Worksport Ltd 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm 42 Audited Consolidated Balance Sheets at December 31, 2023 and 2022 44 Audited Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2023 and 2022 45 Audited Consolidated Statements of Shareholders’ Equity for the year ended December 31, 2023 and 2022 46 Audited Consolidated Statements of Cash Flow for the years ended December 31, 2023 and 2022 47 Notes to Audited Consolidated Financial Statements 48 41 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Worksport Ltd. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Worksport Ltd. and Subsidiaries (the Company) as of December 31, 2023 and 2022, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial condition of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit, that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Inventory Description of the Matter As of December 31, 2023, the Company’s inventory balance was $3.6 million. As reported in Note 5, inventory has increased significantly over the past year as the Company began to stockpile inventory due to its start of domestic production during 2023. The Company evaluates its inventory for obsolescence on an ongoing basis by considering historical usage as well as requirements for future orders. 42 Given the inherent uncertainty and significant judgments necessary to value inventory and its related obsolescence, auditing management’s estimates involved a high degree of auditor judgment. How We Addressed the Matter in Our Audit Our auditing procedures related to inventory valuation included the following, among others: ● We evaluated the appropriateness and consistency of management’s methods used to value inventory and develop its estimates. ● We evaluated the reasonableness of judgments made and significant assumptions used by management relating to key estimates. ● We inquired of management relative to write-offs of inventory during the year. ● We tested the completeness and accuracy of management’s inventory detail. ● We developed an independent expectation of the obsolescence reserve based on our knowledge of the Company’s inventory, including analysis of slow-moving items and historical usage and compared it to actual. ● We performed a lower of cost or net realizable value analysis by selecting a sample of items included in inventory at year-end. ● We selected a sample of purchases made throughout the year to ensure they were included in inventory at the proper weighted-average value. ● We selected a sample of purchases made before and after the year end to ensure proper cut-off was achieved. ● During our physical inventory observation, we toured the Company’s facility and examined inventory on hand to determine the completeness and existence of ending inventory. ● We examined management’s overhead analysis and performed procedures to test its completeness and accuracy. Shareholders’ Equity and Related Transactions Description of the Matter As discussed in Notes 9, 18, and 19 to the consolidated financial statements, the Company has issued a significant amount of equity securities. The tracking of these transactions can be complicated and require management to estimate the value of equity securities using a Black Scholes option pricing model. We identified the fair market value of equity transactions to be a critical audit matter, as the calculations can be complex and subject to error. How We Addressed the Matter in Our Audit Our auditing procedures related to equity transactions included the following, among others: ● We evaluated the appropriateness and consistency of management’s methods used to develop its estimates. ● We gained an understanding of management’s process to record the equity transactions. ● We obtained management’s calculations and tested the clerical accuracy and inputs used. ● We agreed the basic terms to source agreements and considered key assumptions. ● We recalculated the recorded values and conversion amounts. Going Concern Description of the Matter As discussed in Note 3 to the consolidated financial statements, the Company has experienced recurring net losses that raise substantial doubt about the Company’s ability to continue as a going concern. Upon analysis of the Company’s current financial situation and projected outlooks, we believe there is substantial doubt about the Company’s ability to continue as a going concern. How We Addressed the Matter in Our Audit Our auditing procedures related to going concern included the following, among others: ● We obtained the Company’s evaluation of its ability to continue as a going concern and evaluated the Company’s plans to address these concerns. ● We analyzed the Company’s current state of operations. ● We evaluated the Company’s current and projected cash flow. We have served as the Company’s auditor since 2022. /s/ Lumsden & McCormick, LLP Buffalo, New York March 27, 2024 PCAOB ID Number: 130 43 Worksport Ltd. Consolidated Balance Sheets December 31, 2023 and 2022 2023 2022 Assets Current Assets Cash and cash equivalents $ 3,365,778 $ 14,620,757 Accounts receivable, net 463,122 62,601 Other receivable 165,865 268,032 Inventory (note 5) 3,631,492 1,346,372 Prepaid expenses and deposits (note 8) 1,497,249 2,034,345 Total Current Assets 9,123,506 18,332,107 Investment (note 14) 90,731 24,423 Property and Equipment, net (note 6) 14,483,436 11,900,672 Right-of-use asset, net (note 15) 917,354 1,238,055 Intangible Assets, net (note 7) 1,338,889 1,268,873 Total Assets $ 25,953,916 $ 32,764,130 Liabilities and Shareholders’ Deficit Current Liabilities Accounts payable and accrued liabilities $ 1,451,181 $ 2,028,305 Payroll taxes payable 85,010 - Related party loan (note 10) 2,192 46,096 Loan payable (note 16) 5,300,000 - Current lease liability (note 15) 328,229 387,329 Total Current Liabilities 7,166,612 2,461,730 Long Term – Lease Liability (note 15) 608,761 884,146 Loan payable (note 16) - 5,300,000 Total Liabilities 7,775,373 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, 20,320,503 and 17,159,376 shares issued and outstanding, respectively (note 9) 2,032 1,716 Additional paid-in capital 64,685,693 56,919,625 Share subscriptions receivable ( 1,577 ) ( 1,577 ) Share subscriptions payable 1,814,152 591,289 Accumulated deficit ( 48,313,177 ) ( 33,384,219 ) Cumulative translation adjustment ( 8,580 ) ( 8,580 ) Total Shareholders’ Equity 18,178,543 24,118,254 Total Liabilities and Shareholders’ Equity $ 25,953,916 $ 32,764,130 The accompanying notes form an integral part of these consolidated financial statements. 44 Worksport Ltd. Consolidated Statements of Operations and Comprehensive Loss December 31, 2023 and 2022 2023 2022 Net Sales $ 1,529,632 $ 116,502 Cost of Goods Sold 1,289,118 56,967 Gross Profit 240,514 59,535 Operating Expenses General and administrative 9,643,680 4,978,582 Sales and marketing 1,483,054 2,446,266 Professional fees 3,853,134 5,418,863 Gain on foreign exchange ( 2,693 ) ( 10,461 ) Total operating expenses 14,977,175 12,833,250 Loss from operations ( 14,736,661 ) ( 12,773,715 ) Other Income (Expense) Interest expense ( 616,214 ) ( 488,704 ) Interest income 239,353 212,290 Rental income (note 20) 184,564 213,383 Gain on settlement of debt - 302,332 Total other income (expense) ( 192,297 ) 239,301 Net Loss ( 14,928,958 ) ( 12,534,414 ) Loss per Share (basic and diluted) $ ( 0.84 ) $ ( 0.73 ) Weighted Average Number of Shares (basic and diluted) 17,689,911 17,078,480 The accompanying notes form an integral part of these consolidated financial statements 45 Worksport Ltd. Consolidated Statements of Shareholders’ Equity December 31, 2023 and 2022 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 December 31, 2021 100 $ - 16,951,034 $ 1,696 $ 54,608,472 $ ( 1,577 ) $ 430,116 $ ( 20,849,805 ) $ ( 8,580 ) $ 34,180,322 Share issuance - - 45,000 4 260,096 - ( 260,100 ) - - - Warrant exercise (note 18) - - 73,342 7 ( 7 ) - - - - - Issuance for services and subscriptions payable - - 90,000 9 2,051,064 - 421,273 - - 2,472,346 Net loss - - - - - - - ( 12,534,414 ) - ( 12,534,414 ) Balance at December 31, 2022 100 $ - 17,159,376 $ 1,716 $ 56,919,625 $ ( 1,577 ) $ 591,289 $ ( 33,384,219 ) $ ( 8,580 ) $ 24,118,254 Balance 100 $ - 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 - - 250,000 25 3,271,084 - 1,222,863 - - 4,493,972 Shares issued (note 9) - - 2,024,127 202 4,475,578 - - - - 4,475,780 Warrant exercise (note 18) - - 887,000 89 - - - - - 89 Stock option forfeiture (note 19) - - - - 19,406 - - - - 19,406 Net loss - - - - - - - ( 14,928,958 ) - ( 14,928,958 ) Balance at December 31, 2023 100 $ - 20,320,503 $ 2,032 $ 64,685,693 $ ( 1,577 ) $ 1,814,152 $ ( 48,313,177 ) $ ( 8,580 ) $ 18,178,543 Balance 100 $ - 20,320,503 $ 2,032 $ 64,685,693 $ ( 1,577 ) $ 1,814,152 $ ( 48,313,177 ) $ ( 8,580 ) $ 18,178,543 The accompanying notes form an integral part of these consolidated financial statements 46 Worksport Ltd. Consolidated Statements of Cash Flows December 31, 2023 and 2022 2023 2022 Operating Activities Net Loss $ ( 14,928,958 ) $ ( 12,534,414 ) Adjustments to reconcile net loss to net cash from operating activities: Shares, options and warrants issued for services 5,754,717 4,899,433 Depreciation and amortization 1,109,742 486,582 Change in operating lease ( 13,784 ) 10,584 Accrued interest - 27,564 Gain on settlement of debt - ( 302,332 ) Adjustments to reconcile net income loss to cash provided by (used in) operating activities ( 8,078,283 ) ( 7,412,583 ) Changes in operating assets and liabilities (note 13) ( 3,852,297 ) ( 565,377 ) Net cash used in operating activities ( 11,930,580 ) ( 7,977,960 ) Cash Flows from Investing Activities Investments ( 66,308 ) - Purchase of intangible assets - ( 103,329 ) Purchase of property and equipment ( 3,690,056 ) ( 11,047,447 ) Net cash used in investing activities ( 3,756,364 ) ( 11,150,776 ) Financing Activities Proceeds from issuance of common shares, net of issuance cost 4,475,869 - Proceeds from loan payable - 5,300,000 Related party loan ( 43,904 ) 10,547 Repayments on loan and promissory notes payable - ( 128,387 ) Net cash provided by financing activities 4,431,965 5,182,160 Change in cash ( 11,254,979 ) ( 13,946,576 ) Cash and cash equivalents - beginning of year 14,620,757 28,567,333 Cash and cash equivalents end of year $ 3,365,778 $ 14,620,757 Supplemental Disclosure of non-cash activities Shares issued for purchase of intangible assets $ 72,466 $ 575,000 Cashless warrant exercise $ - $ 37,000 Supplemental Disclosure of cash flow information Income tax paid $ - $ - Interest paid $ 626,000 $ 479,000 The accompanying notes form an integral part of these consolidated financial statements. 47 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 1. Nature of Operations 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. 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 and 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’s common stock or reorganization, recapitalization, or acquisition of Terravis. On April 6, 2022, Terravis issued Lorenzo Rossi and Steven Rossi, both of whom are members of Terravis’s board of directors, were granted non-qualified stock options under the Terravis 2022 Plan exercisable for 750,000 and 250,000 shares of Terravis’s 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’s 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’s 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 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 Lorenzo Rossi, the President of Terravis and 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. 48 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 2. Basis of Presentation and Business Condition a) 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”). b) Basis of Measurement The Company’s financial statements have been prepared on an accrual basis. c) Consolidation The Company’s 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. d) Functional and Presentation Currency These consolidated financial statements are presented in United States Dollars. The functional currency of the Company and all its subsidiaries is the United States Dollar. For purposes of preparing these consolidated financial statements, transactions denominated in Canadian Dollar were converted to United States Dollar 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 consolidated statement of operations and comprehensive loss. e) Use of Estimates The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 3. Going Concern As of December 31, 2023, the Company had $ 3,365,778 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 December 31, 2023, the Company had an accumulated deficit of $ 48,313,177 . The accompanying 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 year ended December 31, 2023, the Company had net losses of $ 14,928,958 (2022 - $ 12,534,414 ). As of December 31, 2023, the Company had working capital of $ 1 , 956,894 (2022 – $ 15,870,377 ) and had an accumulated deficit of $ 48,313,177 (2022 - $ 33,384,219 ). The Company has not generated profit from operations since inception and to date has relied 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 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. 49 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 3. Going Concern (continued) The Company has historically operated at a loss, although that may change as sales volumes increase and margins improve. As of December 31, 2023, the Company had working capital of $ 1 , 956,894 (2022 – $ 15,870,377 ) and an accumulated deficit of $ 48,313,177 (2022 - $ 33,384,219 ). As of December 31, 2023, the Company had cash and cash equivalents of $ 3,365,778 (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 continue its ramp-up of manufacturing and increasing sales volumes in 2024, 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 was completed for initial production output in 2023 and has started to generate revenue in the third quarter of 2023. 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 December 31, 2023, the Company has sold and issued 99,127 shares of common stock in consideration for net proceeds of $ 214,238 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 the 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 year ended December 31, 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. 50 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 4. Significant Accounting Policies Cash and Cash Equivalents - Cash and cash equivalents includes cash on account and demand deposits with maturities of three months or less. Cash and cash equivalents in financial institutions may exceed insured limits at various times during the year and subject the Company to concentrations of credit risk. Cash and cash equivalents include restricted cash at December 31, 2023 and 2022 totaling $ 730,802 and $ 411,016 (see note 16). Receivables - Trade accounts receivable are stated at the amount the Company expects to collect. Receivables are reviewed individually for collectability. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, allowances may be required. The Company offers credit terms on the sale of the Company’s products to a significant majority of the Company’s customers and requires no collateral from these customers. The Company performs ongoing credit evaluations of customers’ financial condition and, if needed, maintains an allowance for doubtful accounts receivable based upon the Company’s historical experience, forecasted economic conditions, and a specific review of accounts receivable at the end of each period. At December 31, 2023 and 2022, the Company had no allowance for doubtful accounts. Inventory - Inventory is stated at the lower of cost or net realizable value, with cost being determined on a weighted average basis. Cost includes purchase price of materials, freight, and related costs required to bring the goods to Company warehouses. Research and Development – Research and development costs are expensed as incurred and are included in general and administrative expense in the accompanying financial statements. Warranties - The Company currently offers a limited lifetime warranty against defective products out-of-the-box. Customers who are not satisfied with their purchase may attempt to have their purchases reimbursed outside of the warranty period. Revenue Recognition – In accordance with Accounting Standards Codification (ASC) 606 Revenue from Contracts with Customers, sales are recognized when (1) products are shipped, with no right of return except for defective products, and the title and risk of loss has passed to customers; and (2) when they are delivered based on the terms of the sale, and there is an identifiable contract with a customer with defined performance obligations, the transaction price is determinable, and the entity has fulfilled its performance obligation. Revenue related to shipping and handling costs billed to customers is included in net sales, and the related shipping and handling costs are included in cost of goods sold. Property and Equipment - Capital assets are recorded at cost and are depreciated using the straight-line method over the following estimated useful lives: Schedule of Estimated Useful Lives of Property and Equipment Furniture and equipment 5 years Automobile 5 years Computers 3 years Leasehold improvements 15 years Manufacturing equipment 5 - 15 years Building 15 years 51 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 4. Significant Accounting Policies (continued) Share-based payments - The Company offers a share option plan for its directors, officers, employees, and consultants. ASC 718 “Compensation – Stock Compensation” prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options, and other equity instruments such as stock appreciation rights. Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values at the time of grant. That expense is recognized over the estimated period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of the performance commitment date or performance completion date. Income Taxes - Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between taxable income and pretax financial income, and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Tax positions initially need to be recognized in the financial statements when it is more likely than not the positions will be sustained upon examination by the tax authorities. Foreign Currency Items - Transactions denominated in foreign currencies are initially recorded in the functional currency using exchange rates in effect at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using exchange rates in effect at the dates of the transactions. All exchange gains and losses are included in the statement of operations and comprehensive loss. Financial Instruments - FASB ASC 825, Disclosures about Fair Value of Financial Instruments, requires disclosures of the fair value of financial instruments. The carrying value of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities, approximates their fair values because of the short-term maturities of these instruments. The carrying value of the loan payable approximates fair value as its interest rate fluctuates with market interest rates. Related Party Transactions - All transactions with related parties are in the normal course of operations and are measured at the exchange amount. 52 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 4. Significant Accounting Policies (continued) Intangible Assets and Impairment – Patents and other intangibles are amortized using the straight-line method over their estimated useful lives. Intangible assets, such as trademarks with indefinite lives, are not amortized. Intangible assets are evaluated for impairment at least annually or when events or circumstances arise that indicate the existence of impairment. The Company evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. When indicators of impairment exist, the Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment, and actual results may differ from assumed and estimated amounts. During the years ended December 31, 2023 and 2022, the Company had no impairment losses related to intangible assets. Sales Taxes – Certain jurisdictions impose a sales tax on Company sales to nonexempt customers. The Company collects these taxes from customers and remits the entire amount as required by the applicable law. The Company excluded from revenues and expenses the tax collected and remitted. Lease Accounting - On January 1, 2019, the Company adopted ASC 842, which requires lessees to recognize operating leases on the balance sheet as right-of-use assets and lease liabilities based on the value of the discounted future lease payments. Expanded disclosures about the nature and terms of lease agreements are required and are included in note 15. Recent Accounting Pronouncements Any recently issued Accounting Standards Codification guidance has either been implemented or is not significant to the Company. 5. Inventory Inventory consists of the following at December 31, 2023 and 2022: Schedule of Inventory 2023 2022 Finished goods $ 1,717,669 $ 1,200,759 Promotional items 101,660 50,790 Raw materials 1,812,163 94,823 Inventory $ 3,631,492 $ 1,346,372 53 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 6. Property and Equipment Major classes of property and equipment at December 31, 2023 and 2022 are as follows: Schedule of Property and Equipment 2023 2022 Equipment 2,784,098 2,344,946 Manufacturing equipment 3,260,679 - Furniture 146,049 143,449 Product molds 524,476 122,675 Computers 84,070 78,885 Leasehold improvements 861,332 675,751 Building 6,079,410 6,079,410 Land 2,239,405 2,239,405 Automobile 168,497 168,497 Deposits - 605,000 Property and Equipment, gross Less accumulated depreciation ( 1,664,580 ) ( 557,346 ) Property and Equipment, net $ 14,483,436 $ 11,900,672 During the years ended December 31, 2023 and 2022, the Company recognized depreciation expense of $ 1,107,292 and $ 484,073 , respectively. During the year ended December 31, 2022, the Company completed the purchase of a manufacturing facility and land for $ 6,079,410 and $ 2,239,405 , respectively. The Company has and continues to produce soft tonneau covers in Meizhou, China and Foshan, China, and it began producing hard tonneau covers in its West Seneca manufacturing facility in 2023. The Company believes that by doing so it (i) has better control over design and manufacturing quality of its products, (ii) mitigates supply chain risk, (iii) decreases shipping costs, (iv) cuts overall manufacturing costs, and (v), by on-shoring production, participates in creating positive social externalities including employment in its largest market: the United States. 7. Intangible Assets Intangible assets consist of costs incurred to establish the patent rights related to the quick latch and soft vinyl quad-fold tonneau cover technologies, Worksport trademarks, licenses, and software costs. The Company’s utility patents and design registrations were issued between 2014 and 2023. The patents and software will be amortized on a straight-line basis. At December 31, 2023, the software has not been placed into service. The Company’s trademark, licenses, and other indefinite life intangible assets are reassessed every year for impairment; the Company has determined that impairment is not necessary for the current year ended December 31, 2023. The change in intangible assets for the years ended December 31, 2023 and 2022 are as follows: Schedule of Change in Intangible Assets 2023 2022 Patent 62,706 62,706 License 103,329 103,329 Trademark 5,150 5,150 Software 1,150,000 1,077,534 Other 29,451 29,451 Intangible Assets, gross 29,451 29,451 Less accumulated amortization ( 11,747 ) ( 9,297 ) Intangible Assets, net $ 1,338,889 $ 1,268,873 Amortization expense for the years ended December 31, 2023 and 2022 was $ 2,450 and $ 2,509 , respectively. 54 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 7. Intangible Assets (continued) Estimated amortization of the patent and software over the next five years and beyond December 31, 2023 is as follows: Schedule of Amortization of patent 2024 $ 232,508 2025 $ 232,508 2026 $ 232,508 2027 $ 232,508 2028 and later $ 282,674 8. Prepaid expenses and deposits As of December 31, 2023 and 2022, prepaid expenses and deposits consists of the following: Schedule of Prepaid Expenses and Deposits 2023 2022 Consulting, services and advertising $ 5,215 $ 1,313,799 Insurance - 20,781 Deposits 1,492,034 699,765 Prepaid expenses and deposits, net $ 1,497,249 $ 2,034,345 As of December 31, 2023, prepaid expense and deposit consists of $ 5,215 (2022 - $ 1,313,799 ) in prepaid consulting, services and advertising for third party consultants through the issuance of shares and stock options. Deposits primarily include prepayments for raw materials used in the manufacturing of finished goods. 9. Shareholders’ Equity During year ended December 31, 2023, the following transactions occurred: During the year ended December 31, 2023, the Company sold 99,127 shares of common stock for a total net proceeds of $ 214,238 . The sale of shares was in connection with the shelf registration statement on Form S-3 effective 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 as of September 30, 2022. The Company recognized consulting expense of $ 1,222,863 to share subscriptions payable from restricted shares and stock options to be issued. As of December 31, 2023, the restricted shares have not been issued. During the same period, the Company issued 250,000 shares of common stock for consulting services valued at $ 635,000 . During the year ended December 31, 2023, the Company closed a sale of 1,925,000 shares of common stock for $ 2,579,500 . The Company incurred share issuance expense of $ 428,300 . In association with the sale of common shares, the Company also issued 1,575,000 pre-funded warrants and 7,000,000 warrants. Refer to note 18. Refer to notes 18 and 19 for additional shareholders’ equity (deficit). 55 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 9. Shareholders’ Equity (continued) During year ended December 31, 2022, the following transactions occurred: The Company issued 10,000 common shares to a consultant for services received valued at $ 86,000 , of which $ 66,329 was issued from share subscriptions payable. During the same period, the Company issued 80,000 common shares for consulting, advisory services, and employee compensation valued at $ 240,000 . The Company issued 45,000 shares of restricted stock to members of the board valued at $ 260,100 from share subscriptions payable. The Company recognized consulting expense of $ 487,602 to share subscriptions payable from restricted shares and stock options to be issued. As of December 31, 2022, the restricted shares have not been issued. Refer to note 18 and 19 for additional disclosures of shareholders’ equity. For the years ended December 31, 2023 and 2022, the Company was authorized to issue 299,000,000 shares of its common stock with a par value of $ 0.0001 . All shares were ranked equally with regards to the Company’s residual assets. During 2023 and 2022, the Company was authorized to issue 100 shares of its Series A and 100,000 of its 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 year ended December 31, 2023, the Company recorded salaries expense of $ 374,864 (2022 - $ 387,308 ) related to services rendered to the Company by its CEO. During the same period the Company recorded salaries expense of $ 271,601 (2022 - $ 265,858 ) to an officer and director of the Company. As of December 31, 2023 and 2022, the Company has a payable of $ 2,192 and $ 46,096 to the CEO. Refer to note 9 and 19 for additional related party transactions. 11. Income Taxes a) The income tax expense for the years ended December 31, 2023 and 2022 is reconciled per the schedule below: Schedule of Reconciliation of Income Tax 2023 2022 Loss before income taxes $ ( 14,929,000 ) $ ( 12,534,000 ) State income taxes, net of federal benefits ( 746,000 ) ( 627,000 ) Non-deductible portion of meals and entertainment 14,000 41,000 Share base compensation 1,901,000 - Interest and penalty - 100,000 Adjusted net loss for tax purposes ( 13,760,000 ) ( 13,020,000 ) Statutory rate 21 % 21 % Income tax benefit ( 2,889,000 ) ( 2,734,000 ) Increase in valuation allowance 2,889,000 2,734,000 Provision for income taxes $ - $ - 56 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 11. Income Taxes (continued) b) Deferred Income Tax Assets The tax effects of temporary differences that give rise to the deferred income tax assets at December 31, 2023 and 2022 are as follows: Schedule of Deferred Income Tax Assets 2023 2022 Net operating loss carry forwards $ 6,005,000 $ 3,784,000 Amortization and depreciation 120,000 ( 98,000 ) Change in operating lease ( 3,000 ) ( 2,000 ) Share base compensation 1,415,000 964,000 Deferred tax assets, gross 7,537,000 4,648,000 Deferred tax assets not recognized ( 7,537,000 ) ( 4,648,000 ) Net deferred tax asset $ - $ - Deferred income taxes within each jurisdiction on the balance sheets at December 31, 2023 and 2022 are as follows: Schedule of Deferred Income Taxes Within Each Jurisdiction 2023 2022 United States $ 4,201,000 $ 2,103,000 Canada 3,336,000 2,545,000 Deferred income taxes 3,336,000 2,545,000 Valuation allowance ( 7,537,000 ) ( 4,648,000 ) Net deferred tax asset $ - $ - c) Cumulative Net Operating Losses The Company has non-capital losses carried forward of approximately $ 28,594,000 available to reduce future years’ taxable income. These losses will expire as follows: Schedule of Cumulative Non-capital Losses United States Canada Total 2034 $ 53,000 $ 183,000 $ 236,000 2035 161,000 368,000 529,000 2036 868,000 262,000 1,130,000 2037 1,472,000 59,000 1,531,000 2038 - 520,000 520,000 2039 - 193,000 193,000 2040 - 718,000 718,000 2041 - 3,000,000 3,000,000 2042 - 4,100,000 4,100,000 2043 - 3,140,000 3,140,000 Non-capital losses carried forward Total $ 2,554,000 $ 12,543,000 $ 15,097,000 Never expire $ 13,497,000 $ - $ 13,497,000 Net operating loss carryforwards of approximately $ 28,594,000 may be offset against future taxable income. No tax benefit from these losses have been reported in the December 31, 2023 consolidated financial statements since the potential tax benefit is offset by a valuation allowance of the same amount. 57 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 11. Income Taxes (continued) Due to change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years. The Company complies with the provisions of FASB ASC 740 in accounting for its uncertain tax positions. ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more –likely –than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company has determined that the Company has no significant uncertain tax positions requiring recognition under ASC 740. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company had no accruals for interest and tax penalties at December 31, 2023 and 2022. The Company does not expect the amount of unrecognized tax benefits to materially change within the next twelve months. The Company is required to file income tax returns in the U.S. and Canadian Federal jurisdictions, as well as various states and in the province of Ontario. The Company is no longer subject to income tax examinations by tax authorities for tax years ending before December 31, 2020 in the United States and for tax years ending before December 31, 2014 in Canada. 12. Financial Instruments Credit Risk The Company is exposed to credit risk on the accounts receivable from its customers. To reduce its credit risk, the Company has adopted credit policies which include the analysis of the financial position of its customers and the regular review of their credit balances. The Company incurred bad debt expense of $ 0 during each of the years ended December 31, 2023 and 2022. Currency Risk The Company is exposed to currency risk on its sales and purchases denominated in Canadian Dollars. The Company actively manages these risks by adjusting its pricing to reflect currency fluctuations and purchasing foreign currency at advantageous rates. Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its obligations associated with financial liabilities. The Company relies on its cash reserves, cash flows generated from operations, and injections of capital through the issuance of the Company’s capital stock to settle its liabilities when they become due. Interest Rate Risk The Company is exposed to interest rate risk due to the variable interest rate of its mortgage, which is equal to the Prime Rate plus two hundred twenty-five basis points ( 2.25 %) per annum. 58 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 12. Financial Instruments (continued) Concentration of Supplier Risk The Company has historically purchased all of its soft tonneau cover finished goods from Meizhou, China, and it began purchasing soft tonneau cover finished goods from a second supplier in Foshan, China in late 2023. The Company carries significant strategic inventories of these materials and is increasing its purchasing from the supplier in Foshan to lower supplier concentration risk. Further, the Company has established domestic assembly of its hard tonneau cover product line to further reduce the risk associated with this concentration of finished good suppliers. Strategic inventories are managed based on demand. To date, the Company has been able to obtain adequate supplies of the materials used in the production of its products in a timely manner from existing sources. The loss of these key suppliers or a delay in shipments could have an adverse effect on its business. Concentration of Customer Risk A customer is considered to be significant if they account for greater than 10 % of the Company’s annual sales. The loss of any key customer could have an adverse effect on the Company’s business. For the year ended December 31, 2023, 93 % of the Company’s revenue is comprised of one customer. For the year ended December 31, 2022, two customers made up 50 % ( 38 % and 12 % individually) of revenue. 13. Changes in Cash Flows from Operating Assets and Liabilities The changes to the Company’s operating assets and liabilities for the years ended December 31, 2023 and 2022 are as follows: Schedule of Changes in Operating Assets and Liabilities 2023 2022 Decrease (increase) in accounts receivable $ ( 400,521 ) $ 83 Decrease (increase) in other receivable 102,167 ( 83,311 ) Decrease (increase) in inventory ( 2,285,120 ) ( 844,600 ) Decrease (increase) in prepaid expenses and deposits ( 776,709 ) ( 529,438 ) Increase (decrease) in lease liability - 8,738 Increase (decrease) in payroll taxes payable 85,010 ( 112,189 ) Increase (decrease) in accounts payable and accrued liabilities ( 577,124 ) 995,340 Changes in operating assets and liabilities $ ( 3,852,297 ) $ ( 565,377 ) 14. Investment 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 December 31, 2023 and 2022, the Company had advanced a total of $ 24,423 and is advancing tranches of capital as required by the Company. b) During the year ended December 31, 2023, the Company purchased $ 66,308 ($ 90,000 CAD) of Guaranteed Investment Certificate (“GIC”). The GIC bears a variable interest rate and matured on February 27, 2024. The anticipated earned interest on the GIC at maturity is $ 2,818 ($ 3,825 CAD). 15. 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 . 59 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 15. Operating Lease Obligations (continued) During the year ended December 31, 2022, the Company signed a lease agreement for approximately 20,296 square feet to be used as its then primary, now secondary 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. During the year ended December 31, 2023, the Company signed a lease agreement for office space to be used as an R&D facility pursuant to a one-year lease with an option to extend the lease for an additional year, dated June 1, 2023, for a monthly rent of $ 3,350 . 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 December 31, 2023 and 2022 is as follows: Schedule Right-of-use Asset December 31, 2023 December 31, 2022 Right-of-use asset $ 917,354 $ 1,238,055 Current lease liability $ 328,229 $ 387,329 Long-term lease liability $ 608,761 $ 884,146 The following is a summary of the Company’s total lease costs: Schedule of Lease Costs December 31, 2023 December 31, 2022 Operating lease cost $ 488,463 $ 409,179 The following is a summary of cash paid in 2023 and 2022 for amounts included in the measurement of lease liabilities: Schedule of Measurement of Lease Liabilities December 31, 2023 December 31, 2022 Operating cashflow $ 515,776 $ 400,130 Maturities of lease liability are as follows: Future minimum lease payments as of December 31, 2023: Schedule of Future Minimum Lease Payments 2024 $ 400,999 2025 286,395 2026 277,767 2027 117,158 Total future minimum lease payments 1,082,319 Less: amount representing interest ( 145,329 ) Present value of future payments 936,990 Current portion 328,229 Long term portion $ 608,761 60 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 16. Loans payable a) On May 4, 2022, the Company entered into a secured loan agreement (the “Loan Agreement”) with an external banking entity relating to the Company’s purchase of a 152,847 square-foot building situated on two parcels of land aggregating 18 acres of land located in West Seneca, New York (collectively, the “Property”) for a total purchase price of $ 8,150,000 on May 6, 2022. Under the terms of the Loan Agreement, the Company procured a total principal sum of $ 5,300,000 , bearing an interest rate of the prime rate plus 2.25 % annually, for the Company’s purchase of the Property and covering associated costs. To ensure the loan’s servicing over its duration, the Company allocated $ 667,409 into a specially designated account. By the close of December 31, 2023, this account’s balance had risen to $ 730,802 , which is recorded under cash and cash equivalents in the concurrent financial statements. As of December 31, 2023, the outstanding principal and the accrued interest was an aggregate of $ 5,331,889 . This outstanding balance and accrued interest are due on May 20, 2024. The Company disclosed the material terms of the Loan Agreement in a Current Report on Form 8-K filed with the Securities and Exchange Commission on May 11, 2022. 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 made the 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 December 31, 2023 and 2022, there are no amounts owing, and the loan has been fully settled. 17. Loss per Share For the year ended December 31, 2023, loss per share is $ 0.84 (basic and diluted) compared to that of the year ended December 31, 2022 of $ 0.73 (basic and diluted) using the weighted average number of shares of 17,689,911 (basic and diluted) and 17,078,480 (basic and diluted), respectively. There are 299,000,000 shares authorized with 20,320,503 and 17,159,376 shares issued and outstanding, as at December 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 of December 31, 2023, the Company has 11,627,924 warrants convertible to 11,927,924 common shares, 570,212 restricted stock to be issued, and 5,063,856 stock options exercisable for 5,063,856 common shares for a total underlying common shares of 17,561,922 . As of December 31, 2022, the Company has 3,939,924 warrants convertible to 4,239,924 common shares, 1,940,000 restricted stock to be issued, and 785,000 stock options exercisable for 785,000 common shares for a total underlying common shares of 7,669,924 . 18. Warrants During the year ended December 31, 2023, in connection to the sale of 1,925,000 shares of common stock the Company also sold 1,575,000 pre-funded warrants and 7,000,000 warrants convertible for 8,575,000 shares of common stock at an exercise price of $ 0.0001 and $ 1.34 , respectively. The Company received net proceeds of $ 2,110,342 associated with the sale of the pre-funded warrants. The pre-funded warrants are exercisable immediately with no expiration date. The warrants are exercisable six months after issuance and will expire five and a half years from the issuance date. During the year ended December 31, 2023, 887,000 pre-funded warrants were exercised for 887,000 shares of common stock for $ 89 . During the year ended December 31, 2023, the Company and a stock options holder agreed to cancel all 400,000 stock options in exchange for extending the exercisable period of 300,000 warrants to December 31, 2024. Later in the year ended December 31, 2023, the expiration date for these warrants was extended to December 31, 2026, and the stock option holder was issued an additional 400,000 restricted stock units. 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. 61 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 18. Warrants (continued) 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 shares of common stock 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 share of common stock, each exercisable at $ 2 per share. During the year ended December 31, 2022, the warrants were exercised on a cashless basis for 73,321 shares of common stock. During the year ended December 31, 2021, the Company issued 130,909 representative warrants to the Company’s underwriters. The representative warrants were not exercisable until January 30, 2022. The representative warrants are exercisable for 130,909 shares of common stock 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 December 31, 2023, the Company has the following warrants outstanding: Schedule of Warrants Exercise Price Exercise price Number outstanding Remaining Contractual Life (Years) Expiry date $ 6.05 3,446,515 0.60 August 6, 2024 $ 6.05 130,909 0.59 August 3, 2024 $ 4.00 300,000 3.00 December 31, 2026 $ 2.40 62,500 1.22 March 20, 2025 $ 1.34 7,000,000 5.34 May 2, 2029 $ 0.0001 688,000 N/A Never – see note 22 11,627,924 2.04 Schedule of Warrants Activity December 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 8,575,000 $ 1.09 130,909 $ 6.05 Expired - $ - ( 1,593,691 ) $ ( 4.00 ) Exercise ( 887,000 ) $ 0.0001 ( 250,121 ) $ ( 2.00 ) Balance, end of period 11,627,924 $ 2.78 3,939,924 $ 5.84 19. Stock Options and Performance Share Units Under the Company’s 2015, 2021 and 2022 Equity Incentive Plans, the number of shares of common stock reserved for issuance under the option plan shall not exceed 10% of the issued and outstanding shares of common stock of the Company, have a maximum term of 10 years, and vest at the discretion of the Board of Directors . 62 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 19. Stock Options and Performance Share Units (continued) 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 May 1, 2023, the Company and Steven Rossi reached an agreement to modify 1,600,000 restricted stock units and 400,000 performance stock units (“PSUs”) issued on November 11, 2022, and December 29, 2021, respectively, and replace them with 2,000,000 stock options, as described below. On November 11, 2022, 400,000 and 300,000 PSUs granted on 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 as measured using the volume weighted average of the Company’s common stock for ten (10) consecutive trading days, with over $ 100,000 of trading volume on each of those days. The fair value of the PSUs was estimated to be $ 1,254,460 . As of December 31, 2023, 75,000 PSUs of the remaining 300,000 PSUs had vested, and the Company recognized $ 155,314 (2022 - $ 35,100 ) in consulting expenses. On December 29, 2021, the Company granted 400,000 and 300,000 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 December 31, 2023, no PSUs have vested, and the Company recognized $ 0 (2022 - $ 232,312 ) 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 year ended December 31, 2023, the Company issued 1,500,000 stock options to Steven Rossi. The stock options have an exercise price of $ 1.584 and an expiration date of October 31, 2033 . The stock options shall vest as follows: 20% shall vest upon the Company achieving annual run rate revenue of $10,000,000, measured by $2,500,000 of quarterly revenue; (ii) an additional 20% shall vest upon the Company achieving annual run rate revenue of $20,000,000, measured by $5,000,000 of quarterly revenue; (iii) an additional 20% shall vest upon the Company achieving annual run rate revenue of $30,000,000, measured by $7,500,000 of quarterly revenue; (iv) an additional 20% shall vest upon the Company achieving annual run rate revenue of $40,000,000, measured by $10,000,000 of quarterly revenue; and (v) an additional 20% shall vest upon the Company achieving annual run rate revenue of $50,000,000, measured by $12,500,000 of quarterly revenue. During the year ended December 31, 2023 the Company recognized $ 374,547 in related wages and salary. 63 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 19. Stock Options and Performance Share Units (continued) During the year ended December 31, 2023, the Company issued 12,100 and 25,000 stock options to employees with an exercise price of $ 1.70 and $ 1.44 , respectively. The stock options will expire 10 years from the grant date. 12,100 stock options shall vest in two equal installments on the second and third anniversary of the grant date. 25,000 stock options shall vest on October 31, 2025 . The total fair value of the options on the grant date was estimated to be $ 56,496 . The Company recognized $ 4,144 in wages and salary during the year ended December 31, 2023. During the year ended December 31, 2023, the Company issued 321,150 stock options to employees, consultants and directors with an exercise price ranging from $ 2.55 to $ 4.20 . 108,750 of the stock options shall expire 5 years after grant date and vest in two equal installments on the first and second anniversary of the grant date. 155,400 of the stock options shall expire 10 years after grant date and vest in two equal installments on the first and second anniversary of the grant date. The fair value of the options on the grant date was estimated to be $ 1,116,856 . During the year ended December 31, 2023, 49,500 stock options were cancelled upon the departure of employees. The Company recognized $ 386,606 in wages and salary and consulting expenses during the year ended December 31, 2023. During the year ended December 31, 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 . The fair value of the options on the grant date was estimated to be $ 2,821,572 . The Company recognized $ 714,798 in wages and salary during the year ended December 31, 2023. During the year ended December 31, 2023, the Company issued 75,000 stock options to an employee with an exercise price of $ 2.43 and expiring on May 18, 2033 . The options shall vest in two installments, 25,000 on May 18, 2024, and 50,000 on August 1, 2024 . The fair value of the options on the grant date was estimated to be $ 182,025 . The Company recognized $ 37,632 in wages and salary expenses during the year ended December 31, 2023. During the year ended December 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 $ 33,683 in wages and salary and consulting expenses during the year ended December 31, 2023. During the year ended December 31, 2023, 15,000 stock options were cancelled upon the departure of employees; as a result the Company recognized $ 19,406 in wages and salary expense during the period. During the year ended December 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 in which the Company generates $3,600,000 in sales with at least 20% unit margin and b) one fiscal quarter in which 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 $ 45,476 in wages and salary expenses during the year ended December 31, 2023. During the year ended December 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 . 150,000 of the stock options shall vest on January 30, 2023, and 75,000 of the stock options shall each vest on 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 $ 486,600 in consulting expenses during the year ended December 31, 2023. During the year ended December 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 $ 217,542 in consulting expenses during the year ended December 31, 2023. 64 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 19. Stock Options and Performance Share Units (continued) 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 - $ 283,180 ) in consulting expenses during the year ended December 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 $ 17,083 (2022 - $ 1,642 ) in consulting expenses during the year ended December 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 expenses during the year ended December 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 - $ 5,105 ) to consulting expenses during the year ended December 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 . 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 - $ 1,058,917 ) to consulting expenses during the year ended December 31, 2023. During the year ended December 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 fully 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 - $ 32,856 ) to consulting expenses during the year ended December 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 . For each of these three option grants, 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 $ 75,170 (2022 - $ 73,941 ) in consulting expenses during the year ended December 31, 2023. 65 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 19. Stock Options and Performance Share Units (continued) Schedule of Stock Options Activity December 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 4,743,356 $ 1.80 72,500 $ 2.21 Cancelled ( 464,500 ) $ ( 5.02 ) - $ - Balance, end of period 5,063,856 $ 1.96 785,000 $ 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 December 31, 2023 Stock options $ 1.44 – 5.50 5,063,856 8.63 $ 1.96 1,162,500 As of December 31, 2023, Terravis Energy Inc. had the following options outstanding: Schedule of Stock Options Activity December 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 December 31, 2023 Stock options $ 0.01 1,350,000 8.28 $ 0.01 1,350,000 20. 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 year ended December 31, 2023, the Company recognized rental income of $ 184,564 (2022 - $ 213,383 ). 21. Legal Proceedings There are no legal proceedings except for routine litigation incidental to the business. 66 Worksport Ltd. Notes to the Consolidated Financial Statements December 31, 2023 and 2022 22. Subsequent Events The Company has evaluated subsequent events through March 27, 2024, which is the date the financial statements were available to be issued. The following events occurred after year-end: ● On January 11, 2024, the Company issued 53,194 of restricted stock to an employee. ● On February 5, 2024, the remaining 688,000 pre-funded warrants issued in October of 2023 were exercised for 688,000 shares of common stock for $ 0.0001 per share, for an aggregate of $ 69 . ● On February 7, 2024, the Company issued 1,343 shares of common stock for services received valued at $ 2,000 . ● Subsequent to the year ended December 31, 2023, the Company granted 68,800 stock options to employees. 8,300 of these options shall vest 50 % on July 17, 2025 and 50 % on July 17, 2026; the remainder shall vest in two equal installments on the second and third anniversary of the grant date. The exercise price of the stock options ranges from $ 0.62 to $ 1.41 . 8,300 stock options will expire 5 years from grant date and 60,500 stock options will expire 10 years from grant date. ● Subsequent to the year ended December 31, 2023, the Company issued 504,921 shares of common stock for net proceeds of $ 566,118 . ● On March 18, 2024, Worksport entered into a securities purchase agreement with a single institutional investor to purchase 3,850,132 shares of common stock (or pre-funded warrants to purchase shares of common stock in lieu thereof) in a registered direct offering. The offering was consummated on March 20, 2024. In a concurrent private placement, the Company also agreed to issue and sell to the investor warrants to purchase up to 7,700,264 shares of common stock. The combined effective offering price for each share of common stock (or pre-funded warrant in lieu thereof) and accompanying warrant is $ 0.74 . The warrants will become exercisable six months from issuance, expire five and a half years from the issuance date and have an exercise price of $ 0.74 per share. The gross proceeds to the Company from the registered direct offering and concurrent private placement are estimated to be approximately $ 2.8 million before deducting the placement agent’s fees and other estimated offering expenses payable by the Company. 67 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.