Worksport Ltd. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Worksport reported limited sales while investing in product development, inventory, and domestic manufacturing capacity. The filing describes an anticipated e-commerce platform and domestic manufacturing launch, but does not provide a product-level revenue breakdown.
Financial results and position
- Revenue: Q3 sales were $18,350, down about 80% from $93,408 in Q3 2021. Nine-month sales were $77,439, down about 73% from $287,297.
- Gross profit and margin: Q3 gross profit was $5,748, with a 31% margin versus 12% a year earlier. Nine-month gross profit was $18,873, with a 24% margin versus 3%. Management attributed improved margins to manufacturing and inventory-acquisition efficiencies, including lower ocean freight costs.
- Operating costs and losses: Q3 operating expenses increased 44% to $2.95 million; net loss increased 39% to $2.88 million, or $0.17 per diluted share. Nine-month operating expenses rose to $9.07 million from $3.85 million; net loss increased 121% to $9.07 million, or $0.53 per share. Higher spending reflected research and development, salaries, marketing, consultants, and business expansion.
- Cash flow: Nine-month operating cash use was $6.36 million, versus $2.12 million in 2021; investing cash use was $10.21 million, primarily for property and equipment, versus $0.76 million. Financing provided $5.29 million, compared with $32.69 million in 2021. Cash, cash equivalents, and restricted cash totaled $17.28 million at September 30, 2022.
- Liquidity and assets: Current assets were $22.10 million and current liabilities $2.50 million, yielding reported working capital of $19.59 million. Total assets were $35.72 million. Cash and cash equivalents excluding restricted cash were $16.72 million. Inventory grew to $1.29 million from $0.50 million at year-end 2021.
- Debt and leases: The company had a $5.30 million property loan at prime plus 2.25%, initially due May 2024 with an extension option; $554,994 was held in a restricted account to service it. It also reported $263,211 of promissory notes, classified as current, with certain holders in dispute and accrued interest included in accounts payable. Lease liabilities totaled $1.36 million, including $375,933 current.
- Equity: Accumulated deficit was $29.92 million. Common shares outstanding were reported as approximately 17.19 million; the filing contains differing September 30 share counts in its financial statements, which investors should verify.
Changes, outlook, and risks
- Management attributed lower sales to prioritizing inventory buildup, research and development, and preparation for domestic manufacturing. It anticipated launching the e-commerce platform and domestic manufacturing in early-to-mid 2023; no revenue or earnings guidance was provided.
- Management said existing cash was sufficient for anticipated obligations and working capital for at least 12 months. It also cited possible warrant and option exercises of approximately $28.70 million; that potential funding is contingent and not assured. The company stated it had never generated a profit and had relied primarily on securities offerings.
- Subsequent events included new Terravis Energy preferred shares issued to Worksport’s CEO, carrying 51% of Terravis voting rights while outstanding, and replacement performance stock units with lower stock-price vesting thresholds. The company also granted the CEO restricted stock tied to specified business milestones, including production, revenue, profitability, financing, and spin-off milestones.
- Management concluded disclosure controls and procedures were not effective at quarter-end. It said additional analysis and post-closing procedures were performed; no material change in internal control over financial reporting was reported.
- The filing identifies risks from continued losses, limited revenue, reliance on financing, execution of manufacturing and e-commerce plans, and potential market and liquidity effects of COVID-19. Management said it was monitoring the pandemic’s impact. Legal proceedings were reported as none; the Risk Factors item was marked not applicable.
Important facts for investors to verify
- Progress, funding, and achievable timing for the planned e-commerce launch and domestic manufacturing ramp.
- Cash runway under actual operating and capital-spending needs, excluding unexercised warrants and options; terms and servicing requirements of the $5.30 million loan.
- Status and potential resolution of disputed promissory notes and related accrued interest.
- Share-count discrepancy in the filing, outstanding equity awards, potential dilution, and effects of the Terravis voting and award arrangements.
- Remediation of ineffective disclosure controls and any subsequent updates to the company’s risk disclosures.