Worksport Ltd. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; unaudited. Worksport sells truck-bed covers and related products and said it planned to introduce new tonneau covers and its TerraVis system during 2021. Figures are in U.S. dollars. Share amounts in the filing are affected by a 1-for-20 reverse split effective August 4, 2021.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales, 2021 | $186,239 | $193,889 |
| Net sales, 2020 | $66,102 | $107,129 |
| Gross profit (loss), 2021 | $48,906 | $(3,665) |
| Gross profit, 2020 | $7,219 | $21,235 |
| Operating expenses, 2021 | $851,462 | $1,800,717 |
| Operating loss, 2021 | $(802,556) | $(1,804,382) |
| Net loss, 2021 | $(811,659) | $(2,035,178) |
| Net loss, 2020 | $(192,185) | $(344,451) |
| Basic and diluted loss per share, 2021 | $(0.08) | $(0.27) |
Sales increased approximately 182% for the quarter and 81% for the six-month period. Gross margin was approximately 26% in Q2 2021 versus 11% in Q2 2020; the six-month gross margin was negative, approximately 2%, versus approximately 20% in 2020. Professional fees rose to $410,485 for the quarter and $1,057,599 for six months. General and administrative expense also increased substantially, which management attributed in part to expansion, research and development, salaries, and consultants.
- Cash and liquidity at June 30: Cash was $12,266,597, versus $1,107,812 at December 31, 2020. Current assets were $13,120,450 and current liabilities were $1,463,199, implying working capital of approximately $11.66 million.
- Cash flows for six months: Operating activities used $995,926; investing activities used $321,575; financing activities provided $12,476,286. Financing included $6,928,617 from common-share issuance and $5,636,505 from warrant exercises.
- Debt and leases: Total liabilities were $1,883,568, including $263,211 of current promissory notes, a $28,387 government loan, and lease liabilities totaling $634,144. The convertible note was converted to shares and fully repaid by June 30. Certain secured note holders were in dispute with the company; the notes included 18% interest-bearing obligations.
- Equity financing and dilution: The company raised capital through a Reg A offering, private placement, and warrant exercises. It also issued or committed substantial shares for consulting services and debt settlements.
Changes, outlook, and risks
- Q2 sales growth coincided with improved quarterly gross margin, but the six-month period still produced a gross loss. Net losses grew materially year over year as operating costs increased.
- Management said it intended to prioritize online sales during 2021, citing expectations that online retailers could offer larger volumes and better margins. Online sales represented 78% of Q2 revenue and 79% of six-month revenue.
- Management expected new product introductions to improve the company’s financial position and stated that existing cash was sufficient for contractual obligations and working capital for at least 12 months. The filing also discussed approximately $10 million of potential warrant proceeds; these were prospective, not cash on hand.
- COVID-19 continued to affect manufacturing practices and sales. Management anticipated lower revenue than in previous periods, while the ultimate effects on demand, operations, and access to capital remained uncertain.
- Subsequent events included the August 4 reverse split, additional warrant exercises, and an August 6 public offering of 3,272,727 units at $5.12 each, with one share and one warrant per unit; the warrants’ exercise price was $6.05.
- Management concluded disclosure controls and procedures were not effective at quarter-end, citing material weaknesses and additional post-closing procedures.
Important facts to verify
- The balance sheet reports 162,763,986 common shares issued and outstanding, while the equity statement reports 11,148,293 at June 30 and the filing gives 11,453,446 outstanding as of August 16. Confirm the correct share counts and reverse-split presentation.
- The MD&A states current liabilities of $1,684,764, but the balance sheet shows $1,463,199; confirm the correct figure. The MD&A’s six-month cash-flow narrative also differs from the cash-flow statement on financing proceeds.
- The filing contains incomplete or editorial placeholders in the MD&A, including explanations for revenue and margin changes; some stated explanations are not clearly supported by the supplied text.
- Reconcile the notes describing an unresolved promissory-note legal proceeding with Part II’s statement that there were no legal proceedings, and assess the outcome and exposure of the disputed secured notes.
- Assess the extent of future funding needs, actual warrant exercises after quarter-end, share-based compensation and consulting commitments, and the company’s ability to execute planned product launches and improve gross profitability.