Worksport Ltd

Notes to the Condensed Consolidated Financial Statements

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 three months period ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. 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, 2023 filed with the SEC on March 28, 2024.

Worksport Ltd. (together with its subsidiaries, the “Company”) was incorporated in the State of Nevada on April 2, 2003 under the name Franchise Holdings International, Inc. (“FNHI”). In May 2020, FNHI changed its name to Worksport Ltd. During the year ended December 31, 2014, the Company completed a reverse acquisition transaction (the “Reverse Acquisition”) with TruXmart Ltd. (“TruXmart”). On May 2, 2018, TruXmart legally changed its name to Worksport Ltd. (“Worksport”). Worksport designs and distributes truck tonneau covers in Canada and the United States.

b) Statement of Compliance

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) as issued by the Financial Accounting Standards Board (“FASB”).

c) Basis of Measurement

The Company’s financial statements have been prepared on the accrual basis.

d) Consolidation

The Company’s condensed consolidated financial statements consolidate the accounts of the Company. All intercompany transactions, balances and unrealized gains or losses from intercompany transactions have been eliminated upon consolidation.

e) Functional and Reporting Currency

These condensed consolidated financial statements are presented in United States dollars (USD or US$). The functional currency of the Company and its subsidiaries are United States dollar. For purposes of preparing these condensed consolidated financial statements, transactions denominated in Canadian dollars (CAD or C$) were converted to United States dollars at the spot rate. Transaction gains and losses resulting from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized as incurred in the accompanying condensed consolidated statement of operations.

f) 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.

2. Going Concern

As of March 31, 2024, the Company had $3,536,980 in 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 year 2014, it has never generated a profit. As of March 31, 2024, the Company had an accumulated deficit of $52,027,834.

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 months ended March 31, 2024, the Company had net losses of $3,714,657 (2023 - $3,523,270). As of March 31, 2024, the Company had working capital of $2,901,401 (December 31, 2023 – $1,956,894) and had an accumulated deficit of $52,027,834 (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 financing 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 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 has started to generate revenue in the third quarter of 2023.

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 March 31, 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 the Company issued 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 and 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 the Company issued 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 a 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 as described 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.

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.

3. Significant Accounting Policies

The accounting policies 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, 2023.

4. Inventory

As of March 31, 2024 and December 31, 2023, inventory consists of the following:

As of March 31, 2024, the value of finished goods on-hand increased due to stockpiling of hard tonneau covers, which have higher values than stockpiled soft tonneau covers, in preparation for 2024 sales campaigns.

5. Prepaid expenses and deposits

As of March 31, 2024 and December 31, 2023, prepaid expenses and deposits consist of the following:

As of March 31, 2024, prepaid expenses and deposits consists of $59,009 (December 31, 2023 - $5,215) in prepaid consulting, services, and advertising for third party consultants through the issuance of shares and stock options. Amounts in deposits relate to prepayments for manufacturing components and finished goods.

6. Property and Equipment

As of March 31, 2024 and December 31, 2023, major classes of property and equipment consist of the following:

7. Shareholders’ Equity (Deficit)

During three months ended March 31, 2024, the following transactions occurred:

During the three months ended March 31, 2024, the Company sold 504,921 shares of common stock for a total net proceeds of $566,118. The sale of shares was in connection with the shelf registration statement on Form S-3 effective 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 as of September 30, 2022.

The Company recognized consulting expense of $407,621 to share subscriptions payable from restricted shares and stock options to be issued. As of March 31, 2024, the Company issued 214,537 restricted shares with a value of $304,188.

During the three months ended March 31, 2024, the Company closed a sale of 2,372,240 shares of common stock for net proceeds of $1,535,591. In association with the sale of common stock, the Company issued 1,477,892 pre-funded warrants and 7,700,264 warrants totaling proceeds of $1,093,492. Refer to note 14.

Refer to note 15 for additional shareholders’ equity (deficit) details.

During three months ended March 31, 2023, the following transactions occurred:

The Company recognized consulting expense of $631,822 to share subscriptions payable from restricted shares and stock options to be issued. As of March 31, 2023, the restricted shares have not been issued.

Refer to note 15 for additional shareholders’ equity (deficit) details.

As of March 31, 2024, 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 regard to the Company’s residual assets. During the three months ended March 31, 2024, 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 299 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.

8. Related Party Transactions

During the three months ended March 31, 2024, the Company recorded salaries expense of $121,752 (2023 - $121,410) for the Company’s CEO. During the three months ended March 31, 2024, the Company recorded salaries expense of $77,155 (2023 - $76,938) to an officer and director of the Company. As of March 31, 2024, the Company has a receivable of $14,303 (December 31, 2023 – payable of $2,192) from the CEO.

9. Changes in Cash Flows from Operating Assets and Liabilities

The changes to the Company’s operating assets and liabilities for the three months ended March 31, 2024 and 2023 are as follows:

10. Investments

11. Operating Lease Obligations

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. During the year ended December 31, 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, 2022, the Company signed a lease agreement for approximately 20,296 square feet to be used as its primary corporate office and R&D facility pursuant to a five-year lease, dated June 1, 2022, for a variable rate averaging $22,101 per month over the lifetime of the lease. The Company also pays approximately $4,418 in additional fees per month, which varies year to year.

During the year ended December 31, 2023, the Company signed a lease agreement for office space to be used as an R&D facility pursuant to a one-year lease with an option to extend the lease for an additional year, dated June 1, 2023, for a monthly rent of $3,350.

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 initial amount equal to the lease liability.

The Company’s right-of-use asset and lease liability as of March 31, 2024, and December 31, 2024, are as follows:

The following is a summary of the Company’s total lease costs:

The following is a summary of cash paid during the three months ended March 31, 2024 and 2023 for amounts included in the measurement of lease liabilities:

The following are future minimum lease payments as of March 31, 2024:

12. Loan payable

13. Loss per Share

For the three months ended March 31, 2024, loss per share is $0.18 (basic and diluted) compared to that of the three months ended March 31, 2023, of $0.21 (basic and diluted) using the weighted average number of shares of 21,188,070 (basic and diluted) and 17,159,376 (basic and diluted), respectively.

There are 299,000,000 shares authorized with 24,100,201 and 17,159,376 shares issued and outstanding, as at March 31, 2024 and 2023, respectively. 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 of March 31, 2024, the Company has 20,118,080 warrants convertible to 20,418,080 common shares,357,018 restricted stock to be issued, and 5,132,656 stock options exercisable for 5,132,656 common shares for a total underlying common shares of 25,907,754. As of March 31, 2023, the Company has 3,939,924 warrants convertible to 4,239,924 common shares,2,815,212 restricted stock to be issued,700,000 performance stock units and 1,195,106 stock options exercisable for 1,195,106 common shares for a total underlying common shares of 8,950,242.

14. Warrants

During the three months ended March 31, 2024, in connection with the sale of 2,372,240 shares of common stock, the Company also sold 1,477,892 pre-funded warrants and issued 7,700,264 warrants exercisable for a total of 7,700,264 shares of common stock for $0.0001 and $0.74, respectively, per share. The Company received net proceeds of $1,093,492 associated with the sale of the pre-funded warrants. The pre-funded warrants are immediately exercisable until all of the pre-funded warrants are exercised.

During the year ended December 31, 2023, in connection with the sale of 1,925,000 shares of common stock the Company in a registered direct offering, the Company also sold 1,575,000 pre-funded warrants and 7,000,000 warrants exercisable for 7,000,000 shares of common stock for $0.0001 and $1.34, respectively, per share. The Company received net proceeds of $2,110,342 associated with the sale of the pre-funded warrants. During the same period 887,000 pre-funded warrants were exercised for 887,000 shares of common stock for $89. During the three months ended March 31, 2024, the remaining 688,000 pre-funded warrants were exercised for 688,000 shares of common stock for $69.

During the year ended December 31, 2023, the Company and a stock options holder agreed to cancel all 400,000 stock options in exchange for extending the exercisable period of 300,000 warrants to December 31, 2024. Later in the year ended December 31, 2023, the expiration date for these warrants was extended to December 31, 2026, and the stock option holder was issued an additional 400,000 restricted stock units.

As of March 31, 2024, the Company has the following warrants outstanding:

The average remaining contractual life of outstanding warrants that expire is 3.97

15. Stock Options and Performance Share Units

Under the Company’s 2015, 2021 and 2022 Equity Incentive Plans, the number of shares of common stock reserved for issuance under the option plan shall not exceed 10% of the issued and outstanding shares of common stock 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 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 than that estimated on vesting.

Performance Share Units

On May 1, 2023, the Company and Steven Rossi reached an agreement to modify 1,600,000 restricted stock units and 400,000 performance stock units issued on November 11, 2022, and December 29, 2021, respectively, and replace them with 2,000,000 stock options, as described below.

On November 11, 2022,700,000 performance stock units (“PSUs”) granted on December 29, 2021, as described below, were modified to include new terms pertaining to the PSU vesting schedule. On December 29, 2021, the Company granted 400,000 and 300,000 performance stock units (“PSUs”) to the Company’s Chief Executive Officer and a director, respectively.

Stock Options

The Company uses the Black-Scholes option pricing model to determine fair value of stock options on the grant date.

During the three months ended March 31, 2024, Company issued 68,800 stock options to employees with an exercise price ranging from $0.57 to $1.41 and an expiration from January 31, 2029 to March 21, 2034.

During the year ended December 31, 2023, the Company issued 1,500,000 stock options to Steven Rossi. The stock options have an exercise price of $1.44 and an expiration date of October 31, 2033.

During the year ended December 31, 2023, the Company issued 12,100 and 25,000 stock options to employees with an exercise price of $1.70 and $1.44, respectively. The stock options will expire 10 years from the grant date.

During the year ended December 31, 2023, the Company issued 321,150 stock options to employees, consultants and directors with an exercise price ranging from $2.55 to $4.20 which will expire at various points though August 23, 2033. During the year ended December 31, 2023,49,500 stock options were cancelled upon the departure of employees.

During the year ended December 31, 2023, the Company issued 2,000,000 stock options to Steven Rossi. The stock options have an exercise price of $1.74 and an expiration date of May 1, 2033.

During the year ended December 31, 2023, the Company issued 75,000 stock options to an employee with an exercise price of $2.43 and expiring on May 18, 2033.

During the year ended December 31, 2023, the Company issued 65,000 stock options to employees and a consultant with an exercise price of $1.53 and expiring on March 14, 2033. During the year ended December 31, 2023,15,000 stock options were cancelled upon the departure of employees.

During the year ended December 31, 2023, the Company issued 85,106 stock options to an employee with an exercise price of $1.53 and expiring on March 14, 2033.

During the year ended December 31, 2023, the Company issued 300,000 stock options to a consultant with an exercise price of $1.66 and expiring on January 30, 2028.

During the year ended December 31, 2023, the Company issued 360,000 stock options to directors with an exercise price of $1.66 and expiring on January 30, 2033.

As of March 31, 2024 and December 31, 2023, Terravis Energy Inc., a wholly owned subsidiary of the Company, has the following options outstanding:

16. Rental Income

During the year ended December 31, 2022, the Company entered into a sublease agreement for its warehouse in Mississauga, Ontario, Canada. The sublease commenced on September 15, 2022, and will end on May 31, 2024 at $15,515 ($19,992 CAD) per month.

During the three months ended March 31, 2024, the Company recognized rental income of $45,353 (2023 - $44,456).

17. Subsequent Events

The Company has evaluated subsequent events through May 15, 2024. The following events occurred after the three months ended March 31, 2024: