Worksport Ltd. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2021; amounts are in U.S. dollars. The filing presents unaudited consolidated interim results and compares them with the three months ended March 31, 2020. Worksport sells tonneau covers and was preparing new products, including its TerraVis solar cover.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $7,650 | $41,027 |
| Gross profit (loss) | $(52,571) | $14,016 |
| Gross margin | (687%) | 34% |
| Operating expenses | $949,255 | $138,471 |
| Operating loss | $(1,001,826) | $(124,455) |
| Interest expense | $(230,900) | $(27,811) |
| Net loss | $(1,223,519) | $(152,266) |
| Net cash used in operations | $(506,867) | $(181,035) |
| Cash at period end | $9,311,878 | $11,010 |
- At March 31, 2021, total assets were $10.21 million, current assets $9.81 million, current liabilities $1.37 million, and working capital $8.44 million. Total liabilities were $1.38 million; accumulated deficit was $14.09 million.
- Promissory notes payable were $313,211, all classified as current. The convertible note was converted into shares and reported as fully repaid by quarter-end. The company also had a $28,387 government relief loan outstanding.
- Investing cash outflow was $132,256, including $119,233 for property and equipment. Financing cash inflow was $8,843,188, primarily from equity offerings and warrant exercises.
Material changes and financing
- Sales fell approximately 81% year over year. U.S. sales declined 65% to $7,650, while Canadian sales fell to zero from $13,018. All Q1 2021 sales were online.
- Cost of goods sold increased to $60,221 from $27,011 despite much lower sales; the filing attributes this mainly to shipping expenses related to inventory acquisitions. Gross margin moved from positive 34% to negative 687%.
- Operating expenses rose by $810,784, with professional fees increasing to $647,114 from $109,465, primarily attributed to third-party consultants. General and administrative expense increased to $134,284 from $33,906.
- The company raised approximately $9.0 million during the quarter through Reg A and private offerings and warrant exercises. Common shares outstanding increased from 76.4 million at December 31, 2020 to 162.8 million at March 31, 2021. The filing reported 57.7 million warrants outstanding at quarter-end.
- Q1 net loss includes substantial interest expense, including amortization of debt discounts. A prior-period immaterial error was revised in the comparative 2020 statements, reducing reported Q1 2020 professional fees and net loss by $40,000.
Outlook, risks, and unusual matters
- Management said it expects to focus on online sales during 2021 and anticipated launching several tonneau covers, including TerraVis, later in 2021. It believed new products could improve the company’s financial position; the filing provides no quantified revenue or earnings guidance.
- Management stated that available cash and expected financing, including possible warrant exercises, should fund contractual obligations and working capital for at least 12 months. This depends in part on anticipated warrant exercises and product introductions; no assurance is provided that these expectations will be achieved.
- COVID-19 affected manufacturing practices, sales, shipping, and distribution, including through labor shortages. Management said the long-term impact was uncertain and anticipated lower revenues than in previous periods.
- The company and holders of certain secured promissory notes were in dispute as of March 31, 2021; the notes carried interest rates of 18%. The filing also disclosed an ongoing legal proceeding involving a promissory-note holder with an uncertain outcome.
- Disclosure controls and procedures were concluded to be ineffective at quarter-end. Management reported no material changes in internal control over financial reporting during the quarter.
- Subsequent events included a May 2021 $1 million private unit sale and issuance of 34.35 million shares to the CEO in connection with an employment agreement and amendment eliminating Series A preferred-stock conversion rights.
Important facts for investors to verify
- Whether the company can convert its cash balance into sustained sales and improve margins, given Q1 revenue of only $7,650 and sharply higher losses.
- The terms, exercise likelihood, and potential dilution from the substantial warrant balance and subsequent equity issuances.
- The status and potential financial consequences of the disputed secured notes and other legal proceedings, including maturity and accrued interest.
- Whether cash burn, product-launch timing, and anticipated financing support management’s stated liquidity outlook.
- What remediation has occurred for ineffective disclosure controls, and whether subsequent reporting addresses the identified control issues.