Worksport Ltd. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 14, 2023. Worksport designs and sells truck tonneau covers and is developing solar, portable-power, and other clean-energy products. The unaudited results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $458,483 | $18,350 | $690,259 | $77,439 |
| Gross profit | $89,687 | $5,748 | $148,418 | $18,873 |
| Gross margin | 19.6% | 31.3% | 21.5% | 24.4% |
| Operating expenses | $4,009,196 | $2,948,576 | $11,336,594 | $9,067,672 |
| Net loss | $3,949,298 | $2,877,660 | $11,270,023 | $9,067,588 |
| Basic and diluted loss per share | $0.23 | $0.17 | $0.65 | $0.53 |
- Revenue grew sharply from a low base, mainly because of private-label tonneau-cover sales. Private-label sales were 94% of Q3 revenue and 90% of nine-month revenue; online retail sales were $21,599 for the quarter and $62,827 for the nine months.
- Cost of sales was 80% of revenue in Q3 and 78% for the nine-month period, compared with 69% and 76%, respectively, in 2022. Management attributed the quarterly margin decline primarily to private-label sales at lower agreed prices.
- General and administrative expense rose to $3.09 million in Q3 and $6.97 million for nine months, reflecting research and development, hiring, and operational expansion. Sales and marketing and professional fees declined year over year in both periods.
- At September 30, cash and cash equivalents were $2.97 million, down 80% from $14.62 million at December 31, 2022. Cash includes $869,728 held in a restricted account related to the property loan.
- Nine-month operating cash use was $8.19 million; investing cash use was $3.51 million, primarily for manufacturing equipment and other assets; financing provided $51,637. The filing reports total cash decline of $11.66 million.
- Current assets were $7.89 million and current liabilities $7.56 million, leaving working capital of $330,423, versus $15.87 million at year-end 2022. Total assets were $24.62 million; shareholders’ equity was $16.41 million.
- The $5.3 million property loan bears interest at prime plus 2.25% and matures May 10, 2024, with an option to extend one year. It was classified as current at quarter-end, versus long-term at year-end 2022, after covenant failures; the lender waived those failures subject to quarterly financial reporting. Lease liabilities totaled $985,425.
Business developments, outlook, and risks
- Worksport said its West Seneca manufacturing line was installed and began generating revenue in Q3. It reported purchase orders of approximately $720,000 for soft-folding covers and approximately $1.6 million for hard-folding covers, with initial hard-cover shipments reported in August.
- In September, the company signed a long-term supply agreement with a U.S. aftermarket reseller for which it expects estimated annual sales of $16 million. This is management’s expectation, not reported realized revenue. The company also identified a potential solar-panel supply partner for SOLIS and cited interest in SOLIS and COR products, including from Hyundai’s North American design, technology, and engineering division.
- Management plans to increase manufacturing output and expand sales channels. The filing provides no formal financial guidance. Management expects operating costs to remain elevated and says additional capital may be needed; it cannot assure that financing will be available on acceptable terms.
- The company has never generated a profit and reported an accumulated deficit of $44.65 million. Management states that material uncertainty raises substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the statements.
- On November 2, 2023, after quarter-end, Worksport raised net proceeds of $4.26 million through a sale of common shares and pre-funded warrants and issued 7 million additional warrants exercisable at $1.34 per share. The filing also reports subsequent ATM proceeds of $118,697.
- Key risks discussed include continuing cash burn and financing dependence, variable mortgage interest rates, supply-chain availability and costs, inflation, geopolitical disruption, foreign-exchange exposure, and dependence on growing sales. Disclosure controls and procedures were deemed ineffective at quarter-end; management reported additional post-closing procedures. No legal proceedings were reported.
Most important facts for investors to verify
- Whether the reseller agreement converts into recurring orders and whether the stated $16 million annual sales estimate is achieved.
- Production capacity, delivery and acceptance of reported purchase orders, realized gross margins, and the pace of revenue growth beyond private-label customers.
- Cash burn, remaining liquidity after the November financing, potential further capital needs, and the company’s ability to meet loan terms and improve working capital.
- The extent of potential dilution from the November share, pre-funded warrant, and 7 million warrant issuance, along with outstanding options and other equity awards.
- Remediation of ineffective disclosure controls and the progress of manufacturing and commercialization plans for SOLIS and COR.