Worksport Ltd: Form 10-Q for the period ended Jun 30, 2024

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 December 31st and the associated quarters, months and periods of those fiscal years. Each of the terms “Company” and “Worksport” as used herein refers collectively to Worksport Ltd. and its subsidiaries, unless otherwise stated.

The following discussion should be read in conjunction with the Company’s Annual Report Form 10-K for the fiscal year ended December 31, 2023 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.

Overview

Worksport Ltd., through its subsidiaries, designs, develops, manufactures, and owns the Intellectual Property on a portfolio of tonneau cover, solar integration, portable power station, and NP (Non-Parasitic), Hydrogen-based green energy products and solutions for the automotive aftermarket accessories, power storage, residential heating, and electric vehicle-charging industries. We seek to provide consumers with next-generation automotive aftermarket accessories while capitalizing on growing consumer interest in clean energy solutions and power grid independence.

Rising Popularity of Electric Vehicles

Electric Vehicles (EVs) have been exponentially increasing in consumer interest, whether that interest takes the form of vehicle pre-orders, sales, or investments. As we begin marketing our Worksport SOLIS and COR, we plan to market the SOLIS as a must-have accessory for electric light duty vehicle owners while simultaneously riding the coattails of EV popularity to promote our other products (COR and conventional tonneau covers) to the very large population of Americans that have an interest in EVs without the funds to purchase them. Further, participating in the EV space allows us to target consumers with an interest in cutting-edge technologies – a great market in which to promote our COR.

Regulatory Environment Favoring Electric Vehicles

The Build Back Better Bill was a strong indication of upcoming and favorable USA regulations. Many regulations that improve North America’s EV charging infrastructure or provide grants to businesses operating in the EV space will benefit us. While we are primarily focused on the light duty vehicle market, our energy products are particularly useful for electric light duty pickup trucks and, therefore, are positioned to benefit greatly from any bill that increases the prevalence of such vehicles.

Limited Competitive Landscape

Our conventional tonneau covers are engineered for enhanced user experience and resistance to wear-and-tear, making them strong and competitive products in an otherwise consolidated and saturated market. The Worksport COR, however, operates in a much wider yet unsaturated market. The global Portable Power Station market is quickly growing, and the competitive landscape is far from consolidated. Even less consolidated, the solar tonneau cover market is in its infancy, and it’s a market in which we have first-mover advantage. To ensure we do not fall behind future competitors, we are highly focused on protecting our intellectual property both domestically and abroad.

Business Developments

The following highlights recent material developments in our business in the three months ended June 30, 2024:

• In April 2024, 12,100 stock options issued during 2023 and 8,300 stock options issued during the six months ended June 30, 2024 were forfeited in connection with the termination of employees with the Company.
• 16,667 restricted stock units (“RSUs”) were granted to a contractor on May 1, 2024 in consideration for services rendered in the first quarter of 2024.
• On May 6, 2024, 1,477,892 pre-funded warrants issued during the three months ended March 31, 2024 were exercised for 1,477,892 shares of common stock for a total of $15.
• On May 8, 2024, the Company announced its receipt of a major grant from New York State Excelsior Jobs Program worth up to $2.8 million. The grant, following a strategic low-cost power award from New York Power Authority (NYPA) in April 2024, signifies additional state-level investment in the Company’s expanding operations. With growth exceeding NY State’s forecasts, the Company expects to create up to or over 280 new jobs from 2025 to 2030 and if achieved will receive cash benefits for the creation of these jobs, amounting to $2.8 million received over the next 10 years.
• On May 14, 2024, the Company and Worksport New York Operations Corporation (“Worksport New York”) entered into an Omnibus Amendment of Loan Documents (the “Loan Amendment”) with Northeast Bank (the “Lender”) in connection with that certain secured loan agreement, dated May 4, 2022 (the “Loan Agreement”), by and among the Company, as the guarantor, Worksport New York, as the borrower (the “Borrower”), and the Lender in connection with the Company’s purchase of its 152,847 square foot facility and 18 acres of land in West Seneca, New York on May 6, 2022 for a total purchase price of $8,150,000. Pursuant to the Loan Amendment, effective as of May 10, 2024, the Lender extended the initial maturity date of the Loan from May 10, 2024 to August 10, 2024 (the “Extended Maturity Date”). The Company also agreed to pay the Lender an extension fee of $106,000 (the “Extension Fee”) which was deemed fully earned as of the date of the Loan Amendment. However, the Lender agreed to postpone payment of the Extension Fee until the occurrence of (i) the Loan not being repaid in full by or on the Extended Maturity Date; or (ii) the Loan being accelerated following an Event of Default or Termination Date (as defined in the Forbearance Agreement dated as of February 4, 2024, by and between the Company, Worksport New York and the Lender). If the Loan is repaid in full on or prior to the Extended Maturity Date, the Lender has agreed to waive the Extension Fee. In addition to the Extension Fee, the Company agreed to pay the Lender an exit fee of $106,000 (the “Exit Fee”) in the event the Loan is not repaid in full on or prior to the Extended Maturity Date or if the Loan has been accelerated following an Event of Default or in connection with a Termination Event (as defined in the Forbearance Agreement). If the Loan is repaid in full on or prior to the Extended Maturity Date (and not as a result of an acceleration following a Termination Event), the Company will not be required to pay the Exit Fee.
• On May 29, 2024, the Company entered into a common stock warrant exercise inducement offer letter (the “Inducement Offer Letter”) with a certain holder (the “Holder”) of existing warrants to purchase shares of the Company’s common stock at an exercise price of $1.34 per share issued on November 2, 2023 (the “Existing Warrants”), pursuant to which the Holder agreed to exercise for cash its Existing Warrants to purchase an aggregate of 7,000,000 shares of the Company’s common stock, at a reduced exercised price of $0.5198 per share, in consideration for the Company’s agreement to issue new warrants (the “Inducement Warrants”) to purchase up to 12,950,000 shares of the Company’s common stock at $0.5198 per share. The Company received aggregate gross proceeds of $3,638,600 from the exercise of the Existing Warrants by the Holder and the sale of the Inducement Warrants, before deducting placement agent fees and other offering expenses payable by the Company.

19

• On May 29, 2024, the Company announced it had been issued a new utility patent from the United States Patent & Trademark Office related to its highly anticipated SOLIS Solar Tonneau Cover.
• 45,315 RSUs were granted to two contractors on May 30, 2024 in consideration for services rendered over the prior year.
• On June 5, 2024, the Company announced the formation of a new sales partnership with a prominent Midwest distributor operating within the automotive industry.
• On June 13, 2024, the Company was awarded “Innovator of the Year” by Buffalo Business First – recognizing the Company’s commitment to pioneering advancements in the automotive sector.
• On June 26, 2024, the Company announced it had strategically decided to design its Maximum Power Point Tracking algorithm such that its SOLIS Solar Power System will be able to charge not only the Company’s COR Portable Battery Generator system but also most other portable power stations and power banks on the market.

Key Factors Affecting our Performance

As a result of a number of factors, our historical results of operations may not be comparable to our results of operations in future periods, and our results of operations may not be directly comparable from period to period. Set forth below is a brief discussion of the key factors impacting our results of operations.

Climate Change

Climate change threatens to cause many foreseeable as well as unforeseeable ramifications. In cautious preparation for those that are foreseeable, we have strategically begun domestic manufacturing operations in Western New York – an economically growing region not immediately threatened by climate change to the same extent as other regions and possibly one that may benefit from future population migrations within the United States of America. Further, we intend to lower our own carbon footprint by investing in energy-saving measures in our factory in West Seneca, NY. Considering climate change may also exacerbate geopolitical tensions, we are working to diversify our supply chain and lower our reliance on any particular region or country for raw materials in order to lower our exposure to climate change-induced economic or political instability.

We believe our Worksport SOLIS and Worksport COR products will be received positively by the public for their resilience to, and even increased utility as a result of, Climate Change. However, we acknowledge the potentially negative environmental impacts of poor battery recycling and increasing demand for precious metals. We are actively researching ways to lower such environmental impacts.

Inflation

Prices of certain commodity products, including raw materials, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations, trade restrictions and tariffs. Increasing prices of the component materials for parts of our goods may impact the availability, quality and price of our products as suppliers search for alternatives to existing materials and increase the prices they charge. Our suppliers may also fail to provide consistent quality of product as they may substitute lower cost materials to maintain pricing levels. Rapid and significant changes in commodity prices may negatively affect our profit margins, and it may be difficult to mitigate worsened margins through customer pricing actions and cost reduction initiatives.

Such an inflationary environment also increases our direct cost of raw goods or processed goods for our original equipment manufacturing as well as indirect costs such as overhead and rent. Due to these present and forecasted price increases and the temporary increases in ocean freight and container handling costs faced in recent periods, Worksport factors in all costs when assessing proper pricing of its goods for sale.

Additionally, as central banks and the U.S. Federal Reserve increase interest rates to combat global inflation, the cost of debt financing increases. While we currently do not have material debt other than our $6.0 million Revolving Credit Facility, our facility’s variable rate fluctuates along with the Prime Rate, meaning our monthly interest costs vary not only by our usage of the facility but by interest rates as well. We continue to explore debt financing options at reasonable interest rates in order to strengthen our cash position.

Elevated interest rates have also resulted in a shift in institutional holdings away from micro-cap equities, which has negatively influenced our stock’s trading volume. We continue to forge relationships with institutional investors and analysts in order to maintain a healthy trading volume.

Gasoline Prices and Supply Chain Issues

We faced significantly higher ocean freight, trucking, and container handling costs as well as last mile delivery costs in 2021 and 2022 than we did in previous years – all of which have increased our products’ landed costs. Higher oil and gasoline prices further increased these costs, and while such prices have come down from their 2022 highs, we continue to closely monitor gasoline and shipping costs. While the Freight Rate Index has significantly increased since late 2023 as a result of Houthi attacks against cargo ships in the Red Sea and the concurrent decline in activity across the Panama Canal, the shipping routes used by the Company have not faced dramatic price hikes. Regardless, the Company is closely monitoring international shipping costs.

Our transition towards domestic manufacturing and assembly is anticipated to largely offset these higher costs, as we believe we will be less exposed to higher international shipping costs. We are also identifying North American suppliers of our products’ components and will prioritize transport by rail when possible to avoid high trucking costs.

Geopolitical Conditions

In February 2022, Russia initiated significant military action against Ukraine. In response, the U.S. and certain other countries imposed significant sanctions and export controls against Russia, Belarus and certain individuals and entities connected to Russian or Belarusian political, business, and financial organizations, and the U.S. and certain other countries could impose further sanctions, trade restrictions, and other retaliatory actions should the conflict continue or worsen. It is not possible to predict the broader consequences of these conflicts, including related geopolitical tensions, and the measures and retaliatory actions taken by the U.S. and other countries in respect thereof as well as whether any counter measures or retaliatory actions in response, including, for example, potential cyberattacks or the disruption of energy exports, are likely to cause regional instability and geopolitical shifts, which could materially adversely affect global trade, currency exchange rates, regional economies and the global economy. These situations remain uncertain, and while it is difficult to predict the impact of any of the foregoing, the conflicts and actions taken in response to these conflicts could increase our costs, reduce our sales and earnings, impair our ability to raise additional capital when needed on acceptable terms, if at all, or otherwise adversely affect our business, financial condition, and results of operations.

While we do not have any direct operations or significant sales in the Middle East, geopolitical tensions and ongoing conflicts in the region, particularly between Israel and Hamas, may lead to global economic instability and fluctuating energy prices that could materially affect our business. It is not possible to predict the broader consequences of the Israel-Hamas war, including related geopolitical tensions, and the measures and actions taken by other countries in respect thereof, which could materially adversely affect global trade, currency exchange rates, regional economies and the global economy. While it is difficult to predict the impact of any of the foregoing, the Israel-Hamas war may increase our costs, disrupt our supply chain, reduce our sales and earnings, impair our ability to raise additional capital when needed on acceptable terms, if at all, or otherwise adversely affect our business, financial condition and results of operations.

Foreign Currencies

We are subject to foreign exchange risk as we manufacture certain products and components in China, market extensively in both Canadian and U.S. markets, employ people residing in both the U.S. and Canada and, to date, have raised funds in U.S. Dollars. Meanwhile, we report results of operations in U.S. Dollars. Since some of our Canadian customers pay in Canadian Dollars, we are subject to gains and losses due to fluctuations in the USD relative to the Canadian Dollar. Our manufacturers in China are paid in USD to better avoid the relatively greater fluctuation of the Chinese Yuan. To the extent the U.S. dollar strengthens against any of these foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our operations.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2024 compared to the Three Months Ended June 30, 2023

Revenue

For the three months ended June 30, 2024, revenues from our entire line of products was $1,921,539, as compared to $199,851 for the three months ended June 30, 2023. Year-over-year sales increased by approximately 862%. For the three months ended June 30, 2024, revenue generated in Canada was $31,853 as compared to $0 for the same period in 2023. For the three months ended June 30, 2024, revenue generated in the United States was $1,889,686, compared to $199,851 for the same period in 2023, an increase of 846%.

Revenue increased during the three months ended June 30, 2024 compared to the same period the prior year due to increased sales of tonneau covers to a private label partner, various dealers and distributors, and end users via the Company’s online marketplaces. The Company continues to focus on establishing new and strengthening existing business-to-consumer and business-to-business sales channels while also strengthening customer support to increase customer satisfaction and enable high product turnover. For business-to-consumer channels, we have configured our product offerings in a manner conducive with cost-effective marketing, allowing us to securely invest in marketing and sales campaigns. For business-to-business channels, we have created all necessary marketing/sales materials and policies as well as an online dealer marketplace, and we are now actively contacting thousands of leads and presenting our product offerings to various dealers, jobbers, and retailers across the United States and Canada. We intend to gradually increase output capacity through refined production processes and increased personnel.

Sales from online retailers of our products increased from $18,163 during the three months ended June 30, 2023, to $897,213 during the three months ended June 30, 2024. Online retailers accounted for 47% of total revenue for the three months ended June 30, 2024, compared to 9% for the three months ended June 30, 2023. Distributor sales increased for the three months ended June 30, 2024, compared with the three months ended June 30, 2023, with sales of $63,926 and $0, respectively. Distributors accounted for 3% of total revenue for the three months ended June 30, 2024. Private label sales increased from $181,688 for the three months ended June 30, 2023, to $960,400 for the three months ended June 30, 2024. Private label sales accounted for 50% of total revenue for the three months ended June 30, 2024. We expect to continue to grow our fields of business as we develop unique products with enhanced utility to offer to other prospective clients in the U.S. and Canadian markets.

We distribute our tonneau covers in Canada and the United States through an expanding network of wholesalers, private labels, distributors, and online retail channels, including eBay, Amazon, Walmart, and our own e-commerce platform hosted on Shopify. Distribution via each aforementioned channel is expected to increase during 2024. We have pursued and will continue to pursue relationships with Original Equipment Manufacturers with the intention of distributing through them as well.

Cost of Sales

Cost of sales increased by 960%, from $153,288 for the three months ended June 30, 2023, to $1,624,910 for the three months ended June 30, 2024. Our cost of sales, as a percentage of sales, was approximately 85% and 77% for the three months ended June 30, 2024 and 2023, respectively. The increase in the cost of sales as a percentage of sales was primarily due to increased sales of domestically-produced hard covers. We consistently secure a 20% gross margin on soft covers sold to private labels, as these soft covers are drop shipped from our Chinese suppliers at a fixed cost. However, our margins on domestically manufactured hard covers is dependent on the cost of raw materials, which fluctuates, as well as overhead, which has been high due to manufacturing inefficiencies and low production volumes – both of which are actively being mitigated as we streamline manufacturing processes and allocate more existing human capital and machinery resources away from design engineering and testing towards production.

We provide our distributors and online retailers an “all-in” wholesale price. This includes any import duty charges, taxes, and shipping charges. Discounts are applied if the distributor or retailer chooses to use their own shipping process. Certain exceptions apply on rare occasions where product is shipped outside the contiguous United Sates or from the United States to Canada. Volume discounts are offered to certain high-volume customers, and we also offer a “dock price” or “pickup program” whereby clients are able to pick up product directly from our stocking warehouse.

Operating Expenses

Operating expenses increased for the three months ended June 30, 2024 by $422,095, from $3,785,282 for the three months ended June 30, 2023 to $4,207,377, due to the following factors:

• General and administrative expenses increased by $1,201,585, from $1,744,801 in 2023 to $2,946,386 in 2024. The increase was related to increased research and development activities, increased employment of support personnel including engineers, and increases in wages and salaries as we seek to expand our operations and further develop our products.
• Sales and marketing expenses decreased by $69,920, from $548,712 for 2023 to $478,792 for 2024. The decrease in sales and marketing is primarily attributable to the completion of several marketing agreements and lower cost of in-house marketing campaigns to create brand and product awareness.
• Professional fees, which include accounting, legal, and consulting fees, decreased from $1,491,453 in 2023 to $766,563 in 2024. The decrease in professional fees was due primarily to insourcing of certain business processes and fewer equity grants to third parties for services rendered.
• We realized a loss on foreign exchange of $15,636 during 2024, compared to a loss on foreign exchange of $316 for the prior period due to conversions between CAD and USD.

Other Income and Expenses

We reported net other expenses for the three months ended June 30, 2024 of $102,651, compared to a loss of $58,736 for three months ended June 30, 2023. Net other expenses can be attributed to decreased interest and rental income.

Net Loss

Net loss for the three months ended June 30, 2024 was $4,013,399, compared to a net loss of $3,797,455 for the three months ended June 30, 2023 – an increase of 6%. The increase in the net loss can be attributed to the increase in various operating expenses as we focus on expanding our operations, research and development, manufacturing, and supply chain.

Six Months Ended June 30, 2024 compared to the Six Months Ended June 30, 2023

Revenue

For the six months ended June 30, 2024, revenues from our entire line of products was $2,434,176, as compared to $231,776 for the six months ended June 30, 2023. Year-over-year sales increased by approximately 950%. For the six months ended June 30, 2024, revenue generated in Canada was $51,890, as compared to $2,655 for the same period in 2023. For the six months ended June 30, 2024, revenue generated in the United States was $2,382,286 compared to $229,121 for the same period in 2023, an increase of 940%.

Revenue increased during the six months ended June 30, 2024 compared to the same period the prior year due to increased sales of tonneau covers to a private label partner, various dealers and distributors, as well as end users via the Company’s online marketplaces. The Company continues to focus on establishing new and strengthening existing business-to-consumer and business-to-business sales channels while also strengthening customer support to increase customer satisfaction and enable high product turnover. For business-to-consumer channels, we have configured our product offerings in a manner conducive to cost-effective marketing, allowing us to securely invest in marketing and sales campaigns. For business-to-business channels, we have created all necessary marketing/sales materials and policies as well as an online dealer marketplace, and we are now actively contacting thousands of leads and presenting our product offerings to various dealers, jobbers, and retailers across the United States and Canada. We intend to gradually increase output capacity through refined production processes and increased personnel.

Sales from online retailers of our products increased from $42,437 during the six months ended June 30, 2023, to $921,623 during the six months ended June 30, 2024. Online retailers accounted for 38% of total revenue for the six months ended June 30, 2024, compared to 18% for the six months ended June 30, 2023. Distributor sales increased for the six months ended June 30, 2024, compared with the six months ended June 30, 2023, with sales of $86,773 and $2,655, respectively. Distributor sales accounted for 3% of total revenue for the six months ended June 30, 2024. Private label sales increased from $188,684 for the six months ended June 30, 2023, to $1,425,780 for the six months ended June 30, 2024. Private label sales accounted for 59% of total revenue for the six months ended June 30, 2024. We expect to continue to grow our fields of business as we develop unique products with enhanced utility to offer to other prospective clients in the U.S. and Canadian markets.

We distribute our tonneau covers in Canada and the United States through an expanding network of wholesalers, private labels, distributors, and online retail channels, including eBay, Amazon, Walmart, and our own e-commerce platform hosted on Shopify. Distribution via each aforementioned channel is expected to increase during 2024. We have pursued and will continue to pursue relationships with Original Equipment Manufacturers with the intention of distributing through them as well.

Cost of Sales

Cost of sales increased by 1,114%, from $173,045 for the six months ended June 30, 2023, to $2,100,091 for the six months ended June 30, 2024. Our cost of sales, as a percentage of sales, was approximately 86% and 75% for the six months ended June 30, 2024 and 2023, respectively. The increase in the cost of sales as a percentage of sales was primarily due to increased sales of domestically-produced hard covers. We consistently secure a 20% gross margin on soft covers sold to private labels, as these soft covers are drop shipped from our Chinese suppliers at a fixed cost. However, our margins on domestically manufactured hard covers is dependent on the cost of raw materials, which fluctuates, as well as overhead, which has been high due to manufacturing inefficiencies and low production volumes – both of which are actively being mitigated as we streamline manufacturing processes and allocate more existing human capital and machinery resources away from design engineering and testing towards production.

We provide our distributors and online retailers an “all-in” wholesale price. This includes any import duty charges, taxes, and shipping charges. Discounts are applied if the distributor or retailer chooses to use their own shipping process. Certain exceptions apply on rare occasions where product is shipped outside the contiguous United Sates or from the United States to Canada. Volume discounts are offered to certain high-volume customers, and we also offer a “dock price” or “pickup program” whereby clients are able to pick up product directly from our stocking warehouse.

Operating Expenses

Operating expenses increased for the six months ended June 30, 2024 by $556,901, from $7,327,398 for the six months ended June 30, 2023 to $7,884,299, due to the following factors:

• General and administrative expenses increased by $1,746,291, from $3,874,413 in 2023 to $5,620,704 in 2024. The increase was related to increased research and development activities, increased employment of support personnel including engineers, and increases in wages and salaries as we seek to expand our operations and further develop our products.
• Sales and marketing expenses decreased by $547,494, from $1,093,063 for 2023 to $545,569 for 2024. The decrease in sales and marketing is primarily attributable to the completion of several marketing agreements and lower cost of in-house marketing campaigns to create brand and product awareness.
• Professional fees, which include accounting, legal, and consulting fees, decreased from $2,360,064 in 2023 to $1,710,341 in 2024. The decrease in professional fees was due primarily to insourcing of certain business processes and fewer equity grants to third parties for services rendered.
• We realized a loss on foreign exchange of $7,685 during 2024, compared to a gain on foreign exchange of $142 for the prior period due to conversions between CAD and USD.

Other Income and Expenses

We reported net other expenses for the six months ended June 30, 2024 of $177,842, compared to net expenses of $52,058 for the six months ended June 30, 2023. Other expenses can be attributed to decreased interest and rental income.

Net Loss

Net loss for the six months ended June 30, 2024 was $7,728,056, compared to a net loss of $7,320,725 for the six months ended June 30, 2023 – an increase of 6%. The increase in the net loss can be attributed to the increase in various operating expenses as we focus on expanding our operations, research and development, manufacturing, and supply chain.

Liquidity and Capital Resources; Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. During the three and six months ended June 30, 2024, the Company had a net loss of $4,013,399 (2023 – $3,797,455) and $7,728,056 (2023 – $7,320,725), respectively. As of June 30, 2024, the Company has working capital of $8,489,246 (December 31, 2023 – $1,956,894) and had an accumulated deficit of $56,041,233 (December 31, 2023 – $48,313,177). The Company has not generated profit from operations since inception and to date has relied on debt and equity financings for continued operations. The Company’s ability to continue as a going concern is dependent upon the ability to generate cash flows from operations and obtain equity and/or debt financing. The Company intends to continue funding operations through equity and debt financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements in the long term. There can be no assurance that the steps management is taking will be successful.

Despite the Company having mostly completed its purchasing of large manufacturing machinery, operational costs are expected to remain elevated and, thus, further decrease cash and cash equivalents. Concurrently, the Company intends to continue its ramp-up of manufacturing and increasing sales volumes in the second half of 2024, which should mitigate the effects of operational costs on cash and cash equivalents; this view is supported by the fact that the manufacturing facility of the Company was completed for initial production output in 2023 and started to generate revenue in the third quarter of 2023, registering its highest quarterly sales total in the Company’s history in the second quarter of 2024.

The Company has successfully raised cash, and it is positioned to do so again if deemed necessary or strategically advantageous. During the year ended December 31, 2021, the Company, through its Reg-A public offering, private placement offering, underwritten public offering, and exercises of warrants, raised an aggregate of approximately $32,500,000. On September 30, 2022, the Company filed a shelf registration statement on Form S-3, which was declared effective by the SEC on October 13, 2022, allowing the Company to issue up to $30,000,000 of common stock and prospectus supplement covering the offering, issuance and sale of up to $13,000,000 of common stock that may be issued and sold under an At The Market Offering Agreement dated September 30, 2022 (“ATM Agreement”), with H.C. Wainwright & Co., LLC, as the sales agent (“HCW”). Pursuant to the ATM Agreement, HCW is entitled to a commission equal to 3.0% of the gross sales price of the shares of common stock sold. As of June 30, 2024, the Company has sold and issued 604,048 shares of common stock in consideration for net proceeds of $780,356 under the ATM Agreement.

On November 2, 2023, the Company consummated a registered direct offering pursuant to which it sold 1,925,000 shares of common stock and 1,575,000 pre-funded warrants to an institutional investor for a total net proceeds of $4,261,542. Concurrently with the registered direct offering, the Company issued the same institutional investor 7,000,000 warrants in a private sale. The warrants are exercisable for 7,000,000 shares of common stock for $1.34 per share six months after issuance until five and a half years from the issuance date, subject to beneficial ownership limitations as described in the warrants. The Company registered the 7,000,000 shares of common stock underlying the warrants on a Form S-1 (333-276241) which was declared effective by the SEC on December 29, 2023.

On March 20, 2024, the Company consummated a registered direct offering pursuant to which it sold 2,372,240 shares of common stock and 1,477,892 pre-funded warrants to the same institutional investor as in the Company’s registered direct offering on November 2, 2023, for total net proceeds of $2,629,083. Concurrently with the registered direct offering, the Company issued the institutional investor 7,700,264 warrants in a private sale. The warrants are exercisable for 7,700,264 shares of common stock for $0.74 per share six months after issuance until five and a half years from the issuance date, subject to beneficial ownership limitations contained in the warrants. The Company registered the 7,700,264 shares of common stock underlying the warrants on a Form S-1 (333-278461) which was declared effective by the SEC on April 8, 2024.

As disclosed in the footnotes to our financial statements, on May 14, 2024, the Company and Worksport New York Operations Corporation entered into an Omnibus Amendment of Loan Documents with Northeast Bank. This amendment pertains to the secured loan agreement dated May 4, 2022, which was originally used to finance the purchase of our facility and land in West Seneca, New York. Effective as of May 10, 2024, the Lender extended the maturity date of the loan from May 10, 2024, to August 10, 2024. This extension alleviated immediate cash flow pressures by postponing the loan repayment, allowing us to manage our resources more effectively and focus on other operational needs. As part of the Loan Amendment, we agreed to pay the Lender an extension fee of $106,000. This fee was deemed fully earned but was waived, as the loan was repaid in full on or before the new maturity date. If the loan was not repaid by the extended maturity date or was accelerated due to default, the fee would have become payable. Additionally, we agreed to an exit fee of $106,000 under similar conditions. This fee was waived, as the loan was repaid on or before the new maturity date without acceleration. This loan extension demonstrates our ability to negotiate favorable terms with our creditors and underscores our commitment to maintaining strong liquidity. This strategic decision supported our long-term growth and helped us navigate the current economic and interest rate environment more effectively. The details of the Loan Amendment have been filed as an exhibit to this report and are incorporated by reference herein.

On May 29, 2024, the Company entered into Inducement Offer Letter with a certain holder of existing warrants to purchase shares of the Company’s common stock at an exercise price of $1.34 per share issued on November 2, 2024, pursuant to which the Holder agreed to exercise for cash its Existing Warrants to purchase an aggregate of 7,000,000 shares of the Company’s common stock, at a reduced exercised price of $0.5198 per share, in consideration for the Company’s agreement to issue new warrants to purchase up to 12,950,000 shares of the Company’s common stock at $0.5198 per share. The Company received aggregate gross proceeds of approximately $3,638,600 from the exercise of the Existing Warrants by the Holder and the sale of the Inducement Warrants, before deducting placement agent fees and other offering expenses payable by the Company.

On July 19, 2024, the Company, as the guarantor, and Worksport New York Operations Corporation as well as Worksport USA Operations Corporation, entered into a $6 million Revolving Financing and Assignment Agreement with an external lending entity, Amerisource Business Capital. Upon transaction close, the Company drew down approximately $5.06 million of the Revolving Credit Facility, net of $790,000 of interest reserve required to be withheld to ensure interest payments by the Company. The Company used $4.73 million of the drawn down amount to refinance the Company’s mortgage on the Company’s real property located at 2500 North America Dr. in West Seneca, New York, and additionally drew approximately $330,000 in accounts receivables, leaving approximately $940,000 available for Accounts Receivable financing under the Agreement as of the deal close date.

To date, the Company’s principal sources of liquidity consist of net proceeds from public and private securities offerings and cash exercises of outstanding warrants. Management is focused on transitioning towards revenue as its principal source of liquidity by growing existing product offerings as well as the Company’s customer base. The Company cannot give assurance that it can increase its cash balances or limit its cash consumption and thus maintain sufficient cash balances for planned operations or future business developments. Future business development and demands may lead to cash utilization at levels greater than recently experienced. The Company may need to raise additional capital in the future. However, the Company cannot provide assurances it will be able to raise additional capital on acceptable terms, or at all.

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. Still, certain factors indicate the existence of a material uncertainty that cast substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. These adjustments could be material.

Cash Flow Activities

Cash increased from $3,365,778 at December 31, 2023, to $3,426,089 at June 30, 2024 – an increase of $60,311 or 2%. The increase was primarily due to the closing of a sale of shares as well as a warrant inducement during the six months ended June 30, 2024, raising approximately $6,800,000.

As of June 30, 2024, we had current assets of $10,743,200 (December 31, 2023 – $9,123,506) and current liabilities of $2,253,954 (December 31, 2023 – $7,166,612). As of June 30, 2024, we had working capital of $8,489,246 (December 31, 2023 – $1,956,894) and an accumulated deficit of $56,041,233 (December 31, 2023 – $48,313,177).

Operating Activities

Net cash used by operating activities for the six months ended June 30, 2024 was $6,421,292, compared to $6,018,704 in the prior period, primarily driven by a larger net loss during the six months ended June 30, 2024, and partially offset by the issuance of shares, stock options, and warrants for services.

Accounts receivable increased at June 30, 2024 by $160,264 and increased by $263,874 in the prior period. The increase in accounts receivable was due to larger sales volume with business-to-business customers.

Inventory increased at June 30, 2024 by $2,755,252, and at June 30, 2023 by $1,533,492, as a result of our stockpiling components for production as well as finished goods to fulfill rising demand for our domestically-produced tonneau covers. Prepaid expenses and deposits decreased by $1,345,434 at June 30, 2024, and increased by $14,280 at June 30, 2023 due to deposits used and made by us for the purchase of manufacturing equipment and inventory, respectively.

Accounts payable and accrued liabilities decreased at June 30, 2024 by $59,989 compared to a decrease of $828,757 in the prior period.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2024 was $335,787 compared to $2,663,046 in the prior period. The decrease in investing activities was primarily attributable to higher capital expenditure on various manufacturing equipment in 2023.

Financing Activities

Net cash generated by financing activities for the six months ended June 30, 2024 was $6,817,390 compared to net cash used from financing activities of $36,772 in the prior period.

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 our 2023 Annual Report on Form 10-K filed on March 27, 2024. 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.

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)) as of the end of the period covered by this Quarterly Report on Form 10-Q. 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, as amended, is recorded, processed, summarized and reported within the required time 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, cannot provide absolute assurance that the objectives of the control system are met. 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.

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 our periodic reports filed with the SEC are prepared in accordance with generally accepted accounting principles. 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.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”), which could materially affect our business, financial condition, liquidity, or future results. The risks described in our 2023 Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, liquidity or future results.