Worksport Ltd. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated financial statements are presented in U.S. dollars. Worksport designs and sells truck tonneau covers and is developing solar, portable-power and other energy products.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $199,851 | $11,305 | $231,776 | $59,089 |
| Gross profit | $46,563 | $3,318 | $58,731 | $13,125 |
| Gross margin | 23.3% | 29.4% | 25.3% | 22.2% |
| Operating expenses | $3,785,282 | $3,311,509 | $7,327,398 | $6,119,096 |
| Net loss | $3,797,455 | $3,372,319 | $7,320,725 | $6,189,928 |
| Loss per share, basic and diluted | $0.22 | $0.20 | $0.43 | $0.36 |
- Q2 revenue rose substantially year over year, primarily from $181,688 in private-label sales; online retailer sales were $18,163. For the first half, private-label revenue was $188,684 and online-retailer sales were $42,437. Revenue remained limited in absolute terms.
- Q2 gross margin declined from 29.4% to 23.3%; management attributed the quarterly cost-of-sales ratio increase to inflationary material costs. First-half gross margin improved to 25.3% from 22.2%, which management attributed to better supply-chain logistics.
- First-half operating expenses increased 20% year over year, mainly from higher general and administrative costs, including research and development and production staffing. Lower sales and marketing and professional fees partly offset the increase. First-half net loss increased 18%.
- Cash and cash equivalents were $5,902,235 at June 30, down $8,718,522, or 60%, from year-end 2022. The balance includes $309,513 in restricted cash for debt service. Working capital was $3,554,410, compared with $15,870,377 at year-end.
- First-half operating cash use was $6,018,704, investing cash use was $2,663,046, and financing cash use was $36,772. Investing outlays included $2,596,738 for property and equipment. Inventory increased by $1,533,492 as the company stocked production inputs and finished goods.
- Total liabilities were $7,593,855, including a $5.3 million property loan and $1,084,215 in lease liabilities. The loan bears interest at prime plus 2.25%; the balance sheet classifies it as current at June 30, 2023. The company also reported $14,037,399 of net property and equipment.
Changes, outlook and key risks
- Worksport reported that its custom manufacturing line was installed and ready for training and test runs by May 2023; raw materials for an initial full production run had largely arrived. It relocated headquarters to its West Seneca production facility and launched its SC4 PRO cover.
- Management expected manufacturing to begin and sales volumes to increase in the second half of 2023, with the facility expected to generate more substantial revenue in Q3, barring delays. This is management’s expectation, not reported guidance with quantified targets.
- The company has never generated a profit and reported an accumulated deficit of $40,704,944. Management said it expected available cash and anticipated operating cash flow to cover requirements for at least 12 months after issuance, but also disclosed material uncertainty that raises substantial doubt about the company’s ability to continue as a going concern. It may need additional financing and cannot assure it can obtain capital on acceptable terms or at all.
- Management cited risks including production ramp delays, elevated operating costs, inflation, supply constraints for power electronics, variable mortgage interest rates, foreign-exchange exposure, and geopolitical conditions. The company is shifting toward domestic manufacturing and expanding sales channels to support growth.
- The company issued 250,000 shares for consulting services during the first half and recorded substantial share-based compensation. Potential equity dilution includes outstanding warrants, options and other awards. After quarter-end, it sold 22,995 shares for $91,731 and granted additional options.
- Disclosure controls and procedures were deemed ineffective at quarter-end. Management reported additional post-closing analysis and procedures, but no material changes to internal control over financial reporting during the quarter. No legal proceedings were reported.
Important facts for investors to verify
- Whether the production line began commercial production as expected and whether revenue, order volumes and margins improved after Q2.
- Cash burn, restricted cash, the timing and terms of the $5.3 million loan, and the company’s ability to secure additional financing.
- Whether management remediated the ineffective disclosure controls and what specific material weaknesses remain.
- The extent of potential dilution from warrants, options, restricted awards and future ATM or other equity sales.
- The filing gives inconsistent working-capital figures in MD&A: $3,554,410 in one passage and $3,544,410 in another. The balance-sheet figures calculate to $3,554,410.