Worksport Ltd 10-Q

ITEM 1. FINANCIAL STATEMENTS Worksport Ltd. (formerly Franchise Holdings International, Inc) Condensed Consolidated Balance Sheets (Unaudited) September 30, 2020 December 31, 2019 Assets Current Assets Cash and cash equivalents $ 467,133 $ 11,993 Accounts receivable 125,580 2,974 Other receivable 119,328 64,821 Inventory 68,733 113,156 Prepaid expenses and deposits 126,856 60,741 Total Current Assets 907,630 253,685 Investment (note 6) 24,423 15,658 Property and Equipment, net 92,306 94,695 Right-of-use Asset, net (note 7) 44,115 60,125 Intangible Assets, net 63,535 57,145 Total Assets $ 1,132,009 $ 481,308 Liabilities and Shareholders’ Equity (Deficit) Current Liabilities Accounts payable and accrued liabilities $ 916,290 $ 969,321 Payroll taxes payable 22,783 36,844 Related party loan (note 12) 28,023 28,638 Promissory notes payable (note 4) 384,000 267,881 Loan payable (note 14) 181,062 - Current lease liability (note 7) 23,295 22,000 Total Current Liabilities 1,555,453 1,324,684 Long Term – Lease Liability (note 7) 20,819 39,185 Total Liabilities 1,576,272 1,363,869 Shareholders’ Deficit Series A & B Preferred Stock, $0.0001 par value, 1,100,000 shares authorized, 1,000 Series A and 0 Series B shares issued and outstanding, respectively, 1 - Common stock, $0.0001 par value, 299,000,000 shares authorized, 61,259,391 and 41,906,790 shares issued and outstanding, respectively 6,125 4,191 Additional paid-in capital 11,279,642 8,642,423 Share subscriptions receivable (1,577 ) (1,577 ) Share subscriptions payable 907,980 2,159,395 Accumulated deficit (12,627,854 ) (11,678,413 ) Cumulative translation adjustment (8,580 ) (8,580 ) Total Shareholders’ Deficit (444,263 ) (882,561 ) Total Liabilities and Shareholders’ Deficit $ 1,132,009 $ 481,308 The accompanying notes form an integral part of these condensed consolidated financial statements. 3 Table of Contents Worksport Ltd. (formerly Franchise Holdings International, Inc) Condensed Consolidated Statements of Operations and Comprehensive Loss For the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited) Three Months ended September 30 Nine Months ended September 30, 2020 2019 2020 2019 Net Sales $ 116,491 $ 870,053 $ 223,620 $ 1,959,027 Cost of Goods Sold 94,134 668,516 180,028 1,473,150 Gross Profit 22,357 201,537 43,592 485,877 Operating Expenses General and administrative 50,836 91,254 97,566 149,041 Sales and marketing 59,122 12,253 69,869 62,172 Professional fees 280,413 92,858 509,347 366,843 (Gain) loss on foreign exchange 2,599 (22,701 ) (4,845 ) (43,427 ) Total operating expenses 392,970 173,664 671,937 534,629 Loss from operations (370,613 ) 27,873 (628,345 ) (48,752 ) Other Income (Expense) Interest expense (190,103 ) (8,281 ) (276,822 ) (59,877 ) Gain (loss) on settlement of debt (44,274 ) 250,778 (44,274 ) 250,778 Total other income (expense) (234,377 ) 242,497 (321,096 ) 190,901 Net Income (Loss) $ (604,990 ) $ 270,370 $ (949,441 ) $ 142,149 Other Comprehensive Income (Loss) Foreign currency translation adjustment - (22,492 ) - (42,504 ) Comprehensive Income (Loss) $ (604,990 ) $ 247,878 $ (949,441 ) $ 99,645 Earnings (Loss) per Share Basic $ (0.01 ) $ 0.01 $ (0.02 ) $ 0.00 Diluted $ (0.01 ) $ 0.00 $ (0.02 ) $ 0.00 Weighted Average Number of Shares (basic) 57,148,856 40,639,077 50,547,286 35,236,355 Weighted Average Number of Shares (diluted) 57,148,856 55,710,518 50,547,286 50,259,078 The accompanying notes form an integral part of these condensed consolidated financial statements. 4 Table of Contents Worksport Ltd. (formerly Franchise Holdings International, Inc) Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2020 and 2019 (Unaudited) 2020 2019 Operating Activities Net Income (Loss) $ (949,441 ) $ 142,149 Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization 19,972 25,009 Loss (Gain) on Settlement of Debt 44,274 (250,778 ) Accrued interest 44,095 - Interest on lease liability 3,983 - Amortization of debt discount 198,060 - Amortization on OID interest 17,597 - Shares and warrants issued for services 328,644 - (292,816 ) (83,620 ) Changes in operating assets and liabilities (note 5) (114,888 ) 368,755 Net cash provided by (used in) operating activities (407,704 ) 285,135 Cash Flows from Investing Activities Purchase of property and equipment (7,962 ) (84,149 ) Purchase of investment (note 6) (8,765 ) (15,658 ) Net cash used in investing activities (16,727 ) (99,807 ) Financing Activities Issuance of common stock for cash 250,000 30,000 Proceeds from loan payable 178,836 - Proceeds from notes payable (note 4(b)) 467,500 - Repayment of notes payable (16,150 ) (10,000 ) Repayment of shareholder loans (615 ) (9,395 ) Net cash provided by financing activities 879,571 10,605 Effects of exchange rate changes on cash - (42,504 ) Changes in cash 455,140 153,429 Cash and cash equivalents – beginning of year 11,993 25,323 Cash and cash equivalents – end of period $ 467,133 $ 178,752 Supplemental disclosure of cash flow information: Interest paid $ 11,100 $ - Supplemental disclosure of non-cash flow investing and financing activities: Shares issued for share subscription payable $ 1,626,415 $ - Reverse stock split $ - $ 768 Convertible promissory note – Equity discount $ 467,500 $ - Convertible promissory note – original issue discount $ 41,537 $ - Conversion of Preferred Stock to Common Stock $ - $ (8,642 ) Decrease in share subscription payable $ - $ (768 ) Return and share cancellation $ - $ 8,642 Conversion of convertible promissory note to Common Stock $ 226,587 $ - The accompanying notes form an integral part of these condensed consolidated financial statements. 5 Table of Contents Worksport Ltd. (formerly Franchise Holdings International , Inc) Consolidated Statement of Shareholders’ Equity For the Nine Months Ended September 30, 2020 and 2019 (Unaudited) Preferred Stock Common Stock Additional Paid-in Capital Share Subscriptions Receivable Share Subscription Payable Accumulated Deficit Cumulative Translation Adjustment Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Balance at January 1, 2019 1,000,000 $ 10,000 24,634,051 $ 2,463 $ 8,103,934 $ (1,577 ) $ 2,019,532 $ (10,354,299 ) $ (3,613 ) $ (223,560 ) Issuance of share subscriptions payable - - 2,680,084 268 379,226 - (379,494 ) - - - Deemed dividend related to down-round features - - - - - - 965,079 (965,079 ) - - Return and Cancellation of shares - - (990,742 ) (99 ) (77,179 ) - (247,722 ) - - (325,000 ) Issuance for settlement of payables - - - - - - 30,000 - - 30,000 Conversion of Preferred Stock (1,000,000 ) (10,000 ) 13,583,397 1,358 8,642 - - - - - Net loss - - - - - - - 142,149 - 142,149 Foreign currency translation adjustment - - - - - - - - (42,503 ) (42,503 ) Balance at September 30, 2019 - - 39,906,790 $ 3,990 $ 8,414,623 $ (1,577 ) $ 2,387,395 $ (11,177,229 ) $ (46,116 ) $ (418,914 ) Balance at January 1, 2020 - - 41,906,790 $ 4,191 $ 8,642,423 $ (1,577 ) $ 2,159,395 $ (11,678,413 ) $ (8,580 ) $ (882,561 ) Issuance for services - - 2,413,022 240 168,670 - - - - 168,910 Issuance for prepaid services and subscriptions payable - - 3,723,333 372 203,616 - 57,812 - - 261,800 Issuance of subscriptions payable - - - - - - 250,000 - - 250,000 Issuance from subscriptions payable - - 6,145,812 615 702,532 - (703,147 ) - - - Warrants issuance for services - - - - 12,600 - - - - 12,600 Conversion of convertible promissory note to shares (note 4(b) and 10) - - 2,520,434 252 226,587 - - - - 226,839 Warrants issuance in connection to convertible promissory note (note 4(b) and 10) - - - - 344,110 - - - - 344,110 Share issuance in connection to convertible promissory note (note 4(b)) - - 450,000 45 123,345 - - - - 123,390 Issuance for settlement of payables - - 4,100,000 410 855,670 - (856,080 ) - - - Issuance of Preferred Stock 1,000 1 - - 89 - - - - 90 Net loss - - - - - - - (949,441 ) - (949,441 ) Balance at September 30, 2020 1,000 $ 1 61,259,391 $ 6,125 $ 11,279,642 $ (1,577 ) $ 907,980 $ (12,627,854 ) $ (8,580 ) $ (444,263 ) The accompanying notes form an integral part of these condensed consolidated financial statements. 6 Table of Contents Worksport Ltd. (formerly Franchise Holdings International , Inc) Consolidated Statement of Shareholders’ Equity For the Three Months Ended September 30, 2020 and 2019 (Unaudited) Preferred Stock Common Stock Additional Paid-in Capital Share Subscriptions Receivable Share Subscription Payable Accumulated Deficit Cumulative Translation Adjustment Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Balance at June 30, 2019 - - 40,897,532 $ 4,090 $ 8,491,802 $ (1,577 ) $ 2,635,117 $ (11,447,598 ) $ (23,624 ) $ (341,790 ) Return and Cancellation of shares - - (990,742 ) (99 ) (77,179 ) - (247,722 ) - - (325,000 ) Net loss - - - - - - - 270,370 - 270,370 Foreign currency translation adjustment - - - - - - - - (22,492 ) (22,492 ) Balance at September 30, 2019 - - 39,906,790 $ 3,990 $ 8,414,623 $ (1,577 ) $ 2,387,395 $ (11,177,229 ) $ 46,116 ) $ (418,914 ) Balance at June 30, 2020 1,000 $ 1 52,729,916 $ 5,273 $ 9,996,390 $ (1,577 ) $ 1,248,735 $ (12,022,864 ) $ (8,580 ) $ (782,622 ) Issuance for services - - 2,413,022 240 168,670 - - - - 168,910 Issuance from subscriptions payable - - 3,596,019 360 590,395 - (590,755 ) - - - Issuance of subscriptions payable - - - - - - 250,000 - - 250,000 Warrants issuance in connection to convertible promissory note (note 4(b) and 10) - - - - 285,000 - - - - 285,000 Conversion of convertible promissory note to shares (note 4(b) and 10) - - 2,520,434 252 226,587 - - - - 226,839 Warrant issuance for services - - - - 12,600 - - - - 12,600 Net loss - - - - - - - (604,990 ) - (604,990 ) Balance at September 30, 2020 1,000 $ 1 61,259,391 $ 6,125 $ 11,279,642 $ (1,577 ) $ 907,980 $ (12,627,854 ) $ (8,580 ) $ (444,263 ) The accompanying notes form an integral part of these condensed consolidated financial statements. 7 Table of Contents Worksport Ltd. (formerly Franchise Holdings International, Inc) Notes to the Condensed Consolidated Financial Statements (Unaudited) 1. Basis of Presentation and Going Concern a) Interim Financial Information The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments and reclassifications considered necessary in order to make the financial statements not misleading and for a fair and comparable presentation have been included and are of a normal recurring nature. Operating results for the nine-month period ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. 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, 2019 filed with the SEC on May 14, 2020. b) Functional and Reporting Currency Effective January 1, 2020, the Company changed the functional currency of its subsidiary to United States dollars given the increasing prevalence of U.S. dollar-denominated activities of the subsidiary over time. The change in functional currency from Canadian dollars to United States dollars is accounted for prospectively from January 1, 2020. The subsidiary’s balance sheet was converted from Canadian dollars to United States dollars using the year ended December 31, 2019 United States dollar balance as the opening for January 1, 2020 in accordance to ASC 830 . These condensed interim financial statements are presented in United States Dollars. The functional and presentation currency of the Company and its subsidiary is the United States Dollar. As a result of the change in functional currency the Company recognized a loss on foreign exchange of $29,940. c) Use of Estimates The preparation of condensed unaudited financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed interim financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. d) Going Concern These unaudited condensed consolidated financial statements have been prepared on a going concern basis which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. During the nine-month period ended September 30, 2020, the Company incurred a net loss of $936,841 and as of that date, the Company’s accumulated deficit was $12,615,254. While the Company has demonstrated the ability to generate revenue, there are no assurances that it will be able to achieve level of revenues adequate to generate sufficient cash flow from operations or obtain additional financing through private placements, public offerings and/or bank financing necessary to support our working capital requirements. To the extent that funds generated from any private placements, public offerings and/or bank financing are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on acceptable terms. These conditions raise substantial doubt about our ability to continue as a going concern. If adequate working capital is not available, we may be forced to discontinue operations, which would cause investors to lose their entire investment. The accompanying condensed consolidated financial statements do not include any adjustments that might result relating to the recoverability and classification of the asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this risk and uncertainty. e) Revision of Prior Period Financial Statements In connection with the preparation of our consolidated financial statements, we identified an immaterial error related to the recognition of a deemed dividend related to down-round features along with the associated shares issuance and professional fees in the annual periods in fiscal 2019 and first quarter of 2020. In accordance with SAB (Staff Accounting Bulletins) Topic 1.M, “Materiality,” and SAB (Staff Accounting Bulletins) Topic 1.N, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” we evaluated the error and determined that the related impact was not material to our financial statements for any prior annual or interim period, but that correcting the cumulative impact of the error would be significant to our results of operations and equity fiscal and interim periods of 2019 and 2020. Accordingly, we have revised previously reported financial information for such immaterial error, as previously disclosed in our Quarterly Report on Form 10-Q for the first quarter of fiscal 2020 and for the fiscal year 2019. A summary of revisions to certain previously reported financial information presented herein for comparative purposes is included in Note 15. 2. Significant Accounting Policies The accounting polices used in the preparation of these condensed interim financial statements are consistent with those of the Company’s audited financial statements for the year ended December 31, 2019. 8 Table of Contents Worksport Ltd. (formerly Franchise Holdings International, Inc) Notes to the Condensed Consolidated Financial Statements (Unaudited) 3. Inventory Inventory consists of the following at September 30, 2020 and December 31, 2019: 2020 2019 Finished goods $ 60,445 $ 104,868 Promotional items 552 552 Raw materials 7,736 7,737 $ 68,733 $ 113,156 4. Promissory Notes a) Promissory Notes The following tables shows the balance of the notes payable as of September 30, 2020 and December 31, 2019: Balance as at December 31, 2018 $ 287,425 Payment (19,544 ) Balance as at December 31, 2019 $ 267,881 Reclassification 99,177 Balance as at September 30, 2020 $ 367,058 2020 Notes Payable During the nine-months ended September 30, 2020 the Company reclassified $88,120 from accounts payable to notes payable. The terms of the note is under negotiation. During the nine-months ended September 30, 2020 the Company reclassified a debit balance of $11,058 from notes payable to other receivable. b) Convertible Promissory Notes On February 25, 2020, the Company entered into an agreement with Leonite Capital LLC, a Delaware limited liability company (“Leonite”), pursuant to which the Company issued to Leonite a secured convertible promissory note in the aggregate principal amount of $544,425 to be paid in tranches. As additional consideration for the purchase of the note, (i) the Company issued to Leonite 450,000 common shares, and (ii) the Company issued to Leonite a five-year warrant to purchase 900,000 common shares at an exercise price of $0.10 per share (subject to adjustment), which may be exercised on a cashless basis. The note carries an original issue discount of $44,425 to cover Leonite’s legal fees, accounting fees, due diligence fees and/or other transactional costs incurred in connection with the purchase of the note. Therefore, the purchase price of the note was $500,000. On February 28, 2020, the Company recorded $198,715, $182,500 principal and $16,215 original issue discount. On September 1, 2020 the Company recorded an additional $310,322, $285,000 principal and $25,322 original issue discount. As of September 30, 2020, the Company has recorded $509,037, $467,500 principal and $41,537 original issue discount. Furthermore, the Company issued 450,000 shares of common stock valued at $123,390 and a debt-discount related to the warrants valued at $344,110. During the period ended September 30, 2020 Leonite converted $226,839 of convertible promissory note into 2,520,434 common shares at $0.09 per share. The original value of the convertible note converted was $182,565 as a result the Company recognized a loss of $44,274 on settlement of debt. The Company amortized $198,060 of financing costs related to the shares and warrants for the nine months ended September 30, 2020. The remaining net balance of the note at September 30, 2020 is $16,942 comprised of principal of $286,382 and net of unamortized debt discount of $269,440. The note bears interest at the rate of the greater of 10.2% per annum. Any amount of principal or interest on the note which is not paid by the maturity date shall bear interest at the rate at the lesser of 24% per annum or the maximum legal amount permitted by law (the “Default Interest”). Beginning on March 18, 2020 and on the same day of each and every calendar month thereafter throughout the term of the note, the Company shall make monthly payments of interest only due under the note to Leonite at the Stated Rate as set forth above. The Company shall pay to Leonite on an accelerated basis any outstanding principal amount of the note, along with accrued, but unpaid interest, from: (i) net proceeds of any future financings by the Company, but not its subsidiaries, whether debt or equity, or any other financing proceeds, except any transaction having a specific use of proceeds requirement that such proceeds are to be used exclusively to purchase the assets or equity of an unaffiliated business and the proceeds are used accordingly; (ii) net proceeds from any sale of assets of the Company or any of its subsidiaries other than sales of assets in the ordinary course of business or receipt by the Company or any of its subsidiaries of any tax credits existing prior to the date of the note; and (iii) net proceeds from the sale of any assets outside of the ordinary course of business or securities in any subsidiary. As of September 30, 2020 the Company has paid $11,100 in interest. 9 Table of Contents Worksport Ltd. (formerly Franchise Holdings International, Inc) Notes to the Condensed Consolidated Financial Statements (Unaudited) 4. Promissory Notes (continued) b) Convertible Promissory Notes (continued) The note will mature 18 months from the issue date, or August 25, 2021, at which time the principal amount and all accrued and unpaid interest, if any, and other fees relating to the note, will be due and payable. Unless an event of default as set forth in the note has occurred, the Company has the right to prepay principal amount of, and any accrued and unpaid interest on, the note at any time prior to the maturity date at 100% of the principal amount plus any accrued and unpaid interest plus the lesser of (i) nine months of unaccrued interest or (ii) all unaccrued interest through the remainder of the term. The note contains customary events of default, including in the event of (i) non-payment, (ii) a breach by the Company of its covenants under the securities purchase agreement or any other agreement entered into in connection with the securities purchase agreement, or a breach of any of representations or warranties under the note, or (iii) the bankruptcy of the Company. The note also contains a cross default provision, whereby a default by the Company of any covenant or other term or condition contained in any of the other financial instrument issued by the Company to Leonite or any other third party after the passage all applicable notice and cure or grace periods that results in a material adverse effect shall, at Leonite’s option, be considered a default under the note, in which event Leonite shall be entitled to apply all rights and remedies under the terms of the note. Under the note, Leonite has the right at any time at its option to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of the note into fully paid and non-assessable common shares of the Company. The number of common shares to be issued upon each conversion of the note shall be determined by dividing the conversion amount by the applicable conversion price then in effect. The conversion amount is the sum of: (i) the principal amount of the note to be converted plus (ii) at Leonite’s option, accrued and unpaid interest, plus (iii) at Leonite’s option, Default Interest, if any, plus (iv) Leonite’s expenses relating to a conversion, plus (v) at Leonite’s option, any amounts owed to Leonite. The conversion price shall be $0.09 per share (subject to adjustment as further described in the note for common share distributions and splits, certain fundamental transactions, and anti-dilution adjustments), provided that at any time after any event of default under the note, the conversion price shall immediately be equal to the lesser of (i) the fixed conversion price ($0.09); (ii) 60% of the lowest bid price during the twenty one consecutive trading day period immediately preceding the trading that the Company receives a Notice of Conversion or (iii) the discount to market based on subsequent financing. Notwithstanding the foregoing, in no event shall Leonite be entitled to convert any portion of the note in excess of that portion of the note upon conversion of which the sum of (1) the number of common shares beneficially owned by Leonite and its affiliates (other than common shares which may be deemed beneficially owned through the ownership of the unconverted portion of the note or the unexercised or unconverted portion of any other security of the Company subject to a limitation on conversion or exercise analogous to the limitations contained in the note, and, if applicable, net of any shares that may be deemed to be owned by any person not affiliated with Leonite who has purchased a portion of the note from Leonite) and (2) the number of common shares issuable upon the conversion of the portion of the note with respect to which the determination of this proviso is being made, would result in beneficial ownership by Leonite and its affiliates of more than 4.99% of the outstanding common shares of the Company. Such limitations on conversion may be waived (up to a maximum of 9.99%) by Leonite upon, at its election, not less than 61 days’ prior notice to the Company, and the provisions of the conversion limitation shall continue to apply until such 61st day (or such later date, as determined by Leonite, as may be specified in such notice of waiver). This note shall give Leonite a senior secured obligation of the Company, with first priority over all current and future indebtedness of the Company and any subsidiary. Calculation of beneficial conversion feature As of September 30, 2020 The Company allocated $509,037 as the proceeds from Leonite; $467,500 principal and $41,537 original issue discount. The Company allocated $123,390 to common shares and $242,100 to warrants calculated using the black-scholes model. The effective rate resulted in a beneficial conversion feature greater than the proceeds. Allocated proceeds of Convertible Promissory Note $ 509,037 Conversion Price $ 0.09 Number of shares of Common Stock that would be issued upon conversion of Convertible Promissory Note 5,655,967 Conversion price $ 0.098 FMV of Common Stock $ 0.263 Per Share Intrinsic Value of Beneficial Conversion Feature $ 0.165 Calculated Beneficial Conversion Feature $ 933,646 In accordance to ASC 470-20-30 , if the intrinsic value of the beneficial conversion feature is greater than the proceeds allocated to the convertible promissory note, the amount of the discount assigned to the beneficial conversion feature shall be limited to the amount of the proceeds allocated to the convertible promissory note. As such, the beneficial conversion feature of the convertible promissory note is equal to $467,500 with an excess of $466,146. 10 Table of Contents Worksport Ltd. (formerly Franchise Holdings International, Inc) Notes to the Condensed Consolidated Financial Statements (Unaudited) 5. Changes in Cash Flows from Operating Assets and Liabilities The changes to the Company’s operating assets and liabilities for the nine months period ended September 30, 2020 and 2019 are as follows: 2020 2019 Decrease (increase) in accounts receivable $ (122,606 ) $ (187,706 ) Decrease (increase) in other receivable 22,970 - Decrease (increase) in inventory 44,423 91,038 Decrease (increase) in prepaid expenses and deposits 48,642 97,737 Increase (decrease) in lease liability (21,055 ) - Increase (decrease) in income taxes payable (14,061 ) (69,660 ) Increase (decrease) in accounts payable and accrued liabilities (73,201 ) 437,346 $ (114,888 ) $ 368,755 6. Investment During the year ended December 31, 2019, the Company entered into an agreement to purchase 10,000,000 shares for $50,000 which has been issued to the Company. The Company’s investment accounts for a 10% equity stake in a US based mobile phone development company. As of September 30, 2020 the Company had advanced a total of $24,423 (December 31, 2019 - $15,658) and is advancing tranches of capital as required. 7. Lease Liabilities 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 $2,222. 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, being January 1, 2019. The lease liability is measured at the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate of 10%. The Company has measured the right-of-use asset at an amount equal to the lease liability. The Company’s right-of-use asset for the nine-months ended September 30, 2020 and December 31, 2019 are as follows: September 30, 2020 December 31, 2019 Right-of-use asset $ 44,115 $ 60,125 Current lease liability $ 23,295 $ 22,000 Long-term lease liability $ 20,819 $ 39,185 The components of lease expense are as follows: September 30, 2020 September 30, 2019 Amortization of right-of-use $ 16,010 3,296 Interest on lease liability $ 3,983 1,212 Total lease cost $ 19,993 4,508 Maturities of lease liability are as follows: Future minimum lease payments as of September 30, 2020: 2020 $ 6,665 2021 26,658 2022 15,551 Total future minimum lease payments 48,874 Less: amount representing interest (4,760 ) Present value of future payments 44,114 Current portion 23,295 Long term portion $ 20,819 11 Table of Contents Worksport Ltd. (formerly Franchise Holdings International, Inc) Notes to the Condensed Consolidated Financial Statements (Unaudited) 8. Shareholders’ Deficit During the nine-months ended September 30, 2020 the Company issued 2,413,022 common shares at $0.07 per share for $168,910 for consulting services. During the nine-months ended September 30, 2020, the Company issued 2,520,434 common shares pursuant to the conversion of the convertible promissory note (note 4(b)) with a value of $226,839. During the the nine-months ended September 30, 2020, the Company entered into a share subscription agreement with a consultant of the Company for 4,000,000 common shares valued at $250,000. During the nine-months ended September 30, 2020 the Company issued 1,333,333 and 240,000 common shares at $0.09 and 0.07 per share for $120,000 and $16,800 respectively for prepaid advertising services. As of September 30, 2020 the Company has expensed $53,293 from prepaid expenses. During the nine-months ended September 30, 2020 the Company entered into a share subscription agreement with a consultant of the Company for 4,000,000 common shares valued at $125,000 for prepaid consulting services. As of September 30, 2020 the Company issued 2,150,000 shares with a value of $67,188. As of September 30, 2020 the Company has expensed $93,750 from prepaid expenses. During the nine-months ended September 30, 2020 the Company issued a consultant 5,686,978 common shares of subscription payable with a value of $648,147 relating to the anti-dilution feature triggered on March 5, 2019 as noted below. During the nine-months ended September 30, 2020 the Company issued 458,834 common shares pursuant to a subscription payable with a value of $55,000. During the nine-months ended September 30, 2020 the Company issued 450,000 shares in connection with the issuance of convertible promissory note (note 4(b)) at $0.27 per share. During the nine-months ended September 30, 2020 the Company entered into a settlement to fulfill a debt purchase agreement entered in 2017 for 4,100,000 shares valued at $856,080 . As of September 30, 2020 the Company has issued 4,100,000 shares. During the nine-months ended September 30, 2020, Steven Rossi (the Company’s CEO) was issued 1,000 Series A Preferred Shares at $0.09 per share equal to 299,000 common shares voting rights. During the nine-months ended September 30, 2019, the Company issued 2,680,084 common shares pursuant to a subscription payable to Consultant with a value of $379,494. During the same period, the Company entered into a share subscription agreement with a consultant of the Company for 1,500,000 common shares valued at $30,000. During the nine-months ended September 30, 2019, Steven Rossi was issued 13,583,397 shares of Worksport, Ltd common stock as approved by the board of directors, due to a conversion of all 1,000,000 shares of his Series A Preferred stock. During the nine-month ended September 30, 2019 on March 5, 2019, the Company completed a share consolidation of the Company’s issued and outstanding common shares based on six (6) pre-consolidation shares to one (1) post-consolidation share. The Consolidation reduced the number of issued and outstanding common shares of the Company from 147,804,298 pre-Consolidation common shares to approximately 24,634,051 post-Consolidation common shares. While the share consolidation occurred during the year ended December 31, 2019, the Company has accounted for the effects retrospectively as such, the schedules and all references to shares, options and warrants throughout the financial statements have been updated to reflect the number of post-consolidation securities. 12 Table of Contents Worksport Ltd. (formerly Franchise Holdings International, Inc) Notes to the Condensed Consolidated Financial Statements (Unaudited) 8. Shareholders’ Deficit (continued) On March 5, 2019 immediately following the share consolidation the anti-dilution feature under the Investment and Co-operation agreement dated November 1, 2017 came into effect. As part of the anti-dilution feature the Company is obligated to issue an additional 8,465,608 shares at $0.11 per share for a total of $965,079. The Company recognized a non-cash deemed dividend of $965,079 to retain earnings and share subscriptions payable (Note 15). For the nine-months ended September 30, 2020 and 2019, the Company was authorized to issue 299,000,000 shares of its common stock with a par value of $0.0001. All shares were ranked equally with regards to the Company’s residual assets. During 2020 and 2019, the Company was authorized to issue 1,100,000 shares of its Series A and 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. 9. Earnings per Share For the nine-months ended September 30, 2020, Earnings per Share (EPS) is $(0.02) (basic and diluted) compared to the EPS for the nine-months ended September 30, 2019 of $0.00 (basic and diluted) using the weighted average number of shares of 50,547,286 (basic and diluted) and 35,236,355 basic and 50,259,078 diluted respectively. Earnings per Share (EPS) is $(0.01) (basic and diluted) for the three months ended September 30, 2020 compare to the three months ended September 30, 2019 of $0.01 basic and $0.00 diluted using the weighted average number of shares of 57,148,856 (basic and diluted) and 40,639,077 basic and 55,710,518 diluted respectively. There are 299,000,000 shares authorized, 61,259,391 and 39,906,790 shares issued and outstanding, as at September 30, 2020 and 2019 respectively. As of September 30, 2020 the Company has 7,336,994 shares to be issued. The computation of loss per share is based on the weighted average number of shares outstanding during the period in accordance with ASC Topic No. 260, “Earnings Per Share”. Shares underlying the Company’s outstanding warrants and convertible promissory notes were excluded due to the anti-dilutive effect they would have on the computation. At September 30, 2020 the Company has 2,250,000 warrants convertible to 2,250,000 common shares and convertible promissory note convertible to 3,448,025 common shares for a total underlying common shares of 5,698,025. At September 30, 2019 there were no underlying common shares. 10. Warrants During the nine-months ended September 30, 2020 the Company issued 900,000 warrants convertible to 1 common share each with an exercise period of 5 years. The exercise price of the warrants is $0.10 per share (subject to adjustment) and may be exercised on a cashless basis. Refer to Note 4(b). During the During the nine-months ended September 30, 2020 the Company issued 1,250,000 and 100,000 warrants convertible to 1 common share each exercisable until March 30, 2025 and April 29, 2022 respectively. The exercise price of the warrants are $0.12 and $2 per share. Exercise price Number outstanding Remaining Contractual Life (Years) Expiry date $ 2.00 100,000 1.58 April 29, 2022 $ 0.10 900,000 4.41 February 25, 2025 $ 0.12 1,250,000 4.47 March 20, 2025 2,250,000 4.44 September 30, 2020 September 30, 2019 Number of warrants Weighted average price Number of warrants Weighted average price Balance, beginning of year - $ - - $ - Issuance 2,250,000 $ 0.20 - $ - Balance, end of period 2,250,000 $ 0.20 - $ - 13 Table of Contents Worksport Ltd. (formerly Franchise Holdings International, Inc) Notes to the Condensed Consolidated Financial Statements (Unaudited) 11. Concentration of Customer Risk The following table includes the percentage of the Company’s sales to significant customers for the nine-months ended September 30, 2020 and 2019, as well as the balance included in revenue and accounts receivable for each significant customer as at September 30, 2020 and 2019. A customer is considered to be significant if they account for greater than 10% of the Company’s annual sales. 2020 2019 $ % $ % Customer A 88,165 36.7 59,598 2.8 Customer B n/a n/a 1,910,430 89 The loss of any of these key customers could have an adverse effect on the Company’s business. 12. Related Party Transactions During the nine-months ended September 30, 2020 the Company’s CEO and director paid on behalf of the Company’s lease payments and other general expenses of $6,615. During the same period the Company repaid $7,230 to the Company’s CEO and director for a total net transaction of $615. As of September 30, 2020 the Company has $28,023 in related party loan. 13. Contingent Liability During the nine-months ended September 30, 2020, the Company reached a legal settlement with a supplier in which the Company is obligated to pay $6,037 per month beginning on March 1, 2020 for four months until the settlement amount of $24,148 has been fully paid on June 1, 2020. As of September 30, 2020 the Company has completed all payments. 14. Loan payable During the nine-months ended September 30, 2020 the Company received a loan of $32,439, $10,000 and $108,000 from a unrelated third party with an interest rate of 10% per annum with a maturity date of December 31, July 22 and August 31, 2021 respectively. During the nine-months ended September 30, 2020 the Company received $28,397 ($40,000 CDN) interest free from the Government of Canada as part of the COVID-19 small business relief program. Repaying the balance of the loan on or before December 31, 2022 will result in loan forgiveness of 25 percent. As of September 30, 2020 the Company accrued interest of $2,226. 14 Table of Contents Worksport Ltd. (formerly Franchise Holdings International, Inc) Notes to the Condensed Consolidated Financial Statements (Unaudited) 15. Revision of Prior Period Financial Statements During the review for the nine-months ended September 30, 2020 new information came to light regarding share issuances and an anti-dilution agreement. The share issuances for the three months ended March 31, 2020 were 2,000,000 and 458,834 common shares respectively. The anti-dilution agreement relating to a 2017 share subscription payable agreement was triggered in March 2019 upon the Company’s stock split was also discovered. Please refer to Note 8. We revised certain prior period financial statements for an immaterial error related to the recognition of the deemed dividend related to down-round features along with the associated shares issuance and professional fees (Note 1). A summary of revisions to our previously reported financial statements presented herein for comparative purposes. The cumulative effect of the adjustments on all prior periods to Shareholders’ Equity as of June 30, 2019, September 30, 2019, December 30, 2019 and March 31, 2020 reflected below: Common Stock Additional Paid-in Share Subscriptions Share Subscription Accumulated Cumulative translation Total Stockholders’ Equity Shares Amount Capital Receivable Payable Deficit adjustment (Deficit) Balance at June 30, 2019 28,177,966 $ 2,817 $ 8,309,293 $ (1,577 ) $ 1,853,819 $ (10,482,521 ) $ (23,624 ) $ (341,792 ) Revision 12,719,566 $ 1,273 $ 182,509 - $ 781,298 $ (965,079 ) - - Balance at June 30, 2019, as revised 40,897,532 $ 4,090 $ 8,491,802 $ (1,577 ) $ 2,635,117 $ (11,447,600 ) $ (23,624 ) $ (341,792 ) Balance at September, 2019 38,506,721 $ 3,850 $ 8,230,982 $ (1,577 ) $ 1,606,097 $ (10,212,150 ) $ (46,116 ) $ (418,915 ) Revision 1,400,069 $ 141 $ 183,641 - $ 781,298 $ (965,079 ) - - Balance at September 30, 2019, as revised 39,906,790 $ 3,991 $ 8,414,623 $ (1,577 ) $ 2,387,395 $ (11,177,230 ) $ (46,116 ) $ (418,915 ) Balance at December 31, 2019 41,906,790 $ 4,191 $ 8,381,231 $ (1,577 ) $ 1,511,080 $ (10,768,906 ) $ (8,580 ) $ (882,561 ) Revision - - $ 261,192 - $ 648,315 $ (909,507 ) - - Balance at December 31, 2019, as revised 41,906,790 $ 4,191 $ 8,642,423 $ (1,577 ) $ 2,159,395 $ (11,678,413 ) $ (8,580 ) $ (882,561 ) - Balance at March 31, 2020 46,547,749 $ 4,655 $ 9,060,739 $ (1,577 ) $ 1,178,608 $ (10,961,172 ) $ (8,580 ) $ (727,327 ) Revision 2,458,834 $ 246 $ 731,946 - $ 137,315 $ (869,507 ) - - Balance at March 31, 2020, as revised 49,006,583 $ 4,901 $ 9,792,685 $ (1,577 ) $ 1,315,923 $ (11,830,679 ) $ (8,580 ) $ (727,327 ) The Consolidated Statements of Operations and Comprehensive Loss has been revised to reflect the correction for the three months ended March 31, 2020 as follows For the Three Months Ended March 31, 2020 As previously reported Revision As Revised Professional Fees $ 149,465 $ (40,000 ) $ 109,465 Total Operating Expenses $ 178,471 $ (40,000 ) $ 138,471 Loss from Operations $ (164,455 ) $ 40,000 $ (124,455 ) Net Loss $ (192,266 ) $ 40,000 $ (152,266 ) Comprehensive Loss $ (192,266 ) $ 40,000 $ (152,266 ) Loss per Share – Basic and Diluted $ (0.00 ) - $ (0.00 ) 16. Commitments During the nine months period ended September 30, 2019 the Company entered into an agreement with a third party to reserve 100,000 common shares for consulting services at $0.0001 per share. As of September 30, 2020, the third party has not exercised the shares. 17. Subsequent Events The Company has evaluated subsequent events through November 16, 2020 which is the date the financial statements were available to be issued and the following events after September 30, 2020 occurred: ● On October 7, 2020 the Company issued 2,900,000 common shares from share subscription valued at $145,000 ● On October 7, 2020 the Company issued 2,291,667 common shares from share subscription valued at $275,000 ● On October 23, 2020 the Company reached a settlement agreement with a third party. In accordance with the settlement agreement the third party will release and cancel a reserve of 4,166,666 common shares of the Company. 15 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following management’s discussion and analysis (“MD&A”) should be read in conjunction with financial statements of Worksport, Ltd. (formerly Franchise Holdings International, Inc) and its wholly owned subsidiary, Worksport Ltd. for the nine-months ended September 30, 2020 and 2019, and the notes thereto. Additional information relating to Worksport Ltd is available at Worksport.ca. Safe Harbor for Forward-Looking Statements Certain statements included in this MD&A constitute forward-looking statements, including those identified by the expressions anticipate, believe, plan, estimate, expect, intend, and similar expressions to the extent they relate to Worksport or its management. These forward-looking statements are not facts, promises, or guarantees; rather, they reflect current expectations regarding future results or events. These forward-looking statements are subject to risks and uncertainties that could cause actual results, activities, performance, or events to differ materially from current expectations. These include risks related to revenue growth, operating results, industry, products, and litigation, as well as the matters discussed in Worksport’s MD&A under Risk Factors . Readers should not place undue reliance on any such forward-looking statements. Worksport disclaims any obligation to publicly update or to revise any such statements to reflect any change in the Company’s expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements. The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included in this report. COVID-19 In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. The virus has since spread to over 150 countries and including Canada and United States. On March 11, 2020, the World Health Organization declared the outbreak a pandemic. In both Canada and United Sates most states/provinces and cities have reacted by instituting lockdown orders, restrictions on travel, “stay at home” orders and restrictions on the types of businesses that may continue to operate, as well as guidance in response to the pandemic and the need to contain it. As a result of the lockdown orders enacted in the United States, Canada and China the Company expects a disruption to its manufacturing with significant reduction to sales presented in these condensed interim financial statements. As of the date of this financial statement, lockdown orders have been relaxed in parts of the United States, Canada and China, but due to low consumer confidence and disruption to manufacturing the Company expects sales to remain low. The extent to which the pandemic may impact our results will depend on future developments, which are highly uncertain and cannot be predicted as of the date of this report, including new information that may emerge concerning the severity of the pandemic and steps taken to contain the pandemic or treat its impact, among others. Nevertheless, the pandemic and the current financial, economic and capital markets environment, and future developments in the global supply chain and other areas present material uncertainty and risk with respect to our performance, financial condition, results of operations and cash flows. Revenue For the nine months ended September 30, 2020, revenue generated from the entire line of Worksport products was $223,620, compared to $1,959,027 for the nine months ended September 30, 2019. The year over year decrease of approximately 89% was attributed to the impact of COVID-19. For the nine months ended September 30, 2020, revenue generated in Canada was $10,990 compared to $74,058 for the same period in 2019, a decrease of 85%. For the three months ended September 30, 2020, the Company had refunds of $935 compared to revenue of $49,410 for the same period in 2019, an decrease of 102%. The rate of exchange between the Canadian Dollar and the United States Dollar during the first nine months of fiscal 2020 fluctuated due to COVID-19; the Canadian Dollar decreasing in value compare to United States Dollar on average by $0.1. As a result, Canadian Dollars sales during the first nine-months ended September 30, 2020 will be on average lower compared to 2019 when converted to United States Dollar for financial statement reporting purposes. For the nine months ended September 30, 2020, gross revenue generated in the United States was $212,630 compared to $1,884,969 for the same period in 2019. This represents a year-over-year decrease in US-sourced revenue of approximately 89%. For the three months ended September 30, 2020, gross revenue generated in the United States was $117,426 compared to $820,643 for the same period in 2019, an decrease of 86%. The decrease in revenue generated in Canada and United States can be attributed to the lockdown and stay-at-home orders due to the COVID-19 pandemic resulting in lower consumer confidence and demand. Currently, Worksport works closely with one major distributor in Canada, along with its own contracted distribution and inventory facility in Breinigsville, PA and Depew, NY. This does not include multiple independent online retailers. Although Worksport currently supports a total of 10 dealers and distributors, Worksport believes the trend of increasing sales through online retailers will continue to outpace the traditional distribution business model. Moreover, reputable online retailer’s customers tend to provide larger sales volumes, greater margin of profit as well as greater protection against price erosion. 16 Table of Contents Cost of Sales Cost of sales decreased for the first nine months of fiscal 2020, when compared to the first nine months of fiscal 2019, by 88% from $1,473,150 to $180,028. Our cost of sales, as a percentage of sales, was approximately 81% and 75% for nine months ended September 30, 2020 and 2019, respectively. Cost of sales for the three months ended September 30, 2020 were $94,134 compared to $668,516 for the three months ended September 30, 2019. In relation to our cost of sales, as a percentage of sales, was approximately 81% and 77% for the three months ended September 30, 2020 and 2019. The decrease in cost of sales for the three and nine months ended September 30, 2020 was primarily due to significantly lower consumer demand as the COVID-19 pandemic negatively effected the economy. Within cost of sales, freight costs accounted for 42% of cost of sales during the nine months ended September 30, 2020, whereas in 2019, it accounted for 2% of cost of sales. The increase in the percentage of cost of sales is due to increased shipping expenses due increase demand of international delivery as a result of COVID-19. Worksport provides its 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 States or from the United States to Canada. Volume discounts are also offered to certain higher volume customers. Gross Margin Gross margin percentage for the nine month ended September 30, 2020 and 2019 were 19% and 25% respectively. For the three month ended September 30, 2020 and 2019 gross margin percentage were 19% and 23% respectively. The decrease in gross margin reflects the affect COVID-19 had impacted the Company’s freight costs as stated above increasing from 4% to 42%. Operating Expenses Operating expenses increased for the nine months ended September 30, 2020 by $137,308 to $671,937 compared to $534,629 for the nine months ended September 30, 2019. For the three months ended September 30, 2020 operating expenses were $392,970 compared to $173,664 for the three months ended September 30, 2019. ● General and administrative expense decreased by $51,475 from $149,041 to $97,566 during the nine months ended September 30, 2020. For the three months ended September 30, 2020 general and administrative expense decreased by $40,418 from $91,254 to $50,836 compared to the three month ended September 30, 2019. The nine and three months decrease is attributed to reduced general and administrative expenses as a result of COVID-19. ● The Company also realized a gain on foreign exchange in the amount of $4,845 during the nine months ended September 30, 2020, a decrease of $38,582 when compared to a gain on foreign exchange of $43,427 during the nine months ended September 30, 2019. For the three months ended September 30, 2020 the Company had a loss on foreign exchange of $2,599 compared to a gain on foreign exchange of $22,701 for the three months ended September 30, 2019. The decrease on foreign exchange was the result of the Company’s reduced operations in Canadian Dollars related expenses and sales. ● Professional fees which include accounting, legal and consulting fees, increased from $366,843 for the nine months ended September 30, 2019 to $509,347 for the nine months ended September 30, 2020. For the three months ended September 30, 2020 and 2019 the Company recognized Professional fees of $280,413 and $92,858 respectively. Professional fees increased for the three and nine months ended September 30, 2020 compare to 2019 was due to the Company’ employing third party consultants to help expand production and sales. Other Income and Expenses Other income and expenses for the nine months ended September 30, 2020 was $321,096 compared to an income of $190,901 as at September 30, 2019. A difference of $511,997. For the three months ended September 30, 2020 and 2019 other income and expenses were $234,377 and income of $242,498 respectively. The difference for the three and nine months ended September 30, 2020 and 2019 can be attributed to the Company recognizing a loss on settlement of debt in for $44,274 compare to a gain on settlement of debt $250,778 respectively. Net Loss Net loss for the nine months ended September 30, 2020 was $949,441 compared to a net income of $142,149 for the nine months ended September 30, 2019, a change of $1,091,590 or 768%. For the three months ended September 30, 2020 net loss was $604,990 compare to a net income of $270,370 for the three months ended September 30, 2019. The increase in the net loss can be attributed to the decrease in net sales of $753,562 and $1,959,027 when comparing the three and nine months ended September 30, 2019 to 2020 as a result of COVID-19. 17 Table of Contents Liquidity and Capital Resources Cash Flow Activities Cash increased from September 30, 2019 to September 30, 2020 at $178,752 to $467,133, as a result of funds received from financing activities. Increase in accounts receivable at September 30, 2019 to 2020 were $187,706 and $122,606 respectively. The increase in accounts receivable as at September 30, 2020 was due to the lifting of COVID-19 quarantine measures. Other receivable decreased by $22,970 due to funds being received from sales tax refund. Decrease in inventory as at September 30, 2019 and 2020 were $91,038 and $44,423. Decrease in inventory was a result of disruptions to supplier manufacturing from the COVID-19 pandemic. Prepaid expenses decreased by $48,642 as at September 30, 2020 compared to a decrease of $97,737 as at September 30, 2019. The difference was due the Company entering into new consulting and marketing services not yet to fully rendered. Accounts payable and accrued liabilities decreased by $73,201 as at September 30, 2020 compare to September 30, 2019 with an increase of $437,347. The decrease in payables as at September 30, 2020 is due to the Company increasing payment to vendors compare to expenses being incurred. Investing Activities During the nine months ended September 30, 2020, the Company advanced a further $8,765 to a US based mobile phone development company. During the nine months ended September 30, 2020, the Company purchased $7,962 in patents and leasehold improvements. During the nine months ended September 30, 2019, the Company invested $84,149 in warehouse equipment, product moulds, patents, trademarks, and leasehold improvements. During the nine months ended September 30, 2019, the Company advanced a further $15,658 to a US based mobile phone development company. Financing Activities During the first nine months of fiscal 2020, the Company received $467,500 in convertible promissory note, made repayment of $615 and $16,150 to shareholder loans and convertible promissory note respectively. During the same period the Company received a loan of $150,439 from an unrelated third party and $28,397 ($40,000 CDN) from the Government of Canada. The Company also received $250,000 in share subscription for 4,000,000 common stock. During the first nine months of fiscal 2019, the Company issued $30,000 in issuance of common stock for cash and repayment of $9,395 of shareholder loans. Off-Balance Sheet Arrangements There are no off-balance sheet arrangements with any party. Critical Accounting Policies Our discussion and analysis of results of operations and financial condition are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to provisions for uncollectible accounts receivable, inventories, valuation of intangible assets and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies that we follow are set forth in Note 2 to our financial statements as included in the Form 10K filed on May 14, 2020. These accounting policies conform to accounting principles generally accepted in the United States and have been consistently applied in the preparation of the financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk As a “smaller reporting company,” as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information in this Item. 18 Table of Contents