Worksport Ltd. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparative period is the three months ended March 31, 2021. Figures are unaudited and in U.S. dollars unless stated otherwise.
Business context and results
Worksport reported limited sales while building inventory, developing products and manufacturing capacity, and preparing to launch an e-commerce platform in 2022. Management said it planned to emphasize online sales and was repositioning toward domestic manufacturing. The company reported working with ten dealers and distributors.
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $47,784 | $7,650 |
| Cost of goods sold | $37,977 | $60,221 |
| Gross profit (loss) | $9,807 | $(52,571) |
| Gross margin | Approximately 21% | Approximately (687%) |
| Operating expenses | $2,807,587 | $949,255 |
| Loss from operations | $(2,797,780) | $(1,001,826) |
| Net loss | $(2,817,609) | $(1,223,519) |
| Basic and diluted loss per share | $(0.17) | $(0.24) |
| Net cash used in operating activities | $(2,016,479) | $(506,867) |
Financial position and liquidity
- At March 31, 2022, cash and cash equivalents were $25.81 million, down from $28.57 million at December 31, 2021. Current assets were $30.85 million and current liabilities were $1.79 million; reported working capital was $29.05 million.
- Total assets were $33.96 million; total liabilities were $2.06 million. Accumulated deficit was $23.67 million.
- Cash used in investing was $614,046, principally reflecting property and equipment purchases. Cash used in financing was $127,870; there were no proceeds from share issuance or warrant exercises in the quarter. Cash declined by $2.76 million during the period.
- Promissory notes payable were $263,211, a government loan payable was $28,387, and a related-party loan was $33,684. Lease liabilities totaled $475,825, including current and long-term portions. The filing also describes secured notes that are overdue and a dispute with one noteholder.
- Management said existing cash was sufficient for anticipated obligations and working capital for at least 12 months. It also cited approximately $41 million of possible proceeds from warrant and stock-option exercises; those proceeds are contingent, not committed funding.
Changes, outlook and risks
- Revenue rose approximately 525% year over year from a small base. Cost of sales fell 37%, and gross margin improved to positive 21%, which management attributed to improved manufacturing and inventory-acquisition efficiency.
- Net loss increased 130%, primarily as operating expenses rose with spending on operations, research and development, manufacturing, supply chain, marketing and outside consultants. Professional fees were $1.49 million; sales and marketing were $720,488.
- Management anticipated launching its e-commerce platform in 2022 and expected online retailers to provide higher sales volumes and margins than traditional distribution. The filing provides no quantified revenue or earnings guidance.
- The company has never generated a profit since its acquisition of Worksport in 2014 and has relied principally on public and private securities offerings. COVID-19-related disruption and capital-market access were identified as potential liquidity and operating risks.
- Potential dilution is material: at quarter-end, the filing reported 5.59 million warrants, 722,500 options, 700,000 performance stock units and restricted shares, among other share commitments. It cited approximately 9.07 million underlying common shares in total, subject to applicable vesting and exercise terms.
- Management concluded disclosure controls and procedures were not effective at quarter-end and described additional post-closing review procedures. It reported no material changes in internal control during the quarter.
- Subsequent events included a May 6, 2022 purchase of property in West Seneca, New York, disclosed in a separate Form 8-K; the terms are not stated in the supplied filing text. The filing reported no legal proceedings.
Important facts for investors to verify
- Reconcile the operating-expense figures: the financial statements report $2,807,587, while MD&A gives $2,682,187 and describes a different increase. Confirm the correct figure and related analysis.
- Confirm comparative-period wording: the revenue discussion contains a year reference that appears inconsistent with the stated Q1 2021 comparison.
- Assess whether the e-commerce launch, domestic manufacturing plans and sales growth can be achieved without materially increasing cash burn.
- Evaluate liquidity expectations without assuming possible warrant and option exercise proceeds, and review the status and terms of overdue or disputed secured notes.
- Review the West Seneca property purchase terms and the company’s plans for addressing the disclosed ineffective disclosure controls.
- Assess potential dilution, including warrants, options, performance awards and shares to be issued, against the reported share count.