ToughBuilt Industries (TBLT) 10-K2023 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2023

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ until ______

Commission File Number: 001-38739

TOUGHBUILT INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code (949) 528-3100

Securities registered under Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit post such files).

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☒

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

The aggregate market value of the Registrant’s common stock, held by non-affiliates of the Registrant as of June 30, 2023 (which is the last business day of Registrant’s most recently completed second fiscal quarter) based upon the reported closing price of $19.44 per share on the Over-The-Counter Market on that date, was approximately $7,749,742. Solely for purposes of this calculation, the officers and directors and holders of five percent (5%) of any class of voting securities of the Company are considered affiliates.

As of December 20, 2024, the Registrant had 1,443,125 shares of common stock, par value $0.0001 per share, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

TABLE OF CONTENTS

In this Annual Report on Form 10-K, unless otherwise stated or as the context otherwise requires, references to “ToughBuilt Industries, Inc.,” “ToughBuilt Industries,” “ToughBuilt,” the “Company,” “we,” “us,” “our” and similar references refer to ToughBuilt Industries, Inc., a Nevada corporation formerly known as Phalanx, Inc. Our logo and other trademarks or service marks of the Company appearing in this Annual Report on Form 10-K are the property of ToughBuilt Industries, Inc. This Annual Report on Form 10-K also contains registered marks, trademarks, and trade names of other companies. All other trademarks, registered marks, and trade names appearing in this Annual Report on Form 10-K are the property of their respective holders.

Cautionary Note Regarding Forward-Looking Statements and Industry Data

This Annual Report on Form 10-K, in particular, Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements represent our expectations, beliefs, intentions, or strategies concerning future events, including, but not limited to, any statements regarding our assumptions about financial performance; the continuation of historical trends; the sufficiency of our cash balances for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future of the industry in which we operate, all of which were subject to various risks and uncertainties.

When used in this Annual Report on Form 10-K and other reports, statements, and information we have filed with the Securities and Exchange Commission (“SEC”), in our press releases, presentations to securities analysts or investors, in oral statements made by or with the approval of an executive officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to identify such forward-looking statements. However, any statements contained in this Annual Report on Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. These statements are only predictions. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Any or all of our forward-looking statements in this document may turn out to be wrong. Actual events or results may differ materially. Our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties, and other factors.

This Annual Report on Form 10-K also contains estimates, projections, and other information concerning our industry, business, and particular markets, including data regarding the estimated size of those markets. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, general publications, government data, and similar sources.

PART I

Item 1. Description of Business.

Overview

ToughBuilt Industries, Inc. was formed to design, manufacture, and distribute innovative tools and accessories for the building industry. We market and distribute various home improvement and construction product lines for both Do-It-Yourself and professional markets under the TOUGHBUILT® brand name within the global multibillion-dollar per year tool market. All of our products are designed by our in-house design team. Since our initial product sales launch ten years ago, we have experienced annual sales growth from approximately $1 million in 2013, to approximately $76 million in 2023.

Our business is currently based on the development of innovative and state-of-the-art products, primarily in tools and hardware category, with a particular focus on building and construction industry with the ultimate goal of making life easier and more productive for contractors and workers alike.

Our three major categories contain a total of 22 product lines, consisting of (i) Soft Goods, which includes kneepads, tool bags, pouches, and tool belts; (ii) Metal Goods, which consists of sawhorses, tool stands and workbench; and (iii) Utility Products, which includes utility knives, aviation snips, shears, lasers, and levels. We also have several additional categories and product lines in various stages of development.

We design and manage our product life cycles through a controlled and structured process. We involve customers and industry experts from our target markets in the definition and refinement of our product development. Product development emphasis is placed on meeting and exceeding industry standards and product specifications, ease of integration, ease of use, cost reduction, design-for manufacturability, quality, and reliability.

Our mission consists of providing innovative, superior-quality products to the building and home improvement communities derived in part from enlightened creativity for our end users while enhancing performance, improving well-being, and building high brand loyalty.

We operate through the following subsidiaries: (i) ToughBuilt Industries UK Limited; (ii) ToughBuilt Mexico; (iii) ToughBuilt Armenia, LLC; (iv) ToughBuilt Columbia, and (iv) ToughBuilt Brazil. 

Corporate History

We were incorporated in the State of Nevada on April 9, 2012, as Phalanx, Inc. On December 29, 2015, we changed our name to ToughBuilt Industries, Inc. On September 18, 2018, we effected a 1-for-2 reverse stock split of our common stock. We consummated our initial public offering pursuant to a registration statement on Form S-1 (File No: 333-226104) declared effective by the SEC on November 8, 2018, and become an SEC Exchange Act reporting company pursuant to a Form 8-A (File No. 001-38739) on November 8, 2018. On April 25, 2022, we effected a 1-for-150 reverse stock split of our common stock. On January 2, 2024, we effected a 1-for-65 reverse stock split of our common stock. All share amounts and dollar amounts have been adjusted for the reverse stock splits.

Recent Developments

To maintain its prior listing with the Nasdaq, the Company effected a reverse stock split of its outstanding common stock on a one (1) share for sixty-five (65) shares basis, rounding up for fractional shares, and our common stock commenced trading on a post-reverse stock split basis at market open on January 2, 2024. Unless otherwise indicated, the share and per share information in this report reflects our prior reverse stock splits, including the 1-for-65 stock split. The authorized number and par value of our common stock did not change as a result of the reverse stock split.

Subsequent Events

On April 25, 2024, we filed a Form 8-K with the SEC, disclosing that we received a delinquency notice from Nasdaq on April 19, 2024, informing us that we were not in compliance with Nasdaq Listing Rule 5250(c)(1) due to our failure to file this Annual Report by the prescribed due date.

On May 22, 2024, we filed a Form 8-K with the SEC, disclosing that we received an additional delinquency notice in connection with our failure to file our quarterly report on Form 10-Q for the fiscal quarter ended on March 31, 2024, and Nasdaq required us to submit a plan by June 18, 2024 to regain compliance with respect to the late Form 10-K and Form 10-Q.

On June 12, 2024, we submitted our plan to Nasdaq to regain its compliance. If Nasdaq accepts our plan, we will have up to 180 days from the due date of the delinquent Form 10-K, or October 14, 2024 to file our delinquent Form 10-Qs. If Nasdaq does not accept the plan, we could request a hearing. It is not guaranteed that Nasdaq will accept our plan or grant an exception, and compliance with other listing requirements cannot be guaranteed.

On August 7, 2024, we notified The Nasdaq Stock Market LLC that the Company was voluntarily withdrawing its appeal to the Nasdaq Hearings Panel. Although the Company was earlier notified by Nasdaq on August 7, 2024, that it had regained compliance with the majority independent board and various board committee requirements, specifically under Nasdaq Listing Rules 5605(b), 5605(c)(2)(A)(i) and (ii), 5605(d)(2)(A) and 5605(e)(1), the Company remained subject to delisting based on its continued non-compliance with Nasdaq’s filing requirement, as set forth in Nasdaq Listing Rule 5250(c)(1), and due to concerns raised by the Staff regarding the independence of a former director pursuant to Nasdaq Rule 5101 and IM-5101-1. As a result of the Company’s voluntary withdrawal, by separate notice dated August 7, 2024, Nasdaq notified the Company that trading of the Company’s common stock on Nasdaq would be suspended effective with the open of business on Friday, August 9, 2024. On September 20, 2024, Nasdaq filed a Form 25 Notification of Delisting with the Securities and Exchange Commission (the “SEC”).

The Company is diligently working on the preparation and filing of its Form 10-Qs for the quarters ending March 31, 2024, June 30, 2024, and September 30, 2024, respectively. The Company is committed to ensuring that this filing is completed in a timely and accurate manner, with the goal of meeting all regulatory requirements and deadlines. The efforts to finalize this filing are ongoing, and the Company is focused on ensuring that all necessary documentation and financial statements are prepared in accordance with applicable accounting standards and regulations. The Company is committed to maintaining transparency and compliance with applicable reporting requirements.

2023 Business Developments

The following highlights material business developments in our business during the fiscal year ended December 31, 2023:

Our Products

We create innovative products that help our customers build faster, build stronger, and work smarter. We accomplish this by listening to what our customers want and need and researching how professionals work; then we create tools that help them save time, hassle, and money.

TOUGHBUILT® manufactures and distributes an array of high-quality and rugged tool belts, tool bags, and other personal tool organizer products. We also manufacture and distribute a complete line of knee pads for various construction applications and a variety of metal goods, including utility knives, aviation snips and shears, and digital measures such as lasers and levels. Our line of job site tools and material support products consists of a full line of miter saw and table saw stands, sawhorses/job site tables, roller stands and workbench. Our products are designed and engineered in the United States and manufactured in China, India, and the Philippines under our supervision of quality control. We do not need government approval for any of our products.

Our soft-sided tool storage line is designed for a wide range of Do-It-Yourself and professional needs. This line of pouches and tool and accessories bags is designed to organize our customers’ tools faster and easier. Interchangeable pouches clip on and off any belt, bag ladder wall, or vehicle. Our products let our customers carry what they want so they have it when they want it. ToughBuilt wide-mouth tool carry-all bags come in sizes from 12 inches to 30 inches. They all have steel-reinforced handles and padded shoulder straps, allowing massive loads to be easily carried. Rigid plastic hard-body lining protects everything inside. Double mesh pockets are included inside to provide complete visibility for stored items. They include a lockable zipper for added security and safety and secondary side handles for when it takes more than one to carry the load.

These products have innovative designs with unique features that provide extra functionality and enhanced user experience. Patented features such as our exclusive “Cliptech” mechanism incorporated in some of the products in this line are unique in these products for the industry and have distinguished the line from other similarly situated products; thus, we believe there is an increasing appeal among the different products of this category in the professional community and among the enthusiasts.

Soft Goods

The flagship of the product line is the soft goods line, consisting of over 100 variations of tool pouches, tool rigs, tool belts and accessories, tool bags, totes, a variety of storage solutions, and office organizers/bags for laptop/tablet/cellphones, etc. Management believes that the breadth of the line is one of the deepest in the industry and has specialized designs to suit professionals from all industry sectors, including plumbers, electricians, framers, builders, and more.

We have a selection of over ten models of kneepads, some with revolutionary and patented design features that allow the users to interchange components to suit particular conditions of use. Management believes these kneepads are among the best-performing kneepads in the industry. Our “all-terrain” knee pad protection with snap shell technology is part of our interchangeable kneepad system, which helps to customize the job site needs. They are made with superior quality using multilevel layered construction, heavy-duty webbing, and abrasion-resistant PVC rubber.

Metal Goods

Sawhorses and Work Support Products

The second major category consists of Sawhorses and Work Support products with unique designs and robust construction targeted for the most discerning users in the industry. The innovative designs and construction of more than 18 products in this category have led to the sawhorses becoming among the best sellers of the category everywhere they are sold. The newest additions in this category include several stands and work support products that are quickly gaining recognition in the industry and are expected to position themselves in the top-tier products in a short time. Our sawhorse line, miter saw, table saw & roller stands, and workbench are built to very high standards. Our sawhorse/jobsite table is fast to set up, holds 2,400 pounds, has adjustable heights, is made of all-metal construction, and has a compact design. We believe that these lines of products are slowly becoming the standard in the construction industry.

All of our products are designed in-house to achieve features and benefits for the professional construction worker and the Do-It-Yourself person.

Electronic Goods

Digital measures and levels  

TOUGHBUILT’s third major product line is digital measures and levels. These digital measures are targeted toward PROs for accurate job site measuring to ensure the job is done right and on time. These digital measures help calculate the amount of construction products needed to finish the job, such as measuring floors, tiles, and paint.

Below is just a sample of our products offered:

Tool Belt Sets		Contractor Pouches
Padded Belts		Laptop Bags
Bags & Totes		Rolling Bags

Saw Horses		Knee Pads
Utility Knives and Other Tools		Levelers and Measuring Tools

StackTech™ 

In October 2023, we launched our StackTech™ product line with an initial rollout of over 25 SKUs. StackTech™ is an intuitive modular storage toolbox system, and StackTech™ is the world’s first auto-locking stacking tool storage solution with 14 unique features.

Our Business Strategy

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

We will continue considering other market opportunities while focusing on our customers’ specific requirements to increase sales.

Market

In addition to the construction market, our products are marketed to the “Do-It-Yourself” and home improvement marketplace. The home improvement industry has fared much better after the Great Recession than the housing market. The U.S. housing stock of more than 130 million homes requires regular investment merely to offset normal depreciation. And many households that might have traded up to more desirable homes during the downturn decided instead to make improvements to their current homes. Meanwhile, federal and state stimulus programs encouraged homeowners and rental property owners to invest in energy-efficient upgrades that they might otherwise have deferred. Finally, many rental property owners reinvested in their units, responding to a surge in demand from households either facing foreclosure or nervous about buying amid the housing market uncertainty.

TOUGHBUILT® products are available worldwide in many major retailers, ranging from home improvement and construction products and services stores to major online outlets. Currently, we have placement in Lowes, Home Depot, Menards, Bunnings (Australia), Princess Auto (Canada), Dong Shin Tool PIA (S. Korea), and others, as well as seeking to grow our sales in global markets such as Western and Central Europe, Russia and Eastern Europe, South America and the Middle East.

Retailers by region include:  

We are actively expanding into other markets, including South Africa.

We are currently in product line reviews and discussions with Home Depot Canada, Do It Best, True Value, and other major retailers both domestically and internationally. A product line review requires the supplier to submit a comprehensive proposal that includes product offerings, prices, competitive market studies, relevant industry trends, and other information. Within the near term, management anticipates adding three major retailers to its customer base, along with several distributors and private retailers within six sectors and fifty-six targeted countries.

Innovation and Brand Strength

Management believes that ToughBuilt’s robust capabilities eclipse those of many competitors. Not every distributor or factory has the ability to quickly identify industry and end-user opportunities and execute quickly to deliver winning product lines consistently. Also, in our view, most distributors and factories do not have a recognizable and reputable brand or the proven ability to reach major retailers globally to position their products and brands. We believe that we are able to take a design from concept to market within a very short period of time.

Product and Services Diversification

TOUGHBUILT® is a singular brand with a driven team that is poised to scale into a highly recognized global entity. In the next few years, we aim to grow ToughBuilt with several significant subsidiaries to become the hub/platform for professionals, Do-It-Yourselfers, and passionate builders everywhere. Management anticipates future subsidiaries focusing on licensing, gear, mobile, equipment rentals, and maintenance services.

New Products

Tools

In 2022, we launched the following product lines:

In 2022, we launched the following tools:

In 2023, we launched the following product lines:

Mobile Device Products

Since 2013, we have been planning, designing, engineering, and sourcing the development of a new line of ToughBuilt mobile devices and accessories for the construction industry and building enthusiasts. However, due to microchip shortages, we have currently suspended this segment and put it on hold and will continue developing it in the near future. 

Sales Strategy

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

Suppliers

We use several suppliers to produce our products. We believe that we could retain other suppliers in the event of a slow-down or loss of one or more of its current suppliers without a material adverse effect on our business operations, timeliness of delivery, or quality of products.

Intellectual Property  

We hold several patents and trademarks of various durations and believe that we hold, have applied for, or license all of the patents, trademarks, and other intellectual property rights necessary to conduct our business. We utilize trademarks (licensed and owned) on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, identifying our brands and our Company, and distinguishing our goods from those of others. We consider our ToughBuilt^®, Cliptech^®, and Fearless^® trademarks among our most valuable intangible assets. Trademarks registered both in and outside the U.S. are generally valid for ten years, depending on the jurisdiction, and are generally subject to an indefinite number of renewals for a like period on appropriate application.

In 2019, the United States Patent and Trademark Office (USPTO) granted two new design patents (U.S. D840,961 S and US D841,635 S) that cover ToughBuilt’s ruggedized mobile devices, which are valid for a period of 15 years. We also have several patents pending with the USPTO and anticipate three or four of them to be granted in the near future.

We also rely on trade secret protection for confidential and proprietary information relating to our product designs and processes. Copyright protection is also utilized when appropriate.

Domain names are valuable corporate assets for companies around the world, including ToughBuilt. They often contain a trademark, service mark, or even a corporate name and are often considered intellectual property. Our core strengths are the recognition and value of the ToughBuilt name, trademark, and domain name.

We have entered into and will continue to enter into confidentiality, non-competition, and proprietary rights assignment agreements with our employees and independent contractors and with our suppliers to protect our intellectual property.

We have not entered into any royalty agreements concerning our intellectual property.

Competition

The tool equipment and accessories industry is highly competitive worldwide. We compete with a significant number of other tool equipment and accessories manufacturers and suppliers to the construction, home improvement, and Do-It-Yourself industry, many of which have the following:

Our competitors’ greater capabilities in the above areas enable them to better differentiate their products from ours, gain stronger brand loyalty, withstand periodic downturns in the construction and home improvement equipment and product industries, compete effectively based on price and production, and more quickly develop new products. These and other industry-wide downward pressures on gross margins can adversely affect our financial condition and operating results. Principal competitive factors important to us include price, product features, relative price/performance, product quality and reliability, design innovation, marketing and distribution capability, service and support, and corporate reputation.

Seasonality

Our company’s revenues are not seasonal. However, we usually experience a spike in sales when introducing new products.

Human Capital Resources

As of December 31, 2023, we had 165 employees, including our four executive officers and eight independent contractors and consultants. We engage consultants on an as-needed basis to supplement existing staff. Our employees, consultants, and contractors involved with sensitive and proprietary information have signed non-disclosure agreements. Since the onset of the COVID-19 pandemic, we have taken an integrated approach to helping our employees manage their work and personal responsibilities, with a strong focus on employee well-being, health, and safety.

Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing, and integrating our existing and new employees, advisors, and consultants. The principal purposes of our equity and cash incentive plans are to attract, retain, and reward personnel through the granting of stock-based and cash-based compensation awards to increase stockholder value and the success of our Company by motivating such individuals to perform to the best of their abilities and achieve our objectives.

Available Information

Our website address is www.toughbuilt.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, any amendments to those reports, and proxy and registration statements filed or furnished with the SEC are available free of charge through our website. We make these materials available through our website as soon as reasonably practicable after we electronically file such materials with or furnish such materials to the SEC. The reports filed with the SEC by our executive officers and directors pursuant to Section 16 under the Exchange Act are also made available, free of charge, on our website as soon as reasonably practicable after copies of those filings are provided to us by those persons. These materials can be accessed through our website’s “Investor Relations” section. The information contained in, or that can be accessed through, our website is not part of this Annual Report on Form 10-K.

Item 1A. Risk Factors.

Our business is subject to many risks and uncertainties, which may affect our future financial performance. If any of the events or circumstances described below occur, our business and financial performance could be adversely affected, our actual results could differ materially from our expectations, and our stock price could decline. The risks and uncertainties discussed below are not the only ones we face. There may be additional risks and uncertainties not currently known to us or that we currently do not believe are material that may adversely affect our business and financial performance. Before making an investment decision, you should carefully consider the risks described below and all other information included in this report, including our financial statements and related notes. The statements in this report that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occur, our business, financial condition, or results of operations could be harmed. In that case, the trading price of our common stock could decline, and investors in our securities may lose all or part of their investment.

Risks Related to Our Company

There is substantial doubt about our ability to continue as a going concern. 

We have incurred substantial operating losses since our inception. As reflected in the consolidated financial statements, we had an accumulated deficit of approximately $191.4 million at December 31, 2023 a net loss of approximately $46.4 million, and approximately $5.1 million of net cash used in operating activities for the year ended December 31, 2023. The accompanying consolidated financial statements in this Annual Report on Form 10-K have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As such, we believe that we will need additional financing to fund our operations and develop and commercialize our technology. Also, we will seek to obtain additional capital through debt or sale of equity financing or other arrangements to fund operations; however, there can be no assurance that we will be able to raise needed capital under acceptable terms, if at all. The sale of additional equity may dilute existing stockholders, and newly issued shares may contain senior rights and preferences compared to currently outstanding shares of common stock. Issued debt securities may contain covenants and limit our ability to pay dividends or make other distributions to stockholders. If we cannot obtain such additional financing, future operations will need to be scaled back or discontinued. Due to these factors, management believes that there is substantial doubt in our ability to continue as a going concern for the twelve months from the issuance of these consolidated financial statements.

We will require additional capital in order to achieve commercial success and, if necessary, to finance future losses from operations as we endeavor to build revenue, but we do not have any commitments to obtain such capital and we cannot assure you that we will be able to obtain adequate capital as and when required.

We may not be able to generate any profit in the foreseeable future. For the year ended December 31, 2023, we reported a net loss of $46.4 million, compared to a net loss of $39.3 million for the year ended December 31, 2022. Accordingly, there is no assurance that we will realize profits in fiscal 2024 or thereafter. If we fail to generate profits from our operations, we will not be able to sustain our business. We may never report profitable operations or generate sufficient revenue to maintain our Company as a going concern. We continue to control our cash expenses as a percentage of expected revenue on an annual basis and thus may use our cash balances in the short term to invest in revenue growth; however, we cannot give assurance that we can increase our cash balances or limit our cash consumption and thus maintain sufficient cash balances for our planned operations. Future business demands may lead to cash utilization at levels greater than recently experienced. We may need to raise additional capital in the future. However, we cannot assure you that we will be able to raise additional capital on acceptable terms or at all. Our inability to generate profits could have an adverse effect on our financial condition, results of operations, and cash flows. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations; Liquidity and Capital Resources.”

We have limited management and staff and will be dependent upon partnering arrangements.

As of December 31, 2023, we have eight (8) independent contractors and consultants. Our dependence on third-party consultants and service providers creates a number of risks, including but not limited to, the possibility that such third parties may not be available to us as and when needed, and that we may not be able to properly control the timing and quality of work conducted with respect to our projects. If we experience significant delays in obtaining the services of such third parties or poor performance by such parties, our results of operations and stock price will be materially adversely affected.

The loss of any of our executive officers could adversely affect us.

We currently only have four (4) executive officers. We depend on our executive officers’ extensive experience to implement our acquisition and growth strategy, specifically, Michael Panosian, our President and Chief Executive Officer, and Joshua Keeler, our Vice President of Research and Development. The loss of the services of any of our executive officers could negatively impact our operations and our ability to implement our strategy. Although we maintain a “key man” life insurance policy only for Michael Panosian, we do not carry any key man life insurance for any of our other employees, and our key man insurance policy for Mr. Panosian is for $2 million and will be insufficient to recover any losses resulting from Mr. Panosian’s death or disability while serving as our President and Chief Executive Officer.

We may be unable to attract the necessary employees or be able to prevent our current employees from leaving us.

To induce valuable employees to remain with us, in addition to salary and cash incentives, we have provided restricted stock and stock options that vest over time. The value to employees of stock options that vest over time may be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management may terminate their employment with us. Our success also depends on our ability to continue to attract, retain, and motivate employees.

If the hosts of third-party marketplaces limit our access to such marketplaces, our operations and financial results may be adversely affected.

Third-party marketplaces account for a portion of our revenues. Our sales through online third-party marketplaces represented a combined 15% of total sales for the fourth quarter ended December 31, 2023. We anticipate that sales of our products on third-party marketplaces will continue to account for a portion of our revenues. In the future, the loss of access to these third-party marketplaces, or any significant cost increases from operating on the marketplaces, could significantly reduce our revenues, and the success of our business depends partly on continued access to these third-party marketplaces. Our relationships with our third-party marketplace providers could deteriorate due to various factors, such as if they become concerned about our ability to deliver quality products on a timely basis or to protect a third party’s intellectual property. In addition, third-party marketplace providers could prohibit our access to these marketplaces if we are not able to meet the applicable required terms of use. Loss of access to a marketplace channel could result in lower sales, and as a result, our business and financial results may suffer.

We are highly dependent upon manufacturers in China, India, and Philippines, and an interruption in such relationships or our ability to obtain products from them could adversely affect our business and results of operations.

Our products are manufactured by factories in China, India, and Philippines. Our ability to acquire products from our suppliers in amounts and on terms acceptable to us depends on a number of unforeseeable factors and may be beyond our control. For example, financial or operational difficulties that some of our manufacturers may face could result in an increase in the cost of the products we purchase from them. If we do not maintain our relationships with our existing manufacturers or fail to find replacement or additional manufacturers in a timely manner and on acceptable commercial terms, we may not be able to continue to offer our products at competitive prices and any failure to deliver those products to our customers in a timely and accurate manner may damage our reputation and brand and could cause us to lose customers and our sales could decline.

Disruptions in our supply chain and other factors affecting the distribution of our merchandise could adversely impact our business.

A disruption within our logistics or supply chain network could adversely affect our ability to deliver inventory in a timely manner, which could impair our ability to meet customer demand for products and result in lost sales, increased supply chain costs or damage to our reputation. Such disruptions may result from damage or destruction to our distribution centers, weather-related events, natural disasters, international trade disputes or trade policy changes or restrictions, tariffs or import-related taxes, third-party strikes, lock-outs, work stoppages or slowdowns, shortages of supply chain labor, shipping capacity, third-party contract disputes, supply or shipping interruptions or costs, military conflicts, acts of terrorism, public health issues, including pandemics or quarantines (such as the COVID-19 pandemic) and related shutdowns, re-openings or other actions by the government, civil unrest or other factors beyond our control. In recent years, U.S. ports, particularly those located on the West Coast, have been impacted by capacity constraints, port congestion and delays, periodic labor disputes, security issues, weather-related events, and natural disasters, which the pandemic has further exacerbated. Disruptions to our supply chain due to any of the above factors could negatively impact our financial performance or condition.

In addition, a significant percentage of our product production, downstream processing, and sales occur outside the United States or with vendors, suppliers, or customers located outside the United States. If the United States places tariffs or other restrictions on foreign imports from China, India, the Philippines, or other countries, or any related counter-measures are taken, our business, financial condition, results of operations, and growth prospects may be harmed. Tariffs may increase our cost of goods, which could result in lower gross margins on certain of our products. If we raise prices to account for any such increase in costs of goods, the competitiveness of the affected products could potentially be reduced. In either case, increased tariffs on imports from China, India, Philippines, or other countries could materially and adversely affect our business, financial condition and results of operations. Trade restrictions and sanctions implemented by the United States or other countries, including sanctions imposed on Russia by the United States and other countries due to Russia’s recent invasion of Ukraine, could materially and adversely affect our business, financial condition, and results of operations.

We are highly dependent upon manufacturers in China, India, and Philippines, which exposes us to complex regulatory regimes and logistical challenges.

We acquire majority of our products from manufacturers and distributors located in China, India, and Philippines. We do not have any long-term contracts or exclusive agreements with our foreign suppliers that would ensure our ability to acquire the types and quantities of products we desire at acceptable prices and in a timely manner or that would allow us to rely on customary indemnification protection with respect to any third-party claims similar to some of our U.S. suppliers. In addition, because many of our suppliers are outside of the United States, additional factors could interrupt our relationships or affect our ability to acquire the necessary products on acceptable terms, including:

If we were unable to import products from China, India, and Philippines or import them cost-effectively, we could suffer irreparable harm to our business and be required to significantly curtail our operations, file for bankruptcy, or cease operations.

From time to time, we may also have to resort to administrative and court proceedings to enforce our legal rights with foreign suppliers. However, it may be more challenging to evaluate the level of legal protection we enjoy in China, India, and Philippines and the corresponding outcome of any administrative or court proceedings than in comparison to our suppliers in the United States. 

Increasing commodity prices such as fuel, plastic, and metal could negatively impact our profit margins.

Prices of certain commodity products, including raw materials, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations, trade restrictions, and tariffs. Increasing prices in the component materials for the parts of our goods may impact the availability, the quality and the price of our products, as suppliers search for alternatives to existing materials and increase the prices they charge. We cannot ensure that we can recover all the increased costs through price increases, and our suppliers may not continue to provide consistent quality products as they may substitute lower-cost materials to maintain pricing levels, all of which may have a negative impact on our business and results of operations. Our cost base also reflects significant elements for freight, including fuel. Rapid and significant changes in commodity prices such as fuel, plastic, and metal may negatively affect our profit margins.

Our results of operations could be negatively impacted by inflationary or deflationary economic conditions, which could affect our ability to obtain goods from our suppliers in a timely and cost-effective manner.

Our profitability may be negatively impacted if we are unable to mitigate any inflationary increases through various customer pricing actions and cost-reduction initiatives. Conversely, in the event there is deflation, we may experience pressure from our customers to reduce prices, and there can be no assurance that we would be able to reduce our cost base (through negotiations with suppliers or other measures) to offset any such price concessions which could adversely impact results of operations and cash flows.

We currently, and may in the future, have assets held at financial institutions that may exceed the insurance coverage offered by the Federal Deposit Insurance Corporation (“FDIC”), the loss of such assets would have a severe negative effect on our operations and liquidity.

We may maintain our cash assets at certain financial institutions in the U.S. in amounts that may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000. In the event of a failure of any financial institutions where we maintain our deposits or other assets, we may incur a loss to the extent such loss exceeds the FDIC insurance limitation, which could have a material adverse effect on our liquidity, financial condition, and our results of operations.

If we are unable to manage the challenges associated with our international operations, the growth of our business could be limited and our business could suffer.

We maintain international business operations throughout Europe with a majority being in the United Kingdom. Our international operations include sales and back-office support services for our European market. We are subject to a number of risks and challenges that specifically relate to our international operations. Our international operations may not be successful if we are unable to meet and overcome these challenges, which could limit the growth of our business and may have an adverse effect on our business and operating results. These risks and challenges include:

If we fail to offer a broad selection of products at competitive prices or maintain sufficient inventory to meet customer demands, our revenue could decline.

In order to expand our business, we must successfully offer, on a continuous basis, a broad selection of products that meet the needs of our customers, including being the first to market with new SKUs. Consumers use our products for a variety of purposes, including repair, performance, aesthetics, and functionality. In addition, to be successful, our product offerings must be broad and deep in scope, competitively priced, well-made, innovative and attractive to a wide range of consumers. We cannot predict with certainty that we will successfully offer products that meet all these requirements. If our product offerings fail to satisfy our customers’ requirements or respond to changes in customer preferences or we otherwise fail to maintain sufficient in-stock inventory, our revenue could decline.

As a result of our international operations, we have foreign exchange risk.

Our purchases of products from our China, India, and the Philippines suppliers are denominated in U.S. dollars; however, a change in the foreign currency exchange rates could impact our product costs over time. Our financial reporting currency is the U.S. dollar and changes in exchange rates due to functional currencies of respective countries could significantly affect our reported results and consolidated trends. For example, if the U.S. dollar weakens year-over-year relative to currencies in our international locations, our consolidated gross profit and operating expenses would be higher than if currencies had remained constant.

Our products could be recalled.

The Consumer Product Safety Commission or other applicable regulatory bodies may require the recall, repair, or replacement of our products if they are found not to be in compliance with applicable standards or regulations. A recall could increase costs and adversely impact our reputation, thereby negatively impacting our financial condition, results of operations, and cash flows.

Regulatory and Litigation Risks

Product liability claims and other kinds of litigation could affect our business, reputation, financial condition, results of operations and cash flows.

The products we design and/or have manufactured can lead to product liability or other legal claims being filed against us. In the past, and may in the future, we have been subject to legal proceedings other than those relating to product liability claims. To the extent that plaintiffs are successful in showing that a defect in a product’s design, manufacture or warnings led to personal injury or property damage, or that our provision of services resulted in similar injury or damage, we may be subject to claims for damages. Although we are insured for damages above a certain amount, we bear the costs and expenses associated with defending claims, including frivolous lawsuits, and are responsible for damages below the insurance retention amount. In addition to claims concerning individual products, as a manufacturer, we can be subject to costs, potential negative publicity, and lawsuits related to product recalls, which could adversely impact our results and damage our reputation.

Even defending against unsuccessful claims could cause us to incur significant expenses and divert management’s attention. In addition, even if the money damages themselves did not cause substantial harm to our business, the damage to our reputation and the brands offered on our websites could adversely affect our future reputation and our brand, and could result in a decline in our net sales and profitability.

Failure to comply with privacy laws and regulations and adequately protect customer data could harm our business, damage our reputation, and result in a loss of customers.

Federal and state regulations may govern the collection, use, sharing, and security of data that we receive from our customers. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, U.S. Federal Trade Commission requirements or other federal, state or international privacy-related laws and regulations could result in proceedings or actions against us by governmental entities or others, which could potentially harm our business. Further, failure or perceived failure to comply with our policies or applicable requirements related to the collection, use or security of personal information or other privacy-related matters could damage our reputation and result in a loss of customers.

The regulatory framework for data privacy is constantly evolving, and privacy concerns could adversely affect our operating results.

The regulatory framework for privacy issues is evolving and will likely remain uncertain for the foreseeable future. The occurrence of unanticipated events often rapidly drives the adoption of legislation or regulation affecting the use of data and the way we conduct our business; in fact, there are active discussions among U.S. legislators around adopting a new U.S. federal privacy law. Restrictions could be placed upon the collection, management, aggregation and use of information, which could result in a material increase in the cost of collecting and maintaining certain kinds of data. In June 2018, California enacted the California Consumer Privacy Act, which took effect on January 1, 2020, and in November 2020, California voters approved Proposition 24, which amended the California Consumer Privacy Act and added new additional privacy protections that began on January 1, 2023 (the “C.C.P.A.”). The C.C.P.A. gives consumers the right to request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of the consumer’s personal information, the right not to be discriminated against for exercising these rights, the right to correct inaccurate personal information that a business has about them and the right to limit the use and disclosure of sensitive personal information collected about them. We are required to comply with the C.C.P.A. The C.C.P.A. provides for civil penalties for violations and a private right of action for data breaches that are expected to increase data breach litigation. The C.C.P.A. may increase our compliance costs and potential liability. Some observers have noted that the C.C.P.A. could begin a trend toward more stringent privacy legislation in the U.S., which could increase our potential liability and adversely affect our business.

If we are unable to protect our intellectual property rights, our reputation and brand could be impaired, and we could lose customers.

We regard our trademarks, trade secrets, and similar intellectual property rights as critical to our success. We rely on trademark and copyright law, trade secret protection, and confidentiality and license agreements with employees, customers, partners, and others to protect our proprietary rights. We cannot be sure that we have taken adequate steps to protect our proprietary rights, especially in countries where the laws may not protect our rights as fully as in the United States. In addition, our proprietary rights may be infringed or misappropriated, and we could incur significant expenses to preserve them. The outcome of such litigation can be uncertain, and the cost of prosecuting such litigation may adversely impact our earnings. We have common law trademarks, as well as pending federal trademark registrations for several marks and several registered marks. However, any registrations may not adequately cover our intellectual property or protect us against infringement by others. Effective trademarks, service marks, copyrights, patents, and trade secrets protection may not be available in every country where our products and services are available online. We also currently own or control a number of Internet domain names, including www.toughbuilt.com, and have invested time and money in purchasing domain names and other intellectual property, which may be impaired if we cannot protect such intellectual property. We may be unable to protect these domain names or acquire or maintain relevant domain names in the United States and other countries. If we cannot protect our trademarks, domain names, or other intellectual property, we may experience difficulties achieving and maintaining brand recognition and customer loyalty.

If we are unable to protect our intellectual property, our business may be adversely affected.

We must protect the proprietary nature of the intellectual property used in our business. There can be no assurance that trade secrets and other intellectual property will not be challenged, invalidated, misappropriated, or circumvented by third parties. Our intellectual property includes issued patents, patent applications, trademarks, trademark applications, and know-how related to business, product, and technology development. We plan on taking the necessary steps, including but not limited to filing additional patents as appropriate. There is no assurance any additional patents will be issued or that when they are issued, they will include all of the claims currently included in the applications. Even if they do issue, those new patents and our existing patents must be protected against possible infringement. Nonetheless, we currently rely on contractual obligations of our employees and contractors to maintain the confidentiality of our products. To compete effectively, we need to develop and continue to maintain a proprietary position concerning our technologies, and business. The risks and uncertainties that we face concerning intellectual property rights principally include the following:

It is also possible that others may obtain issued patents that could prevent us from commercializing certain aspects of our products or require us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. If we license patents, our rights will depend on maintaining its obligations to the licensor under the applicable license agreement, and we may be unable to do so. Furthermore, there can be no assurance that the work-for-hire, intellectual property assignment, and confidentiality agreements entered into by our employees and consultants, advisors, and collaborators will provide meaningful protection for our trade secrets, know-how, or other proprietary information in the event of any unauthorized use or disclosure of such trade secrets, know-how or other proprietary information. As all of our products are manufactured in China, India, and the Philippines, we may not have the same strength of intellectual property protection and enforcement in such countries as in North America or Europe. The scope and enforceability of patent claims are not systematically predictable with absolute accuracy. The strength of our patent rights depends, in part, upon the breadth and scope of protection provided by the patent and the validity of our patents, if any.

We may not be able to enforce our intellectual property rights worldwide.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights.

Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property. If we are unable to enforce our intellectual property rights throughout the world adequately, our business, financial condition, and results of operations could be adversely impacted.

Because we are involved in litigation from time to time and are subject to numerous laws and governmental regulations, we could incur substantial judgments, fines, legal fees, other costs, and reputational harm.

We are sometimes the subject of complaints or litigation from customers, employees, or other third parties for various reasons. The damages sought against us in some of these litigation proceedings could be substantial. Although we maintain liability insurance for some litigation claims, if one or more of the claims were to exceed our insurance coverage limits greatly or if our insurance policies do not cover a claim, this could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition, or results of operations.

New income, sales, use, or other tax laws, statutes, rules, regulations, or ordinances could be enacted at any time, which could adversely affect our business operations and financial performance. Further, existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us. For example, legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act (the “Tax Act”), enacted many significant changes to the U.S. tax laws. Future guidance from the Internal Revenue Service and other tax authorities with respect to the Tax Act may affect us, and certain aspects of the Tax Act could be repealed or modified in future legislation. In addition, it is uncertain if and to what extent various states will conform to the Tax Act or any newly enacted federal tax legislation. Changes in corporate tax rates, the realization of net deferred tax assets relating to our operations, the taxation of foreign earnings, and the deductibility of expenses under the Tax Act or future reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges, and could increase our future U.S. tax expense.

Existing or future government regulation could expose us to liabilities and costly changes in our business operations and could reduce customer demand for our products and services.

We are subject to federal and state consumer protection laws and regulations, including laws protecting the privacy of customer nonpublic information and regulations prohibiting unfair and deceptive trade practices, as well as laws and regulations governing businesses in general and the Internet and e-commerce and certain environmental laws. Additional laws and regulations may be adopted with respect to the Internet, the effect of which on e-commerce is uncertain. These laws may cover issues such as user privacy, spyware and the tracking of consumer activities, marketing emails and communications, other advertising and promotional practices, money transfers, pricing, content and quality of products and services, taxation, electronic contracts, and other communications, intellectual property rights, and information security. Furthermore, it is unclear how existing laws governing issues such as property ownership, sales and other taxes, trespass, data mining and collection, and personal privacy apply to the Internet and e-commerce. To the extent we expand into international markets, we will be faced with complying with local laws and regulations, some of which may be materially different than U.S. laws and regulations. Any such foreign law or regulation, any new U.S. law or regulation, or the interpretation or application of existing laws and regulations to the Internet or other online services or our business, in general, may have a material adverse effect on our business, prospects, financial condition and results of operations by, among other things, impeding the growth of the Internet, subjecting us to fines, penalties, damages or other liabilities, requiring costly changes in our business operations and practices, and reducing customer demand for our products and services. We may not maintain sufficient or any insurance coverage to cover the types of claims or liabilities that could arise due to such regulations.

Possible new tariffs that the United States government might impose could have a material adverse effect on our results of operations.

Changes in U.S. and foreign governments’ trade policies have resulted in and may continue to result in, tariffs on imports into and exports from the U.S., among other restrictions. Throughout from 2018 to 2023, the U.S. imposed tariffs on imports from several countries, including China. If further tariffs are imposed on imports of our products or retaliatory trade measures are taken by China or other countries in response to existing or future tariffs, we could be forced to raise prices on all of our imported products or make changes to our operations, any of which could materially harm our revenue or operating results. Any additional future tariffs or quotas imposed on our products or related materials may impact our sales, gross margin, and profitability if we are unable to pass increased prices onto our customers.

We operate in an industry with the risk of intellectual property litigation. Claims of infringement against us may hurt our business.

Our success depends, in part, upon the non-infringement of intellectual property rights owned by others and being able to resolve claims of intellectual property infringement without major financial expenditures or adverse consequences. Participants that own, or claim to own, intellectual property may aggressively assert their rights. From time to time, we may be subject to legal proceedings and claims relating to the intellectual property rights of others. Future litigation may be necessary to defend us or our clients by determining the scope, enforceability, and validity of third-party proprietary rights or to establish its proprietary rights. Some competitors have substantially greater resources and are able to sustain the costs of complex intellectual property litigation to a greater degree and for extended time periods. In addition, patent-holding companies that focus solely on extracting royalties and settlements by enforcing patent rights may target us. Regardless of whether claims that we are infringing patents or other intellectual property rights have any merit, these claims are time-consuming and costly to evaluate and defend and could:

In addition to liability for monetary damages, which may be tripled and may include attorneys’ fees or, in some circumstances, damages against clients, we may be prohibited from developing, commercializing, or continuing to provide some or all of our products unless we obtain licenses from, and pay royalties to, the holders of the patents or other intellectual property rights, which may not be available on commercially favorable terms, or at all.

Geopolitical conditions, including trade disputes and direct or indirect acts of war or terrorism, could adversely affect our operations and financial results.

Since we operate globally, our operations could be disrupted by geopolitical conditions, trade disputes, international boycotts and sanctions, political and social instability, acts of war, terrorist activity, or other similar events. From time to time, we could have a significant investment in a particular asset type, a large revenue stream associated with a specific customer or industry, or a large number of customers located in a certain geographic region. Decreased demand from a discrete event impacting a specific asset type, customer, industry, or region in which we have a concentrated exposure could negatively impact our results of operations.

In February 2022, Russia initiated significant military action against Ukraine. In response, the U.S. and certain other countries imposed significant sanctions and export controls against Russia, Belarus, and certain individuals and entities connected to Russian or Belarusian political, business, and financial organizations, and the U.S. and certain other countries could impose further sanctions, trade restrictions, and other retaliatory actions should the conflict continue or worsen. It is not possible to predict the broader consequences of the conflict, including related geopolitical tensions, and the measures and retaliatory actions taken by the U.S. and other countries in respect thereof, as well as any counter-measures or retaliatory actions by Russia or Belarus in response, including, for example, potential cyber-attacks or the disruption of energy exports, is likely to cause regional instability, geopolitical shifts, and could materially adversely affect global trade, currency exchange rates, regional economies and the global economy. The situation remains uncertain, and while it is difficult to predict the impact of any of the preceding, the conflict and actions taken in response to the conflict could increase our costs, disrupt our supply chain, reduce our sales and earnings, impair our ability to raise additional capital when needed on acceptable terms, if at all, or otherwise adversely affect our business, financial condition, and results of operations.

Risks Related to Information Technology

The Company’s lack of formalized cybersecurity measures and protocols exposes it to significant risks that could materially and adversely affect its business operations, financial condition, and reputation. In particular:

The Company acknowledges the importance of cybersecurity and is evaluating its needs to develop and implement appropriate measures to enhance its cybersecurity posture. However, there can be no assurance that these initiatives will sufficiently mitigate the risks associated with cybersecurity threats. The landscape of cybersecurity risks is constantly evolving, and the Company will need to continuously assess and update its cybersecurity measures in response to emerging threats.

General Risk Factors

An investment in our securities is speculative, and there can be no assurance of a return on such an investment.

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

Certain provisions of our Articles of Incorporation could allow the concentration of voting power in one individual, which may, among other things, delay or frustrate the removal of incumbent directors or a takeover attempt, even if such events may benefit our stockholders.

Provisions of our Articles of Incorporation, such as our ability to designate and issue a class of preferred stock without stockholder approval, may delay or frustrate the removal of incumbent directors and may prevent or delay a merger, tender offer, or proxy contest involving our Company that is not approved by our board of directors (“Board”), even if those events may be perceived to be in the best interests of our stockholders. For example, one or more of our affiliates could theoretically be issued a newly authorized and designated class of shares of our preferred stock. Such shares could have significant voting power, which may dilute the voting power of our common stock, among other terms. Consequently, anyone to whom these shares of preferred stock were issued could have sufficient voting power to significantly influence, if not control, the outcome of all corporate matters submitted to the vote of our common stockholders, subject to the rules promulgated by Nasdaq. Those matters could include the election of directors, changes in the size and composition of the Board, and mergers and other business combinations involving our Company. In addition, through any such person’s control of the Board and voting power, the affiliate may be able to control certain decisions, including decisions regarding the qualification and appointment of officers, dividend policy, access to capital (including borrowing from third-party lenders and the issuance of additional equity securities), and the acquisition or disposition of assets by our Company. In addition, the concentration of voting power in the hands of an affiliate could have the effect of delaying or preventing a change in control of our Company, even if the change in control would benefit our stockholders and may adversely affect the future market price of our common stock should a trading market therefore develop.

If you purchase shares of our common stock, you may experience immediate and substantial dilution in your shares’ net tangible book value. In addition, we may issue shares of common stock under our equity incentive plans and additional equity or convertible debt securities in the future, which may dilute investors further.

We are currently authorized to issue up to 200,000,000 shares of common stock. In the future, we may issue previously authorized and unissued shares of common stock, which would dilute current stockholders’ ownership interests. Additional shares are subject to issuance through various equity compensation plans or the exercise of currently outstanding equity awards. The potential issuance of additional shares of common stock may create downward pressure on the trading price of our common stock. In the future, we may issue additional shares of common stock or other securities that are convertible into or exercisable for common stock to raise capital or effectuate other business purposes. Purchasers of the shares we sell and our existing stockholders will experience significant dilution if we sell shares at prices significantly below the price at which they invested. In addition, to the extent we need to raise additional capital in the future and we issue additional shares of common stock or securities convertible or exchangeable for our common stock, our then existing stockholders may experience dilution, and the new securities may have rights senior to those of our common stock offered in this offering. Any of the above events could significantly harm our business, prospects, financial condition and results of operations, as well as cause the price of our common stock to decline.

Our stock price has been and may continue to be volatile.

The market price of our common stock has been and may continue to be subject to material volatility. Such fluctuations could be in response to, among other things, the factors described in this “Risk Factors” section or other factors, some of which are beyond our control, such as:

In the past, many companies that have experienced volatility and sustained declines in the market price of their stock have become subject to securities class action and derivative action litigation. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could materially harm our business. Any insurance we maintain may not provide adequate coverage against potential losses from such securities litigation, and if claims or losses exceed our liability insurance coverage, our business would be adversely impacted. In addition, insurance coverage may become more expensive, which could harm our financial condition and results of operations.

Other international and geopolitical events could also have a severe adverse impact on our business. For instance, in February 2022, Russia initiated military action against Ukraine. In October 2023, Israel initiated a military action against and Hamas in Gaza. In response, the United States and certain other countries imposed significant sanctions and trade actions against Russia and could impose further sanctions, trade restrictions, and other retaliatory actions. While we cannot predict the broader consequences, the conflict, and retaliatory and counter-retaliatory actions could materially adversely affect global trade, currency exchange rates, inflation, regional economies, and the global economy, which in turn may increase our costs, disrupt our supply chain, impair our ability to raise or access additional capital when needed on acceptable terms, if at all, or otherwise adversely affect our business, financial condition, and results of operations.

We may need but be unable to obtain additional funding on satisfactory terms, which could dilute our stockholders or impose burdensome financial restrictions on our business.

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

Being a public company is expensive and administratively burdensome.

As a public reporting company, we are subject to the information and reporting requirements of the Securities Act, the Exchange Act, and other federal securities laws, rules, and regulations related thereto, including compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). Complying with these laws and regulations requires the time and attention of our Board and management and increases our expenses. Among other things, we are required to:

The costs of preparing and filing annual and quarterly reports, proxy statements, when required, and other information with the SEC and furnishing audited reports to stockholders is expensive and much greater than that of a privately-held company, and compliance with these rules and regulations may require us to hire additional financial reporting, internal controls, and other finance personnel, and involve a material increase in regulatory, legal and accounting expenses and the attention of management. There can be no assurance that we will be able to comply with the applicable regulations in a timely manner, if at all. In addition, being a public company makes it more expensive for us to obtain director and officer liability insurance. In the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain this coverage.

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

We have identified material weaknesses in our internal control over financial reporting. These material weaknesses could continue to adversely affect our ability to report our results of operations and financial condition accurately and in a timely manner.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our management is likewise required, every quarter, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses identified through such evaluation in those internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, so there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

As described in this Annual Report on Form 10-K, we identified several material weaknesses in our internal control over financial reporting. As a result, our management concluded that our internal control over financial reporting was not effective as of December 31, 2023.

Any failure to maintain such internal control could adversely impact on our ability to report our financial position and results from operations on a timely and accurate basis, which could result in a material adverse effect on our business. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Since our financial statements are not filed on time, we are subject to sanctions or investigations by Nasdaq, the SEC, or other regulatory authorities. In addition, we would likely incur additional accounting, legal, and other costs in connection with any remediation steps. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could negatively affect our stock’s trading price.

To respond to these material weaknesses, we have devoted significant efforts and resources committed to the remediation and improvement of our internal control over financial reporting. While we have processes to identify and appropriately apply applicable accounting requirements, we plan to enhance these processes to evaluate our research better and understand the nuances of the complex accounting standards that apply to our financial statements. Our plans at this time include investing in information technology (“IT”) systems to enhance our operational and financial reporting and internal controls, enhancing our organizational structure to support financial reporting processes and internal controls, further developing and documenting detailed policies and procedures regarding business processes for significant accounts, critical accounting policies and critical accounting estimates, establishing effective general controls over IT systems to ensure that information produced can be relied upon by process level controls is relevant and reliable, providing guidance, education and training to employees relating to our accounting policies and procedures. Additionally, we have hired and plan to continue to hire, as resources permit, qualified accounting personnel to manage our functional controls better and segregate responsibilities. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.

We can give no assurance that the measures we have taken and plan to take in the future, will remediate the material weakness identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we successfully strengthen our controls and procedures, in the future, those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.

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

These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, may evolve as the courts and other bodies provide new guidance. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing disclosure and governance practice revisions. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

As a public company subject to these rules and regulations, we may find it more expensive to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board, particularly to serve on its Audit Committee and Compensation Committee, and qualified executive officers.

If research analysts do not publish research about our business or if they issue unfavorable commentary or downgrade our common stock, our stock price and trading volume could decline.

The trading market for our securities may depend partly on the research and reports that research analysts publish about us and our business. If we do not maintain adequate research coverage, or if any of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, the price of our common stock could decline. If one or more of our research analysts ceases to cover our company or fails to publish reports on us regularly, demand for our securities could decrease, which could cause the price of our common stock and warrants or trading volume to decline.

We do not intend to pay dividends on our common stock in the foreseeable future, and consequently, your ability to achieve a return on your investment will depend on its appreciation.

We have never declared or paid cash dividends on our common stock and do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

Anti-takeover provisions in our charter documents and Nevada law could discourage, delay or prevent a change of control of our Company and may affect the trading price of our common stock.

We are a Nevada corporation, and the anti-takeover provisions of the Nevada Control Shares Acquisition Act may discourage, delay, or prevent a change of control by limiting the voting rights of control shares acquired in a control share acquisition. In addition, our Articles of Incorporation and the A&R Bylaws may discourage, delay, or prevent a change in our management or control over us that stockholders may consider favorable. Among other things, our Articles of Incorporation and A&R Bylaws:

These provisions could delay or prevent a change of control, whether desired by or beneficial to our stockholders.

The security of our IT systems may be compromised in the event of system failures, unauthorized access, cyber-attacks, or a deficiency in our cybersecurity, and confidential information, including nonpublic personal information that we maintain, could be improperly disclosed.

We rely extensively on IT and systems, including internet sites, data hosting, physical security, and software applications and platforms. Despite our security measures, our IT systems, some of which are managed by third parties, may be susceptible to damage, disruptions, or shutdowns due to computer viruses, attacks by computer hackers, failures during the process of upgrading or replacing software, power outages, user errors or catastrophic events. A significant breakdown, invasion, corruption, destruction, or interruption of critical IT systems by our employees, others with authorized access to our systems, or unauthorized persons could negatively impact or interrupt operations. Technology, including cloud-based computing, creates opportunities for the unintentional dissemination or intentional destruction of confidential information stored in our or third-party systems. We could also experience a business interruption, theft of confidential information, or reputational damage from malware or other cyber-attacks, which may compromise our systems or lead to data leakage, internally or at our third-party providers.

As part of our business, we maintain large amounts of confidential information, including nonpublic personal information on customers and our employees. Breaches in security, either internally or at our third-party providers, could result in the loss or misuse of this information, which could, in turn, result in potential regulatory actions or litigation, including material claims for damages, interruption to our operations, damage to our reputation or otherwise have a material adverse effect on our business, financial condition, and operating results. Although we maintain information security policies and systems designed to prevent unauthorized use or disclosure of confidential information, including nonpublic personal information, there can be no assurance that such use or disclosure will not occur.

Any such business interruption, theft of confidential information, reputational damage from malware or other cyber-attacks, or violation of personal information laws could have a material adverse effect on our business, financial condition, and results of operations.

Item 1B. Unresolved Staff Comments.

None.

Item 1C. Cybersecurity. 

Cybersecurity Risk Management and Strategy

We recognize the importance of assessing, identifying, and managing material risks associated with cybersecurity threats. These risks include, among other things: operational risks, intellectual property theft, fraud, extortion, harm to employees or customers, and violation of data privacy or security laws.

Identifying and assessing cybersecurity risk is integrated into our overall risk management systems and processes. Cybersecurity risks related to our business, technical operations, privacy, and compliance issues are identified and addressed through a multi-faceted approach including third-party assessments, internal IT Audits, IT security, governance, risk, and compliance reviews. To defend, detect, and respond to cybersecurity incidents, we, among other things: conduct proactive privacy and cybersecurity reviews of systems and applications, audit applicable data policies, perform penetration testing using external third-party tools and techniques to test security controls, conduct employee training, monitor emerging laws and regulations related to data protection and information security (including our consumer products) and implement appropriate changes.

We have implemented incident response and breach management processes. In the event of an incident, the Cybersecurity team assesses, among other factors, safety impact, supply chain and manufacturing disruption, data and personal information loss, business operations disruption, projected cost, and potential for reputational harm, with support from external technical, legal and law enforcement support, as appropriate.

Security events and data incidents are evaluated, ranked by severity, and prioritized for response and remediation. Incidents are evaluated to determine materiality as well as operational, business, and privacy impact.

We occasionally engage third parties and consultants to assess our internal cybersecurity programs and compliance with applicable practices and standards.

Our risk management program also assesses third-party risks, and we perform third-party risk management to identify and mitigate risks from third parties such as vendors, suppliers, and other business partners associated with our use of third-party service providers. Cybersecurity risks are evaluated when determining the selection and oversight of applicable third-party service providers when handling and/or processing our employee, business, or customer data. In addition to new vendor onboarding, we perform risk management during third-party cybersecurity compromise incidents to identify and mitigate risks to us from third-party incidents.

Because we develop, process, store, and transmit large amounts of data, including confidential, classified, sensitive, proprietary, and business and personal information, failure to prevent or mitigate data loss, theft, misuse, unauthorized access, or other security breaches or vulnerabilities affecting our systems could: expose us or our customers to a risk of loss, disclosure, or misuse of such information; adversely affect our operating results; result in litigation, liability, or regulatory action (including under laws related to privacy, data use, data protection, data security, network security, and consumer protection); deter customers or sellers from using our products, and services; and otherwise harm our business and reputation. We use third-party technology and systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery to customers, back-office support, and other functions. Although we have developed systems and processes that are designed to protect our data and prevent such incidents, including systems and processes designed to reduce the impact of a security breach at a third-party vendor or customer, such measures cannot provide absolute security and may fail to operate as intended or be circumvented.

Cybersecurity Governance

Cybersecurity is an important part of our risk management processes and an area of focus for our Board and management. Our Audit Committee is responsible for the oversight of risks from cybersecurity threats. Members of the Audit Committee receive updates every quarter from senior management, including leaders from our Information Security, Product Security, Compliance, and Legal teams regarding matters of cybersecurity. This includes existing and new cybersecurity risks, the status of how management is addressing and/or mitigating those risks, cybersecurity and data privacy incidents (if any), and the status of key information security initiatives.

Our cybersecurity risk management and strategy processes are overseen by leaders from our Information Technology, Information Security, Product Security, Compliance, and Legal teams. Such individuals have extensive prior work experience in various roles involving information technology, including security, auditing, compliance, systems, and programming. These individuals are informed about and monitor the prevention, mitigation, detection, and remediation of cybersecurity incidents through their management of, and participation in, the cybersecurity risk management and strategy processes described above, including the operation of our incident response plan, and report to the Audit Committee.

The Company acknowledges the increasing importance of cybersecurity in today’s digital and interconnected world. Cybersecurity threats pose significant risks to the integrity of our systems and data, potentially impacting our business operations, financial condition, and reputation.

As a smaller reporting company, we currently do not have formalized cybersecurity measures, a dedicated cybersecurity team, or specific protocols to manage cybersecurity risks. Our approach to cybersecurity is in the developmental stage, and we have not yet conducted comprehensive risk assessments, established an incident response plan, or engaged with external cybersecurity consultants for assessments or services.

Given our current stage of cybersecurity development, we have not experienced any significant cybersecurity incidents to date. However, we recognize that the absence of a formalized cybersecurity framework may leave us vulnerable to cyber-attacks, data breaches, and other cybersecurity incidents. Such events could potentially lead to unauthorized access to, or disclosure of, sensitive information, disrupt our business operations, result in regulatory fines or litigation costs, and negatively impact our reputation among customers and partners.

The Company is in the process of evaluating our cybersecurity needs and developing appropriate measures to enhance our cybersecurity posture. This includes considering the engagement of external cybersecurity experts to advise on best practices, conducting vulnerability assessments, and developing an incident response strategy. Our goal is to establish a cybersecurity framework that is commensurate with our size, complexity, and the nature of our operations, thereby reducing our exposure to cybersecurity risks.

Despite our efforts to improve our cybersecurity measures, there can be no assurance that our initiatives will fully mitigate the risks posed by cyber threats. The landscape of cybersecurity risks is constantly evolving, and the Company will continue to assess and update our cybersecurity measures in response to emerging threats.

For a discussion of potential cybersecurity risks affecting the Company, please refer to Item 1A - Risk Factors - Risks Related to IT in this report.

Item 2. Properties.

We lease approximately 15,500 square feet of office space at 8669 Research Drive, Irvine, California 92618 as our principal executive office. This lease commenced on December 1, 2019 and matures on March 31, 2025, with no rent due from December 1, 2019 to April 1, 2020. From April 1, 2020, through March 31, 2025, base rent is due on the first of each month for $25,200. We 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. The base rent shall be adjusted on the following dates as follows:

The lease otherwise contains commercial market terms for events of default, termination, and the like.

The Company entered into two other leases with PCS Properties 2, LLC (“PCS”) for additional space in Irvine, California. The leases commenced on March 1, 2022, and June 1, 2022 and mature on February 28, 2027 and May 31, 2027. Base rent is initially $16,250 and $48,379, with escalations contained in the lease through February 28, 2027, and May 31, 2027. On May 29, 2024, the Company entered into a settlement agreement and mutual release with PCS terminating our lease agreement for premises at 8687 Research Drive, Irvine, California. This settlement resolves all disputes and allows the Company to avoid the expense and risk of further litigation.

The Company entered into a lease agreement with Aviva Life and Pensions UK Limited (“Aviva”) for office space on April 19, 2022 for a five-year term. The lease commenced on April 18, 2023 and matures on January 17, 2027. The quarterly base rent for the lease is $38,759 with no escalation of rent increases.

The Company entered into a lease agreement for office space with Concord Property Development, LLC (“Concord”) in North Carolina on May 1, 2023 for a five year term. The Company paid a security deposit of $24,000 and the monthly base rent was $24,246 with an annual escalation of rent increase at 2%. The landlord completed the improvements to the office space and the lease commenced on December 1, 2023. On June 6, 2024, the Company entered into a settlement agreement with Concord and have resolved all disputes arising from nonpayment of rent. Concord has released and forever discharged the Company from any claims, demands, damages, liabilities, or causes of action related to the lease and the dispute. The agreement also specifies that it is not to be considered an admission of liability by any party.

The Company entered into a lease agreement for office space in Columbia on August 15, 2023 for a two year term. The Company paid a security deposit totaling $24,511 at the inception of the lease. The monthly base rent was $3,500 with no annual escalation of rent increases.

As our business efforts increase, we intend to seek additional leased space, which will include some warehouse facilities.

Item 3. Legal Proceedings.

From time to time, we are involved in lawsuits, claims, investigations, and proceedings, including pending opposition proceedings involving patents that arise in the ordinary course of business. No matters are pending that we expect to have a material adverse impact on our business, results of operations, financial condition, or cash flows, except as set forth below.

An unfavorable outcome in any specific period could have a material adverse effect on our results of operations for that period or future periods. Other than as described below, we are not a party to any material pending or threatened legal proceedings.

October 7, 2022 Litigation

On October 7, 2022, a shareholder derivative action was initiated by a stockholder (“Plaintiff”) against us, Michael Panosian, Joshua Keeler, Zareh Khachatoorian, Martin Galstyan, et al. (“Defendants”), in Nevada’s Eighth Judicial District Court, Case No. A-22-859580-B. The Plaintiff alleged breaches of fiduciary duties by the Defendants, accusing them of failing in their duties in relation to a registered direct offering of Series F and G preferred stock in February 2022, and a 1-for-150 reverse stock split in April 2022. The Plaintiff sought damages exceeding $10,000, attorney fees, an accounting of books and records, equity relief, and reimbursement of legal costs.

The Company’s board formed a special litigation committee (“SLC”) on May 13, 2022, to assess the claims. After review, the SLC, supported by third-party legal counsel, found no misconduct by Defendants and recommended against pursuing the Plaintiff’s claims, a decision upheld by the board on November 4, 2022. A Motion to Dismiss was filed by the SLC on October 12, 2023, and after a hearing on February 14, 2024, the court dismissed the case on March 18, 2024, agreeing that the SLC’s investigation met Nevada’s legal standards and upheld the business judgment rule. Following Plaintiff’s appeal of the District Court’s Order dismissing the derivative claims to the Nevada Supreme Court, Plaintiff filed a Motion for Reconsideration under Rule 60 of the Nevada Rules of Civil Procedure based upon the argument that new evidence demonstrated that at least one member of the SLC was not independent. Following full briefing and oral argument on the Plaintiff’s motion, the District Court issued a Minute Order on October 17, 2024, denying the motion. As the Court recognized, there can be no question that at least two members of the SLC were independent, which is a more than sufficient number under Nevada law. The District Court instructed counsel for the SLC to submit a formal draft order for the District Court’s review and signature. The Plaintiff’s appeal of the dismissal of the derivative claims is still pending and remains in the Nevada Supreme Court settlement program.

June 22, 2023 Litigation

On June 22, 2023, PCS Properties 2, LLC (“Plaintiff”) initiated a lawsuit the Company in the Superior Court of California, County of Orange, alleging breach of a lease agreement dated December 10, 2021, for property at 8687 Research Drive, Irvine, California. The Plaintiff claimed unpaid rent of approximately $124,800 as of May 31, 2023, and sought damages including future rent through the lease’s term ending May 31, 2027, totaling at least $2,374,278, minus avoidable costs. Additional claims included recovery costs for the premises, reletting expenses, attorney fees, leasing commissions, prejudgment interest, and court fees.

On May 29, 2024, both parties reached a settlement, entering into a Settlement Agreement and Mutual Release, effectively resolving all litigation. Concurrently, they executed a Stipulation for Entry of Judgment in case of the Company’s default on settlement payments, to be held by PCS’s counsel and filed in court without further notice to the Company if necessary. Under the Agreement, each party is responsible for its own legal fees and costs. The Company agreed to pay PCS $361,000 in full settlement, has paid $118,000 in June 2024 and $118,000 in July 2024, and paid the remaining balance of $125,000 on October 09, 2024. Both parties agreed to a general release of all past and present claims related to the litigation, with an explicit waiver of California Civil Code Section 1542. The Agreement contains no admission of liability by any party. This settlement concludes all disputes from the litigation, allowing the Company to avoid further litigation costs and risks.

June 6, 2023 Litigation

On June 6, 2024, the Company entered into a Settlement Agreement with Concord Property Development, LLC (“Landlord”) to resolve a dispute arising from nonpayment of rent under a Commercial Lease Agreement dated October 31, 2022, for commercial premises located at 500 South Main Street, Suite 101, Mooresville, North Carolina. Under the terms of the Settlement Agreement, the Company agreed to pay the Landlord a total settlement amount of Six Hundred Sixty-Six Thousand Three Hundred Eighty-Eight Dollars $666,388 in four scheduled payments: (i) paid $100,000 on June 30, 2024; (ii) paid $200,000 on July 31, 2024; (iii) paid $183,194 on August 31, 2024; and (iv) paid $183,194 on September 30, 2024 pursuant to the terms of Settlement Agreement. The Settlement Agreement stipulates that upon the Company’s timely payment of the full settlement amount, the Landlord will release and forever discharge the Company from any claims, demands, damages, liabilities, or causes of action related to the lease and the dispute. Additionally, the Settlement Agreement provides that in the event of the Company’s default on its payment obligations, the Landlord is entitled to record a Confession of Judgment against the Company, creditable with any payments made. The Agreement also specifies that it is not to be considered an admission of liability by any party. This settlement concludes all disputes from the litigation, allowing the Company to avoid further litigation costs and risks.

Item 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5. The market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

Market Information

Our common stock is currently listed on OTC Expert Market under the symbol “TBLT,” and warrants under the symbol “TBLTW.” Trading in our common stock has historically lacked consistent volume, and the market price has been volatile.

Holders of Common Stock

On December 20, 2024, there were 161 holders of record of our common stock.

Dividend Policy

We have never paid any cash dividends on our common stock. We anticipate that we will retain funds and future earnings to support operations and finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future following this offering. Any future determination to pay dividends will be at the discretion of our Board and will depend on our financial condition, results of operations, capital requirements, and other factors that our Board deems relevant. In addition, the terms of any future debt or credit financing may preclude us from paying dividends.

Unregistered Sales of Equity Securities

The Company previously disclosed all prior issuances during the fiscal year ended December 31, 2023, in its quarterly reports on Form 10-Q or current reports on Form 8-K.

Equity Plan Information

EQUITY PLAN INFORMATION 

Item 6. [Reserved]

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Prospective investors should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included in this annual report. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report, including information concerning our plans and strategy for our business, includes forward-looking statements involving risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.” This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this report. We may use certain non-generally accepted accounting principles (GAAP) financial measures in this discussion. An explanation of these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP financial measures are included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Investors should not consider non-GAAP financial measures in isolation or substitutes for financial information presented in compliance with GAAP.

Business Overview

We were formed to design, manufacture, and distribute innovative tools and accessories to the building industry. The global tool market industry is a multibillion-dollar business.

Our business is based on the development of innovative and state-of-the-art products, primarily in the tools and hardware category. We particularly focus on the building and construction industry, with the ultimate goal of making life easier and more productive for contractors and workers alike.

Our three major categories contain a total of 22 product lines, consisting of (i) Soft Goods, which include kneepads, tool bags, pouches, and tool belts; (ii) Metal Goods, which consists of sawhorses, tool stands, utility knives, aviation snips, shears, tape measures and chalk reels; and (iii) Electronic Goods, which includes lasers and levels. We also have several additional categories and product lines in various stages of development.

We are continuing to focus our efforts on increased marketing campaigns and distribution programs to strengthen the demand for our products globally. Management anticipates that our capital resources will improve, and our products will gain wider market recognition and acceptance, resulting in increased product sales.

As discussed below, we have faced the impacts of COVID-19 and inflation and experienced a revenue decline between fiscal 2022 and 2023 of 19.9%. We have incurred substantial operating losses since our inception and anticipate incurring additional losses for the foreseeable future until such time, if ever, that we can commercialize our technology currently in development. Our auditors have expressed substantial doubt about our ability to continue as a going concern in their audit report included in this Annual Report on Form 10-K. To fund our operations and grow our business, we will be required to fund our capital requirements through the sale of debt or equity securities or other arrangements to fund operations. There can be no assurances that we will be able to obtain additional financing on acceptable terms, if at all. If we cannot obtain such additional financing, future operations will need to be scaled back or discontinued. See “Liquidity and Capital Resources; Going Concern” below and Part I Item 1A. Risk Factors “Going Concern” and “We will require additional capital in order to achieve commercial success and, if necessary, to finance future losses from operations as we endeavor to build revenue, but we do not have any commitments to obtain such capital, and we cannot assure you that we will be able to obtain adequate capital as and when required.”

Business Developments

The following highlights recent material developments in our business:

Key Factors Affecting Our Performance

As a result of a number of factors, our historical results of operations may not be comparable to our results of operations in future periods, and our results of operations may not be directly comparable from period to period. Below is a brief discussion of the key factors impacting our results of operations.

Seasonality

Our revenues are not seasonal. However, we usually experience a spike in sales when introducing new products.  

Inflation

Prices of certain commodity products, including raw materials, are historically volatile and are subject to fluctuations arising from domestic and international supply and demand changes, labor costs, competition, market speculation, government regulations, trade restrictions, and tariffs. Increasing prices in the component materials for the parts of our goods may impact on our products’ availability, quality, and price as suppliers search for alternatives to existing materials and increase the prices they charge. Our suppliers may also fail to provide consistent quality products as they may substitute materials at lower costs to maintain pricing levels. Rapid and significant changes in commodity prices may negatively affect our profit margins. We may be unable to mitigate any inflationary increases through various customer pricing actions and cost-reduction initiatives. To offset increased prices charged by our manufacturers and shipping rates, we increased the prices of our products in 2023 and 2024, respectively.

Supply Chain

We acquire most of our products from manufacturers and distributors in China, India, and the Philippines. We do not have any long-term contracts or exclusive agreements with our foreign suppliers that would ensure our ability to acquire the types and quantities of products we desire at acceptable prices and in a timely manner. We utilize a number of techniques to address potential disruption and other risks relating to our supply chain, including, in certain cases, the use of other qualified suppliers. We reduced our inventory from $40.4 million at December 31, 2022 to $21.3 million at December 31, 2023. Due to our inventory levels in 2023, the supply chain disruptions in 2023 have not had a material adverse effect on our operations. We do not anticipate that any continued supply chain disruptions that will have a material adverse effect on our operations for the fiscal year 2024. See Part I Item 1A. Risk Factors: “Disruptions in our supply chain and other factors affecting the distribution of our merchandise could adversely impact our business.”

Results of Operations

The Fiscal Year Ended December 31, 2023, compared to the Fiscal Year Ended December 31, 2022

Revenues

Revenues, net of returns and allowances, for the years ended December 31, 2023, and 2022 were $76.3 million and $95.3 million, respectively, and consisted of metal goods, soft goods, and electronic goods sold to customers. Revenues decreased in 2023 over 2022 by $19.0 million or 19.9%, primarily due to the Company not being able to fulfill the open orders due to lack of inventory on hand and working capital.

Cost of Goods Sold

Cost of goods sold for the years ended December 31, 2023, and 2022 was $59.9 million and $70.0 million, respectively. Cost of goods sold decreased in 2023 over 2022 by $10.2 million, or 14.5%, primarily due to lack of fulfilling and shipping the open orders on hand. Cost of goods sold as a percentage of revenues in 2023 increased to 78.5%, as compared to the cost of goods sold as a percentage of revenues in 2022 of 73.5% primarily due to the manufacturing facilities increasing the products prices in 2023 compared to 2022.

Operating Expenses

Operating expenses consist of selling, general and administrative expenses, and research and development costs.

Selling, general and administrative expenses (the “SG&A Expenses”) for the years ended December 31, 2023 and 2022 were $56.0 million and $66.2 million, respectively. SG&A Expenses decreased in 2023 over 2022 by $10.1 million, or 15.3%, primarily due to decrease in salaries and headcount, and better management of expenses. SG&A Expenses in 2023 as a percentage of revenues increased to 73.5 %, as compared to 69.5% in 2022.

Impairment of property and equipment totaled $5,583,290 or 7.3% of revenues, consisting of impairment of App development of mobile devices of $4,093,533 and website design of $1,489,757 for the year ended December 31, 2023, compared to $0 for the year ended December 31, 2022. Management performed an analysis of property and equipment and decided to impair the assets that were deemed non-producing.

Research and development costs (the “R&D”) for the years ended December 31, 2023, and 2022 were $12.0 million and $11.3 million, respectively. R&D costs increased in 2023 over 2022 by $0.7 million or 6.2% primarily due to the development costs of new tools for the construction industry.

Other income (expense)

Other income for the year ended December 31, 2023, was $10.8 million, consisted of interest expense of $1.7 million, warrant expense of $0.5 million, inducement expense of $6.4 million, and change in fair value of warrant derivative liability of $19.4 million. Other income for the year ended December 31, 2022, was $13.0 million, consisted of interest expense of $1.9 million, warrant expense of $1.9 million, and change in the fair value of warrant derivative liability of $16.8 million.

Net loss

Due to the factors set forth above, we recorded a net loss of $46.4 million and $39.3 million for the years ended December 31, 2023, and 2022, respectively. The increase in net loss is mainly attributable to the $19.0 million reduction in revenues, increase in cost of goods sold as a percentage of revenues, offset by reduction in operating expenses of $3.9 million, and reduction in other income by $2.2 million.

Liquidity and Capital Resources; Going Concern

At December 31, 2023, we reported approximately $1.2 million cash on hand, $10.2 million in accounts receivable, and $52.2 million in accounts payable and accrued expenses. We reported a working capital deficit of $26.6 million as of December 31, 2023. Our sales decreased by 19.9% for the year ended December 31, 2023, compared to the same period in 2022. We are continuing to focus our efforts on increased marketing campaigns and distribution programs to strengthen the demand for our products globally. Management anticipates that our capital resources will improve, and our products will gain wider market recognition and acceptance, resulting in increased product sales. 

We have incurred substantial operating losses since our inception. As reflected in the consolidated financial statements included in this Annual Report on Form 10-K, we had an accumulated deficit of approximately $191.4 million at December 31, 2023, a net loss of approximately $46.4 million, and net cash used in operating activities for the year ended December 31, 2023 was approximately $5.1 million. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. We anticipate incurring additional losses until we will be able to effectively market our products and technology currently in development. We will need additional financing to fund our operations and to develop and commercialize our technology. These factors raise substantial doubt about our ability to continue as a going concern. We do not have sufficient capital to fund our operations for the next 12 months. To date, we have funded our operations primarily by selling equity securities. As reported on a Form 8-K filed with the SEC on February 16, 2024, we closed a public offering of common stock, pre-funded warrants, and warrants with net proceeds of $3.1 million after deducting private placement agent fees and commissions and other expenses. We believe that such net proceeds will fund to settle some of our accounts payable.

For the 12 months from issuance of this Annual Report on Form 10-K and the subsequent 12 months, we intend to fund our capital requirements by selling debt or equity securities or other arrangements to fund operations. However, there is no assurance that we will be able to raise the capital needed under acceptable terms. The sale of additional equity may dilute existing stockholders, and newly issued shares may contain senior rights and preferences compared to currently outstanding shares of common stock. Issued debt securities may contain covenants and limit our ability to pay dividends or make other distributions to stockholders. If we are unable to obtain such additional financing, future operations would need to be scaled back or discontinued. Due to the uncertainty in our ability to raise capital, management believes that there is substantial doubt about our ability to continue as a going concern for twelve months from the issuance of these consolidated financial statements.

Cash Flows

Net cash flows used in operating activities for the year ended December 31, 2023 was $5.1 million, attributable to a net loss of $46.4 million, offset by depreciation expense of $5.8 million, allowance for credit losses of $4.5 million, inducement expense of $6.4 million, stock compensation expense of $0.5 million, loss on sale of property and equipment of $0.02 million, impairment of property and equipment of $5.6 million, amortization of right-of-use assets of $1.3 million, amortization of patents of $0.1 million, write-down of patents of $0.2 million, gain on abandonment of a lease of $0.1 million, change in fair value of warrant and preferred investment option liability of $19.4 million, interest paid on short-term loan of $0.1 million; warrant issuance cost of $0.5 million, and net change in operating assets and liabilities of $35.9 million. Net cash flows used in operating activities for the year ended December 31, 2022 was $37.3 million, attributable primarily to a net loss of $39.3 million, offset by depreciation expense of $4.2 million, bad debt expense of $2.9 million, stock-based compensation expense of $0.8 million, amortization of right-of-use asset of $0.7 million, change in fair value of warrant derivatives of $16.8 million, warrant issuance costs of $1.9 million, and net change in operating assets and liabilities of $8.3 million. We offered cash discounts to our customers and factors to accelerate accounts receivable payments. In addition, we negotiated extended payment terms with suppliers, vendors, and related parties to conserve cash.

Net cash used in investing activities for the year ended December 31, 2023 was $2.6 million due to cash paid for the purchase of other assets of $0.1 million and purchase of property and equipment of $2.5 million. Net cash used in investing activities for the year ended December 31, 2022 was $5.0 million, attributable to net cash paid for purchase of property and equipment of $5.0 million and from the proceeds from the sale of property and equipment.

Net cash provided by financing activities for the year ended December 31, 2023 was $6.2 million, primarily attributable to the net cash received from exercise and conversion of warrants of $3.1 million and cash received from sale of common stock and warrants of $3.9 million, cash proceeds of $0.7 million received from loans payable, and cash paid of $1.5 million in repayments on loans payable. Net cash provided by financing activities for the year ended December 31, 2022 was $37.4 million, primarily attributable to the net cash proceeds of $6.0 million from exercise of warrants, repurchase of common stock warrants of $2.5 million, cash proceeds from issuance of common stock of $33.0 million, net proceeds from loan payable of $1.7 million, and repayment of loans payable of $0.7 million.

We recorded a net decrease in cash of $1.4 million for the year ended December 31, 2023.

Material Cash Requirements from Known Contractual and Other Obligations

The following table summarizes our operating lease contractual obligations for the year ending December 31, 2024 and thereafter:

The Company had recorded a short-term loan payable to a third party totaling $288,588 as of December 31, 2023. Such loan and accrued interest was paid in full to the third party as of March 28, 2024.

We intend to fund our contractual obligations with working capital.

Critical Accounting Estimates

Use of Estimates

The preparation of 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to recognition of revenue including rebates, returns and allowances, valuation of accounts receivable, valuation of long-lived assets, fair value of financial instruments and fair value measurements. 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.

The Company’s financial position, results of operations and cash flows are impacted by the accounting policies the Company has adopted. In order to get a full understanding of the Company’s financial statements, one must have a clear understanding of the accounting policies employed.

Restatement of Previously Filed Quarterly Statements – 2023 Form 10-Qs

Management determined that our financial statements which were included in Quarterly Reports on Form 10-Q for the quarters ended March 31, 2023, June 30, 2023, and September 30, 2023 as filed with the Securities and Exchange Commission, should no longer be relied upon due to errors relating to the recording and reporting of transactions in operating assts and liabilities accounts on the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations. The errors occurred primarily due to an incorrect interface and mapping of our chart of accounts during the implementation of a new financial reporting application and due to ineffective controls relating to information technology, particularly in reviewing system implementations, user provisioning, user rights, and service organization control reports.. Management identified the errors during the Company’s year end audit of its fiscal year 2023 and restated its quarterly statements (See Part II - Item 9A).

As a result of the restatement included herein, we reported net loss for the quarter ended March 31, 2023 of $8,228,431, which was $46,731 less than the net loss previously reported in the March 31, 2023 Original Form 10-Q, net loss for the quarter ended June 30, 2023 of $6,974,485 and six months ended June 30, 2023 of $15,202,916, which was $1,249,115 more for the quarter ended June 30, 2023, and $1,202,384 for the six months ended June 30, 2023 than the net loss reported in the previously reported in the June 30, 2023 Original Form 10-Q, and net loss for the quarter ended September 30, 2023 of $14,516,988 and nine months ended September 30, 2023 of $29,719,904, which was $268,414 more for the quarter ended September 30, 2023, and $1,470,799 than the net loss reported in the September 30, 2023 Original Forms 10-Q.

Unaudited Condensed Consolidated Balance Sheets as of March 31, 2023 - Restated

Unaudited Condensed Statements of Operations - Restated

Unaudited Condensed Consolidated Statements of Cash Flows - Restated

Unaudited Condensed Consolidated Balance Sheets - Restated

Unaudited Condensed Consolidated Statements of Operations - Restated

Unaudited Condensed Consolidated Statements of Cash Flows - Restated