Worksport Ltd 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Prospective investors should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this annual report. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.” This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this report. COVID-19 The outbreak of the coronavirus, specifically identified as “COVID-19,” has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions. Additionally, while the potential economic impact brought by, and the duration of the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic on the global financial markets may reduce our ability to access capital, which could negatively impact our short-term and long-term liquidity. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, financing or the global economy as a whole. However, these effects could have a material impact on our liquidity, capital resources, operations and business and those of the third parties on which we rely. The management and board of the Company is constantly monitoring this situation to minimize potential losses. 13 Business Overview Inflation In an inflationary economy, Worksport benefits from debt financing. While Worksport ended December 31, 2021 with little to no long term debt, Worksport is currently in the process of securing a mortgage for its West Seneca production facility. Worksport has the benefit of mortgaging the facility in a low interest rate environment – locking in a lower rate – while also benefiting from the lower real cost of mortgage payments in an inflationary environment. Such an inflationary environment also increases Worksport’s costs, however. These costs include direct costs such as the cost of raw goods or processed goods for its OEM manufacturing as well as indirect costs such as overhead and rent. Due to these forecasted price increases and the high increases in ocean freight and container handling costs as a result of 2021 supply chain issues, Worksport has updated its product pricing for 2022. Gasoline Prices and Supply Chain Issues Worksport has faced significantly higher ocean freight, trucking, and container handling costs in 2021 than it did in previous years. Further, last mile delivery costs have recently increased – all of which have increased the Company’s products’ landed costs. This more recent rise in gasoline prices has worsened these costs, and the Company is operating under the assumption these higher costs will remain throughout 2022. Worksport’s transition towards Made in America manufacturing will largely offset these higher costs, as the Company will be less exposed to higher international shipping costs. Worksport is also identifying North American suppliers of its products’ components and will prioritize transport by rail when possible to avoid high trucking costs. Rising Popularity of Electric Vehicles Electric Vehicles (EVs) have been exponentially increasing in consumer interest, whether that interest take the form of vehicle pre-orders, sales, or investments. As Worksport begins marketing its Terravis SOLIS and COR, the Company plans to market the SOLIS as a must-have accessory for electric light duty vehicle owners while simultaneously riding the coattails of EV popularity to promote its other products (COR and conventional tonneau covers) to the very large population of Americans that have an interest in EVs without the funds to purchase them. Further, participating in the EV space allows the Company to target consumers with an interest in cutting-edge technologies – a great market to which to promote its COR. Regulatory Environment Favoring Electric Vehicles The Build Back Better Bill was a strong indication of upcoming and favorable USA regulations. Any regulation that improves North America’s Electric Vehicle (EV) charging infrastructure or provide grants to businesses operating in the EV space will benefit Worksport. While the Company is primarily focused on the light duty vehicle market, it is the only existing participant in the electric-specific, light duty vehicle aftermarket accessories market and, therefore, is positioned to benefit greatly from any bill that increases the prevalence of electric light duty vehicles. Limited Competitive Landscape Worksport’s conventional tonneau covers are engineered for enhanced user experience and resistance to wear-and-tear, making them strong and competitive products in an otherwise consolidated and saturated market. The Terravis COR, however, operates in a much wider yet unsaturated market. The global Portable Power Station market is quickly growing, and the competitive landscape is far from consolidated. The solar tonneau cover market is in its infancy, and it’s a market in which the Company has first-mover advantage. To ensure it does not fall behind future competitors, the Company is highly focused on protecting its intellectual property both domestically and abroad. 14 Results of Operations Revenue For the year ended December 31, 2021, revenues from the entire line of Worksport products were $303,750, as compared to $346,144 for the year ended, December 31, 2020. The year over year sales decreased by approximately 12% 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 year ended December 31, 2021, revenue generated in Canada was $40,683, as compared to $28,917 for the same period in 2020, an increase of 41%. For the year ended December 31, 2021, revenue generated in the United States was $263,067, compared to $317,227 for the same period in 2020. This represents a decrease in US-source revenue of approximately 17% year-over-year. 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. In addition, increase cost of shipping and delivery as a result of supply chain disruption, gas prices and inflation contributing to overall sales decrease for fiscal 2021. Sales from online retailers of the Worksport products decreased from $337,053 in 2020 to $263,116 in 2021, a decrease of 22%. Online retailers accounted for 87% of total revenue for the year ended December 31, 2021, compared to 90% for the year ended December 31, 2020. Distributor sales increased for the year ended December 31, 2021 compared with the year ended December 31, 2020 with sales of $40,349 and $29,699, respectively. Worksport expects to continue to grow its fields of business as it develops unique and non-competing products to offer to other prospective clients in the US and Canadian markets. Currently, Worksport works closely with one 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 nine dealers and distributors, Worksport will return to a focus on online sales with new inventory being received in the US market for 2021. Worksport continues to believe the trend of increasing sales through online retailers will continue to outpace the traditional distribution business model. Moreover, reputable online retailers’ customers tend to provide larger sales volumes, greater margin of profit, and greater protection against price erosion. Cost of Sales Cost of sales increased by 17%, from $298,996 for the year ended December 31, 2020 to $350,702 for the year ended December 31, 2021. The Company’s cost of sales, as a percentage of sales, was approximately 115% and 86% for the years ended December 31, 2021 and 2020, respectively. The increase in percentage of sales resulted in a gross margin decrease from 14% for the year ended December 31, 2020 to negative 15% for the year ended December 31, 2021. The increase in cost of sales as a percentage of sales and decrease in gross margin was primarily due to increased cost associated with acquiring and selling inventory translating to increased cost of sales for the year ended December 31, 2021, compared to the prior year. Within cost of sales, shipping and freight costs accounted for 79% of cost of sales during the year ended December 31, 2021, whereas in 2020, it accounted for 28% of cost of sales. This increase is primarily attributed to an increase in international shipping expense due to supply chain issues and rising oil prices as well as increase in sales volume resulting in higher overall shipping and freight cost. 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 Sates or from the United States to Canada. Volume discounts are also offered to certain higher volume customers. Worksport also offers a “dock price” or “pickup program,” where clients are able to pick up product directly from one of Worksport stocking warehouses. 15 Operating Expenses Operating expenses increased for year ended December 31, 2021 by $6,481,392, from $1,033,387 for the fiscal year ended December 31, 2020 to $7,514,779 for the fiscal year ended December 31, 2021, due to the following factors. ● General and administrative expense increased by $1,653,309 from $201,929 for 2020 to $1,855,238 for 2021. 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 $1,238,684, from $148,008 for 2020 to $1,386,692 for 2021. The increase in sales and marketing is a result of building brand and product awareness. ● Professional fees which include accounting, legal and consulting fees, increased from $679,654 in 2020 to $4,268,684 in 2021. The increase was due to the employment of various third-party consultants to help expand the Company’s business operations and in connection with the Company’s underwritten public offering of common stock and warrants in August 2021. ● The Company realized a loss on foreign exchange of $4,165 during 2021, an increase of $369 compared to $3,796 during 2020. Other Income and Expenses Other income and expenses for the year ended December 31, 2021 was $335,354, compared to $201,381 the prior year, representing an increase of $133,973. The difference can be attributed to the Company recognizing a gain on settlement of debt in the prior year and recognition of bad debt for 2021. Net Loss Net loss for the year ended December 31, 2021 was $7,897,085, compared to a net loss of $1,187,620 for the year ended December 31, 2020, an increase of 565%. 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. Liquidity and Capital Resources As of December 31, 2021, the Company had $28,567,333 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 December 31, 2021 the Company had an accumulated deficit of $20,849,805. To date, the Company’s principal sources of liquidity consisted net proceeds from public and private securities offerings and cash exercises of outstanding warrants. During the year ended December 31, 2021 the Company received $32,852,630 of proceeds from public offerings, private placement offering and exercises of warrants net of share issuance costs. During the year ended December 31, 2021, the Company made repayments of $62,905 of promissory notes. The Company believes its current cash balances coupled with anticipated cash flow from operating activities will be sufficient to meet its working capital requirements for at least one year from the date of issuance of the accompanying consolidated financial statements. Based on current internal projections, the Company believes it has and/or will generate sufficient cash for its operational needs, for at least one year from the date of issuance of the accompanying consolidated financial statements. Management is focused on growing the Company’s existing product offerings, as well as its customer base, to increase its revenues. The Company cannot give assurance that it can increase its cash balances or limit its cash consumption and thus maintain sufficient cash balances for its 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 assure that it will be able to raise additional capital on acceptable terms, or at all. Subject to the foregoing, management believes that the Company has sufficient capital and liquidity to fund its operations for at least one year from the date of issuance of the accompanying consolidated financial statements. Public Underwritten Offering On August 6, 2021, the Company consummated an underwritten public offering (the “Public Offering”) of an aggregate of 3,272,727 units, pursuant to a registration statement on Form S-1, as amended (File No. 333-256142) and a registration statement on Form S-1 (File No: 333-258429). The public offering price was $5.50 per unit and each unit consisted of one share of common stock and one warrant (“Public Warrant”) to purchase one share of common stock for $6.05 per share (110% of the unit offering price) from the date of issuance until the third anniversary of the issuance date. The Company received gross proceeds of approximately $18.0 million from the Public Offering, and after deducting the underwriting commissions, discounts, and offering expenses payable by the Company, the Company received net proceeds of approximately $16.1 million. The Company used the net proceeds for Working Capital, R&D, Marketing, and Equipment. 16 Regulation A+ Offering During the years ended December 31, 2020 and 2021, the Company sold 497,590 and 1,502,410 units respectively, $2.00 per unit in a Reg A/Tier 2 public offering pursuant to a Form 1-A (File No: 24-11271) qualified by the Securities and Exchange Commission on November 9, 2020 (the “Reg A Offering”). Each unit consisted of one share of common stock and one warrant to purchase one share of common stock for $4.00 per share during the 12 months following the date of issuance. The gross proceeds from the sale of units were $3,048,199. As of December 31, 2021, the Company received $7,104,090 from the exercise of 1,776,023 warrants. Rule 506(b)/Reg D Private Placement During 2021, the Company sold an aggregate of 2,040,990 units on the same terms as the units sold in the Reg A Offering in a private placement under Section 4(a)(2) and/or Rule 506(b) of Regulation D under the Securities Act. Each unit consisted of one share of common stock and two warrants to purchase two shares of common stock for $4.00 per share during the 16 months following the date of issuance. The gross proceeds from the sale of units in the private placement were $4,081,980. As of the date of this annual report, 700,000 warrants sold in the private offering have been exercised on a cashless basis. Cash Flow Activities Cash increased from $1,107,812 at December 31, 2020 to $28,567,333 at December 31, 2021, an increase of $27,459,521 or 2.487%. 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 December 31, 2021, the Company had current assets of $34,032,005 (2020 - $1,684,764) and current liabilities of $1,796,789 (2020 – $1,718,053). As of December 31, 2021, Company had working capital of $32,235,216 (2020 – working capital deficiency of $33,289) and an accumulated deficit of $20,849,805 (2020 - $12,866,033) Operating Activities Net cash used by operating activities for the year ended December 31, 2021 was $4,046,705, compared to $695,112 in the prior year, primarily driven by a larger net loss in 2021 and partially offset by the issuance of shares, options, and warrants for services. In addition, the following contributed to the balance of net cash used in operating activities: Accounts receivable increased at December 31, 2020 by $119,813 and December 31, 2021 by $2,228, which reduced cashflow from operations to their respective years Other receivables increased at December 31, 2021 by $16,883 and by $121,396 in the prior year due to the Company’s increases in sales tax refund to be received in future periods. Inventory decreased at December 31, 2020 by $72,353 and increased at December 31, 2021 by $460,969. Prepaid expenses increased by $382,067 at December 31, 2021 and decreased at December 31, 2020 by $43,201, due to increased consulting and marketing expenditures during the year ended December 31, 2021. Accounts payable and accrued liabilities increased at December 31, 2021 and decreased at December 31, 2020 by $187,510 and $59,284 respectively. Investing Activities Net cash used in investing activities for the year ended December 31, 2021 was $1,131,735 compared to $16,727 in the prior year. The increase in investing activities was primarily due to the purchase of property and equipment of $1,101,784 and intangible assets of $29,951. 17 Financing Activities Net cash provided by financing activities for the year ended December 31, 2021 was $32,637,961 compared to $1,807,657 in the prior year. During the year ended December 31, 2021 the Company received $32,852,630 of proceeds from public offerings, private placement offering and exercises of warrants net of share issuance cost. During the year ended December 31, 2021 the Company made repayment of $62,905 of promissory notes. Off-Balance Sheet Arrangements None Critical Accounting Policies Our discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these 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 3 to our financial statements as included in this annual report. 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 7A. 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