Worksport Ltd 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended: March 31, 2023 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 001-40681 Worksport Ltd . (Exact Name of Small Business Issuer as specified in its charter) Nevada 35-2696895 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55G East Beaver Creek Rd ., Richmond Hill , Ontario , Canada L4B 1E5 (Address of principal executive offices) (Zip Code) Registrant’s Telephone Number, including area code: (888) 554-8789 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Trading Symbol(s) Name of each exchange on which registered: Common Stock WKSP The Nasdaq Stock Market LLC Warrants WKSPW The Nasdaq Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit post such files). Yes ☒ No ☐ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ As of May 15, 2023, the Registrant had 17,163,810 shares of common stock, par value $0.0001 per share, issued and outstanding. WORKSPORT LTD. TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Condensed Consolidated Balance Sheets as at March 31, 2023 (Unaudited) and December 31, 2022 3 Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022 (Unaudited) 4 Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2023 and 2022 (Unaudited) 5 Condensed Consolidated Statements of Cash Flow for the three months ended March 31, 2023 and 2022 (Unaudited) 6 Notes to the Condensed Consolidated Financial Statements (Unaudited) 7-17 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18-20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 Item 4. Controls and Procedures 21 PART II OTHER INFORMATION Item 1. Legal Proceedings 22 Item 1A. Risk Factors 22 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22 Item 3. Defaults Upon Senior Securities 22 Item 4. Mine Safety Disclosures 22 Item 5. Other Information 22 Item 6. Exhibits 23 SIGNATURES 24 2 Worksport Ltd. Condensed Consolidated Balance Sheets (Unaudited) March 31, 2023 December 31, 2022 (Unaudited) Assets Current Assets Cash and cash equivalents $ 10,489,214 $ 14,620,757 Accounts receivable net 100,614 62,601 Other receivable 272,555 268,032 Inventory (note 4) 1,603,795 1,346,372 Prepaid expenses and deposits (note 5) 2,238,968 2,034,345 Total Current Assets 14,705,146 18,332,107 Investments (note 12) 90,731 24,423 Property and Equipment, net (note 6) 12,793,184 11,900,672 Right-of-use asset, net (note 13) 1,166,396 1,238,055 Intangible Assets, net 1,340,775 1,268,873 Total Assets $ 30,096,232 $ 32,764,130 Liabilities and Shareholders’ Deficit Current Liabilities Accounts payable and accrued liabilities $ 2,021,506 $ 2,028,305 Payroll taxes payable 10,110 - Related party loan (note 10) 2,192 46,096 Current lease liability (note 13) 399,011 387,329 Total Current Liabilities 2,432,819 2,461,730 Long Term – Lease Liability (note 13) 780,312 884,146 Loan payable (note 14) 5,300,000 5,300,000 Total Liabilities 8,513,131 8,645,876 Shareholders’ Equity Series A & B Preferred Stock, $ 0.0001 par value, 100,100 shares authorized, 100 Series A and 0 Series B issued and outstanding, respectively (note 9) - - Common stock, $ 0.0001 par value, 299,000,000 shares authorized, 17,159,376 shares issued and outstanding, respectively (note 9) 1,716 1,716 Additional paid-in capital 57,275,920 56,919,625 Share subscriptions receivable ( 1,577 ) ( 1,577 ) Share subscriptions payable 1,223,111 591,289 Accumulated deficit ( 36,907,489 ) ( 33,384,219 ) Cumulative translation adjustment ( 8,580 ) ( 8,580 ) Total Shareholders’ Equity 21,583,101 24,118,254 Total Liabilities and Shareholders’ Equity $ 30,096,232 $ 32,764,130 The accompanying notes form an integral part of these condensed consolidated financial statements. 3 Worksport Ltd. Condensed Consolidated Statements of Operations and Comprehensive Loss For the Three Months Ended March 31, 2023 and 2022 (Unaudited) 2023 2022 Three Months ended March 31, 2023 2022 Net Sales $ 31,925 $ 47,784 Cost of Goods Sold 19,757 37,977 Gross Profit 12,168 9,807 Operating Expenses General and administrative 2,129,612 600,858 Sales and marketing 544,351 720,488 Professional fees 868,611 1,487,579 Gain on foreign exchange ( 458 ) ( 1,338 ) Total operating expenses 3,542,116 2,807,587 Loss from operations ( 3,529,948 ) ( 2,797,780 ) Other Income (Expense) Interest expense ( 165,099 ) ( 25,095 ) Interest income 119,828 5,266 Rental income (note 18) 44,456 - Gain on settlement of debt 7,493 - Total other income (expense) 6,678 ( 19,829 ) Net Loss $ ( 3,523,270 ) $ ( 2,817,609 ) Loss per Share (basic and diluted) $ ( 0.21 ) $ ( 0.17 ) Weighted Average Number of Shares (basic and diluted) 17,159,376 16,988,033 The accompanying notes form an integral part of these condensed consolidated financial statements 4 Worksport Ltd. Condensed Consolidated Statements of Shareholders’ Deficit For the Three Months Ended March 31, 2023 and 2022 (Unaudited) Shares Amount Shares Amount Capital Receivable Payable Deficit Adjustment (Deficit) Preferred Stock Common Stock Additional Paid-in Share Subscriptions Share Subscription Accumulated Cumulative Translation Total Stockholders’ Equity Shares Amount Shares Amount Capital Receivable Payable Deficit Adjustment (Deficit) Balance at January 1, 2022 100 $ 0 16,951,034 $ 1,696 $ 54,608,472 $ ( 1,577 ) $ 430,116 $ ( 20,849,805 ) $ ( 8,580 ) $ 34,180,322 Issuance for services and subscriptions payable - - 50,000 5 604,397 - ( 64,847 ) - - 539,555 Net loss - - - - - - - ( 2,817,609 ) - ( 2,817,609 ) Balance at March 31, 2022 100 $ 0 17,001,034 $ 1,701 $ 55,212,869 $ ( 1,577 ) $ 365,269 $ ( 23,667,414 ) $ ( 8,580 ) $ 31,902,268 Balance 100 $ 0 17,001,034 $ 1,701 $ 55,212,869 $ ( 1,577 ) $ 365,269 $ ( 23,667,414 ) $ ( 8,580 ) $ 31,902,268 Balance at January 1, 2023 100 $ 0 17,159,376 $ 1,716 $ 56,919,625 $ ( 1,577 ) $ 591,289 $ ( 33,384,219 ) $ ( 8,580 ) $ 24,118,254 Balance 100 $ 0 17,159,376 $ 1,716 $ 56,919,625 $ ( 1,577 ) $ 591,289 $ ( 33,384,219 ) $ ( 8,580 ) $ 24,118,254 Issuance for services and subscriptions payable - - - - 356,295 - 631,822 - - 988,117 Net loss - - - - - - - ( 3,523,270 ) - ( 3,523,270 ) Balance at March 31, 2023 100 $ 0 17,159,376 $ 1,716 $ 57,275,920 $ ( 1,577 ) $ 1,223,111 $ ( 36,907,489 ) $ ( 8,580 ) $ 21,583,101 Balance 100 $ 0 17,159,376 $ 1,716 $ 57,275,920 $ ( 1,577 ) $ 1,223,111 $ ( 36,907,489 ) $ ( 8,580 ) $ 21,583,101 The accompanying notes form an integral part of these condensed consolidated financial statements 5 Worksport Ltd. Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2023 and 2022 (Unaudited) 2023 2022 Operating Activities Net Loss $ ( 3,523,270 ) $ ( 2,817,609 ) Adjustments to reconcile net loss to net cash from operating activities: Shares, options and warrants issued for services 1,453,617 1,224,677 Depreciation and amortization 194,974 52,839 Accrued interest - 7,874 Change in operating lease ( 20,493 ) ( 55,505 ) Adjustments to reconcile net income loss to cash provided by (used in) operating activities ( 1,895,172 ) ( 1,587,724 ) Changes in operating assets and liabilities (note 11) ( 1,039,238 ) ( 554,762 ) Net cash used in operating activities ( 2,934,410 ) ( 2,130,184 ) Cash Flows from Investing Activities Investment ( 66,308 ) - Purchase of property and equipment ( 1,086,921 ) ( 614,046 ) Net cash used in investing activities ( 1,153,229 ) ( 614,046 ) Financing Activities Shareholder Assumption of Debt ( 43,904 ) ( 1,863 ) Net cash used in financing activities ( 43,904 ) ( 1,863 ) Change in cash ( 4,131,543 ) ( 2,758,395 ) Cash, restricted cash and cash equivalents - beginning of year 14,620,757 28,567,333 Cash, restricted cash and cash equivalents end of period $ 10,489,214 $ 25,808,938 Supplemental Disclosure of non-cash investing and financing Activities Shares issued for purchase of software $ 72,467 $ 141,781 Shares base compensation $ 988,117 $ 604,401 Supplemental Disclosure of cash flow information Income tax paid - - Interest paid 159,156 - The accompanying notes form an integral part of these condensed consolidated financial statements. 6 Worksport Ltd. Notes to the Condensed Consolidated Financial Statements (Unaudited) 1. Basis of Presentation and Business Condition a) Interim Financial Information The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments and reclassifications considered necessary in order to make the financial statements not misleading and for a fair and comparable presentation have been included and are of a normal recurring nature. Operating results for the three months period ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. 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, 2022 filed with the SEC on March 31, 2023. Worksport Ltd. (together with its subsidiaries, the “Company”) was incorporated in the State of Nevada on April 2, 2003 under the name Franchise Holdings International, Inc. (“FNHI”). In May 2020, FNHI changed its name to Worksport Ltd. During the year ended December 31, 2014, the Company completed a reverse acquisition transaction (the “Reverse Acquisition”) with TruXmart Ltd. (“TruXmart”). On May 2, 2018, Truxmart legally changed its name to Worksport Ltd. (“Worksport”). Worksport designs and distributes truck tonneau covers in Canada and the United States. On May 21, 2021, the Board of Directors authorized the submission of a Certificate of Change/Amendment to the Nevada Secretary of State in which the Company sought to affect a reverse split of its common stock at the rate of 1-for-20 for the purpose of increasing the per share price for the Company’s stock in an effort to meet the minimum listing requirements of the NASDAQ. The Certificate of Change was submitted to the Nevada Secretary of State on May 21, 2021, and the FINRA corporate action was announced on August 3, 2021. FINRA declared the 1-for-20 reverse stock split effective on August 4, 2021 . These condensed consolidated financial statements, including prior period comparative share amounts, have been retrospectively restated to reflect this reverse split. Terravis Energy, Inc. (“Terravis”) was incorporated in the State of Colorado on May 5, 2021. On August 20, 2021, the Company was issued 100 common shares at par value of $ 0.0001 per share for a controlling interest in Terravis. During the year ended December 31, 2022, the Company was issued an additional 9,990,900 common shares of Terravis at par value of $ 0.0001 per share. On January 20, 2022, the board of directors of Terravis and the board of directors of the Company, as the sole stockholder of Terravis, adopted the Terravis Energy, Inc. 2022 Equity Incentive Plan (the “Terravis 2022 Plan”). Under the Terravis 2022 Plan, Terravis’ board of directors or a committee designated by the board of directors may grant incentive stock options, nonqualified stock options, shares of restricted stock, restricted stock units, performance shares, performance units and stock appreciation rights to eligible participants consisting of employees of Terravis, member of Terravis’ board of directors, advisors and consultants to Terravis. The Terravis board of directors authorized and reserved 1,500,000 shares of Terravis common stock under the Terravis 2022 Plan, subject to adjustment for any stock splits of Terravis’ common stock or reorganization, recapitalization, or acquisition of Terravis. On April 6, 2022, Lorenzo Rossi and Steven Rossi, both of whom are members of Terravis’ board of directors, were granted non-qualified stock options under the Terravis 2022 Plan exercisable for 750,000 and 250,000 shares of Terravis’ common stock, respectively, with exercise prices of $ 0.01 per share exercisable from the date of grant until the tenth anniversary of the date of grant. On April 12, 2022, Steven Rossi, William Caragol, and Ned L. Siegel, all of whom are members of Terravis’ board of directors, were granted non-qualified stock options under the Terravis 2022 Plan exercisable for 250,000 , 50,000 , and 50,000 shares of Terravis’ common stock, respectively, with exercise prices of $ 0.01 per share exercisable from the date of grant until the tenth anniversary of the date of grant. 7 On November 4, 2022, Terravis filed an amendment to its articles of incorporation with the Colorado Secretary of State, pursuant to which the Terravis board of directors attached a certificate of designation designating 1,000 shares of its authorized preferred stock as Series A Preferred Stock with a par value $ 0.0001 per share. According to the certificate of designation, holders of the Series A Preferred Stock do not have any dividend, conversion or liquidation rights. Unless otherwise prohibited by law or the Series A Preferred Stock certificate of designation, the Series A Preferred Stock shall vote together with the outstanding shares of common stock of Terravis as one class on any matter put forth before the common stockholders. For so long the Series A Preferred Stock is outstanding, the holders of the Series A Preferred Stock shall be entitled to 51 % of the total votes on all matters regardless of the actual number of shares of Series A Preferred Stock then outstanding, and the holders of the common stock and any other shares of capital stock of Terravis entitled shall be entitled to their proportional share of the remaining 49 % of the total votes based on their respective voting power. On November 4, 2022, the Company issued 1,000 shares of Series A Preferred Stock to Steven Rossi, the Chief Executive Officer and President of the Company. During the year ended December 31, 2022, Worksport New York Operations Corporation and Worksport USA Operations Corporation were incorporated in the state of New York and Colorado, respectively. During the year ended, the Company was issued 1,000 common shares at par value of $ 0.0001 of Worksport USA Operations Corporation. On April 1, 2022, the Company was issued 10,000 common shares of Worksport New York Operations Corporation. b) Statement of Compliance The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) as issued by the Financial Accounting Standards Board (“FASB”). c) Basis of Measurement The Company’s financial statements have been prepared on the accrual basis. d) Consolidation The Company’s condensed consolidated financial statements consolidate the accounts of the Company. All intercompany transactions, balances and unrealized gains or losses from intercompany transactions have been eliminated upon consolidation. e) Functional and Reporting Currency These condensed consolidated financial statements are presented in United States dollars (USD or US$). The functional currency of the Company and its subsidiaries are United States dollar. For purposes of preparing these condensed consolidated financial statements, transactions denominated in Canadian dollars (CAD or C$) were converted to United States dollars at the spot rate. Transaction gains and losses resulting from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized as incurred in the accompanying condensed consolidated statement of operations. f) Use of Estimates The preparation of condensed unaudited financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed interim financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 8 2. Going Concern The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. During the three months ended March 31, 2023, the Company had net loss of $ 3,523,270 (2022- $ 2,817,609 ). As at March 31, 2023, the Company has working capital of $ 12,272,327 (December 31, 2022 - $ 15,870,377 ) and had an accumulated deficit of $ 36,907,489 (December 31, 2022 - $ 33,384,219 ). The Company has never generated profit from operations and relies on debt and equity financing for continued operations. The Company’s ability to continue as a going concern is dependent upon the ability to generate cash flows from operations and obtain financing. The Company intends to continue funding operations through equity and debt financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements in the long term. There can be no assurance that the steps management is taking will be successful. The Company has historically operated at a loss, although that may change as sales volumes increase. As of March 31, 2023, the Company had working capital of $ 12,272,327 (December 31, 2022 – $ 15,870,377 ) and an accumulated deficit of $ 36,907,489 (December 31, 2022 - $ 33,384,219 ). As of March 31, 2023, the Company had cash and cash equivalents of $ 10,489,214 (December 31, 2022 - $ 14,620,757 ). Despite the company almost having completed its purchasing of large manufacturing machinery, operational costs are expected to remain elevated and, thus, decrease cash and cash equivalents. Concurrently, the Company intends to begin manufacturing and increasing sales volumes within 2023, which should mitigate the effects of operational costs on cash and cash equivalents; this view is supported by the fact that the manufacturing facility of the Company is near completion and is expected to start generating more substantial revenue in the second quarter of 2023, barring unforeseeable delays. The Company has successfully raised cash, and it is positioned to do so again if deemed necessary or strategically advantageous. During the year ended December 31, 2021, the Company, through its Reg-A public offering, private placement offering, underwritten public offering, and exercises of warrants, raised an aggregate of approximately $ 32,500,000 . On September 30, 2022, the Company filed a shelf registration statement on Form S-3, which was declared effective by the SEC on October 13, 2022 allowing the Company to issue up to $ 30,000,000 of common stock and up to $ 13,000,000 of common stock that may be issued and sold under an At The Market Offering Agreement dated as of September 30, 2022. The Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Based on its current operating plans, the Company believes it has a sufficient level of funding for anticipated operations, capital expenditures and debt repayments for a period of at least 12 months from the issuance date of this Quarterly Report. Still, these factors, among others, indicate the existence of a material uncertainty that cast substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. These adjustments could be material. 3. Significant Accounting Policies The accounting polices used in the preparation of these condensed consolidated interim financial statements are consistent with those of the Company’s audited financial statements for the year ended December 31, 2022. 4. Inventory Inventory consists of the following at March 31, 2023 and December 31, 2022: Schedule of Inventory March 31, 2023 December 31, 2022 Finished goods $ 1,319,427 $ 1,200,759 Promotional items 101,660 50,790 Raw materials 182,708 94,823 Inventory $ 1,603,795 $ 1,346,372 9 5. Prepaid expenses and deposits As of March 31, 2023 and December 31, 2022 prepaid expenses and deposits consists of the following: Schedule of Prepaid Expenses and Deposits March 31, 2023 December 31 , 2022 Consulting, services and advertising $ 775,833 $ 1,313,799 Insurance 8,314 20,781 Deposit 1,454,821 699,765 Prepaid expenses and deposits, net $ 2,238,968 $ 2,034,345 As of March 31, 2023 prepaid expense and deposit consists of $ 775,833 (December 31, 2022- $ 1,313,799 ) in prepaid consulting, services and advertising for third party consultants through the issuance of shares and stock options. 6. Property and Equipment Major classes of property and equipment as at March 31, 2023 and December 31, 2022 are as follows: Schedule of Property and Equipment March 31, 2023 December 31, 2022 Equipment $ 3,406,725 $ 2,344,946 Furniture 143,449 143,449 Product molds 122,675 122,675 Computers 88,236 78,885 Leasehold improvements 691,562 675,751 Building 6,079,410 6,079,410 Land 2,239,405 2,239,405 Automobile 168,497 168,497 Deposits 605,000 605,000 Property and Equipment, gross Less accumulated depreciation ( 751,775 ) ( 557,346 ) Property and Equipment, net $ 12,793,184 $ 11,900,672 7. Promissory Notes The following tables shows the balance of the notes payable as of March 31, 2023 and December 31, 2022: Schedule of Notes Payable Balance as at December 31, 2021 $ 263,211 Settlement ( 263,211 ) Balance as at December 31, 2022 and March 31, 2023 $ - During the year ended December 31, 2022, the Company and promissory note holder reached an agreement to settle all outstanding promissory notes and interest for $ 100,000 . As a result of the settlement, the Company recognized a gain on settlement of debt of $ 163,211 . Additionally, as a part of this settlement, there was accrued interest on these promissory notes included in accounts payable on the accompanying condensed consolidated balance sheets totaling $ 139,121 that was also settled; accordingly, the Company recognized a gain on settlement of debt for this amount. During the year ended December 31, 2019, the promissory note holder advanced $ 88,120 to the Company. As of the date the amount was advanced, the terms of the note were under negotiation and, as a result, the note was due on demand. During the year ended December 31, 2022, the Company and promissory note holder reached an agreement to settle all outstanding promissory notes and interest, noted above. During the year ended December 31, 2016, the Company issued a secured promissory note in the principal amount of $ 73,452 ($ 123,231 CAD). During the year ended December 31, 2018, the Company issued two additions to the original unsecured promissory note of July 2016, totaling $ 22,639 ($ 30,884 CAD). The secured promissory note bore interest at a rate of 18 % per annum. The payment terms of the original note including these additions were due “upon completion of going public on the Canadian Securities Exchange, with no change in interest rate.” The secured promissory note was secured by all present and after-acquired property and assets of the Company. During the year ended December 31, 2019, the Company extended the maturity dates of the secured promissory notes to be due on April 1, 2021. During the year ended December 31, 2022, the Company and promissory note holder reached an agreement to settle all outstanding promissory notes and interest, noted above. As of December 31, 2022, principal balance owing was $ nil . As of March 31, 2023 and December 31, 2022, the accrued interest on this note payable was $ nil . 10 During the year ended December 31, 2016, the Company issued secured promissory notes in the aggregate principal amount of $ 79,000 . The secured promissory notes bore interest at a rate of 18 % per annum, payable monthly. The secured promissory notes were secured by all present and after-acquired property and assets of the Company. During the year ended December 31, 2019, the Company extended the maturity dates of all secured promissory notes to be due on April 1, 2021. During the year ended December 31, 2022, the Company and promissory note holder reached an agreement to settle all outstanding promissory notes and interest, noted above. As of March 31, 2023 and December 31, 2022, the principal balance owing was $ nil . 8. 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 22,500 common shares, and (ii) the Company issued to Leonite a five-year warrant to purchase 45,000 common shares at an exercise price of $ 2.00 per share (subject to adjustment), which may be exercised on a cashless basis. The note carried an original issue discount of $ 44,425 to cover Leonite’s legal fees, accounting fees, due diligence fees, and 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 , consisting of $ 182,500 for principal and $ 16,215 as an original issue discount. On September 1, 2020, the Company recorded an additional $ 310,322 , consisting of $ 285,000 for principal and $ 25,322 as an original issue discount. As of December 31, 2021, the Company has recorded $ 509,037 , consisting of $ 467,500 for principal and $ 41,537 as an original issue discount. Furthermore, the Company issued 22,500 shares of common stock valued at $ 123,390 and a debt-discount related to the warrants valued at $ 344,110 . During the year ended December 31, 2020, Leonite converted $ 226,839 of the convertible promissory note into 126,022 common shares at $ 1.80 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. During the year ended December 31, 2021, Leonite converted its remaining outstanding principal and interest into common shares. Leonite received 204,622 common shares at $ 1.80 per share valued at $ 368,319 . The original value of the convertible note converted including interest was $ 325,667 . As a result, the Company recognized a loss of $ 42,651 on settlement of debt. In connection with the settlement, the Company expensed the remaining $ 148,027 of the original debt discount to interest expense. As of March 31, 2023 and December 31, 2022, the convertible promissory note has been repaid in full. 9. Shareholders’ Equity (Deficit) During three months ended March 31, 2023, the following transactions occurred: The Company recognized consulting expense of $ 631,822 to share subscriptions payable from restricted shares and stock options to be issued. As of March 31, 2023, the restricted shares have not been issued. Refer to notes 16 and 17 for additional shareholders’ equity (deficit). During three months ended March 31, 2022, the following transactions occurred: During the three months ended March 31, 2022, the Company issued 10,000 common shares to a consultant for services received valued at $ 86,000 , $ 66,329 of which was issued from share subscriptions payable. During the same period the Company issued 40,000 common shares for consulting services valued at $ 86,400 . 11 During the three months ended March 31, 2022, the Company recognized consulting expense of $ 1,482 to share subscriptions payable from restricted shares issued during the year ended December 31, 2021. As of March 31, 2022, the restricted shares have no t been issued. Refer to note 16 and 17 for additional shareholders’ equity (deficit). As of March 31, 2023, the Company was authorized to issue 299,000,000 shares of its common stock with a par value of $ 0.0001 . All shares were ranked equally with regard to the Company’s residual assets. During the three months ended March 31, 2023, the Company was authorized to issue 100 shares of its Series A and 100,000 Series B Preferred Stock with a par value of $ 0.0001 . Series A preferred Stock have voting rights equal to 299 shares of common stock, per share of preferred stock. Series B preferred Stock have voting rights equal to 10,000 shares of common stock, per share of preferred stock. 10. Related Party Transactions During the three months ended March 31, 2023, the Company recorded salaries expense of $ 121,410 (2022 - $ 80,672 ) for the Company’s CEO. During the same period, the Company recorded salaries expense of $ 76,938 (2022 - $ 67,226 ) to an officer and director of the Company. As of March 31, 2023 the Company has a payable of $ 2,192 to the CEO. Refer to note 17 for additional related party transactions. 11. Changes in Cash Flows from Operating Assets and Liabilities The changes to the Company’s operating assets and liabilities for the three months ended March 31, 2023 and 2022 are as follows: Schedule of Changes in Operating Assets and Liabilities 2023 2022 Decrease (increase) in accounts receivable $ ( 38,013 ) $ 6,733 Decrease (increase) in other receivable ( 4,523 ) 106,413 Decrease (increase) in inventory ( 257,423 ) ( 290,041 ) Decrease (increase) in prepaid expenses and deposits ( 742,590 ) ( 430,916 ) Increase (decrease) in lease liability - 59,612 Increase (decrease) in taxes payable 10,110 ( 112,189 ) Increase (decrease) in accounts payable and accrued liabilities ( 6,799 ) 105,626 Changes in operating assets and liabilities $ ( 1,039,238 ) $ ( 554,762 ) 12. Investments a) During the year ended December 31, 2019, the Company entered into an agreement to purchase 10,000,000 shares of a privately owned US-based mobile phone development company for $ 50,000 – representing a 10 % equity stake. The shares have been issued to the Company. As of March 31, 2023 and December 31, 2022, the Company had advanced a total of $ 24,423 and is advancing tranches of capital as required by the Company. b) During the three months ended March 31, 2023, the Company purchased $ 66,308 ($ 90,000 CAD) of Guaranteed Investment Certificate (“GIC”). The GIC bears a variable interest rate and will mature on February 27, 2024. The anticipated earned interest on the GIC at maturity is $ 2,818 ($ 3,825 CAD). 13. Operating Lease Obligations During the year ended December 31, 2019, the Company signed a lease agreement for warehouse space to commence on August 1, 2019 and end on July 31, 2022 with monthly lease payments of $ 2,221 . During the year ended December 31, 2021 the Company entered into a second lease agreement for warehouse space to commence on June 1, 2021 and end on May 31, 2024 with monthly lease payments of $ 19,910 . 12 During the year ended December 31, 2022, the Company signed a lease agreement for approximately 20,296 square feet to be used as its primary corporate office and R&D facility pursuant to a five-year lease, dated June 1, 2022 , for a variable rate averaging $ 22,101 per month over the lifetime of the lease. The Company also pays approximately $ 4,418 in additional fees per month, which varies year to year. The Company has accounted for its leases upon adoption of ASC 842 whereby it recognizes a lease liability and a right-of-use asset at the date of initial application beginning January 1, 2019. The lease liability is measured at the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate of 10 %. The Company has measured the right-of-use asset at an amount equal to the lease liability. The Company’s right-of-use asset and lease liability as of March 31, 2023 and December 31, 2022 are as follows: Schedule Right-of-use Asset March 31, 2023 December 31, 2022 Right-of-use asset $ 1,166,396 $ 1,238,055 Current lease liability $ 399,011 $ 387,329 Long-term lease liability $ 780,312 $ 884,146 The following is a summary of the Company’s total lease costs: Schedule of Lease Costs March 31, 2023 March 31, 2022 Operating lease cost $ 126,034 $ 70,501 The following is a summary of cash paid during the three months ended March 31, 2023 and 2022 for amounts included in the measurement of lease liabilities: Schedule of Measurement of Lease Liabilities March 31, 2023 March 31, 2022 Operating cashflow $ 122,156 $ 70,501 Maturities of lease liability are as follows: Future minimum lease payments as of March 31, 2023: Schedule of Future Minimum Lease Payments 2023 $ 370,870 2024 361,298 2025 269,645 2026 277,767 2027 and thereafter 117,158 Total future minimum lease payments 1,396,738 Less: amount representing interest ( 217,415 ) Present value of future payments 1,179,323 Current portion 399,011 Long term portion $ 780,312 14. Loan payable a) During the year ended December 31, 2022, the Company entered into a loan agreement with a third party for the purchase of property located in West Seneca, New York, the details of which are disclosed in the Company’s Form 8-K filed with the United States Securities and Exchange Commission on May 11, 2022. The Company received $ 5,300,000 with an interest rate of prime plus 2.25 % with an initial maturity date of May 10, 2024 and the option to extend the loan for an additional year. In order to service the loan throughout the term, the Company deposited $ 667,409 in a restricted account. As of March 31, 2023 the balance in the restricted account was $ 309,513 (December 31, 2022 - $ 411,016 ) and is included in cash and cash equivalents on the accompanying balance sheet. 13 b) During the year ended December 31, 2020, the Company received $ 28,387 ($ 40,000 CAD) 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, 2023 resulted in loan forgiveness of 25 percent ( 25 %). As of September 30, 2022, the Company has made repayment of $ 28,387 ($ 40,000 CAD) and, as of February 14, 2023, received the forgiven debt of $ 7,493 ($ 10,000 CAD). As at March 31, 2023 and December 31, 2022, there are no amounts owing, and the loan has been fully settled. 15. Loss per Share For the three months ended March 31, 2023, loss per share is $ 0.21 (basic and diluted) compared to that of the three months ended March 31, 2022 of $ 0.17 (basic and diluted) using the weighted average number of shares of 17,159,376 (basic and diluted) and 16,988,033 (basic and diluted), respectively. There are 299,000,000 shares authorized and 17,159,376 and 17,001,034 shares issued and outstanding, as at March 31, 2023 and 2022, respectively. The computation of loss per share is based on the weighted average number of shares outstanding during the period in accordance with ASC Topic No. 260, “Earnings Per Share.” Shares underlying the Company’s outstanding warrants and convertible promissory notes were excluded due to the anti-dilutive effect they would have on the computation. As at March 31, 2023, the Company has 3,939,924 warrants convertible to 4,239,924 common shares, 2,815,212 restricted stock to be issued, 700,000 performance stock units and 1,195,106 stock options exercisable for 1,195,106 common shares for a total underlying common shares of 8,950,242 . As at March 31, 2022, the Company had 5,586,523 warrants convertible to 6,577,513 common shares, 1,070,000 restricted stock to be issued, and 722,500 stock options exercisable for 722,500 common shares and 700,00 performance stock units for a total underlying common shares of $ 9,070,013 . 16. Warrants During the three months ended March 31, 2023, the Company and a stock options holder reached an agreement to cancel all 400,000 stock options in exchange for extending the exercisable period of 300,000 warrants to December 31, 2024. During the year ended December 31, 2022, an aggregate of 250,121 warrants were exercised primarily on a cashless basis for 73,321 common shares, and 1,599 ,179 Reg-A public offering and private placement warrants expired. During the year ended December 31, 2022, the Company and a warrant holder reached an agreement to extend the exercisable period of 300,000 warrants, convertible to 2 common shares each, for an additional 12 months. During the year ended December 31, 2021, the Company and warrant holder reached an agreement to amend a previous warrant agreement. The Company issued an additional 150,000 warrants for a total of 250,000 warrants valued at $ 37,000 . The exercisable period of the warrants was also amended to a period of five years beginning on January 14, 2021 . The warrants are convertible to 1 common share each exercisable at $ 2 per share. During the year ended December 31, 2022 the warrants were exercised on a cashless basis for 73,321 common shares. During the year ended December 31, 2021, the Company issued 130,909 representative warrants to the Company’s underwriters. The representative warrants are not exercisable until January 30, 2022. The representative warrants are exercisable for 130,909 common shares at $ 6.05 per share until August 3, 2024. As of December 31, 2022, the Company recognized a value of $ 273,993 for the representative warrants to share issuance cost. As of March 31, 2023, the Company has the following warrants outstanding: Schedule of Warrants Exercise Price Exercise price Number outstanding Remaining Contractual Life (Years) Expiry date $ 4.00 300,000 1.76 December 31, 2024 $ 6.05 3,446,515 1.35 August 3, 2024 $ 6.05 130,909 1.35 August 6, 2024 $ 2.40 62,500 1.97 March 20, 2025 3,939,924 1.56 14 Schedule of Warrants Activity March 31, 2023 December 31, 2022 Number of warrants Weighted average price Number of warrants Weighted average price Balance, beginning of year 3,939,924 $ 5.84 5,652,827 $ 5.14 Issuance - $ - 130,909 $ 6.05 Expired - $ - ( 1,593,691 ) $ ( 4.00 ) Exercise - $ - ( 250,121 ) $ ( 2.00 ) Balance, end of period 3,939,924 $ 5.84 3,939,924 $ 5.84 17. Stock Options and Performance Share Units Under the Company’s 2015 Equity Incentive Plan, the number of common shares reserved for issuance under the option plan shall not exceed 10% of the issued and outstanding common shares of the Company, have a maximum term of 10 years, and vest at the discretion of the Board of Directors . All equity-settled, share-based payments are ultimately recognized as an expense in the statement of operations with a corresponding credit to “Additional Paid in Capital.” If vesting periods or other non-market vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognized in the current period. No adjustment is made to any expense recognized in prior periods if share options ultimately exercised are different than that estimated on vesting. Performance Share Units On November 11, 2022, 700,000 performance stock units (“PSUs”) granted December 29, 2021, as described below, were modified to include new terms pertaining to the PSU vesting schedule. The PSUs vest in 5% increments according to the modified schedule that correlates with the Company’s stock price. The first 5% of the PSUs vest upon the Company’s stock price closing at $2.25. 50% will have vested at a closing price of $5.31, and 100% will have vested at a closing price of $13.76 . The fair value of the PSUs was estimated to be $ 1,254,460 . As of March 31, 2023, no PSUs have vested, and the Company recognized $ 62,723 (2022 - $ 0 ) in consulting expense. On December 29, 2021, the Company granted 400,000 and 300,000 performance stock units (“PSUs”) to the Company’s Chief Executive Officer and a director, respectively. The PSUs were to vest in 5% increments according to a schedule that correlates with the Company’s stock price. The first 5% of the PSUs was to have vested upon the Company’s stock price closing at $3.00. 50% was to have vested at a closing price of $16.50, and 100% was to have vested at a closing price of $31.50 . The fair value of the PSUs was estimated to be $ 1,344,570 . As of March 31, 2023, no PSUs have vested, and the Company recognized $ 0 (2022 - $ 115,400 ) in consulting expenses. Stock Options The Company uses the Black-Scholes option pricing model to determine fair value of stock options on the grant date. During the three months ended March 31, 2023, the Company issued 65,000 stock options to employees and a consultant with an exercise price of $ 1.53 and expiring on March 14, 2033 . The options shall vest in two equal installments on March 14, 2024, and 2025. The fair value of the options on the grant date was estimated to be $ 98,670 . The Company recognized $ 2,295 in wages and salary and consulting expenses during the three months ended March 31, 2023. During the three months ended March 31, 2023, the Company issued 85,106 stock options to an employee with an exercise price of $ 1.53 and expiring on March 14, 2033 . The options shall vest in two installments; a) one fiscal quarter the Company generates $3,600,000 in sales with at least 20% unit margin and b) one fiscal quarter the Company generates $5,400,000 in sales with at least 30% unit margin . The fair value of the options on the grant date was estimated to be $ 129,191 . The Company recognized $ 4,807 in wages and salary expenses during the three months ended March 31, 2023. 15 During the three months ended March 31, 2023, the Company issued 300,000 stock options to a consultant with an exercise price of $ 1.66 and expiring on January 30, 2028 . The options shall vest in three equal installments on January 30, 2023, March 1, 2023, and September 1, 2023. The fair value of the options on the grant date was estimated to be $ 486,600 . The Company recognized $ 136,430 in consulting expenses during the three months ended March 31, 2023. During the three months ended March 31, 2023, the Company issued 360,000 stock options to directors with an exercise price of $ 1.66 and expiring on January 30, 2033 . The options shall vest in six equal installments on January 30, 2023, July 31, 2023, January 30, 2024, July 30, 2024, January 30, 2025, and July 30, 2025. The fair value of the options on the grant date was estimated to be $ 592,560 . The Company recognized $ 38,963 in consulting expenses during the three months ended March 31, 2023. During the year ended December 31, 2022, the Company granted 10,000 and 50,000 options to advisors with an exercise price of $ 2.19 and $ 2.37 , respectively, expiring on February 7, 2027 , and May 5, 2032 , respectively. The options vested immediately upon issuance. The fair values of the options on the grant date were estimated to be $ 21,780 and $ 261,400 , respectively. The Company recognized $ 0 (2022 - $ 21,780 ) in consulting expense during the three months ended March 31, 2023. During the year ended December 31, 2022, the Company granted 12,500 options to a consultant with an exercise price of $ 1.60 expiring on November 29, 2032 . The options are earned in four equal installments on February 27, 2023, May 29, 2023, August 29, 2023, and November 27, 2023. The options shall vest one year after being earned on February 27, 2024, May 29, 2024, August 29, 2024, and November 27, 2024 . The fair value of the options on the grant date was estimated to be $ 18,725 . The Company recognized $ 4,720 (2022 - $ 0 ) in consulting expenses during the three months ended March 31, 2023. During the year ended December 31, 2022, Terravis Energy, Inc., a subsidiary of the Company, granted an aggregate of 1,350,000 of Terravis Energy, Inc. stock options to its officers and directors. The stock options have an exercise price of $0.01 and will expire on April 12, 2032 . The options vested immediately upon issuance. The fair value of the options on the grant date was estimated to be immaterial. On July 23, 2021, the Company granted 15,000 options to a director with an exercise price of $ 5.50 and an expiry date of July 23, 2026 . The stock options vested on January 1, 2022. The fair value of the options on the grant date was estimated to be $129,480 . The Company recognized $ 0 (2022 - $ 799 ) to consulting expense during the three months ended March 31, 2023. On August 6, 2021, the Company granted 140,000 options to directors, advisors, and officers with an exercise price of $ 5.50 and an expiry date of August 6, 2026 . The stock options vested on January 1, 2022. The fair value of the options on the grant date was estimated to be $ 754,189 . The Company recognized $ 0 (2022 - $ 5,096 ) to consulting expenses during the three months ended March 31, 2023. On September 1, 2021, the Company granted 400,000 options to a consultant with an exercise price of $ 5.32 and an expiry date of September 1, 2026 . The options have a vesting period of 6 months from the initial grant date ; 100,000 shall vest on March 1, 2022, 100,000 shall vest on September 1, 2022, 100,000 shall vest on March 1, 2023, and 100,000 shall vest on September 1, 2023. The fair value of the options on the grant date was estimated to be $ 2,112,000 . The Company recognized $ 87,514 (2022 - $ 264,787 ) to consulting expenses during the three months ended March 31, 2023. Additionally, During the three months ended March 31, 2023, the Company and the stock options holder reached an agreement to cancel all 400,000 stock options in exchange for extending the exercisable period of 300,000 warrants to December 31, 2024. On October 7 and November 2, 2021, the Company granted advisors 5,000 and 62,500 options with exercise prices of $ 5.50 and $ 5.24 , respectively. The options will expire on October 7, 2026 , and November 2, 2026 , respectively. The stock options vested on January 1, 2022. The fair value of the options on the grant date was estimated to be $ 353,230 . The Company recognized $ 0 (2022 - $ 5,294 ) to consulting expenses during the three months ended March 31, 2023. On December 29, 2021, the Company granted an aggregate of 90,000 options to members of the board with an exercise price of $ 2.51 . The options will expire on December 29, 2026 . The options have a vesting period of 1 year from the initial grant date ; 10,000 vested on December 29, 2022, 10,000 shall vest on December 29, 2023, and 10,000 shall vest on December 29, 2024. The fair value of the options on the grant date was estimated to be $ 224,280 . The Company recognized $ 18,844 (2022 - $ 18,844 ) in consulting expenses during the three months ended March 31, 2023. 16 Schedule of Stock Options Activity March 31, 2023 December 31, 2022 Number of stock options Weighted average price Number of stock options Weighted average price Balance, beginning of year 785,000 $ 4.74 712,500 $ 5.00 Granted 810,106 $ 1.64 72,500 $ 2.21 Cancelled ( 400,000 ) $ ( 5.32 ) - $ - Balance, end of period 1,195,106 $ 2.44 785,000 $ 4.74 Schedule of Share-based Payment Arrangement, Option, Exercise Price Range Range of Exercise prices Outstanding Weighted average life (years) Weighted average exercise price Exercisable on March 31, 2023 Stock options $ 1.53 - 5.50 1,195,106 6.86 $ 2.44 597,500 As of March 31, 2023 and December 31, 2022, Terravis Energy Inc. has the following options outstanding: Schedule of Stock Options Activity March 31, 2023 December 31, 2022 Number of stock options Weighted average price Number of stock options Weighted average price Balance, beginning of year 1,350,000 $ 0.01 - $ - Granted - $ - 1,350,000 $ 0.01 Balance, end of period 1,350,000 $ 0.01 1,350,000 $ 0.01 Schedule of Share-based Payment Arrangement, Option, Exercise Price Range Range of Exercise prices Outstanding Weighted average life (years) Weighted average exercise price Exercisable on March 31, 2023 Stock options $ 0.01 1,350,000 9.03 $ 0.01 1,350,000 18. Rental Income During the year ended December 31, 2022, the Company entered into a sublease agreement for its warehouse in Mississauga, Ontario, Canada. The sublease commenced on September 15, 2022 and will end on May 31, 2024 at $ 15,515 ($ 19,992 CAD) per month. During the year ended December 31, 2022, the Company entered into a lease agreement in relation to its West Seneca property. Initially, the Company entered into a lease agreement with a third-party from July 1 to December 31, 2022 at $ 33,750 per month. Subsequently, on September 23, 2022, a mutual agreement was reached to terminate the lease agreement. During the three months ended March 31, 2023, the Company recognized rental income of $ 44,456 (2022 - $ 0 ). 19. 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 are unknown at this time, as is the efficacy of the government and central bank interventions. Additionally, while the potential economic impact and duration of such impact brought by the COVID-19 pandemic are 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. The Company does not yet know the full extent of potential delays or impacts on its business, financing or the global economy as a whole. However, these effects could have a material impact on the Company’s liquidity, capital resources, operations and business and those of the third parties on which the Company relies. The management and board of the Company are constantly monitoring this situation to minimize potential losses. 20. Subsequent Events The Company has evaluated subsequent events through May 15, 2023. The following events occurred after the quarter-ended March 31, 2023: ● On April 21, 2023, the Company sold 4,434 common shares at $ 1.72 per share for $ 7,624 . The sale of the common shares was in connection with the Form S-3 shelf registration statement, which was declared effective by the SEC on October 13, 2022 allowing the Company to issue up to $ 30,000,000 of common shares and up to $ 13,000,000 of common shares that may be issued and sold under the At The Market Offering Agreement dated as of September 30, 2022. ● On May 1, 2023, the Company and Steven Rossi reached an agreement to cancel the 1,600,000 restricted stock units and 400,000 performance stock units issued to Steven Rossi on November 11, 2022 and December 29, 2021, respectively. ● On May 1, 2023, the Company issued 2,000,000 stock options to Steven Rossi. The stock options have an exercise price of $ 1.74 and an expiration date of May 1, 2033. The options shall vest in increments of 10% for each dollar that the Company’s stock price increases between $ 2.00 and $ 11.00 , as measured using the volume weighted average of the Company’s common stock for ten consecutive trading days. 17 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 March 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 2022 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. RESULTS OF OPERATIONS Three Months Ended March 31, 2023 compared to the Three Months Ended March 31, 2022 Revenue For the three months ended March 31, 2023, revenues from the entire line of our products were $31,925, as compared to $47,784 for the three months ended March 31, 2022. The year-over-year sales decreased by approximately 33%. For the three months ended March 31, 2023, revenue generated in Canada was $5,522, as compared to $0 for the same period in 2022. For the three months ended March 31, 2023, revenue generated in the United States was $26,403, compared to $47,784 for the same period in 2022, a decrease of 45%. Revenue decreased for the three months ended March 31, 2023 compared to the same period the prior year due to our focus on establishing new business-to-consumer and business-to-business sales channels while strengthening the support of those channels to increase customer satisfaction and enable high product turnover once domestic production begins. For business-to-consumer channels, we established our own e-commerce platform as well as listed our products on online marketplaces including eBay, Amazon, and Walmart. For business-to-business channels, we updated our terms and conditions, created improved product brochures for distributors, strategically created a Minimum Advertised Price policy to prevent our business-to-consumer channels from interfering with our business-to-business channels, established sales representation across the continental U.S. by forging relationships with various sales agencies, and more. We intend to begin domestic manufacturing in the second quarter of fiscal year 2023 and gradually increase output capacity through refined production processes and increased personnel. Sales from online retailers of our products decreased from $47,784 during the three months ended March 31, 2022 to $26,434 during the three months ended March 31, 2023, a decrease of 45%. Online retailers accounted for 83% of total revenue for the three months ended March 31, 2023 compared to 100% for the three months ended March 31, 2022. Distributor sales increased for the three months ended March 31, 2023 compared with the three months ended March 31, 2022 with sales of $5,491 and $0, respectively. We expect to continue to grow our fields of business as we develop unique products with enhanced utility to offer to other prospective clients in the US and Canadian markets. 18 We currently support a network of dealers, distributors, and independent resellers, and we will continue to expand our business and online sales channels in 2023. Cost of Sales Cost of sales decreased by 48%, from $37,977 for the three months ended March 31, 2022 to $19,757 for the three months ended March 31, 2023. Our cost of sales, as a percentage of sales, was approximately 62% and 79% for the three months ended March 31, 2023 and 2022, respectively. The decrease in the cost of sales as a percentage of sales was primarily due to increased efficiency associated with improved supply chain logistics for the three months ended March 31, 2023, compared to the same prior period. We provide our 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 offered to certain high-volume customers, and we also offer a “dock price” or “pickup program” in which clients are able to pick up product directly from our stocking warehouse. Operating Expenses Operating expenses increased for the three months ended March 31, 2023 by $734,529, from $2,807,587 for the three months ended March 31, 2022 to $3,542,116 for the three months ended March 31, 2023, due to the following factors. ● General and administrative expenses increased by $1,528,754 from $600,858 in 2022 to $2,129,612 in 2023. The increase was related to increased research and development activities and an increase in salaries as we seek to expand our operations and further develop our products. ● Sales and marketing expenses decreased by $176,137 from $720,488 for 2022 to $544,351 for 2023. The decrease in sales and marketing is primarily attributable to the completion of several marketing agreements and lower cost of in-house marketing campaigns to create brand and product awareness. ● Professional fees, which include accounting, legal, and consulting fees, decreased from $1,487,579 in 2022 to $868,611 in 2023. The decrease in professional fees was due to the completion of consulting engagements with various third-party consultants. ● We realized a gain on foreign exchange of $458 during 2023, compared to a gain on foreign exchange of $1,338 for the prior period due to conversions between CAD and USD. Other Income and Expenses We reported other income for the three months ended March 31, 2023 of $6,678 compared to a loss of $19,829 in the prior period. The change can be attributed to our gain on loan forgiveness from the Government of Canada as well as rental and interest income, which are partially offset by an increase in interest expense. Net Loss Net loss for the three months ended March 31, 2023 was $3,523,270 compared to a net loss of $2,817,609 for the three months ended March 31, 2022 – an increase of 25%. The increase in the net loss can be attributed to the increase in various operating expenses as we focus on expanding our operations, research and development, manufacturing, and supply chain. Liquidity and Capital Resources As of March 31, 2023, we had $10,489,214 in cash and cash equivalents. We have generated only limited revenues and have relied primarily upon capital generated from public and private offerings of our securities. Since the Company’s acquisition of Worksport in fiscal year 2014, it has never generated a profit. As of March 31, 2023, we had an accumulated deficit of $36,907,489. To date, our principal sources of liquidity consists of net proceeds from public and private securities offerings and cash exercises of outstanding warrants. During the three months ended March 31, 2023, we did not receive any proceeds from public offerings, private placement offering, nor exercises of warrants. Management is focused on transitioning towards revenue as our principal source of liquidity by growing our existing product offerings, as well as our customer base, to increase our revenues. We cannot give assurance that we can increase our cash balances or limit our cash consumption and thus maintain sufficient cash balances for our planned operations or future business developments. Future business development and demands may lead to cash utilization at levels greater than recently experienced. We may need to raise additional capital in the future. However, we cannot assure we will be able to raise additional capital on acceptable terms, or at all. Subject to the foregoing, we believe our current cash balances coupled with anticipated cash flow from operating activities will be sufficient to meet our working capital requirements for at least one year from the date of issuance of the accompanying condensed consolidated financial statements. 19 Cash Flow Activities Cash decreased from $14,620,757 at December 31, 2022 to $10,489,214 at March 31, 2023 – a decrease of $4,131,543 or 28%. The decrease was primarily due to the acquiring of assets for domestic production, such as industrial manufacturing equipment, as well as increasing spending for inventory in anticipation of launching our e-commerce platform, research and development, and overhead. As of March 31, 2023, we had current assets of $14,705,146 (December 31, 2022 - $18,332,107) and current liabilities of $2,432,819 (December 31, 2022 – $2,461,730). As of March 31, 2023, we had working capital of $12,272,327 (December 31, 2022 – $15,870,377) and an accumulated deficit of $36,907,489 (December 31, 2022 - $33,384,219). Operating Activities Net cash used by operating activities for the three months ended March 31, 2023 was $2,934,410, compared to $2,130,184 in the prior period, primarily driven by a larger net loss during the three months ended March 31, 2023 and partially offset by the issuance of shares, options, and warrants for services. Accounts receivable increased at March 31, 2023 by $38,013 and decreased by $6,733 in the prior period. The increase in accounts receivable was due to higher sales to distributors near the end of the period in 2023 compared to 2022. Inventory increased at March 31, 2023 by $257,423 and at March 31, 2022 by $290,041 as a result of our stockpiling inventory in anticipation of the launch of our e-commerce platform. Prepaid expenses increased by $742,590 at March 31, 2023 and by $430,917 at March 31, 2022 due to deposits made by us for the purchase of inventory and professional services. Accounts payable and accrued liabilities decreased at March 31, 2023 by $6,799 and increased by $105,626 in the prior period. Investing Activities Net cash used in investing activities for the three months ended March 31, 2023 was $1,153,229 compared to $614,046 in the prior period. The increase in investing activities was primarily due to the purchase of manufacturing property and equipment and Guaranteed Investment Certificate (“GIC”). Financing Activities Net cash used by financing activities for the three months ended March 31, 2023 was $43,904 compared to $1,863 in the prior period. 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 March 31, 2023. 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. 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk Not Applicable. Item 4. Controls and Procedures Disclosure Controls and Procedures We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the quarter covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. To address the material weaknesses, we performed additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this quarterly report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 21 PART II OTHER INFORMATION Item 1. Legal Proceedings None. Item 1A. Risk Factors Not Applicable. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information Subsequent Events ● On April 21, 2023, the Company sold 4,434 common shares at $1.72 per share for $7,624. The sale of the common shares was in connection with the Form S-3 shelf registration statement, which was declared effective by the SEC on October 13, 2022 allowing the Company to issue up to $30,000,000 of common shares and up to $13,000,000 of common shares that may be issued and sold under the At The Market Offering Agreement dated as of September 30, 2022. ● On May 1, 2023, the Company and Steven Rossi reached an agreement to cancel the 1,600,000 restricted stock units and 400,000 performance stock units issued to Steven Rossi on November 11, 2022 and December 29, 2021, respectively. ● On May 1, 2023, the Company issued 2,000,000 stock options to Steven Rossi. The stock options have an exercise price of $1.74 and an expiration date of May 1, 2033. The options shall vest in increments of 10% for each dollar that the Company’s stock price increases between $2.00 and $11.00, as measured using the volume weighted average of the Company’s common stock for ten consecutive trading days. 22 Item 6. Exhibits EXHIBIT No. DESCRIPTION 31.1 Section 302 Certification of Chief Executive Officer 31.2 Section 302 Certification of Chief Financial Officer 32.1 Section 906 Certifications of Chief Executive Officer and Chief Financial Officer 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. WORKSPORT LTD. Dated: May 15, 2023 By: /s/ Steven Rossi Steven Rossi Chief Executive Officer (Principal Executive Officer) Dated: May 15, 2023 By: /s/ Michael Johnston Michael Johnston Chief Financial Officer (Principal Financial and Accounting Officer) 24