TOUGHBUILT INDUSTRIES, INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS . (Form 10-Q)
The following discussion and analysis are intended to help investors understand our business, financial condition, results of operations, liquidity, and capital resources. You should read this discussion together with our consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q and in conjunction with the Company's Form 10-K for the year ended
December 31, 2021filed with the Securities Exchange Commission("SEC") on April 18, 2022. All common share and per common share numbers have been retroactively adjusted to reflect the 1-for-10 reverse stock split effected on April 15, 2020and the 1-for-150 reverse stock split effected on April 25, 2022. 23 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains "forward-looking statements," which include information relating to future events, future financial performance, financial projections, strategies, expectations, competitive environment and regulation. Words such as "may," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," and similar expressions, as well as statements in the future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved. Forward-looking statements are based on information we have when those statements are made or management's good faith belief as of that time with respect to future events and are subject to significant risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:
? the impact of the global COVID-19 pandemic and government actions, on our
business; ? supply chain disruptions;
? our limited operating history;
? our ability to manufacture, market and sell our products;
? our ability to maintain or protect the validity of our
and other intellectual property;
? our ability to launch and enter markets;
? our ability to retain key members of management;
? our ability to internally develop new inventions and intellectual property;
? interpretations of current laws and passages of future laws; and
? investor acceptance of our business model.
The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or of the risk factors that we face that could cause our actual results to differ from those anticipated 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. Business Overview Our Company was formed to design, manufacture, and distribute innovative tools and accessories to the building industry. The global tool market industry is a multibillion-dollar business. ToughBuilt's business is based on the development of innovative and state-of-the-art products, primarily in the tools and hardware category, with a particular 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 11 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. The Company also has 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 gain wider market recognition and acceptance resulting in increased product sales. As discussed below, while the Company has faced the impacts of COVID-19 and inflation, we have been able to obtain significant revenue growth. Notwithstanding, 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. In their audit report included in the Quarterly Report on Form 10-Q, our auditors have expressed that there is substantial doubt as to our ability to continue as a going concern. To fund our operations and grow our business, we will require 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 will be able to obtain additional financing on acceptable terms, if at all. If the Company is unable to obtain such additional financing, future operations would need to be scaled back or discontinued. See " Liquidity and Capital Resources ; Going Concern " below and Item 1A. Risk Factors " Going Concern " and " We will require additional capital 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 " in the Company's Annual Report on Form 10-K for the year ended
December 31, 2021filed with the SECon April 18, 2022.
We were incorporated in the
State of Nevadaon April 9, 2012, as Phalanx, Inc.We changed our name to ToughBuilt Industries, Inc.on December 29, 2015. 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- 22610) declared effective by the SECon November 8, 2018and became an Exchange Act reporting company pursuant to a Form 8-A (File No. 001-38739) on November 8, 2018. On April 15, 2020, we effected a 1-for-10 reverse stock split of our outstanding common stock. On April 25, 2022, we effected a 1-for-150 reverse stock split of our outstanding common stock. All share amounts and dollar amounts have been adjusted for the reverse stock splits.
The following highlights material business developments in our business during the fiscal year ended
December 31, 2021and during the second quarter ended June 30, 2022:
Stock-Keeping Units (SKUs) to 25 SKUs with Toolstation, a
company with more than 60 stores in
highly respected one-stop suppliers of tools, accessories and
construction products for professionals and serious do-it-yourselfers. These SKUs
include current ranges of ToughBuilt’s range of steel trestles, soft sided tool
storage and kneepads and have been slotted for immediate placement in all
stores and in the Toolstation catalog;
levels, and fully integrated with our mobile app, ToughBuilt Connect,
allowing professional builders and do-it-yourselfers to measure parts quickly, seamlessly
upload information to smartphone and create information shareable with the
touch of a button:
available for purchase from our strategic global partners and buying groups
serving more than 14,400 stores worldwide:
In 2021, our total earnings, net of allowances, totaled approximately
million against approximately
increased online sales through Amazon.com
million for 2021: and
· We have collected a total of approximately
$96.4 millionin gross proceeds in registered and unregistered equity offerings. · We received a total of $2.9 millionin gross proceeds from warrant exercises. Recent Developments Units and Prefunded Public Offering On June 22, 2022, we completed a public offering of (i) 772,157 units ("Units"), each Unit consisting of one share of common stock and one warrant to purchase one share of common stock (each, a "Warrant") for $1.90per Unit; and (ii) 2,385,738 prefunded units ("Prefunded Units"), each Prefunded Unit consisting of one prefunded warrant (a "Prefunded Warrant") to purchase one share of common stock and one Warrant, for $1.8999per Prefunded Unit. Subject to certain ownership limitations described in the Warrants, the Warrants have an exercise price of $1.90per share of common stock, are exercisable upon issuance and will expire five years from the date of issuance. The exercise price of the Warrants is subject to adjustment for stock splits, reverse splits, and similar capital transactions as described in the warrants. In connection with the offering, the Company issued Warrants to purchase an aggregate of 3,157,895 shares of common stock. Subject to certain ownership limitations described in the Prefunded Warrants, the Prefunded Warrants are immediately exercisable and may be exercised at a nominal consideration of $0.0001per share of common stock any time until all of the Prefunded Warrants are exercised in full. A holder will not have the right to exercise any portion of the Warrants or the Prefunded Warrants if the holder (together with its affiliates) would beneficially own in excess of 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrants or the Prefunded Warrants, respectively. However, upon notice from the holder to the Company, the holder may increase the beneficial ownership limitation, which may not exceed 9.99% of the number of shares of common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrants or the Prefunded Warrants, respectively, provided that any increase in the beneficial ownership limitation will not take effect until 61 days following notice to the Company. As compensation to H.C. Wainwright & Co., LLC("Wainwright" or the "Placement Agent"), as the exclusive placement agent in connection with the offering, the Company paid the Placement Agent a cash fee of 7% of the aggregate gross proceeds raised in the offering, plus a management fee equal to 0.5% of the gross proceeds raised in the offering and reimbursement of certain expenses and legal fees. The Company also issued to designees of the Wainwright Agent warrants to purchase up to 189,474 shares of common stock (the "Placement Agent Warrants"). The Placement Agent Warrants have substantially the same terms as the Warrants, except that the Placement Agent Warrants have an exercise price equal to $2.375per share, and expire on the fifth anniversary from the date of the commencement of sales in the offering. In connection with the offering, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with certain institutional investors on June 17, 2022. The Purchase Agreement contained customary representations and warranties and agreements of the Company and the Purchasers and customary indemnification rights and obligations of the parties. The shares of common stock and Warrants underlying the Units, the Warrants and Prefunded Warrants underlying the Prefunded Units and the Placement Agent Warrants described above and the underlying shares of common stock were offered pursuant to the Registration Statement on Form S-1 (File No. 333-264930), as amended, which was declared effective by the Securities and Exchange Commissionon June 17, 2022. The Company received net proceeds of approximately $5.1 millionfrom the offering, after deducting the estimated offering expenses payable by the Company, including the Placement Agent fees. The Company intends to use the net proceeds from the offering for general corporate purposes, including working capital, and the repurchase of certain existing warrants.
Private Placement of Common Shares and Warrants
July 27, 2022, we consummated the closing of a private placement pursuant to Section 4(a)(2) and/or Regulation 506(b) of the Securities Act (the "Private Placement"). Pursuant to the terms and conditions of the Securities Purchase Agreement, dated as of July 25, 2022(the "Purchase Agreement"), by and among the Company and certain institutional investors named on the signature pages thereto (the "Purchasers"). At the closing of the Private Placement, the Company issued (i) 700,000 shares of common stock (the "Placement Shares"), (ii) 3,300,000 prefunded warrants (the "Prefunded Warrants"); (iii) 4,000,000 Series A preferred investment options (the " Series A Preferred InvestmentOptions"); and (iv) 4,000,000 Series B preferred investment options (the "Series B Preferred Investment Option, and together with the "Series A Preferred Investment Options, the "Preferred Investment Options" and collectively with the Prefunded Warrants, the "Warrants"). The purchase price of each Placement Share and associated Preferred Investment Options was $5.00and the purchase price of each Prefunded Warrant and associated Preferred Investment Options was $4.9999. Each Prefunded Warrant is exercisable for $0.0001per share of common stock until all of the Prefunded Warrants are exercised in full. Each Series A Preferred Investment Option is exercisable for one share of common stock for $5.00per share until the third anniversary date of the issuance date. Each Series B Preferred Investment Option is exercisable for one share of common stock for $5.00per share until the second anniversary date of the issuance date. The exercise price and the number of our shares of common stock issuable upon the exercise of each of the Warrants are subject to adjustment for stock splits, reverse splits, and similar capital transactions, as described in the Warrants. The Preferred Warrants are exercisable on a "cashless" basis. The Preferred Investment Options may be exercised on a "cashless basis" if there is no effective registration for the underlying shares of common stock. A holder of the Warrants will not have the right to exercise any portion of the Prefunded Warrants, Series A Preferred Investment Option or Series B Preferred Options, as the case may be if the holder (together with its affiliates) would beneficially own more than 4.99% or 9.99% of the number of shares of common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrants. However, upon notice from the holder to the Company, the holder may increase the beneficial ownership limitation, which may not exceed 9.99% of the number of shares of common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrants, provided that any increase in the beneficial ownership limitation will not take effect until 61 days following notice to the Company (the "Beneficial Ownership Limitation"). If a fundamental transaction occurs, then the successor entity will succeed to, and be substituted for us, and may exercise every right and power that we may exercise and will assume all of our obligations under the Warrants with the same effect as if such successor entity had been named in such security itself. If our stockholders are given a choice as to the securities, cash or property to be received in a fundamental transaction, then the holders of the Warrants shall be given the same choice as to the consideration it receives upon any exercise of the Warrants following such fundamental transaction. In addition, holders of the Preferred Investment Options will have the right to require us to repurchase its Preferred Investment Options for cash in an amount equal to the value of the remaining unexercised portion of the Warrants based on the Black-Scholes option pricing formula. However, if the fundamental transaction is not within our control, including not approved by our board of directors, then the holder of Preferred Investment Options will only be entitled to receive the same type or form of consideration (and in the same proportion), at the value per share of common stock in the fundamental transaction for each share of common stock underlying the unexercised portion of the pre-funded warrants or preferred investment options, that is being offered and paid to our stockholder in connection with the fundamental transaction. In addition, if at any time the Company grants, issues or sells any common stock equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of common stock (the "Purchase Rights"), then the holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the holder could have acquired if the holder had held the number of shares of common stock acquirable upon complete exercise of its Warrants (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of common stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, that, to the extent that the holder's right to participate in any such Purchase Right would result in the holder exceeding the Beneficial Ownership Limitation, then the holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of common stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the holder until such time, if ever, as its right thereto would not result in the holder exceeding the Beneficial Ownership Limitation). During such time as the Warrants are outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of common stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin-off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a "Distribution"), then, in each such case, the holders of the Warrants shall be entitled to participate in such Distribution to the same extent that the holders would have participated therein if the holders had held the number of shares of common stock acquirable upon complete exercise of the Warrants (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation). All of the Purchasers were "accredited investors" as such term is defined in Rule 501(a) under the Securities Act. The Placement Shares and Warrants were offered pursuant to the exemptions provided in Section 4(a)(2) under the Securities Act and/or Rule 506(b) of Regulation D promulgated thereunder, and they were not offered pursuant to this prospectus or another prospectus. Accordingly, the Selling Stockholders may sell the Placement Shares and, upon the exercise of the Warrants, the underlying shares of common stock (the "Warrant Shares") only pursuant to an effective registration statement under the Securities Act covering the resale of those shares, an exemption under Rule 144 under the Securities Act or another applicable exemption under the Securities Act. In connection with the Private Placement, we entered into a Registration Rights Agreement with the Purchasers, dated July 25, 2022(the "Registration Rights Agreement"). The Registration Rights Agreement provides that we shall file a registration statement covering the resale of all of the Registrable Securities(as defined in the Registration Rights Agreement) with the SECno later than August 4, 2022and have the registration statement declared effective by the SECas promptly as possible after the filing thereof, but in any event no later than September 8, 2022, or, in the event of a "full review" by the SEC, October 10, 2022. Upon the occurrence of any Event (as defined in the Registration Rights Agreement), which, among others, prohibits the Purchasers from reselling the Securities for more than ten (10) consecutive calendar days or more than an aggregate of fifteen (15) calendar days during any 12-month period, we are obligated to pay to each Purchaser, on each monthly anniversary of each such Event, an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of 2.0% multiplied by the aggregate subscription amount paid by such Purchaser pursuant to the Purchase Agreement. If the Company fails to pay any partial liquidated damages in full within seven days after the date payable, the Company will pay interest thereon at a rate of 12% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. Subject to certain exceptions, neither we nor any of our security holders (other than the Purchasers in such capacity pursuant thereto) may include the securities of the Company in any registration statements other than the Securities. We may not file any other registration statements until all Securities are registered pursuant to a registration statement that is declared effective by the SEC, provided that we may file amendments to registration statements filed prior to the date of the Registration Rights Agreement so long as no new securities are registered on any such existing registration statements. Our Products TOUGHBUILT® manufactures and distributes an array of high-quality and rugged toolbelts, 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, 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. All our products are designed and engineered in the United Statesand manufactured in China, India, and the Philippinesunder our quality control supervision. We do not need government approval for any of our products.
The flagship of the product line is the soft goods line that consists of over 100 variations of tool pouches, tool rigs, toolbelts 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 sectors of the industry including plumbers, electricians, framers, builders, and more. We have a selection of over 10 models of kneepads, some with unique patented design features that allow the users to interchange components to suit conditions of use. Management believes that these kneepads are among the best performing kneepads in the industry. Our "all terrain" knee pad protection with snapshell 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 Assist Products
The second major category consists of Sawhorses and Work Support products with unique designs targeted at the most discerning users in the industry. The innovative designs and construction of the more than 15 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/job site 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 will become the standard in the construction industry.
Digital measurements and levels
TOUGHBUILT's third major product line is the digital measure and levels. These digital measures are targeted toward the PROs for accurate job site measuring, to make sure the job is done right and in time. These digital measures help calculate what amount of construction product is needed to finish the job, such as measures for floors, tile, and paint.
Our business strategy
Our product strategy is to develop product lines in several 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 time 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:
A commitment to technological innovation achieved through consumer insight,
creativity and speed to market;
· A wide selection of branded and private label products;
· Quick response;
· Superior customer service; and
· Value pricing.
We will continue to consider other market opportunities while focusing on specific customer requirements to increase sales.
In addition to the construction market, our products are marketed to the "Do-It-Yourself" and home improvement marketplace. The
U.S.housing stock of more than 130 million homes requires regular investment merely to offset normal depreciation. According to Statista.com 1 , in recent years, the U.S.home improvement industry has witnessed steady growth, and the trend is expected to continue in the near future. A significant increase occurred in 2020, mostly due to the outbreak of the coronavirus (COVID-19) pandemic and the lockdowns which ensued, leading people to stay home more often than before and take up hobbies and projects such as DIY home improvement. According to a Joint Center for Housing Studiesforecast, homeowner improvements and repair expenditures were expected to reach roughly 370 billion U.S. dollarsin the first quarter of 2022. Aside from the COVID pandemic 2 , the rising real estate prices in many Western countries were a likely contributing factor to the increase in home improvement projects. With real estate price changes outperforming wage increases, homeowners may have opted for upgrading their homes instead of purchasing a new house. 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 placements in Lowes, Home Depot, Menards, Bunnings ( Australia), Princess Auto( Canada), Dong Shin Tool PIA (S. Korea) as well as seeking to grow our sales in global markets such as Western and Central Europe, Eastern Europe, South America, and the Middle East. 1 "Home Depot and Lowe's: average amount spent by consumers 2011-2021"; published by C. Simionato( April 26, 2022); https://www.statista.com/statistics/240861/average-amount-spent-by-consumers-at-the-home-depot-and-lowes/ 2 "Home improvement projects - statistics & facts"; published by C. Simionato; ( Jan 12, 2022); https://www.statista.com/topics/7899/home-improvement-projects/#topicHeader__wrapper 27 Retailers by region include:
Hardware, ORR, Pooley,
Canada: Princess Auto.
We are actively developing in the markets of
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. Management anticipates, within the near term, adding to its customer base up to three major retailers, along with several distributors and private retailers within six sectors and among fifty-six targeted countries.
In 2021, we launched the following product lines:
• Lasers; • Levels; • Utility knives; and • Workbench. 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 to be used in the construction industry and by building enthusiasts. We are planning to have our mobile device products ready to market in 2024 at which time we intend to commence marketing and sell our mobile device products to our current global customer base. We believe that an increasing number of companies in the construction industry are requiring their employees to utilize mobile devices not just to communicate with others but to utilize the special apps that will allow the construction workers to do their job better and more efficiently. All of our mobile devices are designed and built-in accordance with IP-68 and to a military standard level of durability. Our ruggedized mobile line of products was created to place customized technology and wide varieties of data in the palm of building professionals and enthusiasts such as contractors, subcontractors, foremen, general laborers, and others. We are designing the devices, accessories, and custom apps to allow the users to plan with confidence, organize faster, find labor and products faster, estimate accurately, purchase wisely, protect themselves, workers, and their business, create and track invoicing faster and easier. Commencing in 2024, we intend to launch the following accessories: car charger, QI charger, car mounts, and earbud pack, and we will focus on sales in the following industries: construction, industrial, military, and law enforcement and "dotcoms." In late 2024, we intend to launch our T.55 rugged mobile phones and earbud headphones, as well as a "T-Dock," attachable battery, tri lens camera, and tough shield cover and accessories.
At the end of 2024, we also plan to launch applications for our mobile phones on the following themes:
1. National building codes 2. Inspection booking 3. Labor ready
4. Estimation of applications and programs
5. Structural engineers 6. Architects 7. Building plans 8. Workers' comp 9. Equipment insurance
10. Project insurance & bonds
11. Vehicle insurance 12. Liability insurance 13. Umbrella insurance 14. Collection agencies 15. Construction loans 16. Small business loans 17. Job listings 18. Tool exchange Intellectual Property We hold several patents and trademarks of various durations and believe that we hold or have applied for, or license all the patent, trademark, and other intellectual property rights necessary to conduct our business. We utilize trademarks (licensed and owned) on nearly all our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and our Company, and in distinguishing our goods from the goods of others. We consider our ToughBuilt ® , Cliptech ® , and Fearless ® trademarks to be among our most valuable intangible assets. Trademarks registered both in and outside the
U.S.are generally valid for 10 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.
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:
? Financial resources significantly greater than those at our disposal;
? More complete product lines;
? Long-standing relationships with suppliers, manufacturers and retailers;
? Wider distribution capabilities;
? Stronger brand recognition and loyalty; and
? The ability to invest much more in advertising and product sales.
29 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, and compete effectively based on 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 our 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
whosell 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 products or collaborate 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.
Main 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. Set forth below is a brief discussion of the key factors impacting our results of operations.
Known trends and uncertainties
Our business is seasonal as a result of our
China-based production. For the first calendar quarter, we are not able to ship our products from Chinadue to the hiatus as a result of their New Year holidays. We typically make up the lost sales from the first calendar quarter in the subsequent quarters.
March 2020, the World Health Organizationdeclared the outbreak of a novel coronavirus (COVID-19) as a pandemic that continues to spread throughout the United Statesand 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 supplies 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. Due to the speed and fluidity with which the COVID-19 pandemic continues to evolve, and the emergence of highly contagious variants, we do not yet know the full extent of the impact of COVID-19 on our business operations. The ultimate extent of the impact of any epidemic, pandemic, outbreak, or other public health crisis on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemic, pandemic, outbreak, or other public health crisis and actions taken to contain or prevent the further spread, including the effectiveness of vaccination and booster vaccination campaigns, among others. Accordingly, we cannot predict the extent to which our business, financial condition and results of operations will be affected. We have concluded that while it is reasonably possible that the virus could negatively impact our 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. 30 Inflation 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. Our suppliers may also fail to provide consistent quality products as they may substitute lower-cost materials to maintain pricing levels. Rapid and significant changes in commodity prices may negatively affect our profit margins if the Company is unable to mitigate any inflationary increases through various customer pricing actions and cost reduction initiatives. To offset increased prices charged by our manufacturers and increased shipping rates, we increased the prices of our products in 2021.
We acquire a majority of our products from manufacturers and distributors located 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 in and other risks relating to our supply chain, including in certain cases the use of other qualified suppliers. We increased our inventory from $38,432,012at December 31, 2021to $40, 156,305 at June 30, 2022. Due to our increased inventory levels in 2021 and the six months ended June 30, 2022, the ongoing supply chain disruptions have not had a material adverse effect on our operations and we do not currently anticipate that any continued supply chain disruptions will have a material adverse effect on our operations for the fiscal year 2022.
Reverse stock split
April 25, 2022, we effected a 1-for-150 reverse stock split of our issued and outstanding common stock as part of our plan to regain compliance with Nasdaq Listing Rule 5550(a)(2) (the "Minimum Bid Price Requirement"). On May 9, 2022, we were notified by Nasdaq that we regained compliance with Nasdaq's Minimum Bid Price Requirement and that the matter was closed.
The three months ended
Revenues Revenues for the three months ended
June 30, 2022and 2021 were $17,887,655and $15,853,368, respectively, which consisted of metal goods, soft goods and electronic goods sold to customers. Revenues increased in 2022 over 2021 by $2,034,287, or 12.83%, 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. An increase in sales through Amazon was a major factor of the increase. Cost of Goods Sold Cost of goods sold for the three months ended June 30, 2022and 2021 was $12,939,239and $12,500,092, respectively. Cost of goods sold increased in 2022 over 2021 by $439,147, or 3.51%, primarily due to our increased sales as well as increases in materials (e.g., 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 2022 was 72.34% as compared to cost of goods sold as a percentage of revenues in 2021 of 78.85%. 31 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 three months ended June 30, 2022and 2021 were $14,496,942and $9,242,946, respectively. SG&A Expenses increased in 2022 over 2021 by $5,253,996, or 56.84%, 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 June 30, 2022as a percentage of revenues was 81.04%, compared to 58.3% for the quarter ended June 30, 2021. 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 June 30, 2022and 2021 were $2,754,351and $1,429,819, respectively. R&D costs increased by $1,324,532. or 92.64%. This increase was primarily due to the Company developing new tools for the construction industry.
Other expense for the three months ended
June 30, 2022consisted of warrant issuance costs in the amount of $170,308, interest expense of $92,438and change in fair value of warrant liabilities in the amount of $429,572. Other expense for the three months ended June 30, 2021consisted of interest expense of $102,937.
Net profit (net loss)
Due to the above factors, we recorded a net loss of
for the three months ended
for the three months ended
The six months have ended
Revenues Revenues for the six months ended
June 30, 2022and 2021 were $35,108,400and $28,135,621, respectively, which consisted of metal goods, soft goods and electronic goods sold to customers. Revenues increased in 2022 over 2021 by $6,972,779or 24.78%, 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. An increase in sales through Amazon was a major factor of the increase. Cost of Goods Sold Cost of goods sold for the six months ended June 30, 2022and 2021 was $27,156,857and $21,319,219respectively. Cost of goods sold increased in 2022 over 2021 by $5,837,638, or 27.38%, primarily due to our increased sales as well as increases in materials (e.g., 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 2022 was 77.35% as compared to cost of goods sold as a percentage of revenues in 2021 of 75.77%. 32 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 six months ended June 30, 2022and 2021 were $30,430,841and $17,192,727, respectively. SG&A Expenses increased in 2022 over 2021 by $13,238,114, or 77%, 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 six months ended June 30, 2022as a percentage of revenues was 86.68% compared to 61.11% for the six months ended June 30, 2021. 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 six months ended June 30, 2022and 2021 were $5,268,805and $2,836,204, respectively. R&D costs increased by $2,432,601, or 85.77%. This increase was primarily due to the Company developing new tools for the construction industry.
Other expense for the six months ended
June 30, 2022consisted of warrant issuance costs in the amount of $445,438, interest expense of $92,181and change in fair value of warrant liabilities in the amount of $ 4,045,732. Other expense for the six months ended June 30, 2021consisted of interest expense of $263,556. Net Income (Loss) Due to factors set forth above, we recorded a net loss of $24,239,990for the six months ended June 30, 2022as compared to a net loss of $13,476,085for the six months ended June 30, 2021.
liquidity and capital resources; Continuity of exploitation
$2.1 millionin cash at June 30, 2022compared to $7.5 millionat December 31, 2021. The Company has incurred substantial operating losses since its inception. As reflected in the consolidated financial statements, the Company had an accumulated deficit of approximately $120.9 millionat June 30, 2022, a net loss of approximately $24.2 million, and approximately $12.9 millionof net cash used in operating activities for the six months ended June 30, 2022. 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. The Company anticipates incurring additional losses until such time, if ever, that it can obtain marketing approval to sell, and then generate significant sales, of its technology that is currently in development. As such it is likely that additional financing will be needed by the Company to fund its operations and to develop and commercialize its technology. We will seek to obtain additional capital through the sale of debt or equity financings or other arrangements to fund operations; however, there can be no assurance that the Company 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 the Company's ability to pay dividends or make other distributions to stockholders. If the Company is unable to obtain such additional financing, future operations would need to be scaled back or discontinued. Due to the uncertainty in the Company's ability to raise capital, management believes that there is substantial doubt in the Company's ability to continue as a going concern for the next twelve months from the issuance of these consolidated financial statements.
January 19, 2021, the Company filed a prospectus supplement dated January 15, 2021to the Company's shelf registration statement on Form S-3 (File No. 333-251185) (the "First Form S-3") declared effective by the SECon December 13, 2020for the offer and sale of shares of common stock having an aggregate value of $8,721,746through H.C. Wainwright & Co., LLC, as sales agent ("Wainwright"), pursuant to that certain At The Market Offering Agreement, dated December 7, 2020(the "ATM Agreement"), between the Company and Wainwright. Pursuant to the prospectus supplement, the Company sold an aggregate of 99,748 shares of common stock for net proceeds of $16,242,904after 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 Form S-3") containing a base prospectus covering the offering, issuance and sale by the Company of up to $100,000,000of the Company's common stock, preferred stock, warrants and units; and a sales agreement prospectus covering the offering, issuance and sale by the Company 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 that certain At The Market Offering Agreement, dated February 1, 2021, between the Company and Wainwright, as sales agent. The Second S-3 was declared effective by the SECon February 8, 2021. The Company terminated the First S-3 simultaneously with the filing of the Second S-3. From February 2021to July 2021, the Company sold an aggregate of 125,508 shares of common stock through Wainwright with net proceeds of $24,602,110, after deducting underwriting discounts and expenses. On July 14, 2021, the Company sold an aggregate of 306,855 shares of common stock to several institutional and accredited investors in a registered direct offering pursuant to the Second Form S-3 for net proceeds of $36,259,050, after deducting underwriting discounts and expenses. On February 15, 2022, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with certain institutional investors, pursuant to which the Company issued, in a registered direct offering, an aggregate of $5,000,000of Preferred Stock (split evenly among 2,500 shares Series F Convertible Preferred Stock, par value $0.0001per share ("Series F Preferred Stock"), and 2,500 shares of Series G Convertible Preferred Stock, par value $0.0001per share ("Series G Preferred Stock"). The Series F Preferred Stock and Series G Preferred Stock have a stated value of $1,000per share and are convertible into common stock at any time after the date of issuance. The conversion rate, subject to adjustment as set forth in the Certificate of Designation, is determined by dividing the stated value of the Series F Preferred Stock and Series G Preferred Stock by $30(the "Conversion Price"). The Conversion Price can be adjusted as set forth in the Certificate of Designation for stock dividends and stock splits or the occurrence of a fundamental transaction. The 2,500 shares of Series F Preferred Stock and 2,500 shares of Series G Preferred Stock are each convertible into 83,334 shares of common stock. The Series F Preferred Stock and Series G Preferred Stock and the underlying shares of common stock were offered pursuant to the Second Form S-3 (as defined above). In a concurrent private placement, the Company also issued to such investors unregistered warrants to purchase up to an aggregate of 125,000 shares of the Company's common stock for $37.65per share from April 15, 2022until the fifth year from the date of issuance. We received net proceeds of approximately $5.1 millionfrom the offering, after deducting the estimated offering expenses payable by the Company, including the placement agent fees. On July 27, 2022, we consummated the closing of a private placement pursuant to Section 4(a)(2) and/or Regulation 506(b) of the Securities Act (the "Private Placement"). Pursuant to the terms and conditions of the Securities Purchase Agreement, dated as of July 25, 2022(the "Purchase Agreement"), by and among the Company and certain institutional investors named on the signature pages thereto (the "Purchasers"). At the closing of the Private Placement, the Company issued (i) 700,000 shares of common stock (the "Placement Shares"), (ii) 3,300,000 prefunded warrants (the "Prefunded Warrants"); (iii) 4,000,000 Series A preferred investment options (the " Series A Preferred InvestmentOptions"); and (iv) 4,000,000 Series B preferred investment options (the "Series B Preferred Investment Option, and together with the "Series A Preferred Investment Options, the "Preferred Investment Options" and collectively with the Prefunded Warrants, the "Warrants"). The purchase price of each Placement Share and associated Preferred Investment Options was $5.00and the purchase price of each Prefunded Warrant and associated Preferred Investment Options was $4.9999. The net proceeds to the Company from the Private Placement were approximately $18.4 million, after deducting placement agent fees and other offering expenses.
The Company expects to use its cash within twelve months of
and beyond for working capital and research and development.
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