a point in time when delivery is completed and control of the promised goods is transferred
to the customers. Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for those
goods. The Company’s contracts do not involve financing elements as payment terms with customers are less than one year.
Further, because revenue is recognized at the point in time goods are sold to customers, there are no contract asset or contract
liability balances. The Company does not disclose remaining performance obligations related to contracts with durations of one
year or less as allowed by the practical expedient applicable to such contracts.
The
Company disaggregates its revenues by major geographic region. See Note 8, Concentrations, Geographic Data, and Sales by Major
Customers, for further information.
The
Company accounts for fees paid to Amazon for products sold through its Amazon Stores as operating expense.
The
Company offers various discounts, pricing concessions, and other allowances to customers, all of which are considered in determining
the transaction price. Certain discounts and allowances are fixed and determinable at the time of sale and are recorded at the
time of sale as a reduction to revenue. Other discounts and allowances can vary and are determined at management’s discretion
(variable consideration). Specifically, the Company occasionally grants discretionary credits to facilitate markdowns and sales
of slow-moving merchandise, and consequently accrues an allowance based on historic credits and management estimates. Further,
the Company allows sales returns, consequently records a sales return allowance based upon historic return amounts and management
estimates. These allowances (variable consideration) are estimated using the expected value method and are recorded at the time
of sale as a reduction to revenue. The Company adjusts its estimate of variable consideration at least quarterly or when facts
and circumstances used in the estimation process may change. The variable consideration is not constrained as the Company has
sufficient history on the related estimates and does not believe there is a risk of significant revenue reversal.
The
Company also participates in cooperative advertising arrangements with some customers, whereby it allows a discount from invoiced
product amounts in exchange for customer purchased advertising that features the Company’s products. Generally, these allowances
range from 2% to 5% of gross sales and are generally based upon product purchases or specific advertising campaigns. Such allowances
are accrued when the related revenue is recognized. These cooperative advertising arrangements provide a distinct benefit and
fair value, and are accounted for as direct selling expenses.
Sales
commissions are expensed when incurred as the related revenue is recognized at a point in time and therefore, the amortization
period is less than one year. As a result, these costs are recorded as direct selling expenses, as incurred.
The
Company has also elected to adopt the practical expedient related to shipping and handling fees which allows the Company to account
for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead
of assessing such activities as performance obligations. Therefore, shipping and handling activities are considered part of the
Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred
The
Company’s reserve for sales returns and allowances amounted to $13,000 as of September 30, 2020 and December 31, 2019.
NOTE
8: CONCENTRATIONS
Concentration
of Purchase Order Financing
The
Company used a third-party financing company for the quarters ended September 30, 2020 and 2019, respectively, which provided
letters of credit to vendors for a fee against the purchase orders received by the Company for sale of products to its customers.
The letters of credit were issued to the vendors to manufacture Company’s products pursuant to the purchase orders received
by the Company.
Concentration
of Customers
For
the three and nine months ended September 30, 2020 and 2019, respectively, the Company had the following concentrations of customers:
|
|
Percentage of revenues for the
Three Months Ended
|
|
|
Percentage of revenues for the
Nine Months Ended
|
|
|
Percentage of accounts receivables as of
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Customer 1
|
|
|
14
|
%
|
|
|
17
|
%
|
|
|
16
|
%
|
|
|
21
|
%
|
|
|
14
|
%
|
|
|
7
|
%
|
Customer 2
|
|
|
5
|
%
|
|
|
20
|
%
|
|
|
10
|
%
|
|
|
33
|
%
|
|
|
3
|
%
|
|
|
16
|
%
|
Customer 3
|
|
|
11
|
%
|
|
|
14
|
%
|
|
|
15
|
%
|
|
|
6
|
%
|
|
|
4
|
%
|
|
|
21
|
%
|
Customer 4
|
|
|
49
|
%
|
|
|
0
|
%
|
|
|
30
|
%
|
|
|
0
|
%
|
|
|
56
|
%
|
|
|
0
|
%
|
Concentration
of Suppliers
For
the three and nine months ended September 30, 2020 and 2019, respectively, the Company had the following concentrations of suppliers:
|
|
Percentage of purchases for the
|
|
|
Percentage of purchases for the
|
|
|
Percentage of accounts
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
payable as of
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Supplier 1
|
|
|
30
|
%
|
|
|
19
|
%
|
|
|
26
|
%
|
|
|
17
|
%
|
|
|
20
|
%
|
|
|
16
|
%
|
Supplier 2
|
|
|
13
|
%
|
|
|
33
|
%
|
|
|
19
|
%
|
|
|
19
|
%
|
|
|
12
|
%
|
|
|
36
|
%
|
Supplier 3
|
|
|
13
|
%
|
|
|
15
|
%
|
|
|
13
|
%
|
|
|
17
|
%
|
|
|
8
|
%
|
|
|
11
|
%
|
Supplier 4
|
|
|
12
|
%
|
|
|
16
|
%
|
|
|
17
|
%
|
|
|
20
|
%
|
|
|
22
|
%
|
|
|
5
|
%
|
Supplier 5
|
|
|
4
|
%
|
|
|
11
|
%
|
|
|
5
|
%
|
|
|
10
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
Supplier 6
|
|
|
18
|
%
|
|
|
7
|
%
|
|
|
14
|
%
|
|
|
10
|
%
|
|
|
3
|
%
|
|
|
3
|
%
|
Concentration
of Credit Risk
The
Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company
has not experienced any losses in such accounts through September 30, 2020 and 2019. The Company’s bank balances exceeded
FDIC insured amounts at times during the three and nine months ended September 30, 2020 and 2019. The Company’s bank balance
exceeded the FDIC insured amounts as of September 30, 2020 by approximately $8.4 million.
Geographic
Concentration
For
the three and nine months ended September 30, 2020 and 2019, respectively, the Company had the following geographic concentrations:
|
|
Percentage of revenues for the
|
|
|
Percentage of revenues for the
|
|
|
Percentage of accounts
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
receivables as of
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Australia
|
|
|
2
|
%
|
|
|
10
|
%
|
|
|
3
|
%
|
|
|
9
|
%
|
|
|
1
|
%
|
|
|
7
|
%
|
Belgium
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
12
|
%
|
Canada
|
|
|
4
|
%
|
|
|
6
|
%
|
|
|
5
|
%
|
|
|
4
|
%
|
|
|
3
|
%
|
|
|
10
|
%
|
Germany
|
|
|
4
|
%
|
|
|
1
|
%
|
|
|
4
|
%
|
|
|
2
|
%
|
|
|
4
|
%
|
|
|
1
|
%
|
Russia
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
3
|
%
|
South Korea
|
|
|
0
|
%
|
|
|
7
|
%
|
|
|
4
|
%
|
|
|
7
|
%
|
|
|
0
|
%
|
|
|
5
|
%
|
United Kingdom
|
|
|
3
|
%
|
|
|
14
|
%
|
|
|
3
|
%
|
|
|
10
|
%
|
|
|
3
|
%
|
|
|
3
|
%
|
United States of America
|
|
|
85
|
%
|
|
|
59
|
%
|
|
|
80
|
%
|
|
|
67
|
%
|
|
|
89
|
%
|
|
|
59
|
%
|
NOTE
9: SENIOR SECURED CONVERTIBLE NOTES
On
August 19, 2019, the Company entered into a Securities Purchase Agreement with an institutional investor pursuant to which it
sold $11.5 million aggregate principal amount of promissory notes (at an aggregate original issue discount of 15%) to the investor
in a transaction exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. The first note (the
“Series A Note”) has a face amount of $6.72 million for which the investor paid $5 million in cash. The second note
(the “Series B Note” and with the Series A Note, collectively referred to as the “Notes”) has a principal
amount of $4.78 million for which the investor paid $4.78 million in the form of a full recourse promissory note issued by the
investor to the Company (the “Investor Note”) secured by $4.78 million in cash or cash equivalents of the investor
(i.e :an original issue discount of approximately 15% to the face amount of the Series B Note). No portion of the Series B Note
may be converted into shares of our common stock (the “Common Stock”) until the corresponding portion of the Investor
Note has been prepaid to the Company in cash, at which point in time such portion of the Series B Note shall be deemed “unrestricted”.
The Investor Note is subject to optional prepayment at any time at the option of the investor and mandatory prepayment, at the
Company’s option, subject to certain equity conditions, at any time 45 Trading Days after the effectiveness of a resale
registration statement (or otherwise the applicability of Rule 144 promulgated under the Securities Act of 1933, as amended).
Notwithstanding the foregoing, the Company may not effect a mandatory prepayment if the shares underlying the Series A Note and
the portion of the Series B Note that has become unrestricted exceeds 35% of the market capitalization of the Company.
During
the nine months ended September 30, 2020, the Company received $3,000,000 in connection with the Investor Note.
The
Notes are senior secured obligations of the Company secured by a lien on all assets of the Company, bear no interest (unless an
event default has occurred and is continuing) and mature on December 31, 2020. The Notes will be convertible at $1.00 into a fixed
number of shares (the “Conversion Shares”). The Notes are convertible at the Holder’s option, in whole or in
part, at any time after closing. The Conversion Price will be subject to adjustment for stock dividends, stock splits, anti-dilution
and other customary adjustment events.
The
Company shall repay the Principal Amount of the Notes in 12 installments, with the first installment starting on February 1, 2020
(each, an “Installment Date”). Installments 1-3 shall be 1/36th of the Principal Amount, Installments 4-6 shall be
1/18th of the Principal Amount and Installments 7-12 shall be 1/8th of the Principal Amount. The repayment amount shall be payable
in cash, or, subject to the satisfaction of equity conditions, at the option of the Company, in registered Common Stock or a combination
of cash and registered Common Stock. However, if the 30-day volume weighted average price of the Common Stock (the “VWAP”)
of the Company falls below 50% of the market price of a share of the Company’s common stock or the Company fails to satisfy
certain other equity conditions, the repayment amount is payable in shares of Common Stock only unless the Investor(s) waive any
applicable equity condition. If the Company elects to satisfy all or any portion of an installment in shares of Common Stock,
the Company will pre-deliver such shares of Common Stock to the investor on the 23rd trading day prior to the applicable Installment
Date, with a true-up of shares (if necessary) on the Installment Date. Any excess shares of Common Stock shall be applied to subsequent
installments.
The
shares used to meet a Principal Repayment (“Installment Shares”) would be valued at a conversion price calculated
as the lesser of (i) 85% of the arithmetic average of the three lowest daily VWAPs of the 20 trading days prior to the payment
date or (ii) 85% of the VWAP of the trading day prior to payment date (“Installment Price”) with a floor of $0.10.
All
amortization payments shall be subject to the Investors’ right to (a) defer some or all of any Installment Payment to a
subsequent Installment Date; and (b) at any time during an installment period, convert up to four times the installment amount
at the Installment Price; provided shares received pursuant to such accelerated conversions shall be subject to a leak-out provision
that solely limits sales of such shares received by the investor in such accelerated conversion (and not any other sales) to the
greater of (a) $500,000 per trading day or (b) 40% of the volume traded on a given day as reported by Bloomberg LP.
Upon
completion of a Change of Control, the Holders may require the Company to purchase any outstanding Notes in cash at 125% of par
plus accrued but unpaid interest. The Company shall have the right to redeem any and all amounts of the outstanding Note at 125%
of the greater of (a) Principal Amount plus accrued but unpaid interest (if any), or (b) Conversion Value plus accrued but unpaid
interest (if any) provided the Company has satisfied certain equity conditions. The Company must give the Investor(s) ninety (90)
business days’ prior notice of any such redemption.
Prior
to all outstanding amounts under the Note being repaid in full, the Company will not create any new encumbrances on any of its
or its subsidiaries’ assets without the prior written consent of the Lender, with a carve out for a working capital facility
of which the details are to be determined. The Notes shall also be subject to standard events of default and remedies therefor.
The
Company filed a registration statement (“Effectiveness Date”) on Form S-1 (file No: 333-233655) covering the resale
of the shares underlying the Series A Note, the Series B Note and Warrants which was declared effective by the SEC on October
15, 2019.
In
connection with the granting of the Notes, the Company shall issue detachable warrants to the Investor, exercisable in whole or
in part at any time during the five years from the date of issuance, in amount equal to 50% of the conversion shares underlying
the Notes and have an exercise price of $1.00 per share. To the extent the Company has a change of control or a spinoff, the warrants
provide for a put for the warrants to the Company at their Black- Scholes Valuation. The value of the warrants amounted to $575,000
and was recoded as debt discount in the accompanying balance sheet.
Until
the 3 year anniversary of the maturity date, the investor shall have the right (but not the obligation) to participate in 50%
of any subsequent equity or debt issuance. Consummation of the transaction has been subject to certain conditions precedent, including
the Company agrees to procure an approval of this transaction at its annual shareholder meeting scheduled no later than 180 days
after the Closing Date and agrees to procure voting agreements from principal shareholders prior to closing of the Company.
On
December 23, 2019, the Company entered into an exchange agreement with an institutional investor pursuant to which the investor
is exchanging $5.5 million principal amount of its August 19, 2019 Series A Senior Secured Note for 5,775 shares of its Series
D Preferred Stock, which was authorized by the Company’s Board of Directors on December 21, 2019.
During
the nine months ended September 30, 2020, $3,200,000 principal amount of Notes was converted into Common Stock.
As
of September 30, 2020, the principal amount of Notes amounted to $2,131,050, net of debt issuance costs of $185,985. As of December
31, 2019, the principal amount of Notes amounted to $5,602,750, net of debt issuance costs of $1,386,443.
NOTE
10: SUBSEQUENT EVENTS
Management
has evaluated subsequent events through November 6, 2020, the date which the condensed financial statements were issued noting
the following items that would impact the accounting for events or transactions in the current period or require additional disclosures.