Worksport Ltd. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Comparisons are with the corresponding 2021 periods unless noted. Worksport reported limited sales while building inventory, developing products and preparing for domestic manufacturing and an e-commerce launch.
Key financial results
| Metric | Q2 2022 | Six months 2022 | Comparable 2021 |
|---|---|---|---|
| Net sales | $11,305 | $59,089 | $186,239 Q2; $193,889 six months |
| Gross profit (loss) | $3,318 | $13,125 | $48,906 Q2; $(3,665) six months |
| Gross margin | 29% | 22% | 26% Q2; negative 2% six months |
| Operating expenses | $3,311,509 | $6,119,096 | $851,462 Q2; $1,800,717 six months |
| Operating loss | $(3,308,191) | $(6,105,971) | $(802,556) Q2; $(1,804,382) six months |
| Net loss | $(3,372,319) | $(6,189,928) | $(811,659) Q2; $(2,035,178) six months |
| Loss per share, basic and diluted | $(0.20) | $(0.36) | $(0.08) Q2; $(0.27) six months |
- Q2 sales declined approximately 94%; six-month sales declined approximately 70%. Management attributed the reductions to inventory buildup and its shift toward e-commerce, product development and domestic manufacturing.
- Gross margin improved, which management attributed to greater manufacturing and inventory-acquisition efficiencies, including lower ocean freight costs. Operating expenses increased sharply, particularly professional fees, sales and marketing, and general and administrative costs.
- Six-month operating cash use was $5.04 million, versus $1.03 million in 2021. Investing cash use was $9.05 million, mainly for property and equipment, versus $0.29 million. Financing provided $5.29 million, compared with $12.48 million.
- Cash, cash equivalents and restricted cash totaled $19.76 million at June 30, including $19.14 million of cash and cash equivalents and $0.62 million restricted. Cash and restricted cash declined by $8.81 million from the start of 2022.
- Current assets were $25.65 million and current liabilities $2.43 million; reported working capital was $23.23 million. Inventory was $1.10 million, up from $0.50 million at December 31, 2021.
- Total liabilities were $8.81 million. These included a new $5.30 million property loan bearing interest at prime plus 2.25%, with an initial May 2024 maturity and an option to extend one year; lease liabilities totaled approximately $1.45 million. Promissory notes payable were $263,211, with the notes classified as current.
- Property and equipment rose to $10.24 million from $1.13 million at year-end, reflecting substantial investment during the period. Six-month share-based compensation was $2.77 million, a noncash expense included among operating cash flow adjustments.
Outlook, risks and notable matters
- Management anticipated launching its e-commerce platform in late 2022 and said it planned to emphasize online sales. It offered no quantified revenue or earnings guidance.
- Management said existing cash, together with possible warrant and option exercises of approximately $32.78 million, was expected to cover obligations and working capital needs for at least 12 months. The potential exercise proceeds are not assured.
- The company reported it had never generated a profit since its acquisition of Worksport in 2014 and had an accumulated deficit of $27.04 million. It stated that it believed funding was sufficient for at least 12 months despite continuing losses and cash use.
- Two secured promissory note holders were in dispute with the company. The notes carry stated interest rates of 18% and include security over company assets; related accrued interest was included in accounts payable and accrued liabilities.
- Management concluded disclosure controls and procedures were not effective as of quarter-end. It said it performed additional analysis and post-closing procedures; no material changes in internal control over financial reporting were reported during the quarter.
- The filing discussed potential COVID-19 effects on operations, financing and liquidity, but said the duration and impact were uncertain. No legal proceedings or subsequent events were reported.
Important facts for investors to verify
- Whether the planned e-commerce launch and sales growth occurred, and whether inventory buildup converted into sales.
- Cash runway under actual operating and capital spending, excluding uncertain warrant or option exercise proceeds.
- Terms, repayment status and collateral for the $5.30 million property loan and the disputed secured promissory notes.
- Drivers and sustainability of rising operating expenses, especially professional fees, marketing and share-based compensation.
- Potential dilution: 17.04 million common shares were outstanding at June 30, and the filing disclosed 10.47 million underlying shares from warrants, options, restricted awards and performance stock units.
- Remediation of the ineffective disclosure controls and procedures.