The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that may cause our actual results to differ from those anticipate in our forward-looking statements.
Moreover, new risks regularly emerge and it is not possible for our management to predict or articulate all risks we face, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us on the date of this Quarterly Report on Form 10-Q. Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained above and throughout this Quarterly Report on Form 10-Q.
Our Company was incorporated on April 9, 2012 as Phalanx, Inc., in the state of Nevada and changed its name to ToughBuilt Industries, Inc. on December 29, 2015.
We were formed to design, manufacture, and distribute innovative tools and accessories to the building industry. We market and distribute various home improvement and construction product lines for both do-it-yourself (“DIY”) and professional markets under the TOUGHBUILT® brand name, within the global multibillion dollar per year tool market. All of our products are designed by our in-house design team. Since our initial launch of product sales seven years ago, we have experienced annual sales growth from approximately $1,000,000 in 2013 to $20,000,000 in 2019 (or $19,090,071 net of allowances).
Since August 2013, pursuant to a Service Agreement, we have been collaborating with Belegal, a Chinese firm, whose team of experts has provided ToughBuilt with additional engineering, sourcing services, and quality control support for our operations in China. Belegal assists us with supply-chain management (process and operations in China) for our operations in China, among other things, facilitating the transmission of our purchase orders to our suppliers in China, conducting “in-process” quality checking and inspection, and shipping end-products manufactured in China to their final destinations. In accordance with the agreement, we pay all of the monthly costs for payroll, overhead and other operation expenses associated with the Belegal’s activities on behalf of ToughBuilt.
Our business is currently based on development of innovative and state of the art products, primarily in tools and hardware category, with particular focus on building and construction industry with the ultimate goal of making life easier and more productive for contractors and workers alike. Our current product line includes two major categories related to this field, with several additional categories in various stages of development, consisting of Soft Goods and Kneepads and Sawhorses and Work Products.
ToughBuilt designs and manages its 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 products to the building and home improvement communities that are innovative, of superior quality derived in part from enlightened creativity for our end users while enhancing performance, improving well-being and building high brand loyalty.
During 2020, we expanded its product line with Lowes. Lowe.ca will now carry a wide array of ToughBuilt products, including but not limited to Cliptech tool belts, bags and totes, knee pads, sawhorses, and Miter Saw Stands. Lowe’s Canadian customers will now have the option to purchase ToughBuilt products while they shop online at www.lowes.ca..
On April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions from, without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board (PCAOB) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (a) the last day of our fiscal year following the fifth anniversary of the IPO, (b) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (c) the last day of our fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, or Exchange Act (which would occur if the market value of our equity securities that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter), or (d) the date on which we have issued more than $1 billion in nonconvertible debt during the preceding three-year period.
The tool equipment and accessories industry is highly competitive on a worldwide basis. 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:
| | ● | Significantly greater financial resources than we have; |
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| | ● | More comprehensive product lines; |
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| | ● | Longer-standing relationships with suppliers, manufacturers, and retailers; |
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| | ● | Broader distribution capabilities; |
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| | ● | Stronger brand recognition and loyalty; and |
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| | ● | The ability to invest substantially more in product advertising and sales. |
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 on the basis of price and production, and more quickly develop new products. These competitors include DeWalt, Caterpillar, and Samsung Active.
The markets for our mobile products and services are also highly competitive and we are confronted by aggressive competition in all areas of its business. These markets are characterized by frequent product introductions and rapid technological advances that have substantially increased the capabilities and use of mobile communication and media devices, personal computers and other digital electronic devices. Our competitors who sell mobile devices and personal computers based on other operating systems have aggressively cut prices and lowered their product margins to gain or maintain market share. Our financial condition and operating results can be adversely affected by these and other industry-wide downward pressures on gross margins. Principal competitive factors important to us include price, product features, relative price/performance, product quality and reliability, design innovation, a strong third-party software and peripherals ecosystem, marketing and distribution capability, service and support, and corporate reputation.
We are focused on expanding its market opportunities related to mobile communication and media devices. These industries are highly competitive and include several large, well-funded and experienced participants. We expect competition in these industries to intensify significantly as competitors attempt to imitate some of the features of the Company’s products and applications within their own products or, alternatively, collaborate with each other to offer solutions that are more competitive than those they currently offer. These industries are characterized by aggressive pricing practices, frequent product introductions, evolving design approaches and technologies, rapid adoption of technological and product advancements by competitors, and price sensitivity on the part of consumers and businesses. Competitors include Apple, Samsung, and Qualcomm, among others.
Risk and Uncertainty Concerning COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic which continues to spread throughout the United States and the World. We are currently monitoring the outbreak of COVID-19 and the related business and travel restrictions and changes to behavior intended to reduce its spread. All of our Chinese facilities were temporarily closed for a period of time. All of these facilities have been reopened. Depending on the progression of the outbreak, our ability to obtain necessary supplies and ship finished products to customers may be partly or completely disrupted globally. To date we have been able to obtain supplied and products needed. Also, our ability to maintain appropriate labor levels could be disrupted. If the coronavirus continues to progress, it could have a material negative impact on our results of operations and cash flow, in addition to the impact on its employees. We have concluded that while it is reasonably possible that the virus could have a negative impact on the results of operations, the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The three months ended September 30, 2021 compared to the three months ended September 30, 2020.
Revenues for the three months ended September 30, 2021 and 2020 were $17,215,938 and $16,663,389, respectively, consisted of metal goods and soft goods sold to customers. Revenues increased in 2021 over 2020 by $552,549, or 3.32%, primarily due to wide acceptance of our products in the tools industry and receipt of recurring sales orders for metal goods and soft goods from our existing and new customers, and introduction and sale of new soft goods products to our customers.
Cost of goods sold for the three months ended September 30, 2021 and 2020 was $11,771,315 and $9,834,009, respectively. Cost of goods sold increased in 2021 over 2020 by $1,937,306 or 19.70%, primarily due to our increased sales as well as increases in materials cost of steel and plastics polyester to manufacture metal goods and soft goods and increase in labor cost in China. Cost of goods sold as a percentage of revenues in 2021 was 68.37% as compared to cost of goods sold as a percentage of revenues in 2020 of 59.02%.
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 three months ended September 30, 2021 and 2020 were $15,242,780 and $5,703,676, respectively. SG&A Expenses increased in 2021 over 2020 by $9,539,104 or 167.24%, primarily due to an increase in shipping costs, marketing and advertising expenses for product launches and the hiring of additional employees. SG&A Expense for the quarter ended September 30, 2021 as a percentage of revenues was 88.54% compared to 34.23% for the quarter ended September 30, 2020. We expect our SG&A Expenses will start to increase at a lower rate as our business matures, and we develop economies of scale.
Research and development costs (“R&D”) for the three months ended September 30, 2021 and 2020 were $1,610,671 and $789,890, respectively. R&D costs increased by $820,781, or 103.91%. This increase was primarily due to the Company developing new tools for the construction industry.
Other expense for the three months ended September 30, 2021 consisted of warrant issuance costs in the amount of $588,221 and change in fair value of warrant liabilities in the amount of $2,902,342. Other expense for the three months ended September 30, 2020, consisted of interest expense in the amount of $214,979.
Due to factors set forth above, we recorded a net loss of $9,094,707 for the three months ended September 30, 2021 as compared to a net income of $120,835 for the three months ended September 30, 2020.
The nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
Revenues for the nine months ended September 30, 2021 and 2020 were $45,351,558 and $27,412,547, respectively, consisted of metal goods and soft goods sold to customers. Revenues increased in 2021 over 2020 by $17,939,011, or 65.44%, primarily due to additional Amazon sales and European sales that we did not have during the nine months ended September 30, 2020.
Cost of goods sold for the nine months ended September 30, 2021 and 2020 was $31,479,176 and $16,537,654, respectively. Cost of goods sold increased in 2021 over 2020 by $14,941,522 or 90.35%, primarily due to our increased sales as well as increases in materials cost of steel and plastics polyester to manufacture metal goods and soft goods and increase in labor cost in China. Cost of goods sold as a percentage of revenues in 2021 was 69.41% as compared to cost of goods sold as a percentage of revenues in 2020 of 60.33%
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 nine months ended September 30, 2021 and 2020 were $33,904,958 and $14,727,242, respectively. SG&A Expenses increased in 2021 over 2020 by $19,177,716 or 130.22%, primarily due to an increase in shipping costs, marketing and advertising expenses for product launches and the hiring of additional employees. SG SG&A expense for the nine months ended September 30, 2021 as a percentage of revenues was 74.76%, as compared to 53.72% for the nine months ended September 3, 2020. We expect our SG&A expense will start to increase at a lower rate as our business matures, and we develop economies of scale.
Research and development costs (the “R&D”) for the nine months ended September 30, 2021 and 2020 were $4,588,781 and $1,496,129, respectively. R&D costs decreased in 2021 over 2020 by $3,092,652 or 206.71%. We have incurred additional R&D costs during 2021 primarily due to the Company developing new tools for the construction industry.
Other expense for the nine months ended September 30, 2021 consisted of warrant issuance costs in the amount of $588,221, change in fair value of warrant liabilities in the amount of $2,902,342 and interest expense in the amount of $263,555. Other expense for the nine months ended September 30, 2020, consisted of interest expense in the amount of $804,504.
Due to factors set forth above, we recorded net loss of $22,570,791 for the nine months ended September 30, 2021 as compared to a net loss of $6,152,982 for the nine months ended September 30, 2020.
Liquidity and Capital Resources
We had $31.2 million in cash at September 30, 2021, compared to $2.2 million at December 31, 2020.
On June 2, 2020, the Company closed on a public offering of 19 million shares of common stock and 20.7 million warrants pursuant to a Form S-1 from which it received net proceeds of $17,185,640, after deducting underwriting discounts and expenses. On June 12, 2020, the Company closed on the public offering of 1.7 million additional shares of common stock for net proceeds of $1,548,360, after deducting underwriting discounts and expenses, pursuant to the underwriter exercising the overallotment option from the June 2, 2020 public offering.
On January 28, 2020, the Company closed on a public offering 4.5 million shares of common stock and 49.45 million warrants (each exercisable into 1/20
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of a share of common stock for a total of 2.4725 million shares of common stock) from which it received net proceeds of $8,549,470, after deducting underwriting discounts and expenses. On February 24, 2020, the Company closed on the public offering of 445,000 additional shares of common stock for net proceeds of $839,270, after deducting underwriting discounts and expenses, due to the exercise of the over-allotment option issued the underwriter in January 28, 2020 public offering.
On January 19, 2021, the Company filed a prospectus supplement dated January 15, 2021 (the “ATM Prospectus Supplement”) to the shelf registration statement Form S-3 (File No. 333-251185) declared effective by the SEC on December 15, 2020 (the “First Form S-3”) for the offer and sale shares of common stock having an aggregate value of $8,721,746 from time to time through H.C. Wainwright & Co., LLC, as sales agent (“Wainwright”), pursuant to the At The Market Offering Agreement, dated December 7, 2020 (the “ATM Agreement”), between the Company and Wainwright. During January 2021, the Company has raised approximately $16,200,000 through the sale of 14.9 million shares of the Company’s common stock with net proceeds of $16,242,904 after deducting underwriting discounts and expenses
On February 2, 2021, the Company filed a second registration statement on Form S-3 (File No. 333-252630) (the “Second S-3”) containing a base prospectus covering the offering, issuance and sale by the Company of up to $100,000,000 of the Company’s common stock, preferred stock, warrants and units; and a sales agreement prospectus covering the offering, issuance and sale by us of up to a maximum aggregate offering price of $100,000,000 (which amount was included in the aggregate offering price set forth in the base prospectus) of the Company’s common stock that may be issued and sold under a second At The Market Offering Agreement, dated February 1, 2021, we entered into with Wainwright, as sales agent. The Second S-3 was declared effective by the SEC on February 8, 2021. The Company terminated the First S-3 simultaneously with the filing of the Second S-3. From February 2021 to July 2021, the Company sold an aggregate of 18,826,177 shares of common stock through the Wainwright under the Second S-3 with net proceeds of $24,602,110, after deducting underwriting discounts and expenses.
On July 14, 2021, the Company raised gross proceeds of $40,000,000 in a registered direct offering pursuant to a Form S-3 involving the sale of shares and warrants to several institutional and accredited investors. These shares were sold pursuant to the Second S-3. There was a total of 46,029,920 shares of common stock sold with net proceeds of $36,259,050, after deducting underwriting discounts and expenses.
Registered Direct Offering on Form S-3
As previously reported by the Company on Form 8-K filed with the SEC on July 14, 2021, on July 11, 2021, the Company entered into a Securities Purchase Agreement, dated July 11, 2021 (the “Agreement”) with several institutional and accredited investors (the “Purchasers”) pursuant to which the Company agreed to issue and sell in a registered direct offering (the “Offering”) an aggregate of 46,029,920 shares (the “Shares”) of its common stock and warrants (the “Warrants”) to purchase up to an aggregate of 23,014,960 shares of common stock at a combined offering price of $0.869 per share and accompanying warrant, for gross proceeds of approximately $40,000,000. The Warrants have an exercise price equal to $0.81 per share, and are immediately exercisable until the fifth anniversary of the date of issuance.
