Worksport Ltd. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 31, 2023. This is an annual report, not a standalone fourth-quarter report, and the provided filing text does not give separate Q4 results.
Business context
Worksport designs and sells truck-bed tonneau covers and is developing solar-integrated SOLIS covers, COR portable power stations, and other clean-energy products. The company says it had sold only tonneau covers to date. Covers were manufactured in China at year-end, while Worksport was equipping a newly acquired West Seneca, New York facility to begin U.S. manufacturing and assembly.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $116,502 | $303,750 |
| Gross profit (loss) | $59,535 | $(46,952) |
| Operating expenses | $12,833,250 | $7,514,779 |
| Operating loss | $(12,773,715) | $(7,561,731) |
| Net loss | $(12,534,414) | $(7,897,085) |
| Net cash used in operating activities | $(7,977,960) | $(4,210,623) |
- Revenue fell about 62%. U.S. revenue was $101,930 and Canadian revenue was $14,572. Online retailers generated 87% of revenue in both years.
- Cost of sales fell 84% to $56,967. Management reported cost of sales at approximately 49% of revenue, versus 115% in 2021. The resulting 2022 gross margin was approximately 51%.
- Operating expenses rose $5.32 million, including higher general and administrative, sales and marketing, and professional fees. Management attributed increases principally to product development, expansion, and consulting activity.
- Other income was $239,301, versus other expense of $335,354 in 2021; the 2022 amount included a $302,332 gain on debt settlement, $213,383 rental income, and $488,704 interest expense.
- Cash and cash equivalents were $14,620,757 at year-end, down 49% from $28,567,333. This balance includes $411,016 of restricted cash. Investing cash outflow was $11,150,776, primarily for the facility and equipment; financing cash inflow was $5,182,160, including a $5.3 million property loan.
- Current assets were $18,332,107 and current liabilities $2,461,730, yielding working capital of $15,870,377, down from $32,235,216. Total liabilities were $8,645,876, including the $5.3 million variable-rate mortgage and $1,271,475 of lease liabilities.
- Accumulated deficit was $33,384,219. The filing reports loss per share of $0.73 in the statements of operations but $0.72 in a note; investors should verify this discrepancy.
Material changes and developments
- Worksport bought the West Seneca facility in May 2022 for a stated purchase price of $8.125 million, financed in part by a $5.3 million loan. The mortgage bears interest at prime plus 2.25%, with an initial maturity of May 10, 2024 and an option to extend one year.
- Property and equipment, net, increased to $11.9 million from $1.1 million. At year-end, the company also reported $2.545 million of additional equipment purchases to which it was committed.
- Inventory increased to $1.346 million from $502,000, as the company built stock for its e-commerce and channel plans.
- Net loss increased 59%; operating cash use increased by approximately $3.77 million. The company received no public-offering or private-placement proceeds in 2022, compared with substantial equity and warrant-exercise proceeds in 2021.
- Two customers represented approximately 50% of 2022 revenue, compared with three customers representing approximately 77% in 2021. Worksport also disclosed a single Chinese source for its finished goods.
Outlook, risks, and unusual items
- Management expected initial basic U.S. manufacturing or assembly in Q2 2023, subject to delays, with output to increase as processes and staffing developed. It expected domestic production to improve quality control and efficiency and reduce shipping, supply-chain, and geopolitical risks. These are expectations, not reported results.
- Management anticipated continued operating losses and elevated costs while building capacity and launching products. It said year-end cash, together with anticipated operating cash flows, was expected to cover requirements for at least 12 months from issuance of the financial statements, but also disclosed that substantial doubt about the company’s ability to continue as a going concern remained. The auditor’s report likewise highlighted substantial doubt.
- Key risks include limited revenue, dependence on future financing, manufacturing ramp-up execution, reliance on one Chinese supplier and concentrated customers, inflation and shipping costs, variable mortgage rates, foreign-exchange exposure, and competition. The company’s $13 million ATM offering facility had not been used as of the report date; its broader shelf registration permits up to $30 million of common-stock offerings.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2022, citing insufficiently precise written procedures, inadequate control documentation, system-access deficiencies, and insufficient segregation of duties. It expected remediation efforts to continue in 2023. The financial-statement audit was unqualified, with a going-concern emphasis; the auditor did not express an opinion on internal-control effectiveness.
- The company reported no material pending or threatened legal proceedings. The independent auditor changed during 2022; the filing reports no disagreements with accountants on accounting or financial disclosure.
Most important facts for investors to verify
- Whether the West Seneca facility began production on schedule, achieved expected capacity and costs, and required further capital or equipment spending.
- Cash burn, financing availability, ATM usage, mortgage rate and repayment or extension plans, and the company’s ability to fund operations beyond the stated outlook.
- Customer and supplier concentration, inventory turnover, and whether new products or sales channels generated material revenue after year-end.
- The reported EPS inconsistency ($0.73 versus $0.72), and progress in remediating material weaknesses in financial controls.
- Potential dilution from the ATM, outstanding warrants and equity awards, and the voting control associated with CEO Steven Rossi’s 51% voting power through preferred stock.