ToughBuilt Industries (NASDAQ:TBLT) stock seems like it should be a winner in current economic times. The company focuses on making equipment and safety gear for construction workers and electricians, such as sawhorses, knee pads and tool pouches.
With the roaring housing market and in particular a sharp uptick in home improvement and restoration since the pandemic, it would seem like ToughBuilt should be prospering right now. But that’s not the case. In fact, TBLT stock has been crushed over the past year and hasn’t improved much year-to-date (YTD).
This is primarily due to massive share dilution, as ToughBuilt has run large operating losses as it tries to expand its business. It has consistently funded these operations by issuing new shares of stock to the public. In one period in 2019 and 2020, for example, the company increased its outstanding share count twentyfold. Thus, it’s no surprise that the value of ToughBuilt stock has collapsed given the mountain of newly-trading shares.
The flood of new shares eventually led TBLT stock to end up well below the $1 mark. In turn, Nasdaq threatened to delist the security. As such, the company turned to a reverse split — and a shocking one at that. Then last month, the company announced a jaw-dropping 150-to-1 reverse split. This means that if a shareholder had previously owned 1,500 shares of ToughBuilt stock prior to the split, they would own just 10 shares following its enactment.
Overall, ToughBuilt stock was trading around $25 prior to this news. Now, though, shares of TBLT stock are down to $13.25 per share. This means that shareholders have lost almost half of the remaining value of their investments in just a couple of weeks.
Why is ToughBuilt issuing so much stock that it is leading to this sort of painful reverse split? Simply put, the company is spending far more on sales and marketing than it earns back in profit. For 2021, ToughBuilt generated $19 million of gross profit off of $70 million in revenues. However, in doing so, ToughBuilt lost $37 million overall.
Moreover, the company spent $51 million on sales, general, and administrative costs alone in 2021, which was up dramatically from the $22 million it spent on these expenses in 2020. The company’s gross profitability isn’t remotely strong enough to justify these sorts of profligate expenses. Even if the company doubled revenues in 2022, which would be optimistic given the slowdown in the construction market, it wouldn’t come close to breaking even operationally.
Therefore, unless ToughBuilt drastically reduces its operating expenses, it will have to issue yet more new shares of TBLT stock to the public. That, in turn, will continue the downward spiral for the company’s stock price.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
