Worksport Ltd. — Q1 2023 Form 10-Q
Business context and period: Worksport designs and distributes truck tonneau covers in Canada and the United States. This unaudited report covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company was investing in manufacturing capacity and sales channels ahead of planned domestic production.
Financial results and liquidity
- Revenue: $31,925, down 33% from $47,784. U.S. sales declined 45% to $26,403; Canadian sales were $5,522 versus none in the prior period. Distributor sales were $5,491, while online retailer sales were $26,434.
- Gross profit and margin: Gross profit was $12,168 versus $9,807. Gross margin was approximately 38% versus 21%, reflecting lower cost of sales as a share of revenue.
- Expenses and loss: Operating expenses rose 26% to $3.54 million. Operating loss was $3.53 million versus $2.80 million; net loss increased 25% to $3.52 million from $2.82 million. Basic and diluted loss per share was $0.21 versus $0.17.
- Cash flow: Operating activities used $2.93 million, compared with $2.13 million. Investing activities used $1.15 million, mainly for manufacturing equipment and a guaranteed investment certificate. Financing activities used $43,904. Cash declined $4.13 million, or 28%, from year-end.
- Liquidity: At March 31, cash and cash equivalents were $10.49 million, current assets $14.71 million, and current liabilities $2.43 million. Working capital was $12.27 million, down from $15.87 million at December 31, 2022.
- Debt and other obligations: The company reported a $5.30 million loan bearing interest at prime plus 2.25%, initially due May 10, 2024, with an option to extend one year. It also had $1.18 million of lease liabilities. A $309,513 restricted balance securing the loan was included in reported cash and cash equivalents.
- Balance sheet: Total assets were $30.10 million, total liabilities $8.51 million, and shareholders’ equity $21.58 million. Accumulated deficit was $36.91 million.
Changes, outlook, and risks
- Revenue fell as Worksport prioritized establishing and strengthening direct-to-consumer and business-to-business sales channels. Management said it intended to begin domestic manufacturing in Q2 2023 and gradually increase output. The facility was described as near completion; management expected more substantial revenue in Q2, subject to delays.
- General and administrative expense increased to $2.13 million from $601,000, attributed to research and development, higher salaries, and operational expansion. Sales and marketing expense fell to $544,000 from $720,000, and professional fees fell to $869,000 from $1.49 million.
- Management stated that cash and anticipated operating cash flow were expected to cover working capital needs for at least one year from issuance of the statements. However, the filing identifies material uncertainty that raises substantial doubt about the company’s ability to continue as a going concern. The company has never generated an operating profit, relies on debt and equity financing, and said additional capital may be needed; access to acceptable financing is not assured.
- Management noted that operating costs were expected to remain elevated and reduce cash, while planned manufacturing and higher sales volumes were expected to help offset those costs. These expectations are forward-looking and subject to execution and delay risks.
- Disclosure controls and procedures were determined to be ineffective at quarter-end. Management reported additional review procedures, but no material changes to internal control over financial reporting during the quarter.
- Subsequent events: On April 21, 2023, Worksport sold 4,434 shares for $7,624 under its shelf/ATM registration. On May 1, it canceled 1.6 million restricted stock units and 400,000 performance stock units held by CEO Steven Rossi and issued him 2 million stock options with a $1.74 exercise price.
Important facts for investors to verify
- Whether domestic manufacturing began in Q2 2023 and generated the revenue increase management anticipated.
- Cash burn, capital expenditure requirements, and the amount of cash available after accounting for restricted funds.
- Ability to service or refinance the $5.30 million loan before its stated maturity, including the impact of its floating interest rate.
- Whether the company can increase sales and margins enough to reduce its dependence on external financing.
- Remediation of ineffective disclosure controls and the potential dilution from outstanding warrants, options, restricted shares, and other equity awards.