Worksport Ltd 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Prospective investors should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.” This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K . 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 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, we plan to market the SOLIS as a must-have accessory for electric light duty vehicle owners while simultaneously riding the coattails of EV popularity to promote our other products (COR and conventional tonneau covers) to the very large population of Americans that have an interest in EVs without the funds to purchase them. Further, participating in the EV space allows us to target consumers with an interest in cutting-edge technologies – a great market in which to promote our COR portable power system. Regulatory Environment Favoring Electric Vehicles The Build Back Better Bill was a strong indication of upcoming and favorable U.S. regulations. Many regulations that improve North America’s EV charging infrastructure or provide grants to businesses operating in the EV space would 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. However, President Donald Trump has signed an executive order titled Unleashing American Energy in which he has indicated his administration will be reversing the electric vehicle mandates of Joe Biden’s former administration, and he has further paused billions of dollars in funding allocated towards electric vehicle charging stations. The future of the U.S.’s regulatory environment surrounding electric vehicles is uncertain. 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, however, operates in a much wider yet unsaturated market. The global Portable Power Station market is quickly growing, and the competitive landscape is far from consolidated. The solar tonneau cover market is in its infancy, and it’s a market in which 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. Economic Conditions and Market Trends 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. 33 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 U.S. 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. Additionally, as central banks and the U.S. Federal Reserve increase interest rates to combat global inflation, the cost of debt financing increases. The U.S. Federal Reserve has begun to decrease interest rates in 2024, but they may persist at an elevated level for the foreseeable future. Our $6,000,000 mortgage on our West Seneca property and our $1,487,000 in equipment financing both have floating interest rates, meaning we are susceptible to variable monthly mortgage and debt interest costs as a result of changes in interest rates. High 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. 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 while such prices have come down from their 2022 highs, we continue to closely monitor gasoline and shipping costs. While the Freight Rate Index has significantly increased from late 2023 through mid-2024 as a result of Houthi attacks against cargo ships in the Red Sea and the concurrent decline in activity across the Panama Canal, the shipping routes used by Worksport have not faced dramatic price hikes. Regardless, Worksport is closely monitoring international shipping costs. 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. 34 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 USD. 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 USD 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. Critical Accounting Policies Our discussion and analysis of consolidated results of operations and financial condition are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates assumptions and judgments that affect the amounts reported. These estimates, assumptions and judgments are affected by our application of accounting principles, which are discussed in Note 1 – Description of Business and Summary of Significant Accounting Policies of Part II, Item 8, Financial Statements and Supplementary Data, of this report. We believe the accounting policies discussed below are the most critical in understanding and evaluating our financial results. These critical accounting policies have been reviewed with the Audit Committee of our Board of Directors. 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 sales. Inventory Valuation – At December 31, 2024, we had inventories of $5,190,054, or 50% of our current assets. Inventories are stated at the lower of cost or net realizable value with cost determined on a weighted average basis. We record valuation reserves to provide for slow-moving or obsolete inventory by principally using a formula-based method that increases the valuation reserve as the inventory ages. We also take specific circumstances into consideration. We consider overall inventory levels in relation to forecasted demand. Changes in these and other factors, such as low demand or technological obsolescence, could cause us to establish or increase our inventory reserves, which would negatively impact our gross margin. 35 Reviews of Impairment of Long-Lived Assets – Long-lived assets held for use, which primarily includes finite-lived intangible assets, property, plant and equipment, and right-of-use assets, are evaluated for impairment whenever events or circumstances indicate that the undiscounted cash flows to be generated by their use over their expected useful lives and eventual disposition are less than carrying value. The long-term nature of these assets requires the estimation of their cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test. Income Taxes – Our annual tax rate is based on our operating results before taxes by jurisdiction, applicable statutory tax rates, the impacts of permanent differences, tax incentives, and tax planning opportunities in the jurisdictions in which we operate. Significant judgment is required in determining our annual tax rate and evaluating our tax positions. We record reserves against tax benefits when it is more likely than not that we will not sustain a position if the appropriate taxing jurisdiction had full information and examined our position. We adjust these reserves when facts and circumstances change, and there is a considerable amount of judgment in making these assessments. For further information, refer to Note 8, Income Taxes of Part III Item 8, Financial Statements and Supplementary Data, of this report. Split On March 18, 2025, we effected a 1:10 stock split of our authorized shares of common stock and simultaneously reduced the number of authorized shares of common stock from 299,000,000 to 29,900,000. Consolidated Results of Operations The following is a discussion of our results of operations in 2024 compared to 2023. Net sales For the year ended December 31, 2024, net sales were $8,484,379, as compared to $1,529,632 for the year ended December 31, 2023. Year-over-year sales increased by approximately 455%. For the year ended December 31, 2024, net sales generated in the U.S. was $8,397,570, compared to $1,522,821 for the same period in 2023, an increase of 451%. For the year ended December 31, 2024, net sales generated in Canada was $67,519, compared to $6,811 for the same period in 2023, an increase of 891%. For the year ended December 31, 2024, net sales generated outside the U.S. and Canada was $19,290. Net sales increased the year ended December 31, 2024 compared to the same period the prior year due to increased sales of tonneau covers to a private label partner, various dealers and distributors, and end users via the Company’s online marketplace. The Company continues to focus on establishing new and strengthening existing business-to-consumer and business-to-business channels while also strengthening customer support to increase customer satisfaction and enable high product turnover. Worksport has successfully bolstered its business-to-consumer sales channels in 2024, and it is now focusing on increasing cost efficiencies in these sales channels as well as establishing new business-to-business sales channels. For business-to-consumer channels, we are focused on lowering our customer acquisition cost throughout 2025. For business-to-business channels, we have assembled a strong team of both internal and external sales representatives, and we are actively presenting our product offerings to various dealers, wholesalers, and retailers across the U.S. and Canada. We intend to continue gradually increasing output capacity through refined production processes and increased personnel. 36 Net sales from online retailers of our products increased from $104,352 in 2023 to $4,930,822 in 2024, an increase of 4,625%. Online retailers accounted for 58% of total net sales for the year ended December 31, 2024 compared to 7% for the year ended December 31, 2023. Distributor sales increased 6,120% for the year ended December 31, 2024 compared with the year ended December 31, 2023 with net sales of $423,627 and $6,811, respectively. Private label sales accounted for 37% or $3,129,930 of net sales for the year ended December 31, 2024. 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 distribute our hard tonneau covers and soft tonneau covers in the U.S. and Canada through an expanding network of wholesalers, private labels, distributors, and other online retailers, including eBay, Amazon, Walmart, and our own e-Commerce platform hosted on Shopify. Distribution via each aforementioned channel is expected to increase during 2025. We have pursued and will continue to pursue relationships with Original Equipment Manufacturers with the intention of distributing through them as well. We currently work closely with a large Canadian and a large U.S. distributor as well as online retailers to grow our customer base. We are progressing well in conversations with three other major distributors with strong market presences, which will allow us to promote to dealers and sell to jobbers in strategic regions. Lastly, we are in closing discussions with a network of nationwide U.S. dealers capable of bringing our product to all U.S. continental states. Cost of Sales Cost of sales increased by 488%, from $1,289,118 for the year ended December 31, 2023 to $7,578,729 for the year ended December 31, 2024. Our cost of sales, as a percentage of net sales, was approximately 89% and 84% for the years ended December 31, 2024 and 2023, respectively. The increase in the cost of sales as a percentage of sales was primarily due to two factors: (1) strategic discounting aimed at boosting traffic to our direct-to-consumer online marketplace, and (2) overhead allocation associated with sold inventory produced in periods with limited production volume. Our discounting strategy is part of a broader initiative to enhance market presence and build brand awareness. We anticipate this will well position us for sustained customer engagement in future periods, during which discounting may not be necessary to the same extent. Additionally, overhead absorption was initially higher due to the allocation of fixed costs over a smaller production volume earlier in 2024. As production volume grows and our manufacturing process becomes more efficient, we expect to allocate those same fixed costs against a larger production volume base. This scaling will be facilitated by reallocating more of our existing human capital and machinery resources from design engineering and testing functions toward production. This shift is intended to support ongoing production increases and drive long-term efficiencies in our cost structure. 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 U.S. or from the U.S. 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 inventory directly from our stocking warehouse. 37 Operating Expenses Operating expenses increased for the year ended December 31, 2024 by $1,394,309, from $14,977,175 for the fiscal year ended December 31, 2023 to $16,371,484 for the fiscal year ended December 31, 2024, due to the following factors. ● Research and development expense increased by $620,622 from $1,669,318 in 2023 to $2,289,940 in 2024. The increase relates to development initiatives for hard tonneau covers (HD3, AL4), soft tonneau covers (SCX) and energy products. ● General and administrative expense increased by $704,632 from $7,974,362 in 2023 to $8,678,994 in 2024. The increase was related to 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 increased by $903,450, from $1,483,054 for 2023 to $2,386,504 for 2024. The increase in sales and marketing is primarily attributable to the Company’s marking campaigns to create brand and product awareness. ● Professional fees, which include accounting, legal, and consulting fees, decreased by $822,203 from $3,853,134 in 2023 to $3,030,931 in 2024. The decrease in professional fees was due to insourcing certain business processes and fewer share-based payments to third parties for services rendered. \Other Income and Expenses We reported net other expenses for the year ended December 31, 2024 of $697,955 compared to net other expenses of $192,297 the prior year. The increase in other expenses can be attributed to decreased interest and rental income. Liquidity and Capital Resources As of December 31, 2024, we had $4,883,099 in cash and cash equivalents and $892,000 of remaining available capacity on our revolving line of credit. We have historically generated only limited gross profit and have relied primarily upon capital generated from public and private offerings of our securities to fund continuing operations. Since the Company’s acquisition of Worksport in 2014, it has never generated a profit. During the year ended December 31, 2024, we had net losses of $16,163,789 (2023 - $14,928,958). As of December 31, 2024, the Company had working capital of $7,304,110 (2023 – $1,956,894) and had an accumulated deficit of $64,476,966 (202 3 - $ 48,313,177 ). 38 In their audit report, our independent auditors expressed that there is substantial doubt as to our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to generate cash flows from operations and obtain equity and/or debt financing. We intend to continue funding operations through equity and debt financing arrangements, which may be insufficient to fund our capital expenditures, working capital and other cash requirements in the long term. There can be no assurance that the steps our management is taking will be successful. To date, our 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, 2024, the Company received net proceeds of $12,482,549 from offerings. Management is focused on transitioning towards gross profit as our principal source of liquidity by growing our existing product offerings and customer base and realizing manufacturing efficiency improvements. We cannot give assurance that we can increase our cash balances or limit our cash consumption and thus maintain sufficient cash balances for our planned operations or future business developments. Future business development and demands may lead to cash utilization at levels greater than recently experienced. We may need to raise additional capital in the future. However, we cannot ensure that we will be able to raise additional capital on acceptable terms, or at all. Subject to the foregoing, we believe our current cash balances coupled with anticipated cash flow from operating activities will be sufficient to meet our working capital requirements for at least one year from the date of issuance of the accompanying consolidated financial statements. We have raised significant funds during the 2024 fiscal year by utilizing the following public and private offerings: September 2024 Private Offering On September 19, 2024, we entered into a Securities Purchase Agreement with an investor pursuant to which we issued and sold 95,000 shares of our common stock at a purchase price of $4.00 per share. As part of the agreement, we also issued warrants to purchase up to 190,000 shares of common stock at an exercise price of $4.00 per share, exercisable for a period of five years from the date of issuance. The warrants contain standard adjustment provisions for stock splits, recapitalizations and reorganizations and include beneficial ownership limitations to prevent the purchaser from exceeding certain ownership thresholds. We obtained $380,000 in net proceeds from this offering. Public Offering On September 30, 2022, we filed a shelf registration statement on Form S-3 (File No. 333-267696), which was declared effective by the SEC on October 13, 2022, containing a base prospectus covering the offering, issuance and sale by us of up to $30,000,000 of our common stock and prospectus supplement covering the offering, issuance and sale by us of up to $13,000,000 of our common stock that may be issued and sold under an At The Market Offering Agreement dated as of September 30, 2022. Pursuant to the ATM Agreement, H.C. Wainwright & Co., LLC is entitled to a commission equal to 3.0% of the gross sales price of the shares of common stock sold. We sold $6,032,789 of shares of common stock pursuant to the ATM Agreement during the fiscal year ended December 31, 2024. March 2024 Direct Offering and Concurrent Private Offering On March 18, 2024, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with a certain institutional investor (the “Purchaser”) pursuant to which we sold, in a registered direct offering, an aggregate of (i) 237,224 shares (the “Shares”) of common stock and (ii) 147,789 pre-funded warrants (the “Pre-funded Warrants”) to purchase up to 147,789 shares of Common Stock (the “Pre-funded Warrant Shares”). The offering price per Share was $7.40 and the offering price per Pre-funded Warrant was $7.399. The Shares, Pre-funded Warrants and Pre-funded Warrants Shares were offered pursuant to our Form S-3 Registration as supplemented by a prospectus supplement and accompanying base prospectus dated March 18, 2024, filed with the SEC on March 19, 2024 pursuant to Rule 424(b)(5) promulgated under the Securities Act. The registered direct offering closed on March 20, 2024. 39 The Company received net proceeds of approximately $2.59 million from the offering, after deducting the estimated offering expenses payable by the Company, including the tail fees payable to Maxim Group LLC. The Company intends to use the net proceeds from the offering for general corporate purposes, including working capital. In a concurrent private placement, we issued the Purchaser warrants to purchase an aggregate of 770,264 shares of common stock for $7.40 per share. Under the warrants, we are obligated to register the shares underlying the warrants on a registration statement on Form S-3 (or other applicable form). If at the time of exercise of the Warrant there is no effective registration statement available for the shares of common stock underlying the warrants, the warrants may be exercised via a “cashless exercise.” We will not receive any proceeds from any warrants exercised by a “cashless exercise.” Consolidated Statement of Cash Flows Cash increased from $3,365,778 at December 31, 2023 to $4,883,099 at December 31, 2024 – an increase of $1,517,321 or 45%. The increase was primarily due to financing activities conducted during the period to support growth of ongoing operations. Operating Activities Net cash used by operating activities for the year ended December 31, 2024 was $10,138,798, compared to $11,930,580 in the prior year, driven by a shift to production and distribution of hard tonneau covers. Accounts receivable decreased at December 31, 2024 by $387,561 and increased by $400,521 in the prior year. The decrease in accounts receivable was due to volume shifts from private label sales in 2023 to direct to consumer sales in 2024. The shift from private label sales to direct to consumer decreases the cash conversion timeline. Inventory increased at December 31, 2024 by $1,558,562 and increased at December 31, 2023 by $2,285,120 due to a shift in production requirements from soft tonneau covers to hard tonneau covers. Prepaid expenses and deposits decreased by $1,305,057 at December 31, 2024 and increased by $776,709 at December 31, 2023 due to deposits by us for the purchase of production equipment and inventory. Accounts payable and accrued liabilities increased at December 31, 2024 by $1,167,834 and decreased at December 31, 2023 by $492,114, respectively. These fluctuations were driven primarily by the transition to production activities in 2024. 40 Investing Activities Net cash used in investing activities for the year ended December 31, 2024 was $528,235 compared to $3,756,364 in the prior year. The decrease in investing activities was primarily due to higher capital expenditures on various production equipment in 2023 to support the Company’s transition to production in 2024. Financing Activities Net cash provided by financing activities for the year ended December 31, 2024 was $12,184,354 compared to $4,431,965 in the prior year. During the year ended December 31, 2024 the Company received net proceeds of $12,482,549 from the sale of shares and pre-funded warrants. During the year ended December 31, 2023, the Company received net proceeds of $4,475,869 from the sale of shares and pre-funded warrants. Contractual Obligations and Commercial Commitments The following table summarizes our contractual obligations as of December 31, 2024 and 2023: Contractual Obligations December 31, 2024 December 31, 2023 Operating lease obligations $ 615,007 $ 1,082,319 Equipment purchases $ - $ 59,815 Total Contractual Obligations $ 615,007 $ 1,142,134 We intend to fund our contractual obligations with working capital. Off-Balance Sheet Arrangements We do not have any material off balance sheet arrangements that have or are reasonably likely to have a material future effect on our financial condition, results of operations or cash flows. Recent Accounting Pronouncements See Note 1, Description of Business and Summary of Significant Accounting Policies, included in Part II Item 8, Financial Statements and Supplementary Data, of this report for further information regarding Financial Accounting Standards Board issued Accounting Standards Updates (“ASU”). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a “smaller reporting company,” as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information in this Item. 41