Worksport Ltd

1. Description of Business and Significant Accounting Policies

The Company’s corporate history and business overview are described in detail in our most recent registration statement on Form S-1, filed with the SEC on July 3, 2024, which is incorporated herein by reference. For a description of material developments the Company has undertaken since that time, see Corporate History of Part I Item 1, Business of this report.

**Basis of presentation –**The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

**Consolidation **– The Company’s 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.

Foreign currency translation and presentation – The consolidated financial statements are presented in United States Dollars. The functional currency of the Company and all its subsidiaries is the United States Dollar. Transactions denominated in foreign currencies are initially recorded in the functional currency using exchange rates in effect at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using exchange rates in effect at the dates of the transactions. All exchange gains and losses are included in the statement of operations and comprehensive loss.

Use of estimates – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates and assumptions.

**Revenue recognition –**In accordance with Accounting Standards Codification (ASC) 606 Revenue from Contracts with Customers, sales are recognized when (1) products are shipped, with no right of return except for defective products, and the title and risk of loss has passed to customers; and (2) when they are delivered based on the terms of the sale, and there is an identifiable contract with a customer with defined performance obligations, the transaction price is determinable, and the entity has fulfilled its performance obligation. Revenue related to shipping and handling costs billed to customers is included cost of sales and presented net of related shipping and handling costs.

**Cost of sales –**Includes costs of products sold, which include but are not limited to: purchased product, raw material, direct labor, shipping and handling costs, depreciation and amortization, indirect costs and overhead charges.

Research and development – Research and development costs are expensed as incurred and include consulting and material costs.

Advertising costs – The Company expenses advertising costs as incurred and includes expenses in selling and marketing.

Share-based payments - The Company offers a share option plan for its directors, officers, employees, and consultants. ASC 718 “Compensation – Stock Compensation” prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options, and other equity instruments such as stock appreciation rights. Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values at the time of grant. Compensation expense is included in general and administrative expenses. Compensation expense is recognized over the estimated period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). The Company elected to account for forfeitures when the forfeiture of the underlying awards occur.

Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of the performance commitment date or performance completion date.

**Income taxes -**Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between taxable income and pretax financial income, and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Tax positions initially need to be recognized in the financial statements when it is more likely than not the positions will be sustained upon examination by the tax authorities.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expenses and penalties in operating expenses.

The Company treats tax on the Global Intangible Low-Tax Income (“GILTI”) as a current period cost included in tax expense in the year incurred. The Company does not measure the impact of GILTI in the determination of deferred taxes.

Cash and cash equivalents - All highly liquid investments with an original maturity of three months or less are considered cash equivalents. Cash and cash equivalents in financial institutions may exceed insured limits at various times during the year and subject the Company to concentrations of credit risk. Cash and cash equivalents includes restricted cash at December 31, 2023 of $730,802 and primarily represents funds held to satisfy obligations related to a financing arrangement. There isno restricted cash at December 31, 2024 (see Note 13).

1. Description of Business and Significant Accounting Policies(continued)

Accounts receivable, net – Accounts receivable primarily consists of amounts that are due and payable from distributors, wholesalers, and private label partners. Receivables are stated at net realizable value, which approximates fair value. Receivables are reduced by an allowance for credit losses for amounts that may be uncollectible in the future. The allowance is determined by considering factors such as historical experience, credit quality, age of the accounts receivable, economic conditions and reasonable forecasted financial information that may affect a customer’s ability to pay. The allowance for credit losses at December 31, 2024 and 2024 is $15,000 and $0, respectively.

**Inventories -**Inventories are stated at the lower of cost or net realizable value. The cost of inventory is measured on a weighted average cost method. Cost includes purchase price of materials, freight, and related costs required to bring the goods to Company warehouses. Inventories are reviewed to determine if quantities are in excess of forecasted usage or if they become obsolete.

**Property and equipment, net –**Property and equipment are measured at cost. Maintenance and repair costs are charged to expense when incurred. Depreciation is recognized on a straight-line method based on the following estimated useful lives:

Right-of-use assets - The Company recognizes leases in accordance with ASC 842, which requires lessees to recognize operating leases on the balance sheet as right-of-use assets and lease liabilities based on the value of the discounted future lease payments.

Intangible assets – Patents and other intangibles are amortized using the straight-line method over their estimated useful lives. Intangible assets, such as trademarks with indefinite lives, are not amortized.

Valuation of long-lived assets – Intangible assets are evaluated for impairment at least annually or when events or circumstances arise that indicate the existence of impairment. The Company evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. When indicators of impairment exist, the Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment, and actual results may differ from assumed and estimated amounts. During the years ended December 31, 2024 and 2023, the Company had no impairment losses related to intangible assets.

1. Description of Business and Significant Accounting Policies (continued)

**Product warranties -**The Company currently offers a three year limited warranty against defective products out-of-the-box. Customers who are not satisfied with their purchase may attempt to have their purchases reimbursed outside of the warranty period.

**Financial instruments **- FASB ASC 825, Disclosures about Fair Value of Financial Instruments, requires disclosures of the fair value of financial instruments. The carrying value of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities, approximates their fair values because of the short-term maturities of these instruments. The carrying value of the loan payable approximates fair value as its interest rate fluctuates with market interest rates. We do not hold or issue financial instruments for trading purposes.

**Related party transactions **- All transactions with related parties are in the normal course of operations and are measured at the exchanged amount.

**Reclassifications –**Certain prior year amounts have been reclassified to conform to current year’s presentation. The Company reclassified accrued liabilities of $800,283 and $190,896 for the fiscal years ended December 31, 2024 and 2023, respectively, which were reclassified from accounts payable and accrued liabilities to accrued liabilities and other to better align functional classification of obligations. The Company also reclassified research and development costs of $2,289,940 and $1,669,318 for the fiscal years ended December 31, 2024 and 2023, respectively, which were reclassified from general and administrative expense, to research and development expense. This change improves the disclosure of costs to develop new products and technologies and reflects the Company’s ongoing investment in innovation. This change also provides a more accurate depiction of the Company’s operating performance.

Recent accounting pronouncements

Recent accounting pronouncements adopted

In November 2023, the Financial Standards Accounting Board (FASB) issued Accounting Standards Update (ASU) 2023-07 “Segment Reporting (Topic 280):Improvements to Reportable Segment Disclosures” which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for our annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted. We adopted this standard for the year ended December 31, 2024, and applied the amendments retrospectively to all prior periods presented. Refer to Note 18, Segment Reporting. The adoption of this standard did not have a material effect on the financial statements and related disclosures.

Recent accounting pronouncements not yet adopted

In December 2023, the FASB issued ASU 2023-09 “Income Taxes (Topics 740):Improvements to Income Tax Disclosures” to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for our annual periods beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the potential effect that the updated standard will have on the financial statements and related disclosures.

In November 2024, the FASB issued ASU 2024-03, “Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures” to enhance disclosure of specified categories of expenses (purchases of inventory, employee compensation, depreciation and amortization) included in certain expense captions presented on the face of the income statement. ASU 2024-03 is effective beginning after December 15, 2026, and for interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the potential effect that the updated standard will have on the financial statements and related disclosures.

The Company considers the applicability and impact of all ASUs. ASUs not listed were assessed and determined to be either not applicable or had or are expected to have an immaterial impact on the financial statements and related disclosures.

2. Going Concern

As of December 31, 2024, the Company had $4,883,099 in cash and cash equivalents. The Company also has availability on its revolving line of credit of $892,000. 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 2014, it has never generated a profit. As of December 31, 2024, the Company had an accumulated deficit of $64,476,966.

The accompanying 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 year ended December 31, 2024, the Company had net losses of $16,163,789 (2023 - $14,928,958). As of December 31, 2024, the Company had working capital of $7,304,110 (2023 – $1,956,894) and had an accumulated deficit of $64,476,966 (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.

The Company has historically operated at a loss, although that may change as sales volumes increase and margins improve. As of December 31, 2024, the Company had cash and cash equivalents of $4,883,099 (2023 - $3,365,778). Despite the Company having completed its purchasing of large manufacturing machinery for phase one output levels, 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 2025, which should mitigate the effects of operational costs on cash and cash equivalents as it releases new product lines; this view is supported by the fact that the manufacturing facility of the Company was completed for initial production output in 2023 and quickly began improving output and sales during 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. Through December 31, 2024, the Company has sold and issued 761,408 shares of common stock in consideration for net proceeds of $6,247,097 under the ATM Agreement.

On November 2, 2023, the Company consummated a registered direct offering pursuant to which the Company issued 192,500 shares of common stock and 157,500 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 700,000 warrants in a private sale. The warrants are exercisable for 700,000 shares of common stock for $13.40 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 700,000 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 237,224 shares of common stock and 147,789 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 770,026 warrants in a private sale. The warrants are exercisable for 770,026 shares of common stock for $7.40 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 770,026 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.

On December 13, 2024, the Company filed a Prospectus Supplement to amend Amendment No. 1 to the prospectus supplement dated as of November 5, 2024, prospectus supplement dated as of October 13, 2022, and the prospectus dated as of October 13, 2022 to increase the maximum amount of shares that we are eligible to sell pursuant to the Sales Agreement under General Instruction I.B.6. to $4,962,092 of shares of our common stock not including whatever had been sold prior to this filing 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.

3. Inventories

Inventory consists of the following at December 31, 2024 and 2023:

4. Property and Equipment

Major classes of property and equipment at December 31, 2024 and 2023 are as follows:

During the years ended December 31, 2024 and 2023, the Company recognized depreciation expense of $1,367,445 and $1,107,292, respectively.

5. Intangible Assets

Intangible assets consist of costs incurred to establish the patent rights related to the quick latch and soft vinyl quad-fold tonneau cover technologies, Worksport trademarks, licenses, and software costs. The Company’s utility patents and design registrations were issued between 2014 and 2024 . The patents and software are amortized on a straight-line basis over their useful life. The Company’s trademark, licenses, and other indefinite life intangible assets are reassessed every year for impairment. The Company determined that impairment is not necessary for the current year ended December 31, 2024. The components of intangible assets as of December 31, 2024 and 2023 are as follows:

Amortization expense for the years ended December 31, 2024 and 2023 was $385,840 and $2,450, respectively.

5. Intangible Assets (continued)

Estimated amortization of the patent and software over the next five years and beyond December 31, 2024 is as follows:

6. Prepaid Expenses and Deposits

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

Deposits include prepayments for manufacturing equipment and raw materials used in the production of finished goods.

7. Shareholders’ Equity

During year ended December 31, 2024, the following transactions occurred:

During the year ended December 31, 2024, the Company sold 758,995 shares of common stock for a total net proceeds of $6,032,789. 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 $747,366 to share subscriptions payable from restricted shares and stock options to be issued. As of December 31, 2024, the restricted shares have not been issued. As of December 31, 2024, the Company issued 84,594 restricted shares with a value of $438,992.

During the year ended December 31, 2024, in connection with the sale of 237,224 shares of common stock, the Company also sold 147,789 pre-funded warrants and issued 770,026 warrants exercisable for a total of 770,026 shares of common stock for $0.001 and $7.40, 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 the pre-funded warrants are exercised. During the period,147,790 warrants were exercised for 147,790 shares of common stock for $150. Refer to Note 15, Warrants.

During the year ended December 31, 2024, the Company closed a sale of 95,000 shares of common stock for proceeds of $380,000. In connection with the sale of common stock, the Company issued 190,000 warrants. Refer to Note 15, Warrants. As of December 31, 2024, the shares have not been issued.

Refer to Note 15, Warrants and Note 16, Equity Compensation for additional disclosures related to shareholders’ equity.

7. Shareholders’ Equity(continued)

During year ended December 31, 2023, the following transactions occurred:

During the year ended December 31, 2023, the Company sold 9,913 shares of common stock for a total net proceeds of $214,238. 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 $1,222,863 to share subscriptions payable from restricted shares and stock options to be issued. As of December 31, 2023, the restricted shares have not been issued. During the same period, the Company issued 25,000 shares of common stock for consulting services valued at $635,000.

During the year ended December 31, 2023, the Company closed a sale of 192,500 shares of common stock for $2,579,500. The Company incurred share issuance expense of $428,300. In association with the sale of common shares, the Company also issued 157,500 pre-funded warrants and 700,000 warrants.

For the years ended December 31, 2024 and 2023, the Company was authorized to issue 29,900,000 shares of its common stock with a par value of $0.001. All shares were ranked equally with regards to the Company’s residual assets. During 2024 and 2023, the Company was authorized to issue 10 shares of its Series A and 10,000 of its Series B Preferred Stock with a par value of $0.001. Series A Preferred Stock have voting rights equal to 30 shares of common stock, per share of Preferred Stock. Series B Preferred Stock have voting rights equal to 1,000 shares of common stock, per share of Preferred Stock.

8. Income Taxes

a) The income tax expense for the years ended December 31, 2024 and 2023 is reconciled per the schedule below:

8. Income Taxes(continued)

b) Deferred Income Tax Assets

The tax effects of temporary differences that give rise to the deferred income tax assets at December 31, 2024 and 2023 are as follows:

Deferred income taxes within each jurisdiction on the balance sheets at December 31, 2024 and 2023 are as follows:

c) Cumulative Net Operating Losses

The Company has non-capital losses carried forward of approximately $43,999,000 available to reduce future years’ taxable income. These losses will expire as follows:

Effective for 2023, the Tax Cuts and Jobs Act (“TCJA” of 2017 requires taxpayers to capitalize and amortize research and development costs pursuant to IRC Section 174. Domestic expenses are amortized over a 5 year period and foreign over a 15 year period. As a result of the TCJA, a deferred tax asset was established beginning in 2023 and is reflected in the table above.

Realization of deferred tax assets is dependent, in part, upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income, tax planning strategies and carryback opportunities in making its assessment of the recoverability of tax assets. Net operating loss carryforwards of approximately $43,399,000 may be offset against future taxable income. No tax benefit from these losses have been reported in the December 31, 2024 consolidated financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.

8. Income Taxes(continued)

Due to change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.

The Company complies with the provisions of FASB ASC 740 in accounting for its uncertain tax positions. ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company has determined that the Company has no significant uncertain tax positions requiring recognition under ASC 740.

The Company does not expect the amount of unrecognized tax benefits to materially change within the next twelve months.

The Company is subject to income taxes in the U.S. and in various states and foreign jurisdictions. Tax regulations with each jurisdiction are subject to the interpretation of the related tax laws and regulations and require the application of significant judgment. The Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for tax years ending before December 31, 2020 in the U.S. The Company is no longer subject to non-U.S. income tax examinations by tax authorities for tax years ending before December 31, 2014.

9. Financial Instruments and Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate fair value. The definition of the fair value hierarchy is as follows:

Level 1 – Quoted prices in active markets for identical assets and liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for similar assets and liabilities.

Level 3 – Inputs for which significant valuation assumptions are unobservable in a market and therefore value is based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require.

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, revolving line of credit, and long-term debt. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying value because of the short-term nature of these instruments. The Company’s revolving line of credit is based on a variable interest rate and is reflected in the financial statements at carrying value which approximates fair value at December 31, 2024. The Company’s long-term debt is based on a fixed interest rate, and its carrying amount approximates fair value at December 31, 2024. The fair value of the revolving line of credit and long-term debt is classified as Level 2 within the fair value hierarchy and is estimated based on quoted market prices.

The Company is exposed to market risks such as fluctuation in foreign currency exchange rates and interest rates. Derivative instruments may be used to offset some of the effects of these market risks on the expected future cash flows and on certain existing assets and liabilities. The Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures.

Market Risks

Foreign Currency Risk

The Company is exposed to currency risk on its sales and purchases denominated in Canadian Dollars. The Company actively manages these risks by adjusting its pricing to reflect currency fluctuations and purchasing foreign currency at advantageous rates.

Interest Rate Risk

The borrowing under the Company’s Line of Credit Facility and Equipment Financing is at variable interest rates and exposes the Company to interest rate risk. If interest rates increase, debt service obligations on variable rate indebtedness will increase even though the amount borrowed may not change.

9. Financial Instruments and Fair Value(continued)

Concentration of Risk

Concentration of Supplier Risk

The Company has historically purchased all of its soft tonneau cover finished goods from Meizhou, China, and it began purchasing soft tonneau cover finished goods from a second supplier in Foshan, China in late 2023. The Company carries significant strategic inventories of these materials and is increasing its purchasing from the supplier in Foshan to lower supplier concentration risk . Further, the Company has established domestic assembly of its hard tonneau cover product line to further reduce the risk associated with this concentration of finished good suppliers. The company primarily sources raw materials for domestic production and assembly from vendors in Europe, Southeast Asia, and North America. Strategic inventories are managed based on demand. To date, the Company has been able to obtain adequate supplies of the materials used in the production of its products in a timely manner from existing sources. The loss of these key suppliers or a delay in shipments could have an adverse effect on fulfillment of soft tonneau cover orders.

Concentration of Customer Risk

A customer is considered to be significant if they account for greater than 10% of the Company’s annual sales. The loss of any key customer could have an adverse effect on the Company’s business.

For the year ended December 31, 2024,37% of the Company’s revenue is comprised of one customer. For the year ended December 31, 2023,93% of the Company’s revenue was comprised of one customer.

10. Changes in Cash Flows from Operating Assets and Liabilities

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

11. Investment

During the year ended December 31, 2024, $66,308 ($90,000 CAD) of the Company’s Guaranteed Investment Certificate (“GIC”) matured and the Company received $3,054 ($4,129 CAD) in interest income. During the same period, the Company reinvested the principal amount of $66,308 ($90,000 CAD) in a GIC. The GIC bears a variable interest rate and will mature on February 27, 2025. The anticipated earned interest on the GIC at maturity is $3,123 ($4,275 CAD).

12. Leases

During the year ended December 31, 2022, the Company signed a lease agreement for approximately 20,296 square feet to be used as its then primary, now secondary corporate office and R&D facility pursuant to a five-year lease, dated June 1, 2022, for a variable rate averaging $20,242 per month over the lifetime of the lease not inclusive of additional fees, which also vary and averaged $5,250 per month in 2024 not inclusive of taxes.

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 aone-year lease with an option to extend the lease for an additional year, dated June 1, 2023, for a monthly rent of $3,350. This lease was renewed effective June 1, 2024 at a rate of $3,600 per month with atermination date of May 31, 2025.

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 estimated 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 and lease liability as of December 31, 2024 and 2023 is as follows:

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

The following is a summary of cash paid in 2024 and 2023 for amounts included in the measurement of lease liabilities:

Maturities of lease liability are as follows:

Future minimum lease payments as of December 31, 2024:

13. Indebtedness

Long-term debt consists of:

14. Loss per Share

For the year ended December 31, 2024, loss per share is $5.84 (basic and diluted) compared to that of the year ended December 31, 2023 of $8.44 (basic and diluted) using the weighted average number of shares of 2,768,732 (basic and diluted) and 1,768,991 (basic and diluted), respectively.

There are 29,900,000 shares authorized with 4,016,205 and 2,032,050 shares issued and outstanding, at December 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 December 31, 2024, the Company has 2,291,276 warrants convertible to 2,321,276 common shares,117,018 restricted stock to be issued, and 192,784 stock options exercisable for 192,784 common shares for a total underlying common shares of 2,631,078. As of December 31, 2023, the Company has 1,162,792 warrants convertible to 1,192,792 common shares,57,021 restricted stock to be issued, and 506,386 stock options exercisable for 506,386 common shares for a total underlying common shares of 1,756,199.

15. Warrants

During the year ended December 31, 2024, in connection with the sale of 237,224 shares of common stock, the Company also sold 147,789 pre-funded warrants and issued 770,026 warrants exercisable for a total of 770,026 shares of common stock for $0.001 and $7.40, 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 same period,147,789 pre-funded warrants were exercised for 147,789 shares of common stock for $150.

During the year ended December 31, 2024, the Company closed a sale of 95,000 shares of common stock. In connection with the sale of common stock the Company issued 190,000 warrants. The warrants have an exercise price of $4.00 and an expiration date of September 21, 2029.

During the year ended December 31, 2024,13,091 warrants issued on August 3, 2021, and 344,652 warrants issued on August 6, 2021, all of which having an exercise price of $60.50, expired.

During the year ended December 31, 2023, in connection with the sale of 192,500 shares of common stock the Company also sold 157,500 pre-funded warrants and 700,000 warrants convertible for 857,500 shares of common stock at an exercise price of $0.001 and $13.40, respectively. The Company received net proceeds of $2,110,342 associated with the sale of the pre-funded warrants. During the same period,88,700 pre-funded warrants were exercised for 88,700 shares of common stock for $89. During the year ended December 31, 2024, the remaining 68,800 pre-funded warrants were exercised for 68,800 shares of common stock for $69.

On May 9, 2024, the Company entered into a warrant inducement agreement (the “Inducement”) with the holder of existing warrants to purchase an aggregate 700,000 shares at a reduced exercise price of $5.198 in consideration for the Company to issue new warrants to purchase up to 1,295,000 additional shares of common stock – resulting in gross proceeds of approximately $3,638,000 received by the Company. As a result of the Inducement and subsequent exercise, the Company determined the incremental fair value provided to the holder from both the adjustment in exercise price of the existing warrants and the fair value of the inducement warrants issued using the Black Scholes model. The total incremental fair value of $4,996,000 is recorded as a non-cash deemed dividend. The proceeds of the warrant inducement and issuance of 284,000 shares of common stock are recorded as capital in excess of par. The obligation to issue the remaining 416,000 shares was originally recorded as a share subscription payable. During the twelve months ended December 31, 2024, the Company issued 416,000 out of the 416,000 shares to be issued.

During the year ended December 31, 2023, the Company and a stock options holder agreed to cancel all 40,000 stock options in exchange for extending the exercisable period of 30,000 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 40,000 restricted stock units.

December 31, 2023 and 2022

15. Warrants(continued)

During the year ended December 31, 2022, the Company and a warrant holder reached an agreement to extend the exercisable period of 30,000 warrants, convertible to 2 shares of common stock each, for an additional 12 months.

During the year ended December 31, 2021, the Company issued 13,091 representative warrants to the Company’s underwriters. The representative warrants were not exercisable until January 30, 2022. The representative warrants were exercisable for 13,091 shares of common stock at $60.50 per share until August 3, 2024. As of December 31, 2022, the Company recognized a value of $273,993 for the representative warrants to share issuance cost. During the year ended December 31, 2024, these representative warrants expired.

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

The average remaining contractual life of outstanding warrants that expire is 4.78 years.

16. Equity Compensation

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.

16. Equity Compensation(continued)

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 160,000 restricted stock units and 40,000 performance stock units (“PSUs”) issued on November 11, 2022, and December 29, 2021, respectively, and replace them with 200,000 stock options, as described below.

On November 11, 2022,40,000 and 30,000 PSUs granted on December 29, 2021, as described below, were modified to include new terms pertaining to the PSU vesting schedule. The PSUs vest in 5% increments according to the modified schedule that correlates with the Company’s stock price. The first 5% of the PSUs vest upon the Company’s stock price closing at $22.50, 50% will have vested at a closing price of $53.10, and 100% will have vested at a closing price of $137.60 as measured using the volume weighted average of the Company’s common stock for ten (10) consecutive trading days, with over $100,000 of trading volume on each of those days. The fair value of the PSUs was estimated to be $1,254,460. As of December 31, 2024,7,500 PSUs of the remaining 30,000 PSUs had vested, and the Company recognized $107,525 (2023 - $155,314) in consulting expenses.

On December 29, 2021, the Company granted 40,000 and 30,000 PSUs to the Company’s Chief Executive Officer and a director, respectively. The PSUs were to vest in 5% increments according to a schedule that correlates with the Company’s stock price. The first 5% of the PSUs was to have vested upon the Company’s stock price closing at $30.00, 50% was to have vested at a closing price of $165.00, and 100% was to have vested at a closing price of $315.00. The fair value of the PSUs was estimated to be $1,344,570.

Stock Options

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

On July 23, 2024, the Company engaged in stock option repricing for certain employees, executive officers, and members of the board of directors of the Company.538,896 stock options’ exercise prices were repriced to $7.042, and all other criteria were unchanged. As a result of the modification in exercise prices, the Company recognized additional expense of $93,140 on the date of modification.

During the year ended December 31, 2024, the Company issued 84,860 stock options to employees and directors with exercise prices ranging from $5.20 to $14.10 and expiration dates ranging from February 1, 2029 to November 19, 2034. Of these stock options,2,040 were subsequently cancelled.

During the year ended December 31, 2023, the Company issued 474,336 stock options to employees, directors, and consultants with exercise prices ranging from $14.40 to $42.00 and expiration dates ranging from January 30, 2028 to October 31, 2033. Of these stock options,15,720 were subsequently cancelled.

16. Equity Compensation(continued)

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

17. 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 ended on May 31, 2024 at $15,515 ($19,992 CAD) per month.

During the year ended December 31, 2024, the Company recognized rental income of $76,413 (2023 - $184,564).

18. Segment Reporting

The Company manages its business on a product basis and operates in the following two reporting segments for financial reporting purposes: (1) Hard Tonneau Covers and (2) Soft Tonneau Covers. The accounting policies of both reporting segments are the same as those described in Note 1, Description of Business and Summary of Significant Accounting Policies.

The Company’s chief operating decision maker (“CODM”) is the Chief Executive Officer, who regularly reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance of the Company’s reporting segments. The CODM primarily focuses on net income to evaluate its reporting segments. The CODM also uses net income for evaluating pricing strategy and to assess the performance for determining the compensation of certain employees. Significant segment expenses reviewed, which represent the differences between segment revenue and segment net loss, consist of the following:

The following table presents the Company’s net sales disaggregated by geographic area:

No asset information has been provided for the reported segments as the CODM does not regularly review asset information by reportable segment. As of December 31, 2024 and 2023, assets held in the U.S. accounted for 88% and 80% of total assets, respectively.

19. Legal Proceedings

There are no legal proceedings except for routine litigation incidental to the business.

20. Subsequent Events

The Company has evaluated subsequent events through March 27, 2025, which is the date the financial statements were available to be issued. The following events occurred after year-end: