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Worksport Ltd - Quarter Report: 2021 September (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For Quarterly Period Ended: September 30, 2021

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File No. 001-40681

 

 

 

Worksport Ltd.

(Exact Name of Small Business Issuer as specified in its charter)

 

Nevada   35-2696895
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification Number)

 

7299 E Danbro Cres.

Mississauga, Ontario, Canada L5N 6P8

(Address of Principal Executive Offices, Including Zip Code)

 

Registrant’s Telephone Number, including area code: (888) 554-8789

 

With copies to:

Ross Carmel, Esq.

Philip Magri, Esq.

Carmel, Milazzo & Feil LLP

55 W 39th Street, 18th Floor

New York, NY 10018

Tel: 212-658-0458

Fax: 646-838-1314

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:   Trading Symbol(s)   Name of each exchange on which registered:
Common Stock   WKSP   NASDAQ CAPITAL MARKET
Warrants   WKSPW   NASDAQ CAPITAL MARKET

 

Indicate by check mark whether the registrant (1) has filed all Reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter year that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: ☒ No: ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter year that the registrant was required to submit and post such files. Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
    Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition year for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

 

As of November 15, 2021 16,871,486 shares of Common Stock outstanding.

 

 

 

 
 

 

WORKSPORT LTD.

TABLE OF CONTENTS

 

  Page
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements.  
Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020 (Unaudited) 3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020 (Unaudited) 4
Condensed Consolidated Statements of Cash Flow for the nine months ended September 30, 2021 and 2020 (Unaudited) 5
Condensed Consolidated Statements of Shareholders’ Deficit for the three and nine months ended September 30, 2021 and 2020 (Unaudited) 6-7
Notes to the Condensed Consolidated Financial Statements (Unaudited) 8-17
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18-21
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
   
Item 4. Controls and Procedures 22
   
PART II OTHER INFORMATION  
   
Item 1. Legal Proceedings 22
   
Item 1A. Risk Factors 22
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
   
Item 3. Defaults Upon Senior Securities 22
   
Item 4. Mine Safety Disclosures 22
   
Item 5. Other Information 22
   
Item 6. Exhibits 22
   
SIGNATURES 23

 

2
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Worksport Ltd.

Condensed Consolidated Balance Sheets

(Unaudited)

 

   September 30, 2021   December 31, 2020 
Assets          
Current Assets          
Cash, restricted cash and cash equivalents  $29,002,627   $1,107,812 
Restricted cash   1,917,850    - 
Accounts receivable net   155,266    122,787 
Other receivable   103,742    167,836 
Inventory (note 3)   56,205    40,803 
Prepaid inventory (note 3)   141,420    - 
Prepaid expenses and deposits   5,360,043    245,526 
Related party receivable (note 7)   25,468    - 
Total Current Assets   36,762,621    1,684,764 
Investment   24,423    24,423 
Property and Equipment, net   800,970    91,511 
Right-of-use asset, net (note 10)   573,862    38,506 
Intangible Assets, net   442,458    62,948 
Total Assets  $38,604,334   $1,902,152 
           
Liabilities and Shareholders’ Deficit          
Current Liabilities          
Accounts payable and accrued liabilities  $1,171,010   $971,667 
Payroll taxes payable   51,186    48,216 
Related party loan (note 7)   -    23,393 
Promissory notes payable (note 4)   263,211    367,058 
Convertible promissory note, net (note 5)   -    98,982 
Loan payable (note 11)   28,387    184,854 
Current lease liability (note 10)   214,249    23,883 
Total Current Liabilities   1,728,043    1,718,053 
Long Term – Lease Liability (note 10)   368,431    14,624 
Total Liabilities   2,096,474    1,732,677 
           
Shareholders’ Equity (Deficit)          
Series A & B Preferred Stock, $0.0001 par value, 100,100 shares authorized, 100 Series A and 0 Series B issued and outstanding, respectively (note 6)   -    1 
Common stock, $0.0001 par value, 299,000,000 shares authorized, 16,829,037 and 3,820,618 shares issued and outstanding, respectively (note 6)   1,683    382 
Additional paid-in capital   53,279,583    12,665,854 
Share subscriptions receivable   (1,577)   (1,577)
Share subscriptions payable   288,930    379,428 
Accumulated deficit   (17,052,179)   (12,866,033)
Cumulative translation adjustment   (8,580)   (8,580)
Total Shareholders’ Equity (Deficit)   36,507,860    169,475 
Total Liabilities and Shareholders’ Equity (Deficit)  $38,604,334   $1,902,152 

 

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

3
 

 

Worksport Ltd.

Condensed Consolidated Statements of Operations

For the three and nine months ended September 30, 2021 and 2020

(Unaudited)

 

                 
   Three Months ended
September 30		   Nine Months ended
September 30		 
   2021   2020   2021   2020 
                 
Net Sales  $93,408   $116,491   $287,297   $223,620 
Cost of Goods Sold   81,810    94,134    279,364    180,028 
Gross Profit (Loss)   11,598    22,357    7,933    43,592 
                     
Operating Expenses                    
General and administrative   517,735    50,836    924,041    97,566 
Sales and marketing   433,905    59,122    761,712    69,869 
Professional fees   1,111,098    280,413    2,168,697    509,347 
(Gain) loss on foreign exchange   (11,175)   2,599    (2,170)   (4,845)
Total operating expenses   2,051,563    392,970    3,852,280    671,937 
Loss from operations   (2,039,965)   (370,613)   (3,844,347)   (628,345)
                     
Other Income (Expense)                    
Interest expense (note 5)   (26,114)   (190,103)   (275,114)   (276,822)
Interest income   1,798    -    1,798    - 
Gain (loss) on settlement of debt   -    (44,274)   18,204    (44,274)
Total other income (expense)   (24,316)   (234,377)   (255,112)   (321,096)
                     
Net Loss  $(2,064,281)  $(604,990)  $(4,099,459)  $(949,441)
                     
Loss per Share (basic and diluted)  $(0.15)  $(0.21)  $(0.42)  $(0.38)
Weighted Average Number of Shares (basic and diluted)   13,983,567    2,857,443    9,688,668    2,527,364 

 

The accompanying notes form an integral part of these condensed consolidated financial statements

 

4
 

 

Worksport Ltd.

Condensed Consolidated Statements of Cash Flows

For the nine Months Ended September 30, 2021 and 2020

(Unaudited)

 

   2021   2020 
Operating Activities          
Net Loss  $(4,099,459)  $(949,441)
Adjustments to reconcile net loss to net cash from operating activities:          
Shares, options and warrants issued for services   1,838,661    328,644 
Depreciation and amortization   

114,035

    19,972 
Interest on lease liability   21,633    3,983 
Accrued interest   32,654    44,095 
Amortization of debt discount   -    198,060 
Amortization on OID interest   211,340    17,597 
Loss (Gain) on settlement of debt   (18,204)   44,274 
Adjustments to reconcile net loss to net cash from operating activities total   (1,899,340)   (292,816)
Changes in operating assets and liabilities (note 8)   (132,626)   (89,536)
Net cash used in operating activities   (2,031,966)   (382,352)
           
Cash Flows from Investing Activities          
Loan receivable   (5,506)   - 
Purchase of investment   -    (8,765)
Purchase of intangible assets   (23,700)   - 
Purchase of property and equipment   (734,883)   (7,962)
Net cash used in investing activities   (764,089)   (16,727)
           
Financing Activities          
Repayment of lease liability   (85,339)   (25,352)
Proceeds from issuance of common shares, net of issuance cost   24,398,070    250,000 
Proceeds from warrant exercise   8,407,755    - 
Proceeds from loan payable   -    178,836 
Repayment of loan payable   (62,905)   (16,150)
Proceeds from promissory notes   -    467,500 
Shareholder assumption of debt   (48,861)   (615)
Net cash provided by financing activities   32,608,720    854,219 
Change in cash   29,812,665    455,140 
Cash, restricted cash and cash equivalents - beginning of year   1,107,812    11,993 
Cash, restricted cash and cash equivalents end of period  $30,920,477   $467,133 
Supplemental disclosure of cash flow information:          
Interest paid  $9,737   $11,100 
Supplemental Disclosure of non-cash investing and financing Activities          
Shares issued for purchase of software  $357,603   $- 
Shares issued to service providers  $791,029   $- 
Cashless warrant exercise  $238,895   $- 
Non-cash for prepaids  $5,953,950   $- 
Shares issued from share subscriptions payable  $86,688   $1,626,415 
Shares issued for loan repayment  $176,500   $- 
Conversion of convertible promissory note to common stock  $368,318   $- 
Convertible promissory note – equity discount  $-   $467,500 
Convertible promissory note – original issue discount  $-   $41,537 
Conversion of preferred stock to common stock  $171   $226,587 
Reverse stock split  $21,182   $- 

 

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

5
 

 

Worksport Ltd.

Condensed Consolidated Statements of Shareholders’ Deficit

For the Three Months Ended September 30, 2021 and 2020

(Unaudited)

 

                                                   
   Preferred Stock   Common Stock   Additional Paid-in   Share Subscriptions   Share Subscription   Accumulated   Cumulative Translation   Total
Stockholders’ Equity		 
   Shares   Amount   Shares   Amount   Capital   Receivable   Payable   Deficit   Adjustment   (Deficit) 
Balance at July 1, 2020   1,000   $1    2,636,496   $264   $10,001,399   $(1,577)  $1,248,735   $(12,022,864)  $(8,580)  $(782,622)
Issuance for prepaid services   -         -    120,651    12    168,898    -    -    -    -    168,910 
Issuance for prepaid services and subscriptions payable   -    -    179,801    18    590,737    -    (590,755)   -    -    - 
Conversion of convertible promissory note to shares   -    -    126,022    12    226,826    -    -    -    -    226,839 
Warrants issuance in connection to convertible promissory note   -    -    -    -    285,000    -    -    -    -    285,000 
Warrant issuance for services   -    -    -    -    12,600    -    -    -    -    12,600 
Issuance of subscriptions payable   -    -    -    -    -    -    250,000    -    -    250,000 
Net loss   -    -    -    -    -    -    -    (604,990)   -    (604,990)
Balance at September 30, 2020   1,000   $1    3,062,970    306    11,285,460   $(1,577)  $907,980   $(12,627,854)  $(8,580)  $(444,263)
                                                   
Balance at July 1, 2021   100    -    11,148,292   $1,115   $26,609,130   $(1,577)  $833,229   $(14,901,211)  $(8,580)  $12,532,106 
Stock split provision   -    -    237,500    24    86,663    -    -    (86,687)   -    - 
Issuance for services and subscriptions payable   -    -    1,120,000    112    5,972,603    -    (173,384)   -    -    5,799,331 
Public offering   -    -    3,483,636    348    21,805,013    -    -    -    -    21,805,361 
Share issuance cost   -    -    -    -    (4,335,908)   -    -    -    -    (4,335,908)
Warrant exercise (note 14)   -    -    839,609    84    3,142,082    -    (370,915)   -    -    2,771,251 
Net loss   -    -    -    -    -    -    -    (2,064,281)   -    (2,064,281)
Balance at September 30, 2021   100    -    16,829,037   $1,683   $53,279,583   $(1,577)  $288,930   $(17,052,179)  $(8,580)  $36,507,860 

 

The accompanying notes form an integral part of these condensed consolidated financial statements

 

6
 

 

Worksport Ltd.

Condensed Consolidated Statements of Shareholders’ Deficit

For the Nine Months Ended September 30, 2021 and 2020

(Unaudited)

 

   Preferred Stock   Common Stock   Additional Paid-in   Share Subscriptions   Share Subscription   Accumulated   Cumulative Translation   Total
Stockholders’ Equity		 
   Shares   Amount   Shares   Amount   Capital   Receivable   Payable   Deficit   Adjustment   (Deficit) 
Balance at January 1, 2020   -        -    2,095,340   $210   $8,646,404   $(1,577)  $2,159,395   $(11,678,413)  $(8,580)  $(882,561)
Issuance for services   -    -    120,651    12    168,898    -    -    -    -    168,910 
Issuance for prepaid services and subscriptions payable   -    -    493,458    50    907,085    -    (645,335)   -    -    261,800 
Issuance of subscriptions payable   -    -    -    -    -    -    250,000    -    -    250,000 
Warrant issuance for service   -    -    -    -    12,600    -    -    -    -    12,600 
Warrants issuance in connection to convertible promissory note (note 5)   -    -    -    -    344,110    -    -    -    -    344,110 
Share issuance in connection to convertible promissory note (note 5)   -    -    22,500    2    123,388    -    -    -    -    123,390 
Conversion of convertible promissory note to shares (note 5)   -    -    126,021    12    226,826    -    -    -    -    226,839 
Issuance for settlement of payables   -    -    205,000    20    856,059    -    (856,080)   -    -    - 
Issuance of Preferred Stock   1,000    1    -    -    90    -    -    -    -    90 
Net loss   -    -    -    -    -    -    -    (949,441)   -    (949,441)
Balance at September 30, 2020   1,000   $1    3,062,970   $306   $11,285,460   $(1,577)  $907,980   $(12,627,854)  $(8,580)  $(444,263)
                                                   
Balance at January 1, 2021   1,000   $1    3,820,618   $382   $12,665,854   $(1,577)  $379,428   $(12,866,033)  $(8,580)  $169,475 
Stock split provision   -    -    237,500    24    86,663    -    -    (86,687)   -    - 
Conversion of preferred stock to common stock   (900)   (1)   1,717,535    172    (171)   -    -    -    -    - 
Issuance for services and subscriptions payable   -    -    1,533,158    154    7,127,841    -    (77,798)   -    -    7,050,197 
Public offering   -    -    4,986,046    498    24,808,184    -    (32,700)   -    -    24,775,982 
Share issuance cost   -    -    -    -    (4,459,892)   -    -    -    -    (4,459,892)
Issuance of shares from private placement   -    -    2,040,990    204    4,081,776    -    -    -    -    4,081,980 
Warrants issuance for services   -    -    -    -    37,000    -    -    -    -    37,000 
Conversion of convertible promissory note to shares (note 5)   -    -    204,622    20    368,298    -    -    -    -    368,318 
Warrant exercise (note 14)   -    -    2,190,515    219    8,387,540    -    20,000    -    -    8,407,759 
Loan repayment (note 4 and 11)   -    -    98,054    10    176,490    -    -    -    -    176,500 
Net loss   -    -    -    -    -    -    -    (4,099,459)   -    (4,099,459)
Balance at September 30, 2021   100    -    16,829,037    1,683   $53,279,583   $(1,577)  $288,930   $(17,052,179)  $(8,580)  $36,507,860 

 

7
 

 

Worksport Ltd.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

1. Basis of Presentation and Business Condition

 

a) Interim Financial Information

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments and reclassifications considered necessary in order to make the financial statements not misleading and for a fair and comparable presentation have been included and are of a normal recurring nature. Operating results for the nine month period ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on April 13, 2021.

 

On May 21, 2021, the Board of Directors authorized the submission of a Certificate of Change/Amendment to the Nevada Secretary of State in which the Company sought to affect a reverse split of its common stock at the rate of 1 for 20 for the purpose of increasing the per share price for the Company’s stock in an effort to meet the minimum listing requirements of the NADAQ. The Certificate of Change was submitted to the Nevada Secretary of State on May 21, 2021 and the FINRA corporate action was announced on August 3, 2021. FINRA declared the 1 for 20 reverse stock split effective on August 4, 2021. These condensed interim financial statements including, prior period comparative share amounts, have been retrospectively restated to reflect this reverse split.

 

During the nine months period September 30, 2021 Terravis Energy Inc. was incorporated in the State of Nevada on May 5, 2021. On August 20, 2021 the Company was issued 100 common shares at par value of $0.0001 per share for a controlling interest in Terravis Energy Inc.

 

b) Functional and Reporting Currency

 

Effective January 1, 2020, the Company changed the functional currency of its subsidiary to United States dollars given the increasing prevalence of U.S. dollar-denominated activities of the subsidiary over time. The change in functional currency from Canadian dollars to United States dollars is accounted for prospectively from January 1, 2020. The subsidiary’s balance sheet was converted from Canadian dollars to United States dollars using the year ended December 31, 2019 United States dollar balance as the opening for January 1, 2020 in accordance to ASC 830. These condensed interim financial statements are presented in United States Dollars. The functional and presentation currency of the Company and its subsidiary is the United States Dollar. As a result of the change in functional currency the Company recognized a loss on foreign exchange of $29,940.

 

c) Use of Estimates

 

The preparation of condensed unaudited financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed interim financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

d) Business condition

 

The Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued.

 

As of September 30, 2021, the Company had working capital of $35,034,578 and an accumulated deficit of $17,052,179. As of September 30, 2021, the Company had cash, restricted cash and cash equivalents of $30,920,477. Based on its current operating plans, the Company believes it has sufficient level of funding for anticipated operations, capital expenditures and debt repayments for a period of at least 12 months from the issuance date of this Quarterly Report.

 

During the nine months ended September 30, 2021 the Company through its Reg-A public offering, underwritten public offering, private placement offering, and exercises of warrants had raised in aggregate of approximately $32,800,000. In addition, as of November 2021 the Company has approximately 6,400,000 warrants and stock options exercisable at $4 to $6.05 per warrant and stock option compared to an average share price of approximately $5.10 per share. The Company is anticipating additional warrant exercises.

 

8
 

 

Worksport Ltd.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

d) Business condition (continued)

 

Based on the Company’s future operating plans, existing cash and restricted cash of $30,920,477 combined with possible warrants and stock options exercises of approximately $33,000,000; management believes the Company have sufficient funds to meet its contractual obligations and working capital requirements for the next 12 months and the foreseeable future.

 

e) Reclassification

 

Certain amounts in the prior period Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 have been reclassified to conform with current period presentation. The Company reclassified $25,352 of changes from accounts payable and accrued liabilities under operating assets and liabilities to repayment of lease liability under financing activities. This reclassification resulted in a decrease in net cash used by operating activities from $407,704 to $382,352 and decrease in net cash provided by financing activities from $879,571 to $854,219. This reclassification did not have any effect on the reported results of operations.

 

2. Significant Accounting Policies

 

The accounting polices used in the preparation of these condensed consolidated interim financial statements are consistent with those of the Company’s audited financial statements for the year ended December 31, 2020 in addition to:

 

Property and Equipment – During the nine months ended September 30, 2021 the Company purchased an automobile. As such the Company has updated its accounting policy of its capital assets. Capital assets are recorded at cost and are amortized using the straight-line method over the following estimated useful lives:

 

  ● Automobile 5 years

 

3. Inventory

 

Inventory consists of the following at September 30, 2021 and December 31, 2020:

 

   2021   2020 
Finished goods  $46,157   $32,358 
Promotional items   552    552 
Raw materials   9,496    7,893 
Inventory  $56,205   $40,803 
Prepaid inventory  $141,420   $- 

 

4. Promissory Notes

 

The following tables shows the balance of the notes payable as of September 30, 2021 and December 31, 2020:

 

Balance as at December 31, 2019  $267,881 
Reclassification   99,177 
Balance as at December 31, 2020  $367,058 
Repayment   (103,847)
Balance as at September 30, 2021  $263,211 

 

During the year ended December 30, 2020, the Company reclassified $88,120 from accounts payable to promissory notes. The terms of the note is under negotiation and is currently due on demand.

 

During the year ended December 30, 2020, the Company reclassified a debit balance of $11,058 from notes payable to other receivable.

 

During the year ended December 31, 2016, the Company issued a secured promissory note in the amount of $73,452 ($123,231 Canadian Dollars). During the year ended December 31, 2018, the Company issued two additions to the original unsecured promissory note of July 2016, totaling $22,639 ($30,884 Canadian dollars). The secured promissory note bears interest at a rate of 18% per annum. The payment terms of the original note including these additions are due “upon completion of going public on the Canadian Securities Exchange, with no change in interest rate. The secured promissory note is secured by all present and after-acquired property and assets of the Company. During the year ended

 

9
 

 

Worksport Ltd.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

4. Promissory Notes (continued)

 

December 31, 2019, the Company extended the maturity dates of the secured promissory notes to be due on April 1, 2021. As at September 30, 2021, principal balance owing was $96,091 ($123,231 Canadian Dollars) (December 31, 2020 - $96,091 ($123,231 Canadian Dollars)). As of September 30, 2021, the accrued interest on this note payable was $61,970 ($80,693 Canadian Dollars) (December 31, 2020 - $48,770 ($64,102 Canadian Dollars)) included in accounts payable and accrued liabilities. As of September 30, 2021, the Company and the secured promissory note holder are in dispute.

 

During the year ended December 31, 2016, the Company issued secured promissory notes in the amount of $79,000. The secured promissory notes bears interest at a rate of 18% per annum, payable monthly. The secured promissory notes are secured by all present and after-acquired property and assets of the Company. During the year ended December 31, 2019, the Company extended the maturity dates of all secured promissory notes to be due on April 1, 2021. As at September 30, 2021 principal balance owing was $79,000 (December 31, 2020 - $79,000). As of September 30, 2021, the accrued interest on this note payable was $41,607 (December 31, 2020 – $31,000) included in accounts payable and accrued liabilities. As of September 30, 2021, the Company and the secured promissory note holder are in dispute.

 

During the years ended December 31, 2017, the Company issued secured promissory notes in the amount of $53,848 ($67,700 Canadian Dollars). The secured promissory notes were due in October and November 2018 and bears interest at a rate of 12% per annum. The secured promissory notes are secured by Company inventory and personal assets held by the CEO. During the year ended December 31, 2019, the Company extended the maturity date of the secured promissory notes to November 3, 2020. During the nine months ended September 30, 2021, the Company and promissory note holders reached an agreement to repay $62,905 ($80,108 Canadian Dollars) for outstanding principal of $53,848 and interest of $14,740. As a result of the Company recognized a gain on settlement of debt of $5,682. As of September 30, 2021 the secured promissory notes has been repaid in full.

 

During the years ended December 31, 2017, the Company issued secured promissory notes in the amount of $60,000. The secured promissory notes are due in August and November 2018 and bear interest at a rate of 12% per annum. The secured promissory notes are secured by Company inventory and personal assets held by the CEO. During the year ended December 31, 2019 the Company extended the maturity dates of this secured promissory note to November 3, 2020. During the year ended December 31, 2019, the Company a principal repayment of $10,000. During the quarter ended September 30, 2021 the Company and secured promissory note holder agreed to repay all outstanding principal and interest through the issuance of 36,048 common shares valued at $0.09 per share. As at September 30, 2021, the Company had recorded principal and interest of $73,886 as a result of the share repayment the Company recognized a gain on settlement of $8,997. As of September 30, 2021 the secured promissory notes has been repaid in full.

 

The amounts repayable under promissory notes and secured promissory notes at September 30, 2021 and December 31, 2020: 

   September 30, 2021   December 31, 2020 
Balance owing  $263,211   $367,058 
Less amounts due within one year   (263,211)   (367,058)
Long-term portion  $-   $- 

 

5. Convertible Promissory Notes

 

On February 25, 2020, the Company entered into an agreement with Leonite Capital LLC, a Delaware limited liability company (“Leonite”), pursuant to which the Company issued to Leonite a secured convertible promissory note in the aggregate principal amount of $544,425 to be paid in tranches. As additional consideration for the purchase of the note, (I) the Company issued to Leonite 22,500 common shares, and (ii) the Company issued to Leonite a five-year warrant to purchase 45,000 common shares at an exercise price of $2.00 per share (subject to adjustment), which may be exercised on a cashless basis. Refer to note 14 for warrant valuation.

 

10
 

 

Worksport Ltd.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

5. Convertible Promissory Notes (continued)

 

The note carries an original issue discount of $44,425 to cover Leonite’s legal fees, accounting fees, due diligence fees and/or other transactional costs incurred in connection with the purchase of the note. Therefore, the purchase price of the note was $500,000. On February 28, 2020, the Company recorded $198,715, $182,500 principal and $16,215 original issue discount. On September 1, 2020 the Company recorded an additional $310,322, $285,000 principal and $25,322 original issue discount. As of September 30, 2021, the Company has recorded $509,037, $467,500 principal and $41,537 original issue discount. Furthermore, the Company issued 22,500 shares of common stock valued at $123,390 and a debt-discount related to the warrants valued at $344,110. During the year ended December 31, 2020 Leonite converted $226,839 of convertible promissory note into 126,022 common shares at $1.80 per share. The original value of the convertible note converted was $182,565 as a result the Company recognized a loss of $44,274 on settlement of debt. During the nine months ended September 30, 2021 Leonite converted its remaining outstanding principal and interest into common shares. Leonite received 204,622 common shares at $1.80 per share valued at $368,319. The original value of the convertible note converted including interest was $325,667. As a result the Company recognized a loss of $42,651 on settlement of debt. In connection with the settlement the Company expensed the remaining $148,027 of the original debt discount to interest expense. As of September 30, 2021 the convertible promissory note has been repaid in full.

 

The Company amortized $58,146 (2020 - $11,677) of financing costs related to the shares and warrants for the nine months ended September 30, 2021. The remaining net balance of the note at September 30, 2021 is $0 (2020 - $12,715) comprised of principal of $0 (2020 - $183,538) and net of unamortized debt discount of $0 (2020 - $170,823).

 

6. Shareholders’ Equity (Deficit)

 

During the nine months period ended September 30, 2021, the following transactions occurred:

 

During the nine months ended September 30, 2021 the Company issued a total of 1,502,409 common shares relating to the Reg-A public offering. Of the shares issued 15,500 common shares valued at $31,200 were from share subscription payable and 750 common shares were cancelled and refunded valued at $1,500. The Company raised $3,004,818 and incurred share issuance cost of $123,984.

 

During the nine months ended September 30, 2021 the Company had a underwriters’ public offering for 3,272,727 units consisting of 1 common share and 1 warrant at $5.50 per unit. In addition, the Company has granted the underwriter of the offering the option to purchase 490,909 warrants and/or an additional 490,909 common shares for 45 days after the closing of the option. During the nine months ended September 30, 2021 the underwriter purchased 210,909 common shares at $5.49 per share and 490,909 warrants. A cumulative 3,483,636 common shares were issued in connection with offering for $19,162,798 incurring share issuance costs of $4,335,908.

 

During the same period 2,277,171 warrants were exercised for 2,196,416 common shares. As of September 30, 2021 2,190,515 common shares were issued valued at $8,387,758. Subsequent to September 30, 2021 the remaining 5,899 common shares valued at $20,000 were issued. Refer to note 14.

 

During the nine months ended September 30, 2021 the Company raised $4,081,980 through private placement offerings of 2,040,990 units for 1 common share and 2 warrants at $2 per unit. As such the Company issued 2,040,990 common shares in connection with the private offering.

 

During the nine months ended September 30, 2021 the Company entered into a loan settlement agreement with a loan holder to issue 62,006 common shares at $1.80 per share for all outstanding loan principal and interest valued at $111,610. As of the date of the settlement the Company had $157,787 loan payable, resulting in the Company recognized a gain on settlement of $46,176. Refer to note 11. As of September 30, 2021 the Company issued 62,006 common shares.

 

During the nine months ended September 30, 2021 the Company entered into a promissory notes payable settlement agreement with a note holder to issue 36,048 common shares valued at $1.80 per share for a total value of $64,890. As of the date of the settlement the Company had $73,886 promissory notes payable, resulting in the Company recognized a gain on settlement of $8,997. Refer to note 4. As of September 30, 2021 the Company issued 36,048 common shares.

 

During the nine months ended September 30, 2021 the Company entered into a settlement agreement with the convertible promissory note holder to settle all outstanding principal and interest. The Company issued 204,622 common shares at $1.80 per share valued at $368,318. As of the date of the settlement the Company had $325,667 convertible promissory note, resulting in the Company recognizing a loss of $42,651 on settlement of debt. Refer to note 5.

 

11
 

 

Worksport Ltd.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

6. Shareholders’ Equity (Deficit) (continued)

 

During the nine months ended September 30, 2021 the Company issued 1,717,535 common shares to Steve Rossi, the Company’s Chief Executive Officer and Director, in connection with his Employment Agreement in consideration for Mr. Rossi agreeing to amend the Series A Certificate of Designation to eliminate the Series A Preferred Stock conversion rights and returning 900 Series A Preferred Stock to the Company.

 

During the nine months ended September 30, 2021 the Company entered into consulting agreements with third party consultants for 380,000 shares of common stock valued at $1,648,700 for consulting services. As of September 30, 2021 the Company issued 370,000 common shares to the third party consultants for services received. The remaining 10,000 common share will be expensed throughout the term of the agreement as the Company accrues the stock payable. As of September 30, 2021 the Company recorded $44,652 in share subscriptions payable.

 

During the nine months ended September 30, 2021 the Company issued 259,808 common shares valued at $741,159 for consulting services, $241,559 were issued from share subscriptions payable. During the same period the Company issued 150,000 common shares valued at $390,000 for consulting services. During the same period the Company issued 3,350 common shares for employee compensation valued at $24,121.

 

During the nine months ended September 30, 2021 the Company granted 750,000 restricted shares of the Company to consultants for services to be rendered over a period of 12 and 24 months. Upon issuance 750,000 of the restricted shares vested immediately and issued. As of September 30, 2021 the Company recognized consulting and advertising expense of $177,333 and $3,812,667 to prepaid expense.

 

During the nine months ended September 30, 2021 the Company granted 45,000 restricted shares of the Company to directors of the Company. Upon issuance 15,000 of the restricted shares vested immediately, 30,000 shall vest on January 1, 2022. As of September 30, 2021 the Company recognized consulting expense of $35,569.

 

During the nine months ended September 30, 2021, the Company completed a share consolidation of the Company’s issued and outstanding common shares based on twenty (20) pre-consolidation shares to one (1) post-consolidation share. As a result of the share consolidation a anti-dilution clause was triggered resulting in the Company issuing 237,500 common shares valued at $86,688.

 

During the nine months period ended September 30, 2020, the following transactions occurred:

 

During the nine months ended September 30, 2020 the Company issued 120,651 common shares at $1.40 per share for $168,910 for consulting services.

 

During the nine months ended September 30, 2020, the Company issued 126,022 common shares pursuant to the conversion of the convertible promissory note (note 5) with a value of $226,839.

 

During the nine months ended September 30, 2020, the Company entered into a share subscription agreement with a consultant of the Company for 200,000 common shares valued at $250,000.

 

During the nine months ended September 30, 2020 the Company issued 66,667 and 12,000 common shares at $1.80 and $1.40 per share for $120,000 and $16,800 respectively for prepaid advertising services. As of September 30, 2020 the Company has expensed $53,293 from prepaid expenses.

 

During the nine months ended September 30, 2020 the Company entered into a share subscription agreement with a consultant of the Company for 200,000 common shares valued at $125,000 for prepaid consulting services. As of September 30, 2020 the Company issued 107,500 shares with a value of $67,188. As of September 30, 2020 the Company has expensed $93,750 from prepaid expenses.

 

During the nine months ended September 30, 2020 the Company issued a consultant 284,349 common shares of subscription payable with a value of $648,147 relating to the anti-dilution feature triggered on March 5, 2019.

 

During the nine months ended September 30, 2020 the Company issued 22,942 common shares pursuant to a subscription payable with a value of $55,000.

 

During the nine months ended September 30, 2020 the Company issued 22,500 shares in connection with the issuance of convertible promissory note (note 5) at $5.40 per share.

 

12
 

 

Worksport Ltd.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

6. Shareholders’ Equity (Deficit) (continued)

 

During the nine months ended September 30, 2020 the Company entered into a settlement to fulfill a debt purchase agreement entered in 2017 for 205,000 shares valued at $856,080. As of September 30, 2020 the Company has issued 205,000 shares.

 

During the nine months ended September 30, 2020, Steven Rossi (the Company’s CEO) was issued 1,000 Series A Preferred Shares at $0.09 per share equal to 299,000 common shares voting rights.

 

As of September 30, 2021, the Company was authorized to issue 299,000,000 shares of its common stock with a par value of $0.0001. All shares were ranked equally with regards to the Company’s residual assets. During 2021, the Company was authorized to issue 100 shares of its Series A and 100,000 Series B Preferred Stock with a par value of $0.0001. Series A preferred Stock have voting rights equal to 0 shares of common stock, per share of preferred stock. Series B preferred Stock have voting rights equal to 10,000 shares of common stock, per share of preferred stock.

 

7. Related Party Transactions

 

During the nine months ended September 30, 2021, the Company recorded salaries expense of $157,899 (2020 - $48,194) related to services rendered to the Company by its CEO. During the same period the Company recorded salaries expense of $58,167 to an officer of the Company who is also a director of the Company.

 

During the nine months ended September 30, 2021 the Company repaid $75,621 to the Company’s CEO and director. During the same period the Company’s CEO and director paid on behalf of the Company’s operating expense of $26,760 for a total net transaction of $48,861. As of September 30, 2021 the Company has a receivable from related party of $25,468.

 

During the year ended December 31, 2020, the Company repaid $5,245 to the Company’s CEO and director. As of December 31, 2020, the Company has $23,393 in related party loan.

 

During the nine months ended September 30, 2021 the Company paid a director of the Company $50,000 for services rendered from 2015 to 2020.

 

During the nine months ended September 30, 2021, the Company paid $59,203 to a U.S.-based corporation which the Company’s CEO and director is also a stockholder.

 

Refer to note 6 and 15 for additional related party transactions.

 

8. Changes in Cash Flows from Operating Assets and Liabilities

 

The changes to the Company’s operating assets and liabilities for the nine months ended September 30, 2021 and 2020 are as follows:

   2021   2020 
Decrease (increase) in accounts receivable  $(32,479)  $(122,606)
Decrease (increase) in other receivable   69,603    22,970 
Decrease (increase) in inventory and prepaid inventory   (156,822)   44,423 
Decrease (increase) in prepaid expenses and deposits   (223,582)   48,642 
Increase (decrease) in lease liability   (14,295)   4,297 
Increase (decrease) in payroll taxes payable   2,970    (14,061)
Increase (decrease) in accounts payable and accrued liabilities   221,979    (73,201)
Changes in operating assets and liabilities  $(132,626)  $(89,536)

 

9. Commitments and contingencies

 

During the nine months ended September 30, 2021 the Company entered into an amended agreement to reserve an additional 7,500 common shares for consulting services. During the year ended December 31, 2020 the Company entered into an agreement with a third-party advisor to reserve for issuance 5,000 common shares for consulting services. As of September 30, 2021, 12,500 common shares were issued to the third party.

 

13
 

 

Worksport Ltd.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

9. Commitments and contingencies (continued)

 

During the nine months period ended September 30, 2021 the Company entered into an agreement with a third-party advisor to reserve for sale and issuance 15,000 common shares for consulting services at a $0.001 per share.

 

During the year ended December 31, 2020 the Company (defendant) is currently in an ongoing legal proceeding with a promissory notes payable holder (plaintiff). As September 30, 2021, the outcome of the legal proceeding is uncertain.

 

10. Lease Liabilities

 

During the nine months ended September 30, 2021 the Company entered into a second lease agreement for warehouse space to commence on June 1, 2021 and end on May 31, 2024 with monthly lease payments of $19,910. During the year ended December 31, 2019, the Company signed a lease agreement for warehouse space to commence on August 1, 2019 and end on July 31, 2022 with monthly lease payments of $2,221.

 

The Company has accounted for its leases upon adoption of ASC 842 whereby it recognizes a lease liability and a right-of-use asset at the date of initial application, beginning January 1, 2019. The lease liability is measured at the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate of 10%. The Company has measured the right-of-use asset at an amount equal to the lease liability.

 

The Company’s right-of-use asset for the nine months ended September, 2021 and December 31, 2020 as follows:

 

   September 30, 2021   December 31, 2020 
Right-of-use asset  $573,862   $38,506 
           
Current lease liability  $214,249   $23,883 
Long-term lease liability  $368,431   $14,624 

 

The components of lease expense are as follows:

 

   September 30, 2021   September 30, 2020 
Amortization of right-of-use  $86,817   $16,010 
Interest on lease liability  $21,633   $3,983 
Total lease cost  $108,451   $19,993 

 

Maturities of lease liability are as follows:

 

Future minimum lease payments as of September 30, 2021,

 

      
2021 (remainder of year)   66,395 
2022   254,469 
2023   238,918 
2024   99,549 
Total future minimum lease payments   659,331 
Less: amount representing interest   (76,652)
Present value of future payments   582,680 
Current portion   214,249 
Long term portion  $368,431 

 

14
 

 

Worksport Ltd.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

11. Loan payable

 

During the year ended December 31, 2020 the Company received loans of $32,439, $10,000 and $108,000 from a unrelated third party with an interest rate of 10% per annum with a maturity date of December 31, July 22 and August 31, 2021 respectively. During the nine months ended September 30, 2021 the Company agreed to repay the outstanding principal and interest through the issuance of 62,006 common shares at $1.80 per share. During the nine months ended September 30, 2021, the Company accrued interest expense of $1,319 (2020 - $2,226). As of the date of the settlement agreement the Company had $150,439 principal and $7,348 interest outstanding, resulting in the Company recognizing a gain on settlement of $46,176 for the nine months ended September 30, 2021.

 

During the year ended December 31, 2020 the Company received $28,387 ($40,000 CDN) interest free from the Government of Canada as part of the COVID-19 small business relief program. Repaying the balance of the loan on or before December 31, 2022 will result in loan forgiveness of 25 percent. As of September 30, 2021 loan payable outstanding is $28,387 ($40,000 CDN).

 

12. Government Assistance

 

The Government of Canada is currently providing funding through the Canada Emergency Wage Subsidy (“CEWS”) and Canada Emergency Rent Subsidy (“CERS”) programs in order to provide financial relief to Canadian businesses affected by COVID-19. The CEWS program provides a reimbursement of salaries for eligible employers based on a decrease in revenues. The CERS program provides a reimbursement of rent expenses paid by eligible parties based on a decrease in revenues. During the three and nine months ended September 30, 2021, the Company recognized CEWS of $103,870 ($129,947 CDN) and CERS of $13,628 ($16,974 CDN) as a reduction in general and administrative on the condensed consolidated statements of operations.

 

13. Loss per Share

 

For the three and nine months ended September 30, 2021, loss per Share is $(0.15) and $(0.42) (basic and diluted), compared to the three and nine months ended September 30, 2020, of $(0.21) and $(0.38) (basic and diluted). Using the weighted average number of shares of 13,983,567 and 9,688,668 (basic and diluted) for the three nine months ended September 30, 2021 and 2,857,443 and 2,527,364 (basic and diluted) for the three and nine months ended September 30, 2020.

 

There are 299,000,000 shares authorized, 16,829,037 and 3,062,970 shares issued and outstanding, as at September 30, 2021 and 2020 respectively. As of September 30, 2021, the Company has 227,566 shares to be issued. The computation of loss per share is based on the weighted average number of shares outstanding during the period in accordance with ASC Topic No. 260, “Earnings Per Share”. Shares underlying the Company’s outstanding warrants and convertible promissory notes were excluded due to the anti-dilutive effect they would have on the computation. As at September 30, 2021 the Company has 5,896,680 warrants and 555,000 stock options convertible to 7,187,670 common shares for a total underlying common shares of 7,187,670. At September 30, 2020 the Company has 145,000 warrants convertible to 145,000 common shares and convertible promissory note convertible to 110,397 common shares for a total underlying common shares of 255,397.

 

14. Warrants

 

During the nine months ended September 30, 2021, a total of 2,277,171 warrants were exercised for 2,196,416 common shares. 1,626,161 warrants were exercised at $4.00 per share, 317,000 warrants were exercised at $6.05 per share and 294,500 warrants were exercised on a cashless basis for 213,743 common shares. During the same period the 39,512 warrants were exercised on a cashless basis related to a convertible promissory note, please refer to note 5. As of September 30, 2021 2,190,517 common shares were issued with the remaining 5,899 common shares issued subsequent to the period ended.

 

During the nine months ended September 30, 2021, the Company issued 1,502,409 and 2,040,990 warrants convertible to 1 and 2 common shares each exercisable for a period of 12 and 18 months respectively. The warrants were issued in connection with the Reg-A public offering and private placement offering respectively. The exercise price of the warrants is $4.00 per share. During the same period the Company issued 3,763,636 warrants convertible to 1 common share at an exercise price of $6.05 per share exercisable for a period of 36 months. 3,272,727 warrants were purchased through the underwritten public offering and 490,909 over-allotment warrants purchased by the underwriter. The warrants were issued in connection with the underwritten public offering.

 

During the nine months ended September 30, 2021 the Company and warrant holder reached an agreement to amend a previous warrant agreement. The Company will issue an additional 150,000 warrants for a total of 250,000 warrants valued at $37,000. The exercisable period of the warrants was also amended to a period of five years beginning on January 14, 2021. The warrants are convertible to 1 common share each exercisable at $2 per share.

 

15
 

 

Worksport Ltd.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

14. Warrants (continued)

 

During the nine months period ended the Company issued 130,909 representative warrants to the Company’s underwriters. The representative warrants are not exercisable until January 30, 2022. The representative are exercisable for 130,909 common shares at $6.05 per share until August 3, 2024. As of September 30, 2021 the Company has not valued the representative warrants.

 

As of September 30, 2021, the Company has the following warrants outstanding:

 

Exercise price   Number outstanding   Remaining Contractual Life (Years)   Expiry date
$4.00    11,250    0.17   December 1, 2021
$4.00    329,816    0.30   February 24, 2022
$4.00    1,790,990    1.00   October 1, 2022
$6.05    3,446,636    2.85   August 6, 2024
$2.00    5,488    3.41   February 25, 2025
$2.40    62,500    3.47   March 20, 2025
$40.00    250,000    4.29   January 14, 2026
      5,896,680    1.75    

 

 

   September 30, 2021   December 31, 2020 
   Number of warrants   Weighted average price   Number of warrants   Weighted average price 
Balance, beginning of year   716,815   $4.00    -   $- 
Issuance   7,307,036   $4.30    716,815   $4.00 
Exercise   (2,277,171)  $(4.00)   -   $- 
Balance, end of period   5,896,680   $4.30    716,815   $4.00 

 

15. Stock Options

 

Under the Company’s 2015 Equity Incentive Plan the number of common shares reserved for issuance under the option plan shall not exceed 10% of the issued and outstanding common shares of the Company, have a maximum term of 10 years and vest at the discretion of the Board of Directors.

 

All equity-settled share-based payments are ultimately recognized as an expense in the statement of operations and comprehensive loss with a corresponding credit to “Additional Paid in Capital”. If vesting periods or other non-market vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognized in the current period. No adjustment is made to any expense recognized in prior periods if share options ultimately exercised are different to that estimated on vesting.

 

On August 6, 2021, the Company granted 140,000 options to directors, advisors and officers with an exercise price of $5.50 and an expiry date of August 6, 2026. The stock options will vest on January 1, 2022. The fair value of the options on grant date was estimated to be $754,189. The Company recognized $283,131 to consulting expense during the nine months ended September 30, 2021.

 

On July 23, 2021, the Company granted 15,000 options to a director with an exercise price of $5.50 and an expiry date of July 23, 2026. The stock options will vest on January 1, 2022. The fair value of the options on grant date was estimated to be $129,480. The Company recognized $52,242 to consulting expense during the nine months ended September 30, 2021.

 

On September 1, 2021, the Company granted 400,000 options to a consultant with an exercise price of $5.32 and an expiry date of September 1, 2026. The options have a vesting period of 6 months from the initial grant date; 100,000 shall vest on March 1, 2022, 100,000 shall vest on September 1, 2022, 100,000 shall vest on March 1, 2023 and 100,000 shall vest on September 1, 2023. The fair value of the options on grant date was estimated to be $2,112,000. The Company recognized $84,949 to consulting expense during the nine months ended September 30, 2021.

 

16
 

 

Worksport Ltd.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

15. Stock Options (continued)

 

  

Nine months ended
September 30, 2021

 
   Number of options   Weighted Average Price 
Balance, beginning of period   -   $- 
Granted   555,000   $5.37 
Balance, end of period   555,000   $5.37 

 

   Range of
Exercise prices		   Number
outstanding		   Weighted average
life (years)		   Weighted average
exercise price		   Number exercisable on September 30, 2021 
Stock options  $5.32 - 5.50    555,000          4.86   $5.37          - 

 

As of September 30, 2021 no stock options has been vested.

 

16. COVID-19

 

The recent outbreak of the novel coronavirus, specifically identified as “COVID-19”, has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions.

 

Additionally, while the potential economic impact brought by, and the duration of the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic on the global financial markets may reduce our ability to access capital, which could negatively impact our short-term and long-term liquidity. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, financing or mining production activities or the ore and mining industry or the global economy as a whole. However, these effects could have a material impact on our liquidity, capital resources, operations and business and those of the third parties on which we rely. The management and board of the Company is constantly monitoring this situation to minimize potential losses.

 

17. Subsequent Events

 

  ● On October 7, 2021, the Company entered into a board advisory agreement with a third party. As compensation the Company shall grant to the advisor 5,000 stock options. The stock option has an exercise price of $5.50 and an expiry date of October 7, 2026. The stock options will fully vest on January 1, 2022.
  ● On October 26, 2021, 11,250 warrants were exercised for 11,250 shares valued $45,000.
  ● On October 27, 2021, 300 warrants were exercised for 300 shares valued $1,200.
  ● On November 2, 2021, the Company and an advisor entered into a modified advisory board agreement. The advisor and Company has agreed to a milestone compensation structure base on when milestone criteria are achieved for Customer/Revenue generation, Strategic Partnership, Board/Advisor, Government Affairs and Banking and Capital Markets. The Company has agreed to potential compensation package for the advisory of 250,000 stock options exercisable at $5.24 for 10 years and/or 100,000 restricted stocks of common shares.
    ○ As of November 3, 2021 the Company has issued 25,000 restricted stock valued at $131,000.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This section and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. All forward-looking statements in this Form 10-Q are made based on current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, various factors, uncertainties, and risks should be specifically considered that could affect future results or operations. These factors, uncertainties and risks may cause actual results to differ materially from any forward-looking statement set forth in this Form 10-Q. These risks and uncertainties described and other information contained in the reports filed with or furnished to the SEC should be carefully considered before making any investment decision with respect to the Company’s securities. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

 

Unless otherwise stated, all information presented herein is based on the Company’s fiscal calendar, and references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company” and “Worksport” as used herein refers collectively to Worksport Ltd. and its wholly owned subsidiaries, unless otherwise stated.

 

The following discussion should be read in conjunction with the 2020 Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q.

 

COVID-19

 

The Company believes that the COVID- 19 pandemic has had certain impacts on its business, but management does not believe there has been a material long-term impact from the effects of the pandemic on the Company’s business and operations, results of operations, financial condition, cash flows, liquidity or capital and financial resources.

 

During the nine months ended September 30, 2021, aspects of the Company’s business continued to be affected by the COVID-19 pandemic with respect to its manufacturing practices and sales. Combined with decreased consumer confidence, Management expects the Company to generate less revenues than in previous periods.

 

The full extent of the future impact of the COVID-19 pandemic on the Company’s operational and financial performance is currently uncertain and will depend on many factors outside the Company’s control, including, without limitation, the timing, extent, trajectory and duration of the pandemic; the availability, distribution and effectiveness of vaccines; the imposition of protective public safety measures; and the impact of the pandemic on the global economy and demand for consumer products.

 

RESULTS OF OPERATIONS

 

Three Months Ended September 30, 2021 compared to Three Months Ended September 30, 2020

 

Revenue

 

For the three months ended September 30, 2021, revenue generated from sales was $93,408, compared to $116,491 for the three months ended September 30, 2020. Total revenues decreased by approximately 20% compared to the same period in the prior year.

 

Revenue decreased for the three months ended September 30, 2021 compared to the same period the prior year due to the Company shifting its focus to building up its inventory to mitigate against potential supply chain issues in anticipation of launching its e-commerce platform, while it repositions to domestic manufacturing.

 

For the three months ended September 30, 2021 total revenues generated in Canada were $0 compared to a loss of $935 in the prior period. For the three-months ended September 30, 2021, total revenue generated in the United States decreased by 20% from $117,426 in the prior period to $93,408. Similar to above, the decrease in revenue was a result of the Company shifting its focus to building up its inventory to mitigate against potential supply chain issues in anticipation of launching its e-commerce platform, while it repositions to domestic manufacturing.

 

For the three months ended September 30, 2021, online revenues decreased by 20% from $116,482 in the prior period to $93,408. Online revenue accounted for 100% of total revenue for the three months ended September 30, 2021 compared to 99% for the same period in 2020.

 

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Cost of Sales

 

For the three months ended September 30, 2021 cost of sales decreased by 13% from $94,134 in the prior period to $81,810. Cost of sales, as a percentage of sales, was approximately 88% for three months ended September 30, 2021 compared to 81% for the same period in 2020, respectively. The increase in cost of sales as a percentage of sales was primarily due to increased cost associated with acquiring inventory for the nine months ended September 30, 2021 compare to the same prior period

 

Shipping and freight costs accounted for 55% of the total cost of sales during the three months ended September 30, 2021, compared to 40% for the same period in 2020.

 

Gross Margin

 

Gross margin percentage for the three months ended September 30, 2021 was 12% compared to 19% for the same period in 2020. The decrease in gross margin reflects the increased cost of inventory due to increased costs of manufacturing.

 

Operating Expenses

 

Operating expenses increased for the three months ended September 30, 2021 by $1,658,593 from $392,970 in the prior periods to $2,051,563.

 

  ● General and administrative expense increased by $466,899 from $50,836 in the prior period to $517,735. The increase related to research and development and salaries as the Company seeks to expand its operations and further develop its products.
  ● Sales and marketing expenses increased by $374,783 from $59,122 in the prior period to $433,905. The increase in sales and marketing is a result of building brand and product awareness.
  ● The Company realized a gain on foreign exchange of $11,175 during the three months ended September 30, 2021, an increase of $13,774 compared to a loss of $2,599 during the prior period. The gain on foreign exchange can be attributed to operating expenses denominated in the Canadian Dollar.
  ● Professional fees which include accounting, legal and consulting fees, increased from $280,413 for the three months ended September 30, 2020 to $1,111,098 for the three months ended September 30, 2021. The increase was due to the employment of various third-party consultants to help expand the Company’s business operations.

 

Other Income and Expenses

 

Other income and expenses for the three months ended September 30, 2021 was $24,316 compared to $234,377 the prior period, a decrease of $210,061. The change can be attributed to the Company’s decrease in interest expense.

 

Net Loss

 

Net loss for the three months ended September 30, 2021 was $2,064,281 compared to $604,990 for the three months ended September 30, 2020, a change of $1,459,291 or 241%. The increase in the net loss can be attributed to the increase of various operating expenses as the Company focuses on expanding its operations, research and development, manufacturing and supply chain.

 

Nine Months Ended September 30, 2021 compared to Nine Months Ended September 30, 2020

 

Revenue

 

For the nine months ended September 30, 2021, revenue generated from sales was $287,297, compared to $223,620 for the nine months ended September 30, 2020. Total revenues increased by approximately 28% compared to the same period in the prior year.

 

Revenue increased for the nine months ended September 30, 2021 compared to the same period the prior year due to the increased demand for the Company’s products during the first six months of the year as Covid-19 restrictions were eased.

 

For the nine months ended September 30, 2021 total revenues generated in Canada increased by 370% from $10,990 in the prior periods to $40,645. For the nine months ended September 30, 2021, total revenue generated in the United States increased by 16% from $212,620 in the prior period to $246,652. The increase in revenue generated in Canada and United States can be attributed to the easing of Covid-19 restrictions.

 

For the nine months ended September 30, 2021, online revenues increased by 18% from $208,554 in the prior period to $246,701. Online revenue accounted for 86% of total revenue for the nine months ended September 30, 2021 compared to 98% for the same period in 2020.

 

For the nine months ended September 30, 2021, revenues based on sales to distributors were $40,311 compared to $8,845 for the same period in 2020.

 

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Cost of Sales

 

For the nine months ended September 30, 2021 cost of sales increased by 55% from $180,028 in the prior periods to $279,364. Cost of sales, as a percentage of sales, was approximately 97% for nine months ended September 30, 2021 compared to 81% for the same periods in 2020, respectively. The increase in cost of sales as a percentage of sales was primarily due to increased cost associated with acquiring inventory for the nine months ended September 30, 2021 compare to the same prior period.

 

Shipping and freight costs accounted for 38% of total cost of sales during the nine months ended September 30, 2021, compared to 42% for the same period in 2020.

 

Gross Margin

 

Gross margin percentage for the nine months ended September 30, 2021 was 3% compared to 19% for the same period in 2020. The decrease in gross margin reflects the Company’s increased costs of procuring inventory as the Company seeks to gain greater control over its manufacturing process.

 

Operating Expenses

 

Operating expenses increased for the nine months ended September 30, 2021 by $3,180,343 from $671,937 in the prior periods to $3,852,280.

 

  ● General and administrative expense increased by $826,473 from $97,566 in the prior period to $924,041. The increase was related to research and development and salaries as the Company seeks to expand its operations and further develop its products.
  ● Sales and marketing expenses increased by $691,843 from $69,869 in the prior period to $761,712. The increase in sales and marketing is a result of building brand and product awareness.
  ● The Company realized a gain on foreign exchange of $2,170 during the nine months ended September 30, 2021, a decrease of $2,675 compared to $4,845 during the prior period. The decrease in gain on foreign exchange can be attributed to the weakening of the Canadian Dollar against the United States Dollar.
  ● Professional fees which include accounting, legal and consulting fees, increased from $509,347 for the nine months ended September 30, 2020 to $2,168,697 for the nine months ended September 30, 2021. The increase was due to the employment of various third-party consultants to help expand the Company’s business operations.

 

Other Income and Expenses

 

Other income and expenses for the nine months ended September 30, 2021 was $255,112 compared to $321,096 the prior period, a decrease of $65,984. The difference can be attributed to the Company’s gain on settlement of debt and interest income.

 

Net Loss

 

Net loss for the nine months ended September 30, 2021 was $4,099,459 compared to $949,441 for the nine months ended September 30, 2020, a change of $3,150,018 or 332%. The increase in the net loss can be attributed to the increase of various operating expenses as the Company focuses on expanding its operations, research and development programs and manufacturing and supply chains.

 

Worksport currently works with a total of ten dealers and distributors, however, given current market conditions Worksport plans to focus on online sales during 2021. Management believes that increasing sales through online retailers will continue to outpace the traditional distribution business model during 2021. Management further believes that online retailer’s customers tend to provide larger sales volumes, greater profit margins and greater protection against price erosion.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2021, the Company had $30,920,477 in cash, restricted cash and cash equivalents. The Company has generated only limited revenues and has relied primarily upon capital generated from public and private offerings of its securities.

 

Since the Company’s acquisition of Worksport in fiscal 2014, it has never generated a profit.

 

As of September 30, 2021 the Company had an accumulated deficit of $17,052,179.

 

Cash Flow Activities

 

Accounts receivable increased at September 30, 2020 by $122,606 and September 30, 2021 by $32,479. The increase was due to the Company increased sale near quarter end. Other receivable decreased at September 30, 2021 and 2020 by $69,603 and $22,970 respectively, due to funds received from a sales tax refund.

 

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Inventory decreased at September 30, 2020 by $44,423 and increased at September 30, 2021 by $156,822. Prepaid expenses increased by $223,582 at September 30, 2021 and decreased at September 30, 2020 by $48,642, due to increased consulting and marketing expenditures during the quarter ended September 30, 2021.

 

Accounts payable and accrued liabilities increased at September 30, 2021 $221,979 and decreased at September 30, 2020 by and $73,201 respectively.

 

Cash increased from $467,133 at September 30, 2020 to $30,920,477 at September 30, 2021, an increase of $30,453,343 or 6,519%. The increase in cash was primarily due to warrants exercises, public offerings and private placement offerings which generated of approximately $32,000,000.

 

As of September 30, 2021, the Company had current assets of $36,762,621 and current liabilities of $1,728,043.

 

Operating Activities

 

Net cash used by operating activities for the nine months ended September 30, 2021 was $2,031,966, compared to $382,352 in the prior period.

 

Investing Activities

 

Net cash used in investing activities for the nine months ended September 30, 2021 was $764,090 compared to $16,727 in the prior period. The increase in investing activities was primarily due to the purchase of property and equipment of $734,883 and intangible assets of $23,700.

 

Financing Activities

 

Net cash provided by financing activities for the nine months ended September 30, 2021 was $32,608,720 compared to $854,219 in the prior period.

 

During the nine months ended September 30, 2021 the Company received $32,805,825 of proceeds from public offerings, private placement offering and exercises of warrants net of share issuance cost. During the nine months ended September 30, 2021 the Company made repayment of $62,905 of promissory notes and repayment of $48,861 of shareholder loans.

 

During 2021, the Company intends to introduce several new tonneau covers as well as the Terravis system. The Company anticipates that the introduction of these new products will improve the Company’s financial position.

 

Based on the Company’s future operating plans, existing cash of $30,920,477; management believes that the Company has sufficient funds to meet its contractual obligations and working capital requirements for the next 12 months and the foreseeable future.

 

Off-Balance Sheet Arrangements

 

None.

 

Critical Accounting Policies

 

Our discussion and analysis of results of operations and financial condition are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to provisions for uncollectible accounts receivable, inventories, valuation of intangible assets and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

The accounting policies that we follow are set forth in Note 2 to our financial statements as included in the Form 10-K filed on April 13, 2021. These accounting policies conform to accounting principles generally accepted in the United States and have been consistently applied in the preparation of the financial statements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not Applicable.

 

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Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the quarter covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time years and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. To address the material weaknesses, we performed additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this quarterly report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

Not Applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not Applicable.

 

Item 6. Exhibits

 

EXHIBIT No.   DESCRIPTION
     
31.1   Section 302 Certification of Chief Executive Officer
31.2   Section 302 Certification of Chief Financial Officer
32.1   Section 906 Certifications of Chief Executive Officer and Chief Financial Officer
     
101.INS   Inline XBRL Instance Document
101.SCH   Inline XBRL Taxonomy Extension Schema Document
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document
104   Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  WORKSPORT LTD.
   
Dated: November 15, 2021 By: /s/ Steven Rossi
    Steven Rossi
    Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

  WORKSPORT LTD.
     
Dated: November 15, 2021 By: /s/ Michael Johnston
    Michael Johnston
    Chief Financial Officer and Accounting Officer

 

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