Worksport .(WKSP) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company's financial statements for the period ended June 30, 2020, show a significant revenue decline and increased net loss, primarily due to the COVID-19 pandemic, with a shareholders' deficit and going concern uncertainty Condensed Consolidated Balance Sheets As of June 30, 2020, the company reported total assets of $742,729 and a shareholders' deficit of $782,622, reflecting an increase in assets and a slight improvement in the deficit from December 31, 2019 Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2020 ($) | December 31, 2019 ($) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $21,111 | $11,993 | | Total Current Assets | $519,498 | $253,685 | | Total Assets | $742,729 | $481,308 | | Liabilities & Shareholders' Deficit | | | | Total Current Liabilities | $1,452,715 | $1,324,684 | | Total Liabilities | $1,525,351 | $1,363,869 | | Total Shareholders' Deficit | $(782,622) | $(882,561) | Condensed Consolidated Statements of Operations For the six months ended June 30, 2020, net sales significantly decreased to $107,129, resulting in a net loss of $344,451, primarily due to the COVID-19 pandemic Statement of Operations Summary (Unaudited) | Metric | Six Months Ended June 30, 2020 ($) | Six Months Ended June 30, 2019 ($) | | :--- | :--- | :--- | | Net Sales | $107,129 | $1,088,974 | | Gross Profit | $21,235 | $284,340 | | Loss from operations | $(257,732) | $(76,624) | | Net Loss | $(344,451) | $(128,220) | | Loss per Share (Basic and Diluted) | $(0.01) | $(0.00) | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2020, the company used $229,553 in cash from operating activities, offset by $247,435 from financing, resulting in a slight increase in cash and cash equivalents to $21,111 Cash Flow Summary (Unaudited) | Activity | Six Months Ended June 30, 2020 ($) | Six Months Ended June 30, 2019 ($) | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(229,553) | $99,896 | | Net cash used in investing activities | $(8,764) | $(1,198) | | Net cash provided by financing activities | $247,435 | $25,688 | | Change in cash | $9,118 | $104,375 | | Cash and cash equivalents – end of period | $21,111 | $129,698 | Notes to the Condensed Consolidated Financial Statements The notes detail significant accounting policies, a going concern warning due to recurring losses and accumulated deficit, new financing agreements, a COVID-19 relief loan, high customer concentration, and prior period financial revisions - The company's financial statements have been prepared on a going concern basis, but recurring net losses ($344,451 for the six months ended June 30, 2020) and a significant accumulated deficit ($12,022,864) raise substantial doubt about its ability to continue[23] - On February 25, 2020, the company issued a secured convertible promissory note to Leonite Capital for an aggregate principal amount of $544,425. As part of the deal, Leonite received 450,000 common shares and a five-year warrant to purchase 900,000 common shares[32] - The company received a $28,397 ($40,000 CDN) interest-free loan from the Government of Canada under the COVID-19 small business relief program. 25% of the loan may be forgiven if repaid by December 31, 2022[69] - Financial statements for prior periods were revised to correct an immaterial error related to the recognition of a deemed dividend from an anti-dilution feature triggered in March 2019[71][72] Significant Customer Sales Concentration | Customer | 2020 (% of Sales) | 2019 (% of Sales) | | :--- | :--- | :--- | | Customer A | 55.7% | 3.9% | | Customer B | 11.3% | 2.0% | | Customer C | - | 86.5% | - Subsequent to June 30, 2020, the company issued a total of 4,100,000 common shares to a consultant, entered a new $10,000 loan agreement, and issued a warrant to purchase 1,250,000 common shares[73][74] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 90% revenue decline and widened net loss for H1 2020 to the COVID-19 pandemic, which disrupted operations and increased freight costs, while the company secured financing to support liquidity COVID-19 Impact The company anticipates continued disruptions to manufacturing and sales due to the COVID-19 pandemic, leading to low consumer confidence and material uncertainty for future performance - The company anticipates disruptions to manufacturing and a significant reduction in sales due to lockdown orders and low consumer confidence resulting from the COVID-19 pandemic[79] - The pandemic and its impact on the global supply chain and financial markets present material uncertainty and risk to the company's performance, financial condition, and cash flows[80] Results of Operations Revenue for H1 2020 plummeted 90% to $107,129, increasing cost of sales as a percentage of sales and decreasing gross margin to 20%, resulting in a 169% increase in net loss to $344,451 Revenue and Gross Margin Comparison (Six Months Ended June 30) | Metric | 2020 ($) | 2019 ($) | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $107,129 | $1,088,974 | -90% | | Gross Margin % | 20% | 26% | -6 p.p. | | Net Loss | $(344,451) | $(128,220) | +169% | - The decrease in gross margin was primarily driven by increased freight costs, which accounted for 23% of cost of sales in H1 2020, up from 4% in H1 2019[86][88] - Operating expenses decreased by $81,997 for the six-month period, mainly due to lower professional fees and general and administrative expenses as a result of reduced operations during the pandemic[89][91] Liquidity and Capital Resources Cash decreased to $21,111 by June 30, 2020, due to lower sales and operating cash usage, but liquidity was bolstered by a convertible promissory note and government relief loans - Cash used in operations was $229,553, a reversal from cash provided by operations of $99,896 in the prior year, driven by lower sales and disruptions from COVID-19[14][92] - Financing activities provided $247,435 in cash, primarily from a convertible promissory note ($182,500), a third-party loan ($32,439), and a Canadian government COVID-19 relief loan ($28,397)[95] - The company has no off-balance sheet arrangements[96] Quantitative and Qualitative Disclosures About Market Risk The company is exempt from providing quantitative and qualitative disclosures about market risk as a "smaller reporting company" - As a "smaller reporting company," the registrant is exempt from providing quantitative and qualitative disclosures about market risk[99] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of June 30, 2020, due to limited staff and the absence of a formal audit committee with a financial expert - The CEO and CFO concluded that the company's disclosure controls and procedures are not effective as of June 30, 2020[101] - The ineffectiveness is due to a limited number of employees, which prohibits segregation of duties, and the absence of a formal audit committee with a financial expert[102] - There were no changes in internal control over financial reporting during the period that materially affected, or are reasonably likely to materially affect, internal controls[103] PART II OTHER INFORMATION Legal Proceedings The company is not a party to any material legal proceedings, nor are any currently contemplated or threatened - The company is not involved in any material legal proceedings[105] Risk Factors As a smaller reporting company, Worksport Ltd. is not required to provide risk factor disclosures in its Form 10-Q and refers to its 2019 Form 10-K - The company is a smaller reporting company and is not required to provide this information. It refers to its 2019 Form 10-K for risk factors[106] Unregistered Sales of Equity Securities and Use of Proceeds The company did not complete any unregistered sales of equity securities during the six months ended June 30, 2020 - No unregistered sales of equity securities were completed during the six months ended June 30, 2020[107] Defaults Upon Senior Securities The company reports no defaults upon its senior securities - There have been no defaults upon senior securities[108] Other Information As a "smaller reporting company," the registrant is exempt from providing information in this item - As a "smaller reporting company," the registrant is exempt from providing information in this item[110] Exhibits This section lists exhibits filed with the quarterly report, including corporate governance documents, officer certifications, and XBRL data files - Exhibits filed include corporate governance documents (Articles of Incorporation, By-Laws), officer certifications (302, 906), and XBRL financial data[111] Signatures Signatures The quarterly report was signed on August 27, 2020, by CEO Steven Rossi and CFO Michael Johnston - The report was signed on August 27, 2020, by CEO Steven Rossi and CFO Michael Johnston[116][117]