Toughbuilt Industries, Inc

TOUGHBUILT INDUSTRIES, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE Nine MONTHS ENDED September 30, 2021 and 2020

(UNAUDITED)

	Series C					Series D						Series E
	Preferred					Preferred						Preferred								Additional						Total
	Stock					Stock						Stock				Common Stock				Paid-in			Accumulated			Stockholders’
	Shares			Amount		Shares			Amount			Shares		Amount		Shares		Amount		Capital			Deficit			Equity

Balance - January 1, 2020		1,268		$	-		5,775		$	4,816,485			-	$	-		3,300,015	$	330	$	41,823,048		$	(43,413,370	)	$	3,226,493
Redemption of Series D Preferred Stock		-			-		(2,212	)		(1,844,860	)		-		-		-		-		(1,295,294	)		-			(3,140,154	)
Issuance of common stock upon Series C preferred conversion		(1,268	)		-					-			-		-		126,800		13		(13	)		-			-
Issuance of common stock upon conversion of convertible notes payable		-			-		-			-			-		-		200,000		20		(186,171	)		-			(186,151	)
Issuance of common stock and warrants, net of issuance costs		-			-		-			-			-		-		4,945,000		495		9,388,245			-			9,388,740
Issuance of common stock upon exercise of warrants		-			-		-			-			-		-		2,407,953		241		(241	)		-			-
Stock based compensation expense		-			-		-			-			-		-						96,490						96,490
Net loss		-			-		-			-			-		-		-		-		-			(3,754,659	)		(3,754,659	)

Balance - March 31, 2020		-		$	-		3,563		$	2,971,625			-	$	-		10,979,768	$	1,099	$	49,826,064		$	(47,168,029	)	$	5,630,759
Issuance of common stock upon conversion of Series D Preferred Stock		-			-		(3,563	)		(2,971,625	)		-		-		3,141,426		314		2,971,311			-			-
Issuance of common stock upon conversion of convertible notes payable		-			-		-			-			-		-		3,200,000		320		3,091,965			-			3,092,285
Issuance of common stock and warrants		-			-		-			-			-		-		20,700,000		2,070		18,731,930			-			18,734,000
Issuance of common stock for services		-			-		-			-			-		-		360,000		36		572,364			-			572,400
Issuance of common stock upon exercise of warrants		-			-		-			-			-		-		33,437		3		(3	)		-			-
Stock based compensation expense		-			-		-			-			-		-		-		-		227,499			-			227,499
Net loss		-			-		-			-			-		-		-		-		-			(2,519,158	)		(2,519,158	)
Balance – June 30, 2020		-		$	-		-		$	-			-	$	-		38,414,631	$	3,842	$	75,421,130		$	(49,687,187	)	$	25,737,785

Stock based compensation expense		-			-		-			-			-		-		-		-		(8,316	)		-			(8,316	)
Net income		-			-		-			-			-		-		-		-		-			120,835			120,835
Balance – September 30, 2020		-		$	-		-		$	-			-	$	-		38,414,631	$	3,842	$	75,412,814		$	(49,566,352	)	$	25,850,304


January 1, 2021		-		$	-		-		$	-			-		-		43,918,831	$	4,392	$	80,103,653		$	(60,761,992	)	$	19,346,053
Issuance of common stock upon conversion of warrants		-			-		-			-			-		-		5,408,540		541		5,407,999			-			5,408,540
Issuance of common stock for services		-			-		-			-			-		-		150,000		15		188,985			-			189,000
Issuance of common stock		-			-		-			-			-		-		32,127,914		3,213		39,071,177			-			39,074,390
Stock based compensation expense		-			-		-			-			-		-		-		-		81,537			-			81,537
Net loss		-			-		-			-			-		-		-		-		-			(6,053,659	)		(6,053,659	)
Balance - March 31, 2021		-		$	-		-		$	-			-	$	-		81,605,285	$	8,161	$	124,853,351		$	(66,815,651	)	$	58,045,861
Stock based compensation expense		-			-		-			-			-		-		-		-		81,539			-			81,539
Net loss		-			-		-			-			-		-		-		-		-			(7,422,426	)		(7,422,426	)
Balance – June 30, 2021		-		$	-		-		$	-			-		-		81,605,285	$	8,161	$	124,934,890		$	(74,238,077	)	$	50,704,974
Issuance of common stock and warrants		-			-		-			-			-		-		47,690,322		4,769		31,150,121			-			31,154,890
Issuance of common stock upon exercise of warrants		-			-		-			-			-		-		4,000		-		4,000			-			4,000
Stock based compensation expense		-			-		-			-			-		-		-		-		69,371			-			69,371
Net loss		-			-		-			-			-		-		-		-		-			(9,094,707	)		(9,094,707	)
Balance – September 30, 2021		-		$	-		-		$	-			-	$	-		129,299,607	$	12,930	$	156,158,382		$	(83,332,784	)	$	72,838,528

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.

TOUGHBUILT INDUSTRIES, INC.

Notes to the Condensed Consolidated Financial Statements

September 30, 2021 and 2020

(Unaudited)

NOTE 1: NATURE OF OPERATIONS AND BASIS OF PRESENTATION

General

The unaudited condensed consolidated financial statements of ToughBuilt Industries, Inc. (“ToughBuilt” or the “Company”) as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 should be read in conjunction with the financial statements for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the Securities Exchange Commission (“SEC”) on March 26, 2021 and can also be found on the Company’s website (www.toughbuilt.com). ToughBuilt was incorporated under the laws of the State of Nevada on April 9, 2012 under the name Phalanx, Inc., and on December 29, 2015, Phalanx, Inc. changed its name to ToughBuilt Industries, Inc.

On April 15, 2020, the Company effected a 1-for-10 reverse stock split (the “Reverse Split”) of its issued and outstanding common stock. As a result of the Reverse Split, each ten shares of issued and outstanding prior to the Reverse Split were converted into one share of common stock, with fractional shares resulting from the Reverse Split rounded up to the nearest whole number. All share and per share numbers in the unaudited condensed consolidated financial statements and notes below have been revised retroactively to reflect the Reverse Split.

Nature of Operations

In these notes, the terms “we,” “our,” “ours,” “us,” “it,” “its,” “ToughBuilt,” and the “Company” refer to ToughBuilt Industries, Inc., a Nevada corporation.

The Company designs and distributes tools and accessories to the home improvement community and the building industry. The Company aspires to augment brand loyalty in part from the enlightened creativity of its end users throughout the global tool market industry. The Company holds exclusive patents and licenses to develop, manufacture, market and distribute various home improvement and construction product lines for both Do-it-Yourself (“DIY”) and professional trade markets under the TOUGHBUILT® brand name.

TOUGHBUILT distributes products in the following categories, all designed and engineered in the United States and manufactured by third party vendors in China, with manufacturing being brought online in India and the Philippines:

	●	tool belts, tool bags and other personal tool organizer products;
	●	complete line of knee pads for various construction applications; and
	●	job-site tools and material support products consisting of a full line of miter-saws and table saw stands, saw horses/job site tables and roller stands.

On 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

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.

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 consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Liquidity

As of September 30, 2021, the Company’s principal sources of liquidity consisted of approximately $31 million of cash and future cash generated from operations. The Company believes its current cash balances coupled with anticipated cash flow from operating activities will be sufficient to meet its working capital requirements for at least one year from the date of the issuance of the accompanying consolidated financial statements. The Company continues to control its cash expenses as a percentage of expected revenue on an annual basis and thus may use its cash balances in the short-term to invest in revenue growth. Based on current internal projections, the Company believes it has and/or will generate sufficient cash for its operational needs, for at least one year from the date of issuance of the accompanying consolidated financial statements. Management is focused on growing the Company’s existing product offering, as well as its customer base, to increase its revenues. The Company cannot give assurance that it can increase its cash balances or limit its cash consumption and thus maintain sufficient cash balances for its planned operations or future acquisitions. Future business demands may lead to cash utilization at levels greater than recently experienced. The Company may need to raise additional capital in the future. However, the Company cannot assure that it will be able to raise additional capital on acceptable terms, or at all. Subject to the foregoing, management believes that the Company has sufficient capital and liquidity to fund its operations for at least one year from the date of issuance of the accompanying consolidated financial statements.

Basis of Presentation

These interim condensed consolidated financial statements are unaudited and were prepared by the Company in accordance with generally accepted accounting principles in the United States of America (GAAP) and with the SEC’s instructions to Form 10-Q and Article 10 of Regulation S-X.

The preparation of interim condensed consolidated financial statements requires management to make assumptions and estimates that impact the amounts reported. These interim consolidated condensed financial statements, reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company’s results of operations, financial position and cash flows for the interim periods ended September 30, 2021 and 2020; however, certain information and footnote disclosures normally included in our audited annual financial statements, as included in the Company’s interim condensed consolidated financial statements on Form 10-Q, have been condensed or omitted pursuant to such SEC rules and regulations and accounting principles applicable for interim periods. It is important to note that the Company’s results of operations and cash flows for interim periods are not necessarily indicative of the results of operations and cash flows to be expected for a full fiscal year or any other interim period. The information included in this Quarterly Report on Form 10-Q should be read in connection with the financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Toughbuilt Industries UK Limited. All intercompany balances and transaction are eliminated.

Reclassifications

Certain amounts in the prior periods presented have been reclassified to conform to the current period financial statement presentation. These reclassifications have no effect on previously reported total assets or net loss.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to the valuation of accounts and factored receivables, valuation of long-lived assets, accrued liabilities, notes payable and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Cash

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. The Company did not have any cash equivalents at September 30, 2021 and December 31, 2020.

Accounts Receivable

Accounts receivable represent income earned from the sale of tools and accessories for which the Company has not yet received payment. Accounts receivable are recorded at the invoiced amount and adjusted for amounts management expects to collect from balances outstanding at period-end. The Company estimates the allowance for doubtful accounts based on an analysis of specific accounts and an assessment of the customer’s ability to pay, among other factors. At September 30, 2021 and December 31, 2020, no allowance for doubtful accounts was recorded.

The Company accounts for the transfer of accounts receivable to a third party under a factoring type arrangement in accordance with Accounting Standards Codification (“ASC”) 860,

“

Transfers and Servicing

”. ASC 860 requires that several conditions be met in order to present the transfer of accounts receivable as a sale. Even though the Company has isolated the transferred (sold) assets and has the legal right to transfer its assets (accounts receivable), it does not meet the third test of effective control since its accounts receivable sales agreement with a third-party factor requires it to be liable in the event of default by one of its customers. Because it does not meet all three conditions, it does not qualify for sale treatment of its accounts receivable, and its debt thus incurred is presented as a secured loan liability, entitled “Factor loan payable,” on its balance sheet. The Company recorded a sales discount of $13,000 at September 30, 2021 and December 31, 2020.

Inventory

Inventory is valued at the lower of cost or net realizable value using the first-in, first-out method. The reported net value of inventory includes finished saleable products that will be sold or used in future periods. The Company reserves for obsolete and slow-moving inventory. At September 30, 2021 and 2020, there were no reserves for obsolete and slow-moving

inventory.

Inventory includes capitalized freight in and custom duty fees. The Company began capitalizing such fees to inventory during the three months ending September 30, 2021.

Property and Equipment

Property and equipment are recorded at cost, less accumulated depreciation. The Company provides for depreciation on a straight-line basis over the estimated useful lives which are as follows: furniture 5 years, computers 3 years, production equipment 5 years, automobiles and transportation 5 years, tooling and molds 3 years, application development 3 years, website design 4 years, and steelbox 5 years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related assets when they are placed into service. The Company evaluates property and equipment for impairment periodically to determine if changes in circumstances or the occurrence of events suggest the carrying value of the asset or asset group may not be recoverable. Maintenance and repairs are charged to operations as incurred. Expenditures which substantially increase the useful lives of the related assets are capitalized.

Long-lived Assets

In accordance with ASC 360, “

Property, Plant, and Equipment,

” the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset compared to the estimated future undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss equal to the excess of the carrying value over the assets fair market value is recognized when the carrying amount exceeds the undiscounted cash flows. The impairment loss is recorded as an expense and a direct write-down of the asset. No impairment loss was recorded during the nine months ended September 30, 2021 and 2020.

Fair Value of Financial Instruments and Fair Value Measurements

The Company adheres to ASC 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

	●	Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

	●	Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.

	●	Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The fair value of the Company’s warrant liability recorded in the Company’s financial statements was determined using a Black-Scholes valuation methodology and the quoted price of the Company’s common stock in an active market, a Level 3 measurement. Volatility was based on the actual market activity of the Company for the period in which the Company was public and it’s peer group for the remaining period. The expected life was based on the remaining contractual term of the warrants, and the risk-free interest rate was based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants’ expected life.

The Company calculated the estimated fair value of warrants on the date of issuance and at each subsequent reporting date using the following assumptions:

	For the Nine Months
	Ended September 30, 2021
Risk-free interest rate		0.80% - 0.98%
Contractual term		4.75 – 5 years
Expected volatility		56.27 % - 57.67%

Level 3 Fair Value Sensitivity

Warrant liability

The table below provides a reconciliation of the balances for the warrant liability which is measured at fair value using significant unobservable inputs (Level 3):

Balance, January 1, 2021	$	—
Fair value of warrant liability at issuance (2021 Offering Warrants as defined and described in Note 6)		7,463,005
Change in the fair value of warrant liability		(2,902,342	)
Balance, September 30, 2021	$	4,560,663

Revenue Recognition

The Company recognizes revenues when product is delivered to the customer, and the ownership is transferred. The Company’s revenue recognition policy is based on the revenue recognition criteria established under the Financial Accounting Standards Board – Accounting Standards Codification 606

“Revenue From Contracts With Customers

” which has established a five-step process to govern contract revenue and satisfy each element is as follows: (1) Identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as you satisfy a performance obligation. The Company records the revenue once all the above steps are completed. See Note 7 for further information on revenue recognition.

Income Taxes

The Company accounts for income taxes following the asset and liability method in accordance with the ASC 740 “Income Taxes.” Under such method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company applies the accounting guidance issued to address the accounting for uncertain tax positions. This guidance clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements as well as provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company classifies interest and penalty expense related to uncertain tax positions as a component of income tax expense. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years that the asset is expected to be recovered or the liability settled. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in its assessment of a valuation allowance.

During 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was passed, which temporarily removed 80% limitations on net operating loss carryforwards for the years 2019 and 2020.

The Company adopted FASB ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting of Income Taxes,” as of January 1, 2021. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The adoption of this guidance did not have a material impact on its financial statements.

Stock Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718-10, “

Share-Based Payment

,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock units, and employee stock purchases based on estimated fair values. In addition, as of January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2018-07,

Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting

. This ASU simplified aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. The adoption of this guidance did not have a material impact on the financial statements.

The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The Company’s determination of fair value using an option-pricing model is affected by the stock price as well as assumptions regarding the number of highly subjective variables.

The Company estimates volatility based upon the historical stock price of the comparable companies and estimates the expected term for employee stock options using the simplified method for employees and directors and the contractual term. The risk-free rate is determined based upon the prevailing rate of United States Treasury securities with similar maturities.

The Company recognizes forfeitures as they occur rather than applying a prospective forfeiture rate in advance.

Common Stock Purchase Warrants

The Company accounts for the common stock purchase warrants in accordance with the guidance contained in ASC 815-40, under which the Warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, the Company classifies the Warrants as liabilities at their fair value and adjusts the Warrants to fair value in respect of each reporting period. This liability is subject to re-measurement at each balance sheet date until the Warrants are exercised, and any change in fair value is recognized in the statements of operations.

Earnings (Loss) Per Share

The Company computes net earnings (loss) per share in accordance with ASC 260, “

Earnings per Share”

. ASC 260 requires presentation of both basic and diluted net earnings per share (“EPS”) on the face of the statement of operations. Basic EPS is computed by dividing earnings (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of warrants, convertible preferred stock and convertible debentures. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2021			2020		2021			2020
Net income (loss) computation of basic and diluted net income (loss) per common share:
Net income (loss)	$	(9,094,707	)	$	120,835	$	(22,570,791	)	$	(6,152,982	)
Less: Redemption of Series D Preferred Stock deemed dividend		-			-		-			(1,295,294	)
Net income (loss) attributable to common stockholders	$	(9,094,707	)	$	120,835	$	(22,570,791	)	$	(7,448,276	)

Basic and diluted net income (loss) per share:
Basic and diluted net income (loss) per common share	$	(0.07	)		0.00.		(0.25	)		(0.32	)
Basic and diluted weighted average common shares outstanding		122,060,087			38,414,631		90,619,171			23,154,481

Potentially dilutive securities that are not included in the calculation of diluted net loss per share because their effect is anti-dilutive are as follows as of September 30, (in common equivalent shares):

	2021		2020
Warrants		42,289,317		21,925,102
Series A & B Notes		-		213,105
Options and restricted stock units		203,135		197,193
Total anti-dilutive weighted average shares		42,492,452		22,335,400

No Segment Reporting

The Company operates one reportable segment referred to as th

tools segment. A single management team that reports to the Chief Executive Officer comprehensively manages the business. Accordingly, the Company does not have separately reportable segments.

Advertising

Advertising costs are expensed as incurred. Advertising expense for the three months ended September 30, 2021 and 2020 amounted to $2,618,475 and $467,982, respectively. Advertising expense for the nine months ended September 30, 2021 and 2020, amounted to $6,844,886 and $952,416, respectively.

Patents

Legal fees and similar costs incurred relating to patents are capitalized and are amortized over their estimated useful life once determined. Such costs amounted to $333,403 as of September 30, 2021, and are included in other assets on the accompanying consolidated balance sheet.

Recent Accounting Pronouncements

As an emerging growth company, the Company has elected to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Securities and Exchange Act of 1934, as amended.

In February 2016, the FASB issued ASU 2016-02, “

Leases

(Topic 842).” The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective

for

fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022 and is to be applied utilizing a modified retrospective approach. The Company is currently evaluating this guidance to determine the impact it may have on its financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (“Topic 326”)”. The ASU introduces a new accounting model, the Current Expected Credit Losses model (“CECL”), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. ASU 2016-13 is effective for annual period beginning after December 15, 2022, including interim reporting periods within those annual reporting periods. The Company is currently evaluating this guidance to determine its impact it may have on its financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share calculation in certain areas. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2021, although early adoption is permitted. The Company is in the process of evaluating the impact of this new guidance on its financial statements.

NOTE 3: FACTOR RECEIVABLES, LETTERS OF CREDIT PAYABLE AND LOAN PAYABLE

In April 2013, the Company entered into a financing arrangement with a third-party purchase order financing company (the “Factor”), whereby the Company assigned to the Factor selected sales orders from its customers in exchange for opening a letter of credit (“LC”) with its vendors to manufacture its products. The Company paid an initial fixed fee of 5% of the cost of products it purchased from the vendor upon opening the LC, and 1% each 30 days thereafter, after the LC is funded by the Factor until such time as the Factor receives the payment from the Company’s customers. The factoring agreement provides for full recourse against the Company for factored accounts receivable that are not collected by the Factor for any reason, and the collection of such accounts receivable is fully secured by substantially all of the receivables of the Company. The factoring advances for the LCs at September 30, 2021 and December 31, 2020 have been treated as a loan payable to third party in the accompanying balance sheets, and total outstanding accounts receivable factored, net of allowance for sales returns, discounts and rebates of $13,000 as of September 30, 2021 and December 31, 2020, were $0 and $807,648, respectively.

NOTE 4: PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following:

	September 30, 2021			December 31, 2020
Furniture	$	738,928		$	183,672
Computers		850,841			586,749
Production equipment		245,713			182,446
Automobile and transportation		635,542			635,542
Tooling and molds		5,407,684			1,989,366
Application development		1,760,816			93,435
Website design		765,573			507,088
Leasehold Improvements		993,197			42,249
Steelbox		882,000			-
Less: accumulated depreciation		(2,350,185	)		(1,153,623	)
Property and Equipment, net	$	9,930,109		$	3,066,924

Depreciation and capitalized costs with respect thereto consists of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Depreciation expense	$	552,464	$	176,691	$	1,196,562	$	394,322

NOTE 5 – COMMITMENTS AND CONTINGENCIES

On January 3, 2017, the Company executed a non-cancellable operating lease for its principal office with the lease commencing February 1, 2017 for a five (5) year term. The Company paid a security deposit of $29,297. The lease required the Company to pay its proportionate share of direct costs estimated to be 22.54% of the total property, a fixed monthly direct cost of $6,201 for each month during the term of the lease, and monthly rental pursuant to the lease terms.

The Company entered into a lease for office space at 8669 Research Drive, in Irvine, CA, which is to replace the current corporate headquarters. The lease commenced on December 1, 2019 with no rent due until April 1, 2020. From April 1, 2020 through March 31, 2025, base rent will be due on the first of each month in the amount of $25,200 escalating annually on December 1 of each year to $29,480 beginning December 1, 2023. The Company paid an initial amount of $68,128 comprising the rent for April 2020, a security deposit and the amount due for property taxes, insurance and association fees.

Future minimum lease and other commitments of the Company are as follows:

For the years ending December 31,	Building leases
2021 (remaining)	$	126,637
2022		343,821
2023		341,653
2024		358,085
Thereafter		89,521
	$	1,259,717

The Company recorded rent expense of $211,672 and $208,672 and $650,605 and $536,566 for the three and nine months ended September 30, 2021 and 2020, respectively. The Company recorded a slotting expense of $83,334 and $83,334 and $250,002 and $250,002 for the three and nine months ended September 30, 2021 and 2020, respectively.

Employment Agreements with Officers

On January 3, 2017, the Company entered into an employment agreement with its President and Chief Executive Officer for a five-year term. The officer received a sign-on-bonus of $50,000 and was entitled to an annual base salary of $350,000 to increase by 10% each year commencing on January 1, 2018. The officer was also granted a stock option to purchase 125,000 shares of the Company’s common stock at an exercise price of $10.00 per share.

On January 3, 2017, the Company entered into an employment agreement with its Vice-President of Design and Development for a five-year term. Under the terms of this agreement, the officer received a sign-on-bonus of $35,000 and is entitled to an annual base salary of $250,000 beginning on December 1, 2016 to increase by 10% each year commencing on January 1, 2018.

On January 3, 2017, the Company entered into an employment agreement with its Chief Operating Officer and Secretary for a three-year term. Under the terms of this agreement, the officer is entitled to an annual base salary of $180,000 beginning on January 1, 2017 to increase by 10% each year commencing on January 1, 2018.

The Company’s former Chief Financial Officer was appointed on June 14, 2019, with whom the Company entered into a verbal consulting arrangement at $10,000 per month. Effective July 2, 2020 such former Chief Financial Officer resigned from the Company.

Effective July 1, 2020, the Company and the Chief Financial Officer agreed to a salary of $230,000 per annum.

The employment agreements also entitle the officers to receive, among other benefits, the following compensation: (i) eligibility to receive an annual cash bonus at the sole discretion of the Board and as determined by the Compensation Committee commensurate with the policies and practices applicable to other senior executive officers of the Company; (ii) an opportunity to participate in any stock option, performance share, performance unit or other equity based long-term incentive compensation plan commensurate with the terms and conditions applicable to other senior executive officers and (iii) participation in benefit plans, practices, policies and programs provided by the Company (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent available to the Company’s other senior executive officers.

Litigation Costs and Contingencies

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm business. Other than as set forth below, management is currently not aware of any such legal proceedings or claims that could have, individually or in the aggregate, a material adverse effect on our business, financial condition, or operating results.

In the normal course of business, the Company incurs costs to hire and retain external legal counsel to advise it on regulatory, litigation and other matters. The Company expenses these costs as the related services are received. If a loss is considered and the amount can be reasonable estimated, the Company recognizes an expense for the estimated loss.

Edwin Minassian v. Michael Panosian and Toughbuilt Industries, Inc., Los Angeles Superior Court Case No. EC065533.

On August 16, 2016, Plaintiff Edwin Minassian filed a complaint against Defendants ToughBuilt Industries, Inc. (the “Company”) and Michael Panosian in the Superior Court of California, County of Los Angeles, Case No. EC065533. The complaint alleges breach of oral contracts to pay Plaintiff for consulting and finder’s fees, and to hire him as an employee. The complaint further alleged claims of fraud and misrepresentation relating to an alleged payment in exchange for stock in the Company. The complaint seeks unspecified monetary damages, declaratory relief, stock in the Company, and other relief according to proof.

On April 12, 2018, the Court entered judgments of default against the Company and Mr. Panosian in the amounts of $7,080 and $235,542, plus awarding Mr. Minassian a 7% ownership interest in the Company (the “Judgments”). Mr. Minassian served notice of entry of the judgments on April 17, 2018 and the Company and Mr. Panosian received notice of the entry of the default judgments on April 19, 2018.

The Company and Panosian satisfied the judgments on September 14, 2018 by payment of $252,949 to Plaintiff Minassian and by issuing Plaintiff Minassian 376,367 shares of common stock of the Company. On October 18, 2018, the Company and Panosian filed a Notice of Appeal from the Order denying their motion for relief from the above-referenced default judgment.

On October 1, 2019, the Second Appellate District of the California Court of Appeal issued its opinion reversing the trial court’s order denying ToughBuilt’s motion for relief from the default judgment and directing the trial court to grant ToughBuilt’s motion for relief, including allowing Toughbuilt to file an Answer and contest Minassian’s claims.

The appellate court recently issued a remittitur officially transferring the matter from the appellate court back to the trial court for further proceedings consistent with its ruling, and the Company and Panosian have filed an Answer to the Complaint. The trial court has not yet set a trial date, and discovery in this case is just now beginning. The Company intends to vigorously defend the Complaint and seek to recover the compensation and stock previously paid to satisfy the now vacated default judgment. The Company believes it has a strong position, but cannot quantify the likelihood that it will prevail in the above litigation, or any likely liability or recoveries, because of the current status of the case and the unpredictability of litigation.

Minassian seeks damages and stock based on a breach of an alleged oral agreement. Discovery is presently ongoing. In addition, Plaintiff Minassian is in violation of a court order for restitution and the Company is engaged in collection efforts to enforce that order. A trial date has been set for April 25, 2022.

Design 1

v. Toughbuilt Industries, Inc., American Arbitration Association

On November 26, 2019, Claimant Design 1

filed a Demand for Arbitration against the Company seeking $169,094 in damages, plus attorney’s fees and costs. Claimant contends the Company breached a written contract by failing to pay for design services. The Company filed a Cross-Demand for Arbitration against Claimant seeking $394,956 in damages, plus attorney’s and costs alleging Claimant breached the same contract by performing negligent services, failing to meets its obligations under the contract, and fraudulent billing.

The arbitration hearing occurred in April 2021. On July 14, 2021, the arbitrator concluded that neither party was entitled to prevail on their respective claims and rejected all counterclaims. Both parties are required to bear all fees and incurred in connection with the arbitration.

NOTE 6: STOCKHOLDERS’ EQUITY

At September 30, 2021 and December 31, 2020, the Company had 200,000,000 shares of common stock, and 4,268 shares of Series C preferred stock authorized, both with a par value of $0.0001 per share. In addition, as of September 30, 2021 and December 31, 2020, the Company had 5,775 shares of Series D preferred stock, authorized, and 15 Series E Non-Convertible preferred stock, with a par value of $1,000 and $0.001 per share, respectively.

Common Stock and Preferred Stock

On February 24, 2020, the Company closed on the public offering of 0.445 million shares of its common stock, for gross proceeds of $912,250 based upon the overallotment option arising from the closing of its January 28, 2020 public offering. In the January 28, 2020 public offering, the Company sold 4.5 million shares of its common stock and 49.45 million warrants (each exercisable into 1/20 of a share of common stock for a total of 2.4725 million shares of common stock) from which it received gross proceeds of $9,472,250.

On June 12, 2020, the Company closed on the public offering of 1.7 million shares of its common stock, for gross proceeds of $1,683,000 based upon the overallotment option arising from the closing of its June 2, 2020 public offering. In the June 2, 2020 public offering, the Company sold 19 million shares of its common stock and 20.7 million warrants from which it received gross proceeds of $19,017,000.

During 2020, 1,268 shares of Series C Preferred Stock converted into 126,800 shares of the Company’s common stock and 3,563 shares of Series D Preferred Stock converted into 3,141,426 shares of the Company’s common stock.

During 2020, $3,200,000 principal amount of Notes was converted into the Company’s common Stock

During 2020, the Company granted 360,000 shares of common stock to consultants in consideration for services rendered.

On January 19, 2021, the Company filed a prospectus supplement dated January 15, 2021 (the “ATM Prospectus Supplement”) to the shelf registration statement Form S-3 (File No. 333-251185) declared effective by the SEC on December 15, 2020 (the “First 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 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.

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 us of up to $100,000,000 of the Company’s common stock, preferred stock, warrants and units; and a sales agreement prospectus covering the offering, issuance and sale by us of up to a maximum aggregate offering price of $100,000,000 (which amount was included in the aggregate offering price set forth in the base prospectus) of the Company’s common stock that may be issued and sold under a second At The Market Offering Agreement, dated February 1, 2021, we entered into with Wainwright, as sales agent. The Second Form S-3 was declared effective by the SEC on February 8, 2021.

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 expense.

On March 26, 2021, the Company filed with the Nevada Secretary of State a certificate of designation therein establishing the Series E Preferred Stock consisting of fifteen (15) shares, and the Company issued nine (9) shares of such preferred stock to an institutional investor pursuant to an exchange agreement, dated November 20, 2020, between the Company and the investor.

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.

The net proceeds to the Company from the Offering were $36,259,050, after deducting placement agent fees and expenses payable by the Company. The Offering closed on July 14, 2021.

Nevada		46-0820877
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

25371 Commercentre Drive, Suite 200 Lake Forest, CA		92630
(Address of principal executive offices)		(Zip Code)

Title of each class:	Trading Symbol(s)	Name of each exchange on which registered:
Common Stock	TBLT	NASDAQ CAPITAL MARKET
Series A Warrants	TBLTW	NASDAQ CAPITAL MARKET

	Large accelerated filer ☐	Accelerated filer ☐
	Non-accelerated filer ☒	Smaller reporting company ☒
		Emerging growth company ☒

PART I.	FINANCIAL INFORMATION	3

ITEM 1.	FINANCIAL STATEMENTS	3

	CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2021 (UNAUDITED) AND DECEMBER 31, 2020	3

	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2021 AND 2020 (UNAUDITED)	4

	CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2021 AND 2020 (UNAUDITED)	5

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2021 AND 2020 (UNAUDITED)	6

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	32

ITEM 4.	CONTROLS AND PROCEDURES	32

PART II.	OTHER INFORMATION	33

ITEM 1.	LEGAL PROCEEDINGS	33

ITEM 1A.	RISK FACTORS	34

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	34

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	34

ITEM 4.	MINE SAFETY DISCLOSURES	34

ITEM 5.	OTHER INFORMATION	34

ITEM 6.	EXHIBITS	35

	SIGNATURES	36

	September 30,			December 31,
	2021			2020
	(UNAUDITED)
Assets
Current Assets
Cash	$	31,189,160		$	2,194,850
Accounts receivable		17,040,362			10,537,395
Factor receivables, net		-			807,648
Inventory		31,317,878			8,915,345
Prepaid assets		1,045,496			1,003,774
Subscription receivable		-			837,025
Total Current Assets		80,592,896			24,296,037
Other Assets
Property and equipment, net		9,930,109			3,066,924
Other assets		460,656			127,733
Total Assets	$	90,983,661		$	27,490,694

Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	12,142,937		$	6,955,218
Accrued expenses		1,441,533			598,473
Factor loan payable		-			590,950
Warrant liabilities		4,560,663			-
Total Current Liabilities		18,145,133			8,144,641
Total Liabilities		18,145,133			8,144,641

Commitment and Contingencies

Shareholders’ Equity
Series C Preferred Stock, $0.0001 par value, 4,268 authorized, 0 issued and outstanding at September 30, 2021 and December 31, 2020		-			-
Series D Preferred Stock, $1,000 par value, 5,775 shares authorized, 0 and 5,775 issued, and outstanding at September 30, 2021 and December 31, 2020, respectively.		-			-
Series E Preferred Stock, $0.0001 par value, 15 authorized, 9 and 0 issued and outstanding at September 30, 2021 and December 31, 2020, respectively		-			-
Common stock, $0.0001 par value, 200,000,000 shares authorized, 129,299,607 and 43,918,831 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively		12,930			4,392
Additional paid-in capital		156,158,382			80,103,653
Accumulated deficit		(83,332,784	)		(60,761,992	)
Total Shareholders’ Equity		72,838,528			19,346,053
Total Liabilities and Shareholders’ Equity	$	90,983,661		$	27,490,694

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Revenues, net of allowances
Metal goods	$	8,078,180		$	5,368,015		$	18,130,530		$	10,824,861
Soft goods		9,137,758			11,295,374			27,221,028			16,587,686
Total revenues, net of allowances		17,215,938			16,663,389			45,351,558			27,412,547

Cost of Goods Sold
Metal goods		6,419,003			3,136,146			13,680,028			6,871,998
Soft goods		5,352,312			6,697,863			17,799,148			9,665,656
Total cost of goods sold		11,771,315			9,834,009			31,479,176			16,537,654

Gross profit		5,444,623			6,829,380			13,872,382			10,874,893

Operating expenses:
Selling, general and administrative expenses		15,242,780			5,703,676			33,904,958			14,727,242
Research and development		1,610,671			789,890			4,588,781			1,496,129
Total operating expenses		16,853,451			6,493,566			38,493,739			16,223,371

Income (loss) from operations		(11,408,828	)		335,814			(24,621,357	)		(5,348,478	)

Other income (expense)
Warrant issuance costs		(588,221	)		-			(588,221	)		-
Change in fair value of warrant liabilities		2,902,342			-			2,902,342			-
Interest expense		-			(214,979	)		(263,555	)		(804,504	)
Total other income (expense)		2,314,121			(214,979	)		2,050,566			(804,504	)

Net income (loss)	$	(9,094,707	)	$	120,835		$	(22,570,791	)	$	(6,152,982	)

Redemption of Series D Preferred Stock deemed dividend		-			-			-			(1,295,294	)

Net income (loss) attributable to common stockholders	$	(9,094,707	)	$	120,835		$	(22,570,791	)	$	(7,448,276	)

Basic and diluted net income (loss) per share attributed to common stockholders
Basic and diluted net income (loss) per common share	$	(0.07	)	$	0.00		$	(0.25	)	$	(0.32	)
Basic and diluted weighted average common shares outstanding		122,060,087			38,414,631			90,619,171			23,154,481