Worksport Ltd. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial statements are unaudited and reported in U.S. dollars. Worksport sells tonneau covers and is developing new products, including the Terravis system.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2021; 2020 | $93,408; $116,491 | $287,297; $223,620 |
| Gross profit; gross margin, 2021 | $11,598; 12% (2020: $22,357; 19%) | $7,933; 3% (2020: $43,592; 19%) |
| Operating expenses, 2021 | $2,051,563 (2020: $392,970) | $3,852,280 (2020: $671,937) |
| Net loss, 2021; 2020 | $2,064,281; $604,990 | $4,099,459; $949,441 |
| Loss per share, 2021; 2020 | $0.15; $0.21 | $0.42; $0.38 |
| Operating cash used, 2021; 2020 | $2,031,966; $382,352 for nine months |
At September 30, cash, restricted cash and cash equivalents totaled $30.9 million; current assets were $36.8 million and current liabilities $1.7 million, yielding working capital of $35.0 million. Total liabilities were $2.1 million, including $582,680 of lease liabilities. Current promissory notes were $263,211 and a government loan payable was $28,387; the convertible note had been repaid. Accumulated deficit was $17.1 million.
Investing cash outflow was $764,089, primarily reflecting $734,883 of property and equipment purchases. Financing cash inflow was $32.6 million, principally from equity offerings and warrant exercises. The filing reports no off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Third-quarter revenue fell about 20%; nine-month revenue rose about 28%. Management attributed the quarterly decline to building inventory ahead of an e-commerce platform launch and shifting toward domestic manufacturing; nine-month growth reflected stronger demand as COVID restrictions eased.
- Margins weakened materially: nine-month gross margin fell to 3% from 19%, which management attributed to higher inventory procurement and manufacturing costs. Shipping and freight represented 38% of nine-month cost of sales, versus 42% a year earlier.
- Operating expenses rose sharply, particularly professional fees, sales and marketing, and general and administrative costs. Management linked the increases to consultants, brand development, research and development, salaries, and business expansion. Nine-month net loss increased by $3.15 million.
- Cash rose substantially from $1.1 million at December 31, 2020, largely due to approximately $32.8 million raised through offerings, private placements, and warrant exercises. Common shares outstanding increased from 3.82 million at year-end to 16.83 million at quarter-end; 16.87 million were outstanding November 15, 2021.
Outlook, risks, contingencies, and unusual items
- Management stated existing cash and expected operating plans should fund contractual obligations and working capital for at least 12 months. It also anticipated possible proceeds from warrant and option exercises; these proceeds are uncertain. No quantified revenue or earnings guidance was provided.
- Management planned new tonneau-cover products and the Terravis system, and said it intended to emphasize online sales during 2021. It expected COVID-related manufacturing and sales impacts and weaker consumer confidence to constrain revenue; pandemic effects remained uncertain.
- A secured promissory note holder dispute remained unresolved, and the outcome of the related legal proceeding was described as uncertain. The notes also disclose disputes with secured note holders; the report’s “Legal Proceedings” item says none, creating an apparent disclosure inconsistency.
- Disclosure controls and procedures were assessed as ineffective at quarter-end. Management said it performed additional analyses and post-closing procedures, but the filing identifies no material control changes during the quarter.
- The company reported substantial equity-based compensation and prepaid expenses and deposits of $5.36 million. A 1-for-20 reverse stock split took effect August 4, 2021, and comparative share amounts were retrospectively restated.
- As of September 30, approximately 5.90 million warrants and 555,000 options were outstanding, potentially diluting shareholders. Management’s liquidity discussion also referenced potential future exercises.
Important facts for investors to verify
- Whether operating plans, product launches, and the e-commerce strategy can convert the company’s very limited revenue and low gross margins into sustainable growth and profitability.
- Cash availability and use, including the restricted-cash balance, substantial prepaid expenses, planned capital spending, and actual cash burn.
- Current status and potential financial impact of the secured-note dispute and other note obligations, including the note described as due on demand.
- Potential dilution from outstanding warrants, options, restricted shares, and subsequent share issuances, and whether anticipated warrant exercises occur.
- Remediation of ineffective disclosure controls and clarification of the apparent difference between the legal-proceedings disclosure and the note describing ongoing litigation.