Worksport Ltd. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited financial statements are in U.S. dollars. Worksport sells its product line through distributors and online retailers. Management attributed the sharp sales decline to COVID-19-related lockdowns, manufacturing disruptions and weaker demand.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $66,102 | $516,696 | $107,129 | $1,088,974 |
| Gross profit | $7,219 | $145,010 | $21,235 | $284,340 |
| Gross margin | 11% | 28% | 20% | 26% |
| Operating expenses | $140,496 | $134,321 | $278,967 | $360,964 |
| Operating income (loss) | $(133,277) | $10,689 | $(257,732) | $(76,624) |
| Net income (loss) | $(192,185) | $(1,748) | $(344,451) | $(128,220) |
- For the first half, sales fell about 90% year over year. Cost of sales declined 89%, but represented 80% of sales versus 74% a year earlier; freight rose to 23% of cost of sales from 4%, pressuring margins.
- Q2 sales fell about 87% year over year. Management cited COVID-19 restrictions and disruption to manufacturing and shipping. Q2 professional fees increased to $119,469 from $101,482; first-half professional fees declined to $228,934 from $273,984.
- First-half interest expense was $86,719, up from $51,596. Loss per share was $(0.01) for the six months, versus $(0.00) in 2019; Q2 loss per share was reported as $(0.00).
Cash, liquidity and debt
- Cash was $21,111 at June 30, 2020, versus $11,993 at December 31, 2019. First-half operating cash flow was negative $229,553; investing outflow was $8,764, and financing inflow was $247,435.
- Current assets were $519,498 against current liabilities of $1,452,715, a working-capital deficit of approximately $933,000. Total liabilities were $1,525,351, exceeding total assets of $742,729; shareholders’ deficit was $782,622.
- Current notes payable were $367,058, including $88,120 reclassified from accounts payable under terms still being negotiated. The company also had a secured Leonite convertible note, with $186,235 principal reported outstanding at June 30 and maturity on August 25, 2021. It carries interest of at least 10.2%, conversion features and anti-dilution provisions; default interest may reach 24% or the legal maximum.
- Additional financing included a $32,439 third-party loan at 10% due December 2021 and a $28,397 interest-free Canadian COVID-19 relief loan, potentially 25% forgivable if repaid by December 31, 2022. A $60,906 loan payable appears on the balance sheet; the filing’s presented detail does not clearly reconcile this amount to the two loan proceeds.
- Management stated that recurring losses and financing needs raise substantial doubt about the company’s ability to continue as a going concern. It warned that financing may not be available on acceptable terms and that insufficient working capital could force operations to cease.
Material changes, outlook and other disclosures
- Management expected sales to remain low amid pandemic-related supply-chain disruption and weak consumer confidence. It provided no quantified revenue, earnings or cash-flow guidance.
- Sales were highly concentrated: one customer represented 55.7% of first-half 2020 sales, compared with 3.9% in the comparable period; another represented 11.3%. Management warned that losing key customers could adversely affect the business.
- Common shares outstanding rose from 41,906,790 at year-end 2019 to 52,729,916 at June 30, 2020. At June 30, 6,933,013 shares were still to be issued; the Leonite note and warrants also had underlying shares. Subsequent to quarter-end, the company issued 4.1 million shares to a consultant and agreed to a warrant for up to 1.25 million shares.
- The company revised comparative equity information for an immaterial prior-period error involving a deemed dividend, anti-dilution features, share issuances and professional fees. It also changed its subsidiary’s functional currency to U.S. dollars effective January 1, 2020 and recognized a $29,940 foreign-exchange loss in connection with the change.
- Disclosure controls and procedures were assessed as ineffective at June 30, 2020, citing limited staff, lack of segregation of duties and no formal audit committee with a financial expert. The filing also checked “No” on whether all required Exchange Act reports had been filed during the preceding 12 months.
- A supplier settlement of $24,148 was substantially paid by June 30; the company reported that all required payments were subsequently completed. It reported no material legal proceedings and no defaults upon senior securities.
Investor verification priorities
- Assess the company’s near-term cash needs, available financing and going-concern risk, including the terms and repayment obligations of its debt.
- Review the Leonite note’s conversion, default and collateral provisions, as well as potential dilution from the note, warrants, shares payable and later share issuances.
- Verify whether sales, manufacturing capacity and shipping costs recovered after the reporting date, and evaluate customer concentration and dependence on key distribution channels.
- Review the prior-period revisions, the unresolved terms of the reclassified payable, and management’s plans to remediate ineffective disclosure controls.