Worksport Ltd. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparative figures are for FY2019. Amounts are in U.S. dollars unless noted. The company designs and distributes pickup-truck tonneau covers in the United States and Canada.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $346,144 | $1,926,405 |
| Gross profit / margin | $47,148 / 14% | $238,548 / 12% |
| Operating expenses | $1,033,387 | $776,398 |
| Operating loss | $(986,239) | $(537,851) |
| Net loss | $(1,187,620) | $(359,034) |
| Net cash used in operations | $(726,304) | $(2,157) |
- Revenue fell approximately 82%, which management attributed to COVID-related production and distribution constraints and the loss of a major customer. U.S. revenue declined to $317,227 from $1,860,563; Canadian revenue declined to $28,917 from $65,842.
- Cost of sales fell 82% alongside revenue. Gross margin improved to 14% from 12%, while shipping and freight rose to 28% of cost of sales from 3%.
- Professional fees increased 32% to $679,654; sales and marketing increased to $148,008 from $50,159. Interest expense increased to $386,249 from $71,961.
Financial position and liquidity
- At year-end, cash was $1,107,812, total assets $1,902,152, and working capital was deficient by $33,289. Accumulated deficit was $12,866,033.
- Current liabilities were $1,718,053, including $971,667 of accounts payable and accrued liabilities, $367,058 of promissory notes, a $98,982 net convertible-note balance, and a $184,854 loan payable. The company also reported $23,393 of related-party loans and $38,507 of lease liabilities in total.
- FY2020 cash flows: $726,304 used in operating activities, $16,727 used in investing activities, and $1,838,850 provided by financing activities. Financing proceeds were primarily from equity offerings and borrowings.
- Management said it believed available cash and approximately $6.3 million raised after year-end were sufficient for obligations and working capital for at least 12 months. The filing also describes additional potential warrant proceeds; those are not guaranteed.
Material changes, outlook, and risks
- Sales shifted toward online channels. The filing reports online revenue of $337,053 versus $174,793 in 2019 and says online sales represented 90% of 2020 revenue. Management planned to emphasize online sales in 2021.
- Management estimated SC4 and TC4 launches in Q3 2021 and planned the TerraVis solar tonneau and portable battery system. These were development plans, not reported commercial results. The company also sought to establish North American manufacturing; production was then in China.
- Key operating risks include reliance on a single Asian inventory supplier, dependence on a concentrated customer base, competition, product-development and launch execution, shipping and supply disruption, and the possibility of difficulty accessing capital. Two customers represented 77% of 2020 sales; one customer represented 89% in 2019.
- The company disclosed an ongoing legal proceeding with a promissory-note holder, with an uncertain outcome, and noted disputes with holders of secured notes. Certain secured notes carried interest rates of 12%–18%; one overdue note’s rate had risen to 22%.
- Management identified disclosure controls and internal control over financial reporting as ineffective at year-end, citing insufficient accounting personnel, limited segregation of duties, and inadequate accounting procedures. Management planned to address weaknesses as resources permitted.
- The auditor issued an unqualified opinion on the financial statements, but did not attest to internal control effectiveness. A convertible-note accounting matter was identified as a critical audit matter. The company also revised comparative 2019 figures for an immaterial error, reducing reported 2019 professional fees and net loss by $55,573.
- CEO Steven Rossi held 1,000 Series A preferred shares carrying 51% of voting power. Subsequent financing and share issuance increased the potential for substantial dilution.
Important facts for investors to verify
- Reconcile the filing’s sales-channel disclosures: it reports $337,053 of online revenue, $29,699 of distributor revenue, and $346,144 total revenue, while also stating online sales were 90% of total revenue.
- Confirm post-year-end capital raised, warrant exercises, outstanding warrants, and resulting fully diluted share count. The cover reports 165,052,348 shares outstanding as of April 13, 2021, while Item 5 gives 163,074,698 for that date.
- Track resolution and repayment of promissory notes, the note-holder litigation, and the company’s ability to meet near-term liabilities.
- Assess whether SC4, TC4, and TerraVis reached commercialization on schedule, and whether manufacturing diversification and customer concentration improved.
- Monitor remediation of material weaknesses in financial reporting controls and the company’s ongoing cash burn relative to available financing.