Notes
to the Condensed Consolidated Financial Statements
March
31, 2021 and 2020
(Unaudited)
NOTE
1: NATURE OF OPERATIONS AND BASIS OF PRESENTATION
General
The
unaudited condensed consolidated financial statements of ToughBuilt Industries, Inc. (“ToughBuilt” or the “Company”)
as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 should be read in conjunction with the financial statements
for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020,
which was filed with the Securities Exchange Commission (“SEC”) on March 26, 2021 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 consolidated 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.
On
January 19, 2021, the Company filed a prospectus supplement dated January 15, 2021 (the “ATM Prospectus Supplement”) to the
shelf registration statement Form S-3 (File No. 333-251185) declared effective by the SEC on December 15, 2020 (the “First S-3”)
for the offer and sale shares of common stock having an aggregate value of $8,721,746 from time to time through H.C. Wainwright &
Co., LLC, as sales agent (“Wainwright”), pursuant to At The Market Offering Agreement, dated December 7, 2020 (the “ATM
Agreement”), between the Company and Wainwright. During January 2021, the Company has raised approximately $16,200,000 through
the sale of 14,962,139 million shares of the Company’s common stock.
On
February 2, 2021, the Company terminated the First S-3 and filed a second registration statement on Form S-3 (File No. 333-252630) (the
“Second S-3”) containing a base prospectus covering the offering, issuance and sale by the Company of up to $100,000,000
of the Company’s common stock, preferred stock, warrants and units; and a sales agreement prospectus covering the offering, issuance
and sale by us of up to a maximum aggregate offering price of $100,000,000 (which amount was included in the aggregate offering price
set forth in the base prospectus) of the Company’s common stock that may be issued and sold under a second At The Market Offering
Agreement, dated February 1, 2021, we entered into with Wainwright, as sales agent. The Second S-3 was declared effective by the SEC
on February 8, 2021. The Company terminated the First S-3 simultaneously with the filing of the Second S-3. As of the termination of
the First S-3, the Company had sold $19,763,121 through the sale of 18,616,339 shares of common stock.
During
February to March 2021, the Company has raised approximately $22,800,000 through the sale of 17,165,775 shares of the Company’s
common stock in connection with the Second ATM Agreement.
As
of March 31, 2021, the Company has sold an aggregate of 35,782,113 shares of common stock under the First S-3 and Second S-3 for gross
proceeds of $42,563,121.
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 March 31, 2021, the Company’s principal sources of liquidity consisted of approximately $32.5 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 consolidated 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 consolidated
financial statements requires management to make assumptions and estimates that impact the amounts reported. These interim condensed
consolidated 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 March 31, 2021 and 2020;
however, certain information and footnote disclosures normally included in our audited annual financial statements, as included in the
Company’s interim condensed consolidated 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, 2020.
Principles of Consolidation
The condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary, Toughbuilt Industries UK Limited. All intercompany balances and
transaction are eliminated.
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The preparation of condensed consolidated
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 consolidated 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 March 31, 2021 and December 31, 2020.
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 March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 2020.
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 March 31, 2021 and 2020, 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 months ended March 30, 2021 and 2020, 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 March 31, 2021 and December 31, 2020.
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.
The
Company adopted FASB ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting of Income Taxes,” as of January 1,
2021. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to
improve consistent application. The adoption of this guidance did not have a material impact on its financial statements.
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.
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
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Net loss computation of basic and diluted net loss per common share:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,053,659
|
)
|
|
$
|
(3,754,659
|
)
|
Less: Redemption of Series D Preferred Stock deemed dividend
|
|
|
-
|
|
|
|
(1,295,294
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(6,053,659
|
)
|
|
$
|
(5,049,953
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
Basic net loss per common share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.43
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
67,593,607
|
|
|
|
8,679,959
|
|
Diluted net loss per common share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.43
|
)
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
67,593,607
|
|
|
|
8,679,959
|
|
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 March 31, (in common equivalent shares):
|
|
2021
|
|
|
2020
|
|
Preferred shares
|
|
|
-
|
|
|
|
356,300
|
|
Warrants
|
|
|
16,516,562
|
|
|
|
1,274,102
|
|
Series A & B Notes
|
|
|
-
|
|
|
|
535,105
|
|
Options and restricted stock units
|
|
|
203,135
|
|
|
|
112,500
|
|
Total anti-dilutive weighted average shares
|
|
|
16,719,697
|
|
|
|
2,278,007
|
|
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
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.
In May 2021, the FASB issued ASU 2021-04, Earnings
per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives
and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), which clarifies and reduced diversity in an issuer’s accounting
for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified
modification or exchange. ASU 2021-04 is effective for annual periods beginning after December 15, 2021, including interim periods within
those annual reporting periods. The Company is currently evaluating this guidance to determine the impact it may have 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 March 31, 2021 and December 31, 2020 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 March 31, 2021 and December 31, 2020, were $1,040,820 and $807,648, respectively.
NOTE
4: PROPERTY AND EQUIPMENT, NET
Property
and equipment consists of the following:
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Furniture
|
|
$
|
316,969
|
|
|
$
|
183,672
|
|
Computers
|
|
|
690,238
|
|
|
|
586,749
|
|
Production equipment
|
|
|
272,182
|
|
|
|
182,446
|
|
Automobile and transportation
|
|
|
412,509
|
|
|
|
635,542
|
|
Tooling and molds
|
|
|
2,748,606
|
|
|
|
1,989,366
|
|
Application development
|
|
|
-
|
|
|
|
93,435
|
|
Website design
|
|
|
544,569
|
|
|
|
507,088
|
|
Leasehold Improvements
|
|
|
42,249
|
|
|
|
42,249
|
|
Office Construction
|
|
|
35,741
|
|
|
|
-
|
|
Development
|
|
|
543,435
|
|
|
|
-
|
|
|
|
|
5,606,498
|
|
|
|
4,220,547
|
|
Less: accumulated depreciation
|
|
|
(1,449,639
|
)
|
|
|
(1,153,623
|
)
|
Property and Equipment, net
|
|
$
|
4,156,859
|
|
|
$
|
3,066,924
|
|
Depreciation
and capitalized costs with respect thereto consists of the following:
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Depreciation expense
|
|
$
|
296,016
|
|
|
$
|
84,924
|
|
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,
|
|
Building leases
|
|
2021 (remaining)
|
|
$
|
377,813
|
|
2022
|
|
|
343,821
|
|
2023
|
|
|
341,653
|
|
2024
|
|
|
358,085
|
|
Thereafter
|
|
|
89,521
|
|
|
|
$
|
1,510,893
|
|
The
Company recorded rent expense of $216,550 and $206,088 for the three months ended March 31, 2021 and 2020, respectively. The Company
recorded a slotting expense of $83,334 and $83,334 for the three months ended March 31, 2021 and 2020, respectively.
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 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 ToughBuiltToughBuilt’s motion for relief from the default judgment and directing the trial court to grant ToughBuiltToughBuilt’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. Claimant 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 was due on December 11, 2020. Design 1st’s
submission was due on January 9, 2021. The parties have the option to take depositions after January 9, 2021. The arbitration hearing
occurred in April 2021, and the Company is currently awaiting the resolution.
Design
1st is seeking $169,094 based on a claim for breach of contract for failure to pay, and the Company seeks $394,956 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.
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
March 31, 2021 and December 31, 2020, the Company had 200,000,000 and 200,000,000 shares of common stock authorized, 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 March 31, 2021,
the Company had 5,775 shares of Series D preferred stock, authorized, with a par value of $1,000 per share. and 15 shares of Series E
Preferred Stock, par value $0.0010 per share, authorized.
Common
Stock and Preferred Stock
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
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
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.
On
January 19, 2021, the Company filed a prospectus supplement dated January 15, 2021 (the “ATM Prospectus Supplement”) to the
shelf registration statement Form S-3 (File No. 333-251185) declared effective by the SEC on December 15, 2020 (the “First S-3”)
for the offer and sale shares of common stock having an aggregate value of $8,721,746 from time to time through H.C. Wainwright &
Co., LLC, as sales agent (“Wainwright”), pursuant to At The Market Offering Agreement, dated December 7, 2020 (the “ATM
Agreement”), between the Company and Wainwright. During January 2021, the Company has raised approximately $16,200,000 through
the sale of 14,962,139 million shares of the Company’s common stock.
On
February 2, 2021, the Company filed a second registration statement on Form S-3 (File No. 333-252630) (the “Second S-3”)
containing a base prospectus covering the offering, issuance and sale by us of up to $100,000,000 of the Company’s common stock,
preferred stock, warrants and units; and a sales agreement prospectus covering the offering, issuance and sale by us of up to a maximum
aggregate offering price of $100,000,000 (which amount was included in the aggregate offering price set forth in the base prospectus)
of the Company’s common stock that may be issued and sold under a second At The Market Offering Agreement, dated February 1, 2021,
we entered into with Wainwright, as sales agent. The Second S-3 was declared effective by the SEC on February 8, 2021.
During
February to March 2021, the Company has raised approximately $22,800,000 through the sale of 17,165,775 shares of the Company’s
common stock in connection with the Second ATM Agreement.
As of March 31, 2021, the Company has the ability
to raise approximately $76,400,000 under the Second ATM Agreement.
As
of March 31, 2021, the Company has sold an aggregate of 35,782,113 shares of common stock under the First S-3 and Second S-3 for gross
proceeds of $42,563,121.
On
March 26, 2021, the Company filed with the Nevada Secretary of State a certificate of designation therein establishing the Series E Preferred
Stock consisting of fifteen (15) shares, and the Company issued nine (9) shares of such preferred stock to an institutional investor
pursuant to an exchange agreement, dated November 20, 2020, between the Company and the investor.
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 March 31, 2021, 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 March 31, 2021 and December 31, 2020, 20,000 warrants and 20,000 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 three months ended March 31, 2021. 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 March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 2020, 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. During 2021, 5,408,540 warrants were converted to common stock.
As
of March 31, 2021, the Company had 15,371,574 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 $28,154 for the
three months ended March 31, 2020. 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 March 31, 2021, there was no unrecognized compensation
expense.
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 $81,537 and $68,336 for the three months ended March 31, 2021 and 2020, respectively. As of
March 31, 2021, the unrecognized compensation expense was $295,779 which will be recognized as compensation expense over 1.78 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
During
2020, the Company incurred costs to obtain a contract. Such costs amounted to $853,412. The Company expects to recover those costs through
future revenue during the period of the contract. The Company is amortizing these costs over one year which is the stated term of the
contract. As of March 31, 2021, the remaining capitalized contract costs amounted to $425,706.
The
Company’s reserve for sales returns and allowances amounted to $13,000 as of March 31, 2021 and December 31, 2020.
NOTE
8: CONCENTRATIONS
Concentration
of Purchase Order Financing
The
Company used a third-party financing company for the quarters ended March 31, 2021 and 2020, 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 months ended March 31, 2021 and 2020, respectively, the Company had the following concentrations of customers:
|
|
|
Percentage of revenues for the
Three Months Ended
|
|
|
Percentage of accounts receivables as of
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Customer 1
|
|
|
|
37
|
%
|
|
|
0
|
%
|
|
|
60
|
%
|
|
|
0
|
%
|
Customer 2
|
|
|
|
17
|
%
|
|
|
26
|
%
|
|
|
6
|
%
|
|
|
9
|
%
|
Customer 3
|
|
|
|
10
|
%
|
|
|
21
|
%
|
|
|
7
|
%
|
|
|
36
|
%
|
Customer 4
|
|
|
|
8
|
%
|
|
|
18
|
%
|
|
|
9
|
%
|
|
|
17
|
%
|
Customer 5
|
|
|
|
6
|
%
|
|
|
5
|
%
|
|
|
7
|
%
|
|
|
15
|
%
|
Concentration
of Suppliers
For
the three months ended March 31, 2021 and 2020, respectively, the Company had the following concentrations of suppliers:
|
|
Percentage of purchases for the
|
|
Percentage of accounts
|
|
|
|
Three Months Ended
|
|
payable as of
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
2021
|
|
|
2020
|
|
Supplier 1
|
|
|
51
|
%
|
|
11
|
%
|
|
8
|
%
|
|
|
29
|
%
|
Supplier 2
|
|
|
24
|
%
|
|
0
|
%
|
|
0
|
%
|
|
|
14
|
%
|
Supplier 3
|
|
|
11
|
%
|
|
21
|
%
|
|
16
|
%
|
|
|
6
|
%
|
Supplier 4
|
|
|
10
|
%
|
|
10
|
%
|
|
8
|
%
|
|
|
6
|
%
|
Supplier 5
|
|
|
0
|
%
|
|
22
|
%
|
|
16
|
%
|
|
|
0
|
%
|
Supplier 6
|
|
|
0
|
%
|
|
16
|
%
|
|
12
|
%
|
|
|
0
|
%
|
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 March 31, 2021 and 2020. The Company’s bank balances exceeded FDIC insured
amounts at times during the three months ended March 31, 2021 and 2020. The Company’s bank balance exceeded the FDIC insured amounts
as of March 31, 2021 by approximately $32.2 million.
Geographic
Concentration
For
the three months ended March 31, 2021 and 2020, respectively, the Company had the following geographic concentrations:
|
|
|
Percentage of revenues for the
|
|
|
Percentage of accounts
|
|
|
|
|
Three Months Ended
|
|
|
receivable as of
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Australia
|
|
|
|
0
|
%
|
|
|
3
|
%
|
|
|
0
|
%
|
|
|
4
|
%
|
Canada
|
|
|
|
4
|
%
|
|
|
11
|
%
|
|
|
4
|
%
|
|
|
11
|
%
|
Europe
|
|
|
|
3
|
%
|
|
|
7
|
%
|
|
|
3
|
%
|
|
|
7
|
%
|
USA
|
|
|
|
92
|
%
|
|
|
81
|
%
|
|
|
92
|
%
|
|
|
80
|
%
|
Other
|
|
|
|
1
|
%
|
|
|
-2
|
%
|
|
|
1
|
%
|
|
|
-2
|
%
|
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
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 year ended December 31, 2020, the Company received $3,000,000 in connection with the Investor Note. Also, during the year ended December
31, 2020, $3,200,000 principal amount of Notes was converted into common stock.
On
November 20, 2020, the Company and the investor entered into an exchange agreement (the “Exchange Agreement”) whereas the
investor exchanged the balance of $2,131,050 of outstanding Notes for the following: an aggregate cash payment of $744,972, an aggregate
of 1,850,000 shares of the Company’s common stock, a warrant to purchase up to an aggregate of 575,000 shares of the Company’s
common stock for $1.00 per share, and nine shares of Series E Non-Convertible Preferred Stock of the Company. The Series E Preferred
Stock has not yet been issued. In addition, the Company relinquished their note receivable of $1,480,000 owed from the investor. As a
result of this transaction, the Company recorded a loss of $1,810,712.
During
April 2020, the Company entered into a promissory note with an approved lender in the principal amount of $399,300. The note was approved
under the provisions of the Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”) and the terms of the Paycheck
Protection Program of the U.S. Small Business Administration’s 7(a) Loan Program (“PPP Loan”). The Company repaid the
PPP Loan in full during June 2020.
NOTE
10: SUBSEQUENT EVENTS
Management has evaluated subsequent events through
May 17, 2021, the date which the condensed consolidated financial statements were issued noting that there were no events
or transactions that would impact the accounting for events or transactions in the current period or require additional disclosures.