Worksport Ltd 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This section and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. All forward-looking statements in this Form 10-Q are made based on current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, various factors, uncertainties, and risks should be specifically considered that could affect future results or operations. These factors, uncertainties and risks may cause actual results to differ materially from any forward-looking statement set forth in this Form 10-Q. These risks and uncertainties described and other information contained in the reports filed with or furnished to the SEC should be carefully considered before making any investment decision with respect to the Company’s securities. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. Unless otherwise stated, all information presented herein is based on the Company’s fiscal calendar, and references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company” and “Worksport” as used herein refers collectively to Worksport Ltd. and its wholly owned subsidiaries, unless otherwise stated. The following discussion should be read in conjunction with the 2020 Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q. COVID-19 The Company believes that the COVID- 19 pandemic has had certain impacts on its business, but management does not believe there has been a material long-term impact from the effects of the pandemic on the Company’s business and operations, results of operations, financial condition, cash flows, liquidity or capital and financial resources. During the nine months ended September 30, 2021, aspects of the Company’s business continued to be affected by the COVID-19 pandemic with respect to its manufacturing practices and sales. Combined with decreased consumer confidence, Management expects the Company to generate less revenues than in previous periods. The full extent of the future impact of the COVID-19 pandemic on the Company’s operational and financial performance is currently uncertain and will depend on many factors outside the Company’s control, including, without limitation, the timing, extent, trajectory and duration of the pandemic; the availability, distribution and effectiveness of vaccines; the imposition of protective public safety measures; and the impact of the pandemic on the global economy and demand for consumer products. RESULTS OF OPERATIONS Three Months Ended September 30, 2021 compared to Three Months Ended September 30, 2020 Revenue For the three months ended September 30, 2021, revenue generated from sales was $93,408, compared to $116,491 for the three months ended September 30, 2020. Total revenues decreased by approximately 20% compared to the same period in the prior year. Revenue decreased for the three months ended September 30, 2021 compared to the same period the prior year due to the Company shifting its focus to building up its inventory to mitigate against potential supply chain issues in anticipation of launching its e-commerce platform, while it repositions to domestic manufacturing. For the three months ended September 30, 2021 total revenues generated in Canada were $0 compared to a loss of $935 in the prior period. For the three-months ended September 30, 2021, total revenue generated in the United States decreased by 20% from $117,426 in the prior period to $93,408. Similar to above, the decrease in revenue was a result of the Company shifting its focus to building up its inventory to mitigate against potential supply chain issues in anticipation of launching its e-commerce platform, while it repositions to domestic manufacturing. For the three months ended September 30, 2021, online revenues decreased by 20% from $116,482 in the prior period to $93,408. Online revenue accounted for 100% of total revenue for the three months ended September 30, 2021 compared to 99% for the same period in 2020. 18 Cost of Sales For the three months ended September 30, 2021 cost of sales decreased by 13% from $94,134 in the prior period to $81,810. Cost of sales, as a percentage of sales, was approximately 88% for three months ended September 30, 2021 compared to 81% for the same period in 2020, respectively. The increase in cost of sales as a percentage of sales was primarily due to increased cost associated with acquiring inventory for the nine months ended September 30, 2021 compare to the same prior period Shipping and freight costs accounted for 55% of the total cost of sales during the three months ended September 30, 2021, compared to 40% for the same period in 2020. Gross Margin Gross margin percentage for the three months ended September 30, 2021 was 12% compared to 19% for the same period in 2020. The decrease in gross margin reflects the increased cost of inventory due to increased costs of manufacturing. Operating Expenses Operating expenses increased for the three months ended September 30, 2021 by $1,658,593 from $392,970 in the prior periods to $2,051,563. ● General and administrative expense increased by $466,899 from $50,836 in the prior period to $517,735. The increase related to research and development and salaries as the Company seeks to expand its operations and further develop its products. ● Sales and marketing expenses increased by $374,783 from $59,122 in the prior period to $433,905. The increase in sales and marketing is a result of building brand and product awareness. ● The Company realized a gain on foreign exchange of $11,175 during the three months ended September 30, 2021, an increase of $13,774 compared to a loss of $2,599 during the prior period. The gain on foreign exchange can be attributed to operating expenses denominated in the Canadian Dollar. ● Professional fees which include accounting, legal and consulting fees, increased from $280,413 for the three months ended September 30, 2020 to $1,111,098 for the three months ended September 30, 2021. The increase was due to the employment of various third-party consultants to help expand the Company’s business operations. Other Income and Expenses Other income and expenses for the three months ended September 30, 2021 was $24,316 compared to $234,377 the prior period, a decrease of $210,061. The change can be attributed to the Company’s decrease in interest expense. Net Loss Net loss for the three months ended September 30, 2021 was $2,064,281 compared to $604,990 for the three months ended September 30, 2020, a change of $1,459,291 or 241%. The increase in the net loss can be attributed to the increase of various operating expenses as the Company focuses on expanding its operations, research and development, manufacturing and supply chain. Nine Months Ended September 30, 2021 compared to Nine Months Ended September 30, 2020 Revenue For the nine months ended September 30, 2021, revenue generated from sales was $287,297, compared to $223,620 for the nine months ended September 30, 2020. Total revenues increased by approximately 28% compared to the same period in the prior year. Revenue increased for the nine months ended September 30, 2021 compared to the same period the prior year due to the increased demand for the Company’s products during the first six months of the year as Covid-19 restrictions were eased. For the nine months ended September 30, 2021 total revenues generated in Canada increased by 370% from $10,990 in the prior periods to $40,645. For the nine months ended September 30, 2021, total revenue generated in the United States increased by 16% from $212,620 in the prior period to $246,652. The increase in revenue generated in Canada and United States can be attributed to the easing of Covid-19 restrictions. For the nine months ended September 30, 2021, online revenues increased by 18% from $208,554 in the prior period to $246,701. Online revenue accounted for 86% of total revenue for the nine months ended September 30, 2021 compared to 98% for the same period in 2020. For the nine months ended September 30, 2021, revenues based on sales to distributors were $40,311 compared to $8,845 for the same period in 2020. 19 Cost of Sales For the nine months ended September 30, 2021 cost of sales increased by 55% from $180,028 in the prior periods to $279,364. Cost of sales, as a percentage of sales, was approximately 97% for nine months ended September 30, 2021 compared to 81% for the same periods in 2020, respectively. The increase in cost of sales as a percentage of sales was primarily due to increased cost associated with acquiring inventory for the nine months ended September 30, 2021 compare to the same prior period. Shipping and freight costs accounted for 38% of total cost of sales during the nine months ended September 30, 2021, compared to 42% for the same period in 2020. Gross Margin Gross margin percentage for the nine months ended September 30, 2021 was 3% compared to 19% for the same period in 2020. The decrease in gross margin reflects the Company’s increased costs of procuring inventory as the Company seeks to gain greater control over its manufacturing process. Operating Expenses Operating expenses increased for the nine months ended September 30, 2021 by $3,180,343 from $671,937 in the prior periods to $3,852,280. ● General and administrative expense increased by $826,473 from $97,566 in the prior period to $924,041. The increase was related to research and development and salaries as the Company seeks to expand its operations and further develop its products. ● Sales and marketing expenses increased by $691,843 from $69,869 in the prior period to $761,712. The increase in sales and marketing is a result of building brand and product awareness. ● The Company realized a gain on foreign exchange of $2,170 during the nine months ended September 30, 2021, a decrease of $2,675 compared to $4,845 during the prior period. The decrease in gain on foreign exchange can be attributed to the weakening of the Canadian Dollar against the United States Dollar. ● Professional fees which include accounting, legal and consulting fees, increased from $509,347 for the nine months ended September 30, 2020 to $2,168,697 for the nine months ended September 30, 2021. The increase was due to the employment of various third-party consultants to help expand the Company’s business operations. Other Income and Expenses Other income and expenses for the nine months ended September 30, 2021 was $255,112 compared to $321,096 the prior period, a decrease of $65,984. The difference can be attributed to the Company’s gain on settlement of debt and interest income. Net Loss Net loss for the nine months ended September 30, 2021 was $4,099,459 compared to $949,441 for the nine months ended September 30, 2020, a change of $3,150,018 or 332%. The increase in the net loss can be attributed to the increase of various operating expenses as the Company focuses on expanding its operations, research and development programs and manufacturing and supply chains. Worksport currently works with a total of ten dealers and distributors, however, given current market conditions Worksport plans to focus on online sales during 2021. Management believes that increasing sales through online retailers will continue to outpace the traditional distribution business model during 2021. Management further believes that online retailer’s customers tend to provide larger sales volumes, greater profit margins and greater protection against price erosion. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2021, the Company had $30,920,477 in cash, restricted cash and cash equivalents. The Company has generated only limited revenues and has relied primarily upon capital generated from public and private offerings of its securities. Since the Company’s acquisition of Worksport in fiscal 2014, it has never generated a profit. As of September 30, 2021 the Company had an accumulated deficit of $17,052,179. Cash Flow Activities Accounts receivable increased at September 30, 2020 by $122,606 and September 30, 2021 by $32,479. The increase was due to the Company increased sale near quarter end. Other receivable decreased at September 30, 2021 and 2020 by $69,603 and $22,970 respectively, due to funds received from a sales tax refund. 20 Inventory decreased at September 30, 2020 by $44,423 and increased at September 30, 2021 by $156,822. Prepaid expenses increased by $223,582 at September 30, 2021 and decreased at September 30, 2020 by $48,642, due to increased consulting and marketing expenditures during the quarter ended September 30, 2021. Accounts payable and accrued liabilities increased at September 30, 2021 $221,979 and decreased at September 30, 2020 by and $73,201 respectively. Cash increased from $467,133 at September 30, 2020 to $30,920,477 at September 30, 2021, an increase of $30,453,343 or 6,519%. The increase in cash was primarily due to warrants exercises, public offerings and private placement offerings which generated of approximately $32,000,000. As of September 30, 2021, the Company had current assets of $36,762,621 and current liabilities of $1,728,043. Operating Activities Net cash used by operating activities for the nine months ended September 30, 2021 was $2,031,966, compared to $382,352 in the prior period. Investing Activities Net cash used in investing activities for the nine months ended September 30, 2021 was $764,090 compared to $16,727 in the prior period. The increase in investing activities was primarily due to the purchase of property and equipment of $734,883 and intangible assets of $23,700. Financing Activities Net cash provided by financing activities for the nine months ended September 30, 2021 was $32,608,720 compared to $854,219 in the prior period. During the nine months ended September 30, 2021 the Company received $32,805,825 of proceeds from public offerings, private placement offering and exercises of warrants net of share issuance cost. During the nine months ended September 30, 2021 the Company made repayment of $62,905 of promissory notes and repayment of $48,861 of shareholder loans. During 2021, the Company intends to introduce several new tonneau covers as well as the Terravis system. The Company anticipates that the introduction of these new products will improve the Company’s financial position. Based on the Company’s future operating plans, existing cash of $30,920,477; management believes that the Company has sufficient funds to meet its contractual obligations and working capital requirements for the next 12 months and the foreseeable future. Off-Balance Sheet Arrangements None. Critical Accounting Policies Our discussion and analysis of results of operations and financial condition are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to provisions for uncollectible accounts receivable, inventories, valuation of intangible assets and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies that we follow are set forth in Note 2 to our financial statements as included in the Form 10-K filed on April 13, 2021. These accounting policies conform to accounting principles generally accepted in the United States and have been consistently applied in the preparation of the financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not Applicable. 21