Worksport Ltd 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This section and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. All forward-looking statements in this Form 10-Q are made based on current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, various factors, uncertainties, and risks should be specifically considered that could affect future results or operations. These factors, uncertainties and risks may cause actual results to differ materially from any forward-looking statement set forth in this Form 10-Q. These risks and uncertainties described and other information contained in the reports filed with or furnished to the SEC should be carefully considered before making any investment decision with respect to the Company’s securities. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. Unless otherwise stated, all information presented herein is based on the Company’s fiscal calendar, and references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in March and the associated quarters, months and periods of those fiscal years. Each of the terms “Company” and “Worksport” as used herein refers collectively to Worksport Ltd. and its 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. Overview Worksport Ltd., through its subsidiaries, designs, develops, manufactures, and owns the Intellectual Property on a portfolio of tonneau cover, solar integration, portable power station, and NP (Non-Parasitic), Hydrogen-based green energy products and solutions for the automotive aftermarket accessories, power storage, residential heating, and electric vehicle-charging industries. We seek to provide consumers with next-generation automotive aftermarket accessories while capitalizing on growing consumer interest in clean energy solutions and power grid independence. Rising Popularity of Electric Vehicles Electric Vehicles (EVs) have been exponentially increasing in consumer interest, whether that interest takes the form of vehicle pre-orders, sales, or investments. As we begin marketing our Worksport SOLIS and COR products, we plan to market the SOLIS tonneau cover as a must-have accessory for electric light duty vehicle owners while simultaneously riding the coattails of EV popularity to promote our other products (COR portable energy storage systems 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 us to target consumers with an interest in cutting-edge technologies – a great market in which to promote our COR battery system. Regulatory Environment Favoring Electric Vehicles The Build Back Better Bill was a strong indication of upcoming and favorable USA regulations. Many regulations that improve North America’s Electric Vehicle (EV) charging infrastructure or provide grants to businesses operating in the EV space will benefit us. While we are primarily focused on the light duty vehicle market, our energy products are particularly useful for electric light duty pickup trucks and, therefore, are positioned to benefit greatly from any bill that increases the prevalence of such vehicles. Limited Competitive Landscape Our 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 Worksport COR portable energy storage system, 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 is a market in which we have first-mover advantage. To ensure we do not fall behind future competitors, we are highly focused on protecting our intellectual property both domestically and abroad. 21 Business Developments The following highlights recent material developments in our business in the nine months ended September 30, 2023: ● In January 2023, a Worksport representative traveled to a European vendor who was manufacturing a portion of Worksport’s assembly line to assess the quality of said machinery. Later that month, Worksport announced its approval of the machinery following a rigorous on-site inspection, after which the machine was shipped to Worksport’s USA production facility with an arrival date of March 14, 2023. ● In February and June of 2023, Worksport hosted job fairs at its production facility to attract local assembly people, machine operators, and clerical workers. Both job fairs proved to be a success, the former of which attracted nearly 100 applicants. ● By May 2023, Worksport had completed its installation of its custom manufacturing line, at which point it was ready to conduct training sessions and test production runs. That same month, Worksport sent a potential private-label customer hard-folding tonneau cover samples – samples that were approved shortly thereafter. Further, much of the raw materials required for a first full production run were received in May 2023. ● In June 2023, Worksport announced the launch of a new product line: the SC4 PRO, a soft, quad-fold cover with enhanced usability compared to Worksport’s SC4 tonneau cover. ● In June 2023, Worksport officially relocated its corporate headquarters to its production facility in West Seneca, New York. This change symbolizes Worksport’s focus on domestic manufacturing and investment of resources into its West Seneca production facility. ● In July 2023, Worksport announced the opening of its state-of-the-art R&D facility in Springfield, Missouri to house the Company’s tonneau cover research and development team. ● Also in July 2023, Worksport received $720,000 in purchase orders for its innovative soft-folding tonneau covers and commenced shipping from its West Seneca manufacturing facility. The $720,000 consists of four (4) individual purchase orders each representing a value of $180,000. ● In July 2023, Worksport completed its qualification for “Made in the USA” designation for its upcoming line of hard tonneau covers. ● In July 2023, Worksport announced an approximate $1,600,000 purchase order for its advanced hard-folding tonneau covers along with scheduled production of the hard-folding covers scheduled to begin within the following month utilizing its multi-million dollar custom manufacturing line. Worksport fulfilled its first shipment of hard-folding tonneau covers in the following month. ● In September 2023, Worksport announced it has identified a potential supply partnership with a top-tier solar panel provider for its highly-anticipated SOLIS Solar Tonneau Cover. The SOLIS Solar Cover, complemented by the development of Worksport’s COR Battery System, has already piqued the interest of multiple automotive manufacturers. One notable major auto manufacturer partnership has already been announced with Hyundai’s North American design, technology, and engineering division. ● In September 2023, Worksport signed a long-term supply agreement with an established, US-based automotive aftermarket reseller in which it expects annual sales of an estimated $16,000,000 of its advanced hard-folding and soft-folding tonneau covers. Key Factors Affecting our Performance As a result of a number of factors, our historical results of operations may not be comparable to our results of operations in future periods, and our results of operations may not be directly comparable from period to period. Set forth below is a brief discussion of the key factors impacting our results of operations. COVID-19 The outbreak of the coronavirus, specifically identified as “COVID-19,” resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which included 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 experienced significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions – many of which have deeply impacted capital markets. As a safety precaution, we created a policy such that any personnel exposed to an infectious disease or virus was not to report to the office until the completion of a variable length quarantine. While this resulted in fewer personnel working in our offices or labs on a given day, it likely prevented further contamination and sick leave. We do not believe this policy has impacted revenue nor timelines towards upcoming product launches; however, supply chain issues caused by COVID-19 did result in higher cost of goods sold during 2021 and 2022. While freight costs have since returned to pre-COVID-19 levels, 2021 freight costs were, in some cases, more than four times higher than those shortly before COVID-19. The supply chain for certain raw materials has been disproportionately, negatively impacted when compared to supply chains of other raw materials. The supply chain for power electronics, specifically, is still facing supply chain issues as a result of COVID-19, for the globe faced a simultaneous supply shock and heightened demand for these goods – increasing the prices for such raw materials while simultaneously slowing suppliers’ order fulfillments. Further, due to such shortages, many suppliers of power electronics have focused their attention on large customers such as those more directly aligned within the electric vehicle supply chain as compared to companies on the outskirts of this supply chain such as Worksport. This particular result of COVID-19 primarily affects the sourcing of components for the Worksport COR. In order to mitigate these supply chain issues, we have invested more resources into sourcing power electronics in the interest of finding reliable suppliers with manageable lead times and competitive pricing. 22 The response of many governments to the COVID-19 pandemic has resulted in higher interest rates and destabilized equity markets – particularly among micro- or low-capitalization companies – effectively increasing the cost of and decreasing easy access to capital, which could negatively impact our short-term and long-term liquidity. These factors, combined with the consequences of possible future waves of the disease, could have a material impact on our liquidity, capital resources, operations, and business as well as those of the third parties on which we rely. The management and Board are constantly monitoring this situation to minimize potential losses. Climate Change Climate change threatens to cause many foreseeable as well as unforeseeable ramifications. In cautious preparation for those that are foreseeable, we have strategically begun domestic manufacturing operations in Western New York – an economically growing region not immediately threatened by climate change to the same extent as other regions and possibly one that may benefit from future population migrations within the United States of America. Further, we intend to lower our own carbon footprint by investing in energy-saving measures in our factory in West Seneca, NY. Considering climate change may also exacerbate geopolitical tensions, we are working to diversify our supply chain and lower our reliance on any particular region or country for raw materials in order to lower our exposure to climate change-induced economic or political instability. We believe our Worksport SOLIS and Worksport COR products will be received positively by the public for their resilience to, and even increased utility as a result of, Climate Change. However, we acknowledge the potentially negative environmental impacts of poor battery recycling and increasing demand for precious metals. We are actively researching ways to lower such environmental impacts. Inflation Prices of certain commodity products, including raw materials, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations, trade restrictions and tariffs. Increasing prices of the component materials for parts of our goods may impact the availability, quality and price of our products as suppliers search for alternatives to existing materials and increase the prices they charge. Our suppliers may also fail to provide consistent quality of product as they may substitute lower cost materials to maintain pricing levels. Rapid and significant changes in commodity prices may negatively affect our profit margins, and it may be difficult to mitigate worsened margins through customer pricing actions and cost reduction initiatives. Such an inflationary environment also increases our direct cost of raw goods or processed goods for our OEM manufacturing as well as indirect costs such as overhead and rent. Due to these present and forecasted price increases and the temporary increases in ocean freight and container handling costs faced during the majority of 2022 as a result of 2021 supply chain issues, we updated our product pricing in 2022. Additionally, as central banks and the U.S. Federal Reserve increase interest rates to combat global inflation, the cost of debt financing increases. While we currently do not have material debt other than our $5.3 million mortgage on our West Seneca facility, our mortgage’s variable rate increases and decreases along with interest rates, which resulted in an increase of monthly premiums throughout 2022 and 2023. We are still susceptible to variable monthly mortgage interest costs as a result of changes in interest rates. We continue to explore debt financing options at reasonable interest rates in order to strengthen our cash position. Rising interest rates have also resulted in a shift in institutional holdings away from micro-cap equities, which has negatively influenced our stock’s trading volume. We continue to forge relationships with institutional investors and analysts in order to maintain a healthy trading volume. 23 Gasoline Prices and Supply Chain Issues We faced significantly higher ocean freight, trucking, and container handling costs as well as last mile delivery costs in 2021 and 2022 than we did in previous years – all of which have increased our products’ landed costs. Higher oil and gasoline prices further increased these costs, and we are operating under the assumption most of these higher costs will remain throughout 2023. Our transition towards domestic manufacturing and assembly is anticipated to largely offset these higher costs, as we believe we will be less exposed to higher international shipping costs. We are also identifying North American suppliers of our products’ components and will prioritize transport by rail, when possible, to avoid high trucking costs. Geopolitical Conditions In February 2022, Russia initiated significant military action against Ukraine. In response, the U.S. and certain other countries imposed significant sanctions and export controls against Russia, Belarus and certain individuals and entities connected to Russian or Belarusian political, business, and financial organizations, and the U.S. and certain other countries could impose further sanctions, trade restrictions, and other retaliatory actions should the conflict continue or worsen. It is not possible to predict the broader consequences of these conflicts, including related geopolitical tensions, and the measures and retaliatory actions taken by the U.S. and other countries in respect thereof as well as whether any counter measures or retaliatory actions in response, including, for example, potential cyberattacks or the disruption of energy exports, are likely to cause regional instability and geopolitical shifts, which could materially adversely affect global trade, currency exchange rates, regional economies and the global economy. These situations remain uncertain, and while it is difficult to predict the impact of any of the foregoing, the conflicts and actions taken in response to these conflicts could increase our costs, reduce our sales and earnings, impair our ability to raise additional capital when needed on acceptable terms, if at all, or otherwise adversely affect our business, financial condition, and results of operations. In addition, while we do not have any direct operations or significant sales in the Middle East nor Africa, geopolitical tensions and ongoing conflicts in these regions, particularly between Israel and Palestine as well as within Sudan, may lead to further global economic instability and fluctuating energy prices that could materially affect our business. It is not possible to predict the broader consequences of these conflicts, including related geopolitical tensions, and the measures and actions taken by other countries in respect thereof, which could materially adversely affect global trade, currency exchange rates, regional economies and the global economy. While it is difficult to predict the impact of any of the foregoing, these conflicts may increase our costs, disrupt our supply chain, reduce our sales and earnings, impair our ability to raise additional capital when needed on acceptable terms, if at all, or otherwise adversely affect our business, financial condition and results of operations. Foreign Currencies We are subject to foreign exchange risk as we manufacture certain products and components in China, market extensively in both Canadian and U.S. markets, employ people residing in both the U.S. and Canada and, to date, have raised funds in Canadian Dollars. Meanwhile, we report results of operations in U.S. Dollars. Since our Canadian customers pay in Canadian Dollars, we are subject to gains and losses due to fluctuations in the USD relative to the Canadian Dollar. Our manufacturers in China are paid in USD to better avoid the relatively greater fluctuation of the Chinese Yuan. To the extent the U.S. dollar strengthens against any of these foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our operations. RESULTS OF OPERATIONS Three Months Ended September 30, 2023 compared to the Three Months Ended September 30, 2022 Revenue For the three months ended September 30, 2023, revenues from our entire line of products was $458,483, as compared to $18,350 for the three months ended September 30, 2022. Year-over-year sales increased by approximately 2,399%. For the three months ended September 30, 2023, revenue generated in Canada was $4,225, as compared to $5,216 for the same period in 2022. For the three months ended September 30, 2023, revenue generated in the United States was $454,258, compared to $13,134 for the same period in 2022, an increase of 3,359%. Revenue increased for the three months ended September 30, 2023 compared to the same period the prior year due to increased sales of soft tonneau covers to a private label partner during the three months ended September 30, 2023. Worksport continues to 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. 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 gradually increase output capacity through refined production processes and increased personnel. 24 Sales from online retailers of our products increased from $13,134 during the three months ended September 30, 2022, to $21,599 during the three months ended September 30, 2023. Online retailers accounted for 5% of total revenue for the three months ended September 30, 2023, compared to 72% for the three months ended September 30, 2022. Distributor sales decreased for the three months ended September 30, 2023, compared with the three months ended September 30, 2022, with sales of $4,225 and $5,216, respectively. Private label sales increased from $0 for the three months ended September 30, 2022, to $432,659 for the three months ended September 30, 2023. Private label sales accounted for 94% of total revenue for the three months ended September 30, 2023. 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 U.S. and Canadian markets. We currently support a network of dealers, distributors, and independent resellers, and we will continue to expand our business and online sales channels in the fourth quarter of 2023. Cost of Sales Cost of sales increased by 2,826% from $12,602 for the three months ended September 30, 2022, to $368,796 for the three months ended September 30, 2023. Our cost of sales, as a percentage of sales, was approximately 80% and 69% for the three months ended September 30, 2023 and 2022, respectively. The increase in the cost of sales as a percentage of sales was primarily due to increased sales to private labels at a lower agreed upon sales price compared to online retail sales. Accordingly, cost of sales to private labels are lower compared to that of online retail sales, as indirect costs are assumed by the private labels. 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” whereby clients are able to pick up product directly from our stocking warehouse. Operating Expenses Operating expenses increased for the three months ended September 30, 2023 by $1,060,620, from $2,948,576 for the three months ended September 30, 2022 to $4,009,196 for the three months ended September 30, 2023, due to the following factors: ● General and administrative expenses increased by $1,571,100, from $1,520,388 in 2022 to $3,091,488 in 2023. The increase was related to increased research and development activities and an increase in wages and salaries as we seek to expand our operations and further develop our products. ● Sales and marketing expenses decreased by $205,541, from $586,388 for 2022 to $380,847 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 $858,605 in 2022 to $539,126 in 2023. The decrease in professional fees was due primarily to the completion of consulting engagements with various third-party consultants. ● We realized a gain on foreign exchange of $2,265 during 2023, compared to a gain on foreign exchange of $16,805 for the prior period due to conversions between CAD and USD. Other Income and Expenses We reported other expenses for the three months ended September 30, 2023 of $29,789 compared to a gain of $65,168 in the prior period. Other expenses can be attributed to increased interest expense partially offset by interest and rental income. 25 Net Loss Net loss for the three months ended September 30, 2023 was $3,949,298 compared to a net loss of $2,877,660 for the three months ended September 30, 2022 – an increase of 37%. 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. Nine Months Ended September 30, 2023 compared to the Nine Months Ended September 30, 2022 Revenue For the nine months ended September 30, 2023, revenues from the entire line of our products were $690,259, as compared to $77,439 for the nine months ended September 30, 2022. Year-over-year sales increased by approximately 791%. For the nine months ended September 30, 2023, revenue generated in Canada was $6,961, as compared to $11,981 for the same period in 2022. For the nine months ended September 30, 2023, revenue generated in the United States was $683,298, compared to $65,458 for the same period in 2022, an increase of 944%. Revenue increased for the nine months ended September 30, 2023 compared to the same period the prior year increased sales of soft tonneau covers to a private label partner during the three months ended September 30, 2023. Worksport continues to 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. 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 gradually increase output capacity through refined production processes and increased personnel. Sales from online retailers of our products decreased from $65,458 during the nine months ended September 30, 2022 to $62,827 during the nine months ended September 30, 2023, a decrease of 4%. Online retailers accounted for 9% of total revenue for the nine months ended September 30, 2023 compared to 85% for the nine months ended September 30, 2022. Distributor sales decreased for the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022 with sales of $6,961 and $11,981, respectively. Private label sales increased from $0 for the three months ended September 30, 2022 to $620,471 for the three months ended September 30, 2023. Private label sales accounted for 90% of total revenue for the nine months ended September 30, 2023. 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 U.S. and Canadian markets. We currently support a network of dealers, distributors, and independent resellers, and we will continue to expand our business and online sales channels in the fourth quarter of 2023. Cost of Sales Cost of sales increased by 825%, from $58,566 for the nine months ended September 30, 2022, to $541,841 for the nine months ended September 30, 2023. Our cost of sales, as a percentage of sales, was approximately 78% and 76% for the nine months ended September 30, 2023 and 2022, respectively. The increase in the cost of sales as a percentage of sales was primarily due to increased sales to private labels at a lower agreed upon sales price compared to online retail sales. Accordingly, cost of sales to private labels are lower compared to that of online retail sales, as indirect costs are assumed by the private labels. 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. 26 Operating Expenses Operating expenses increased for the nine months ended September 30, 2023 by $2,268,922, from $9,067,672 for the nine months ended September 30, 2022 to $11,336,594 for the nine months ended September 30, 2023, due to the following factors: ● General and administrative expenses increased by $3,993,740 from $2,972,161 in 2022 to $6,965,901 in 2023. The increase was related to increased research and development activities, increased employment of production personnel including engineers, machine operators, and assembly people, and increases in wages and salaries as we seek to expand our operations and further develop our products. ● Sales and marketing expenses decreased by $479,333 from $1,953,243 for 2022 to $1,473,910 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 $4,160,059 in 2022 to $2,899,190 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 $2,407 during 2023, compared to a gain on foreign exchange of $17,791 for the prior period due to conversions between CAD and USD. Other Income and Expenses We reported other expenses for the nine months ended September 30, 2023 of $81,847 compared to $18,789 in the prior period. The increase in other expenses can be attributed to higher interest expense in the current period compared to the prior period, offset by interest income and rental income. Net Loss Net loss for the nine months ended September 30, 2023 was $11,270,023, compared to a net loss of $9,067,588 for the nine months ended September 30, 2022 – an increase of 24%. 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; Going Concern As of September 30, 2023, the Company had $2,965,578 in 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 year 2014, it has never generated a profit. As of September 30, 2023, the Company had an accumulated deficit of $44,654,242. 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 and nine months ended September 30, 2023, the Company had net loss of $3,949,298 (2022 - $2,877,660) and $11,270,023 (2022 - $9,067,588). As of September 30, 2023, the Company has working capital of $330,423 (December 31, 2022 - $15,870,377) and had an accumulated deficit of $44,654,242 (December 31, 2022 - $33,384,219). The Company has not generated profit from operations since inception and to date has relied on debt and equity financings for continued operations. The Company’s ability to continue as a going concern is dependent upon the ability to generate cash flows from operations and obtain equity and/or debt financing. The Company intends to continue funding operations through equity and debt financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements in the long term. There can be no assurance that the steps management is taking will be successful. The Company has historically operated at a loss, although that may change as sales volumes increase. As of September 30, 2023, the Company had working capital of $330,423 (December 31, 2022 – $15,870,377) and an accumulated deficit of $44,654,242 (December 31, 2022 - $33,384,219). As of September 30, 2023, the Company had cash and cash equivalents of $2,965,578 (December 31, 2022 - $14,620,757). Despite the Company having mostly completed its purchasing of large manufacturing machinery, operational costs are expected to remain elevated and, thus, further decrease cash and cash equivalents. Concurrently, the Company intends to begin manufacturing and increasing sales volumes in 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 has started to generate further revenue in the third quarter of 2023. 27 The Company has successfully raised cash, and it is positioned to do so again if deemed necessary or strategically advantageous. During the year ended December 31, 2021, the Company, through its Reg-A public offering, private placement offering, underwritten public offering, and exercises of warrants, raised an aggregate of approximately $32,500,000. On September 30, 2022, the Company filed a shelf registration statement on Form S-3, which was declared effective by the SEC on October 13, 2022, allowing the Company to issue up to $30,000,000 of common stock and prospectus supplement covering the offering, issuance and sale of up to $13,000,000 of common stock that may be issued and sold under an At The Market Offering Agreement dated September 30, 2022 (“ATM Agreement”), with H.C. Wainwright & Co., LLC, as the sales agent (“HCW”). Pursuant to the ATM Agreement, HCW is entitled to a commission equal to 3.0% of the gross sales price of the shares of common stock sold. As of September 30, 2023, the Company has sold and issued 27,429 shares of common stock in consideration for net proceeds of $95,541 under the ATM Agreement. On November 2, 2023, the Company closed a sale of 1,925,000 shares of common stock and 1,575,000 pre-funded warrants for a total net proceeds of $4,261,542. In association with sale, the Company also issued 7,000,000 warrants convertible for 7,000,000 shares of common stock at an exercise price of $1.34. The warrants are exercisable six months after issuance and will expire five and a half years from the issuance date. To date, the Company’s principal sources of liquidity consist of net proceeds from public and private securities offerings and cash exercises of outstanding warrants. During the nine months ended September 30, 2023, the Company received nominal proceeds from public offerings, private placement offerings, and from the exercise of any outstanding warrants or options. Management is focused on transitioning towards revenue as its principal source of liquidity by growing existing product offerings as well as the Company’s customer base. The Company cannot give assurance that it can increase its cash balances or limit its cash consumption and thus maintain sufficient cash balances for planned operations or future business developments. Future business development and demands may lead to cash utilization at levels greater than recently experienced. The Company may need to raise additional capital in the future. However, the Company cannot provide assurances it will be able to raise additional capital on acceptable terms, or at all. The Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Still, certain factors indicate the existence of a material uncertainty that cast substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. These adjustments could be material. Cash Flow Activities Cash decreased from $14,620,757 at December 31, 2022, to $2,965,578 at September 30, 2023 – a decrease of $11,655,179 or 80%. The decrease was primarily due to the acquiring of assets for domestic production, such as industrial manufacturing equipment, as well as increasing spending on production personnel, and for raw materials in anticipation of domestic production, research and development, and overhead. As of September 30, 2023, we had current assets of $7,894,134 (December 31, 2022 - $18,332,107) and current liabilities of $7,563,771 (December 31, 2022 – $2,461,730). As of September 30, 2023, we had working capital of $330,423 (December 31, 2022 – $15,870,377) and an accumulated deficit of $44,654,242 (December 31, 2022 - $33,384,219). Operating Activities Net cash used by operating activities for the nine months ended September 30, 2023 was $8,194,347, compared to $6,361,539 in the prior period, primarily driven by a larger net loss during the nine months ended September 30, 2023, and partially offset by the issuance of shares, options, and warrants for services. Accounts receivable increased at September 30, 2023 by $455,509 and by $390 in the prior period. The increase in accounts receivable was due to higher sales to private labels near the end of the period in 2023 compared to that of 2022. 28 Inventory increased at September 30, 2023 by $2,205,692, and at September 30, 2022 by $785,014, as a result of our stockpiling components for production as well as finished goods in anticipation of the launch of our e-commerce platform. Prepaid expenses decreased by $26,200 at September 30, 2023, and increased by $1,063,680 at September 30, 2022. Accounts payable and accrued liabilities decreased at September 30, 2023 by $152,474, compared to an increase of $647,996 in the prior period. Investing Activities Net cash used in investing activities for the nine months ended September 30, 2023 was $3,512,469 compared to $10,212,245 in the prior period. The decrease in investing activities was primarily due to the purchase of a manufacturing facility in 2022. Financing Activities Net cash generated by financing activities for the nine months ended September 30, 2023 was $51,637 compared to net cash generated from financing activities of $5,285,712 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. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not Applicable.