SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
the Fiscal Year Ended:
(Exact Name of Small Business Issuer as specified in its charter)
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|Large accelerated filer||☐||Accelerated filer||☐|
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As of March 31, 2023, the Registrant had shares of common stock, par value $0.0001 per share, issued and outstanding.
Table of Contents
|ITEM 1. BUSINESS||3|
|ITEM 1A. RISK FACTORS||13|
|ITEM 1B. UNRESOLVED STAFF COMMENTS||27|
|ITEM 2. PROPERTIES||27|
|ITEM 3. LEGAL PROCEEDINGS||27|
|ITEM 4. MINE SAFETY DISCLOSURES||27|
|ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES||27|
|ITEM 6. [RESERVED].||29|
|ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS||30|
|ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK||37|
|ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA||38|
|ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE||68|
|ITEM 9A. CONTROLS AND PROCEDURES||68|
|ITEM 9B. OTHER INFORMATION||69|
|ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS||69|
|ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE||70|
|ITEM 11. EXECUTIVE COMPENSATION||75|
|ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS||83|
|ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE||84|
|ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES||85|
|ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES||86|
|ITEM 16. FORM 10-K SUMMARY.||88|
In this Annual Report on Form 10-K, unless otherwise stated or as the context otherwise requires, references in this document to “Worksport Ltd.,” “Worksport,” “us,” “we,” “our” or the “Company” refer to Worksport Ltd. and its subsidiaries, Worksport Ltd., Worksport Acquisition Corporation, Worksport USA Holding Corporation, Worksport USA Operations Corporation, Worksport New York Operations Corporation and Terravis Energy, Inc. Our logo and other trademarks or service marks of the Company appearing in this Annual Report on Form 10-K are the property of Worksport Ltd. This Annual Report on Form 10-K also contains registered marks, trademarks, and trade names of other companies. All other trademarks, registered marks, and trade names appearing in this Annual Report on Form 10-K are the property of their respective holders.
Cautionary Note Regarding Forward-Looking Statements and Industry Data
This Annual Report on Form 10-K, in particular, Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements represent our expectations, beliefs, intentions, or strategies concerning future events, including, but not limited to, any statements regarding our assumptions about financial performance; the continuation of historical trends; the sufficiency of our cash balances for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future of the industry in which we operate, all of which were subject to various risks and uncertainties.
When used in this Annual Report on Form 10-K and other reports, statements, and information we have filed with the Securities and Exchange Commission (“SEC”), in our press releases, presentations to securities analysts or investors, in oral statements made by or with the approval of an executive officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to identify such forward-looking statements. However, any statements contained in this Annual Report on Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. These statements are only predictions. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Any or all of our forward-looking statements in this document may turn out to be wrong. Actual events or results may differ materially. Our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties, and other factors.
This Annual Report on Form 10-K also contains estimates, projections, and other information concerning our industry, our business, and particular markets, including data regarding the estimated size of those markets. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, general publications, government data, and similar sources.
ITEM 1. BUSINESS
Worksport Ltd., through its subsidiaries, designs, develops, manufactures, and owns the intellectual property (“IP”) 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.
The Company was incorporated in the State of Nevada on April 2, 2003 under the name Franchise Holdings International, Inc. (“FNHI”). On December 16, 2014, FNHI acquired 100% of the outstanding equity of Worksport Ltd., a corporation formed in the Province of Ontario on December 13, 2011, formerly known as Truxmart Ltd. (“Worksport Ontario”), pursuant to which Worksport Ontario became a wholly-owned subsidiary of FNHI. In May 2020, FNHI changed its name from “Franchise Holding International Inc.” to “Worksport Ltd.”
On May 21, 2021, the Board of Directors (“Board”) authorized the submission of a Certificate of Change/Amendment to the Nevada Secretary of State in which the Company sought to affect a reverse split of its common stock at the rate of 1-for-20 for the purpose of increasing the per share price for the Company’s stock in an effort to meet the minimum listing requirements of the Nasdaq. The Certificate of Change was submitted to the Nevada Secretary of State on May 21, 2021, and the Financial Industry Regulatory Authority (“FINRA”) corporate action was announced on August 3, 2021. FINRA declared the 1-for-20 reverse stock split effective on August 4, 2021.
Terravis Energy, Inc. (“Terravis”) was incorporated in the State of Colorado on May 24, 2021. On August 20, 2021, the Company was issued 100 shares of common stock at par value of $0.0001 per share. On January 20, 2022, Terravis issued an additional 9,999,900 shares of Common Stock to Worksport Ltd. at a par value of $0.0001. On November 4, 2022, Steven Rossi was issued 1,000 shares of Series A Preferred Stock of Terravis at par value of $0.0001, representing 100% of the authorized Series A Preferred Stock, in consideration for services rendered. The shares of Series A Preferred Stock vote together with the common stock of Terravis, unless prohibited by law, and have 51% voting power, regardless of how many shares of Series A Preferred Stock are outstanding.
Worksport Acquisition Corporation was incorporated in the State of Delaware on December 28, 2021. On January 1, 2022, the Company was issued 1,000 shares of common stock at par value of $0.0001 per share, representing 100% of the outstanding equity of Worksport Acquisition Corporation.
Worksport USA Holding Corporation was incorporated in the State of Colorado on March 11, 2022. On March 11, 2022, the Company was issued 1,000 shares of common stock at par value of $0.0001 per share, representing 100% of the outstanding equity of Worksport USA Holding Corporation.
Worksport USA Operations Corporation was incorporated in the State of Colorado on March 23, 2022. On March 23, 2022, the Company was issued 1,000 shares of common stock at par value of $0.0001 per share, representing 100% of the outstanding equity of Worksport USA Operations Corporation.
Worksport New York Operations Corporation was incorporated in the State of New York on March 31, 2022. On April 1, 2022, the Company was issued 10,000 shares of common stock at par value of $0.0001 per share, representing 100% of the outstanding equity of Worksport New York Operations Corporation.
On August 6, 2021, we consummated an underwritten public offering (the “Public Offering”) of an aggregate of 3,272,727 units, pursuant to a registration statement on Form S-1, as amended (File No. 333-256142) and a registration statement on Form S-1 (File No: 333-258429). The Public Offering price was $5.50 per unit, and each unit consisted of one share of common stock and one warrant (“Public Warrant”) to purchase one share of common stock for $6.05 per share (110% of the unit offering price) from the date of issuance until the third anniversary of the issuance date. We received gross proceeds of approximately $18.0 million from the Public Offering, and after deducting the underwriting commissions, discounts, and offering expenses payable by us, we received net proceeds of approximately $16.1 million. We used the net proceeds for working capital, research & development, marketing, and equipment.
In connection with the Public Offering, our common stock and Public Warrant commenced trading on The Nasdaq Capital Market under the symbols “WKSP” and “WKSPW,” respectively, since August 4, 2021. Prior to the uplisting, our common stock was quoted on the OTCQB Marketplace under the symbol “WKSP.”
The following highlights recent material developments in our business:
In May 2022, we closed on the purchase of a commercial property (the “Property”) for $8,125,000 in the town of West Seneca, Erie County, New York (the “Acquisition”) pursuant to a Purchase and Sale Agreement that we entered into with J&M Distributing, Inc. We financed $5,300,000 in connection with the closing of the Acquisition pursuant to a Loan Agreement that we entered into with Northeast Bank (“Lender”), of which we issued a Promissory Note to the Lender guaranteed by Worksport Ltd. and secured by the Property per a Mortgage and Security Agreement entered into with the Lender. The Property consists of two parcels of land: (i) one parcel consisting of approximately 14 acres improved by a building containing approximately 152,847 square feet; and (ii) a second parcel consisting of approximately four acres of vacant land. Currently, our manufacturing operations are in China. With the acquisition of the Property, we plan to move our manufacturing operations to the United States. We believe that by moving our manufacturing operations to the United States, we can (i) have better control over design and manufacturing quality of our products, (ii) lessen supply chain risk, (iii) decrease shipping costs, and (iv) cut overall manufacturing costs.
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 (the “Form S-3”), 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 (the “ATM Agreement”). Pursuant to the ATM Agreement, H.C. Wainwright & Co., LLC (“Wainwright”) is entitled to a commission equal to 3.0% of the gross sales price of the shares of common stock sold. As of the filing date of this Annual Report on Form 10-K, no securities have been sold pursuant to the Form S-3.
|●||On November 14, 2022, our shareholders approved the Worksport Ltd. 2022 Equity Incentive Plan (the “2022 Plan”). A total of 750,000 shares of common stock were initially reserved for the issuance of awards under the 2022 Plan. The 2022 Plan contains an “evergreen formula” pursuant to which the number of shares of common stock available for issuance under the 2022 Plan will automatically increase on January 1 of each calendar year during the ten-year term of the 2022 plan, beginning with the calendar year 2023, by an amount of shares of common stock so that the total amount of common stock available under the 2022 Plan is equal to 15% of the total number of shares of common stock outstanding on December 31st of the prior calendar year minus the total number of shares reserved and available for issuance under the Worksport Ltd. 2015 Equity Incentive Plan and Worksport Ltd. 2021 Equity Incentive Plan. On January 1, 2023, the authorized number of shares of common stock of the 2022 Plan was 2,518,502.|
On November 18, 2022, we engaged Lumsden & McCormick, LLP to replace Haynie & Company as our independent registered public accounting firm.
|●||On February 23, 2023, our subsidiary, Terravis, announced the installation of its proprietary electric vehicle fast charging stations with two direct current (DC) fast chargers at our factory in West Seneca, New York. Each station’s initial two charge points are rated at 120 kilowatt-hours (kWh) and equipped with two CCS1 connectors (Combined Charging Standard: A standard for charging electric vehicles that uses Combo 1 or Combo 2 connectors to provide power at up to 350 kilowatts), also known as pistols. We are planning installations of additional DC fast chargers in the near future as well, rated at a minimum of 240 kWh.|
We have developed a series of soft and hard folding tonneau covers as well as energy products.
Soft Tonneau Covers
Our soft tonneau cover offering consists of vinyl wrapped tri- and quad-fold tonneau covers manufactured overseas in Meizhou, China. Enhanced versions of our vinyl tri-fold soft tonneau covers are now available for purchase and marketed under a “PRO” designation; our quad-fold soft tonneau covers will soon have an upgraded “PRO” version available as well. These upgraded versions include our patented quick latch system, which allows the operator to open the cover by simply pulling a release cable – enabling single-sided operation. Each soft cover is fitted with a powder-coated, lightweight aluminum frame and rear cam latches as well as ultra-violet (UV) protected, vinyl tri-layer material that seals around the truck bed with a rubber gasket designed to protect cargo from moisture and debris.
Tri-fold soft covers are a lower cost option when compared to quad-fold tonneau covers. Compared with Worksport tri-fold soft tonneau covers, Worksport quad-fold covers have the additional benefit of enabling full truck bed access by being foldable upwards toward the rear window of the truck. As the market’s first quad-folding vinyl-wrapped cover that will provide full truck bed access utilizing Worksport’s Intellectual Property, Worksport’s soft quad-fold covers are compact when folded parallel to the back window of the truck while avoiding obstruction of the rear brake light on most truck models.
Our soft tonneau cover line includes:
|○||The Worksport SC3 – soft tri-fold introduced in 2011, first Worksport Ltd. product;|
|○||The Worksport SC3 PRO –soft tri-fold with Smart Latch system introduced in 2012;|
|○||The Worksport SC4 – soft quad-fold introduced in 2022; and|
|○||The Worksport SC4 PRO –soft quad-fold with Smart Latch system to be introduced in 2023.|
|○||The Worksport SCX – soft tri-fold with extendable frame.|
Hard Tonneau Covers
Our hard line of tonneau covers includes tri- and quad-fold, aluminum flush-mounted and top-mounted folding tonneau covers. Our entire line of hard folding tonneau covers will be manufactured in the USA. Our hard cover panels are designed with formed aluminum, ultra-strong high temper formed alloy panels with a durable black surface. These panels will have significant dent resistance over many other tonneau covers as they use thicker aluminum on the exterior surface as opposed to the sandwich style of most covers today. Designed to auto index (center) in the truck bed and be only 7.5mm above the truck bed, it is a low profile, sleek look that is easy to install. Our hard covers will be offered with the XCX rail upgrade, allowing future accessories such as expandable cargo division and storage solutions. Similar to the soft cover line, our hard cover line products will each be available in upgraded versions utilizing our quick latch system, enabling single-sided operation.
Our hard tonneau cover line, all of which is in development, includes:
The Worksport TC3 – top-mounted hard tri-fold;
|●||The Worksport TC3 PRO – top-mounted hard tri-fold with Smart Latch system;|
The Worksport FC3 – flush-mounted hard tri-fold;
The Worksport FC4 – flush-mounted hard quad-fold; and
|●||The Worksport FC4 PRO – flush-mounted hard quad-fold with Smart Latch system.|
We are researching and developing various energy-based products, two of which can be sold together as a kit: the Worksport SOLIS tonneau cover (“SOLIS”) and the Worksport COR energy storage system (“COR”). This kit will be available for both end-consumers and Original Vehicle Manufactures alike. This kit integrates tonneau cover, solar energy capture, and portable energy storage technologies to convert pickup trucks to mobile microgrid power stations – allowing Worksport to compete within niche markets in each the automotive aftermarket accessory, solar energy, and portable power station markets.
The SOLIS, a tonneau cover with integrated solar panels, is a unique, folding tonneau cover design founded on our top-mounted tough cover design but with the addition of cutting edge, monocrystalline, semi-flexible solar panels and wiring system. These solar panels are secured to aluminum alloy panels both mechanically and using specialized adhesives, which ensure the covers are extremely strong, durable, and secure. The SOLIS cover is intended to be sold as an Original Equipment Manufacturer product, as it can be integrated into the design of leading electric pickup trucks; consequently, we have and will continue forging relationships with electric pickup truck manufacturers, including but not limited to Workhorse, Atlis, Bollinger, and Hercules as well as Toyota, Stellantis, General Motors, Ford, Nissan, and Rivian.
The solar panels that we plan to integrate into the SOLIS cover are capable of generating 170-180 watts per square meter. For example, as tested outdoors, the SOLIS cover is capable of generating approximately 460 watts of power on a RAM 6’5” truck bed. When integrated into the design of an electric pickup truck, this power generation can be converted to additional vehicle mileage. The specific added mileage is dependent on many factors including but not limited to region of the world in which the vehicle is driven, weather conditions, season, temperature, hours of sun light per day, and average irradiance. For example, assuming a solar power density of 170 W/m2, battery capacity of 98 kWh, mileage range of 300 miles, average hours of sun per day of 6 hours, average irradiance per day of 700 W/m2, and surface area of 2.7 m2, the SOLIS cover is estimated to provide 5.6 additional miles of range to an electric pickup truck per day.
The COR or COR ESS (energy storage system) is a modular, portable power station uniquely designed to mount to the inside of a pickup truck bed and enable battery swapping without an immediate drop in power output. The COR built-in inverter with an output voltage of 120V AC (frequency of 60Hz) is capable of powering loads up to 3000W. Combined with its modular 48V batteries, it can store up to 6kWh of energy on the go. Each additional modular battery adds 1.5kWh of energy storage. The COR main battery, a Lithium battery, boasts a capacity of 1534Wh while its Hot Swap Lithium Iron Phosphate (Li-LFP) battery has a capacity of around 200Wh. The system allows Bluetooth connection for monitoring and controlling the COR system and its external batteries.
Not only does the COR system allow users to swap a depleted battery for a fully charged one, but it does so without a drop in power output for up to 15 seconds with a load of 3000W. This unique feature allows the COR system to be used in a variety of applications, including but not limited to sporting and outdoor activities, disaster relief and general emergencies, and vocational activities ranging from contractor to drone operator. While the COR system is designed to nicely complement the SOLIS tonneau cover, it will be purchasable as a standalone product – allowing consumers to utilize stored energy, whether captured via grid or grid-independent energy sources, anywhere. As Worksport’s first step into the energy storage market, the COR system is Worksport’s pioneer product within its future COR platform.
As of December 31, 2022, all Worksport tonneau covers were manufactured in a facility located in Meizhou, China according to Worksport’s specifications, schematics and blueprints. We believe production at the factory can be increased within 30 days to facilitate volumes up to ten times the current output without any adverse effects on quality or craftsmanship.
We have purchased many production tools including injection molds, die cast molds, extrusion dies, and stamping dies – many of which are residing among foreign suppliers who are currently utilizing said tooling to produce needed components for manufacturing or assembly within the USA. We are concurrently diversifying this list raw material suppliers who can use our production tools to continue producing our tonneau cover components, should trade with any particular or preferred raw material supplier become more expensive or difficult.
In May of 2022, we purchased a 152,847 square foot production facility for domestic production, storage, and distribution, located in West Seneca, New York. We have received the majority of all manufacturing equipment deemed necessary to begin production, and we are in the process of installing and testing those machines, as well as training personnel to use those machines. Management believes that having manufacturing capability in North America will increase quality control and production efficiency, as well as lower landed costs and geopolitical risks.
Our Plant-Readiness Team believes that we will begin initial, basic manufacturing and/or assembly at our USA-based production facility within the second quarter of fiscal year 2023, improving our process on an on-going basis.
We currently hold a broad collection of intellectual property rights relating to certain aspects of our parts and accessories and services. This includes patents, trademarks, copyrights and trade secrets. Although we believe the ownership of such intellectual property rights is an important factor in our business and that our success does depend in part on such ownership, we rely primarily on the innovative skills, technical competence and marketing abilities of our personnel.
As of December 31, 2022, the Company’s patent portfolio consists of eight (8) issued U.S. utility patents, one (1) issued Canadian utility patent, and twenty-seven (27) pending patent applications: eight (8) U.S. utility applications, seven (7) U.S. design applications, three (3) PCT applications, six (6) Canadian utility applications, one (1) Chinese invention application, and two (2) Chinese design applications. The Company is also in the process of preparing and filing several other utility and design patent applications across relevant countries and jurisdictions.
Granted U.S. patents will expire between 2032 and 2036, excluding any patent term adjustment that might be available following the grant of the patent. If issued, pending applications would expire 20 years from the filing date of each application, excluding the filing date of any provisional applications and excluding any patent term adjustment that might be available following the grant of the patent.
As of December 31, 2022, the Company has 20 trademark registrations and 15 pending trademark applications in the United States, Canada, China, and European Union.
We primarily compete in the Automotive Aftermarket Accessories and New Energy industries with a focus on the Tonneau Cover and the Portable Power Station Markets.
Tonneau Cover Market
There are various forms of tonneau covers, each with their advantages and disadvantages, available for consumption through direct-to-consumer and retailer and dealer sales channels. Some forms of tonneau covers include but are not limited to:
Solid One Piece Caps and Lids;
Soft Folding & Roll-Up Covers; and
Hard Folding & Standing Covers.
Solid one piece covers and retractable covers tend to have limited functionality and tend to be priced higher when compared to other types of tonneau covers. Soft and hard folding/rolling tonneau covers, in contrast, tend to be priced more competitively and, as such, are a popular choice among tonneau cover consumers. Given these factors and our belief that we can develop less cumbersome, high functioning, and low cost soft and hard folding covers, we focus primarily on developing soft and hard folding covers.
Our tonneau cover revenue stream is largely proportional to sales of pickup trucks. Currently, there are 284.9 million vehicles in operation in the USA1, 21%, or 59.5 million, of which are pickup trucks.2 However, as a result of supply chain shortages, rising interest rates, high prices, and slowing sales, it may take until 2025 for new-vehicle sales to return to pre-pandemic levels.1 While new vehicle sales have decreased, we are well-positioned to capitalize on new vehicle sales; we offer tonneau covers for each of the 10 most popular makes/models by projected 2022-2029 sales (including, for example, the Ford F-Series, RAM Pickups, and Chevrolet Silverado), as well as the top 10 most accessorized pickup truck makes/models projected in 2022-2029.2 Within the USA market, pickup truck market revenue is expected to show a compound annual growth rate of 1.70% in 2023-2027.3 Within this market, pickup trucks are most popular within the southern region of the United States2, and the two largest state markets for pickup trucks are by far Texas and California.2 Globally, pickup truck market revenue is expected to show a compound annual growth rate of 1.01% in 2023-2027.4
Electric pickup trucks are projected to gain a larger portion of the pickup truck market share each year through 20351, as this submarket is estimated to have a compound annual growth rate of 29.7% between 2022 and 2023.5 However, a large headwind acting against this trend is that pickup trucks tend to be more popular in areas with less-developed charging infrastructure2 – a headwind that the SOLIS cover directly addresses and positions us favorably for possible partnerships and deals with electric pickup truck manufacturers.
The Specialty Equipment Aftermarket provides more specific insight into how often and for what reasons vehicle owners or renters are purchasing accessories for their vehicles. Despite crossover utility vehicles being the most common vehicle type on the road in the USA1, pickup trucks are the largest market by sales within the USA for specialty equipment – constituting 31% of this market2, which translated to $16 billion in sales during 2021.2 This market is expected to grow from $50.9 billion in 2021 to $58.66 billion by 2025.6 Within this pickup truck accessory market, 34% of accessories are truck bed & utility modifications2, which is the submarket in which we operate. Truck bed covers are among the top product categories for aftermarket accessory purchases in 20212, and the size of the tonneau cover market within the USA was valued at $3 billion as of 2021.7
As discretionary consumer goods, the specialty automotive part market is subject to consumer spending trends. Per capita disposable income fell 7.8% during 2022 as government stimulus ended; however, it is expected to increase slowly during 2023.8 Further, while the Federal Reserve has projected unemployment rates to increase in 2023 and subsequent years9, recent unemployment rates are the lowest they have been in recent decades.10 Together, these factors suggest consumer disposable income and unemployment will need to be carefully monitored in order to accurately forecast the automotive aftermarket accessories’ market potential year-to-year.
Consumers purchase automotive aftermarket accessories, as well as tonneau covers, specifically, for various reasons. According to recent reports, 97%, 92%, 80%, and 62% of pickup truck owners use their trucks for utility/work, travel/vacation, outdoor recreation, and off-road uses, respectively.2 Of those pickup truck owners who have purchased accessories for their trucks, 93%, 86%, 68%, and 43% of them use their pickup trucks for day trips, carrying tools/gear, light off-roading, and car camping, respectively.2 Pickup truck owners who use their vehicles for outdoor recreation, work, or off-roading are much more likely to purchase accessories when compared to those who use their vehicles for other purposes.2 Worksport’s tonneau covers largely benefit truck owners using their vehicles for any of these aforementioned purposes, and the SOLIS cover provides additional utility for those utilizing their trucks for utility/work, outdoor recreation, and car camping, in particular.
Sales of truck bed covers occur across several channels, among those including but not limited to part manufacturers, specialty retailers and online retailers. For physical location sales, the most popular sales channels for truck bed covers include Specialty Retailers/Installers and New Vehicle Dealerships, which constitute 17% and 11% of in-store sales, respectively.6 For online sales, the most popular sales channels for truck bed covers include Online Only General Retailer, Specialty Retailers/Installers, and Parts Manufacturers, which constitute 23%, 19%, and 8% of online sales, respectively.6 In the Fall of 2022, it was reported that roughly 59% of retailer specialty equipment sales were sold through in-store/physical channels while the other 41% were sold through online channels.11 It was further reported that roughly 50% of manufacturer specialty equipment sales were sold through in-store/physical channels while the other 50% were sold through online channels.11 Worksport aims to list its products on each of these highly-popular in-person and online sales channels in order to maximize sales volumes.
|1.||SEMA. 2023 Future Trends Report. Retrieved from www.sema.org|
|2.||SEMA. Pickup Accessorization Report. Retrieved from www.sema.org|
Statista. Pickup Trucks – Worldwide. Retrieved from
Statista. Pickup Trucks – Worldwide. Retrieved from
|5.||Market Decipher. Electric Pickup Truck Market Size, Statistics, Growth Trend Analysis, and Forecast Report, 2022 – 2032. Retrieved from https://www.marketdecipher.com/report/electric-pickup-trucks-market|
|6.||SEMA. 2022 Market Report. Retrieved from www.sema.org|
Arizton. U.S. Tonneau Covers Market - Industry Outlook & Forecast 2022-2027. Retrieved from
IBIS World. Per Capita Disposable Income. Retrieved from
Federal Reserve Board. Summary of Economic Projections. Retrieved from
Bureau of Labor Statistics. The Employment Situation – January 2023. Retrieved from
|11.||SEMA. State of the Industry Report 2022 Fall. Retrieved from www.sema.org|
Portable Power Station Market
Compared to the Tonneau Cover Market, the Portable Power Station Market is much younger and globalized. Gas and diesel generators have long been used by consumers to generate electricity when they could not rely on the grid, whether it be for grid damages or the lack of grid in remote areas. Unlike such generators, portable power stations do not generate electricity, themselves, but can also be used to provide electricity during times of grid unreliability. These portable power stations are often charged by the grid via home outlets or independent of the grid via consumers’ vehicles or solar panels.
The Portable Power Station Market is large and growing. At a compound annual growth rate of 3.9% between 2022 and 20311, the global Portable Power Station market size was valued at $4.0 billion in 2021.1 Within this global market, the largest regional market is the North American market.2 The highest compound annual growth rates in this regional market is expected to be those power stations utilizing lithium-ion batteries for off-grid power applications2, which matches the COR system’s battery type as well as intended usage.
When paired with the SOLIS cover, the COR energy storage system will be a market outlier in that it can be charged safely while mobile whereas competing portable power stations are intended to be stationary during charging.
Allied Market Research. Portable Power Station Market. Retrieved from
Markets And Markets. Portable Power Station Market. Retrieved from
We distribute our tonneau covers in Canada and the United States through an expanding network of wholesalers, private labels, distributors, and online retail channels, including eBay, Amazon, Walmart, and our own e-commerce platform hosted on Shopify. Distribution via each aforementioned channel is expected to increase during 2023. We have pursued and will continue to pursue relationships with Original Equipment Manufacturers with the intention of distributing through them as well.
The specialty equipment aftermarket consists of three major types of customers, which include master warehouse distributors and big box stores, dealers and wholesalers, and retail end consumers. Master warehouse distributors and big box stores stock and distribute products to their customers, which are usually local dealers and wholesalers. Dealers and wholesalers are local stores which sell products to some businesses and retail consumers in their area and online. Dealers purchase most of their products from their local distributor who deliver to them regularly. Retail end consumers are the end users of the products.
Tonneau Cover Competitors
The Tonneau Cover market is relatively consolidated with one industry leader, Real Truck (formerly Truck Hero), having the largest market share. Real Truck has acquired upwards of 16 independent tonneau cover brands in North America, allowing it to concurrently target many different niche markets but also potentially cannibalizing its own sales. We compete directly with Real Truck. Other competitors in this space include Truck Accessories Group (Primarily Leer), Agricover (primarily Access), Truck Covers USA, and Paragon.
We believe that being independent, innovative, operationally lean, and competitively priced will enable us to acquire a larger portion of the existing market share. In order to execute on this, we intend to have a small and effective sales team to forge strong business-to-business relationships, while turning inventory regularly through direct-to-consumer sales supported by a strong customer support team. Selling above MAP (Minimum Advertised Price) and enforcing this policy will allow business customers to sell without competing with us and in return support the growth of the distribution base. Our innovative covers are designed to serve purposes that no other tonneau cover is currently capable of, some of which are specifically geared towards improving margins for distributors. Further, the SOLIS cover’s inclusion of solar panels may be particularly attractive to electric pickup truck original equipment manufacturers, paving the path towards an original equipment manufacturer relationship that may be lucrative beyond standard tonneau cover partnerships.
Portable Power Station Competitors
The Portable Power Station market is global and highly fragmented and includes many competitors from across the world including but not limited to Alpha ESS Co., Ltd., Anker Technology, Bluetti, Chilwee Group Co., Ltd, Duracell, GES Group Limited Company, Jackery Inc., Lion Energy, Milwaukee Tool, and Mitsubishi Corporation. Some of these competitors offer a line of Portable Power Stations, each with different power capacities, sizes, and price points. Others specialize in few or even one Portable Power Station as to target a specific or niche submarket.
We intend to be competitive by focusing on our portable power station’s biggest strengths – primarily it’s modularity and Hot Swap battery. Modularity allows consumers not only to determine themselves the ideal stored energy capacity and price point they are seeking but also to upgrade their COR system overtime based on their evolving needs.
Supply of Components
Production of our soft and hard cover product lines requires components including but not limited to injection molded plastics, rubber hinges, rubber seals, foam corners, aluminum blanks, aluminum extrusions, and metal brackets. We believe that we can source materials needed for soft and hard tonneau cover production from other suppliers without major delay should any preferred supplier no longer be suitable.
For our domestically-assembled products, we have developed an extensive network of suppliers based in a diverse range of countries, including but not limited to the USA, China, Romania, Spain, Turkey, and Canada. We are further diversifying our supply chain of tonneau cover components by developing relationships with suppliers based in countries, including but not limited to Malaysia, Hungary, Czech Republic, Estonia, Latvia, Slovakia, Bulgaria, Vietnam, Thailand, Poland, Finland, Italy, and Lithuania. For our COR and SOLIS components, we are establishing relationships with suppliers based in countries, including but not limited to China, Germany, Romania, Turkey, Philippines, and India. We actively seek to lower reliance on any country deemed a potential geo-political supply chain risk.
Research and Development
We invest in research and development activities on an ongoing basis. We are actively acquiring new engineering and design assets, both in-house and third-party. Our industrial engineers are based in both Canada and the United States, and they have developed and are further developing unique tonneau cover designs with enhanced user experience, cost-effective and sustainable materials, and automatable manufacturing potential. Our electrical engineers are based in Canada and work heavily on sourcing solar panels with features suitable for the Company’s SOLIS cover, as determined through deep product research and testing. Concurrently, the electrical engineering department is researching and developing more size- and cost-effective methods of portable energy storage in order to offer the market a competitive portable energy storage system with distinguishable and unique product features.
Our subsidiary, Terravis, researches green energy solutions for home and community power as well as Electric Vehicle DC charging and heat-pump technology.
Governmental Programs, Incentives and Regulations
Globally, both the operation of our business and the ownership of our products by our customers are impacted by various government programs, incentives, and other arrangements. Our business and products are also subject to numerous governmental regulations that vary among jurisdictions.
Programs and Incentives
We have applied for and been granted tax, mortgage, wage, and energy cost relief in New York in addition to wage cost relief in Ontario. These programs are provided by several agencies including the Erie County Industrial Development Agency, Empire State Development, NY Power Authority, and The Canada Revenue Agency. Each of these incentive programs includes its own set of guidelines and requirements, including but not limited to timely eligibility reporting, environmental regulation compliance, and headcount projection realization – each of which we have agreed to and must abide by in order to continue realizing said incentives.
We continue to seek additional incentives and grants in order to lower our operational costs as well as commit less capital to new product initiatives.
Our COR portable power station is subject to various U.S. and international regulations that govern transport of “dangerous goods,” defined to include lithium-ion batteries, which may present a risk in transportation. We plan to conduct testing to demonstrate our compliance with such regulations.
We use lithium-ion cells in our energy storage products. The use, storage, and disposal of our battery packs are regulated under existing laws and are the subject of ongoing regulatory changes that may add additional requirements in the future.
We are committed to high environmental standards and carry out our activities and operations in compliance with all relevant and applicable environmental regulations and best industry practices. Costs of environmental regulatory compliance are not expected to be significant.
As of December 31, 2022, we had a total of 25 employees, of which included 16 full-time employees in Canada and five full-time and four temporary employees in the USA. We intend to hire additional employees as operations grow – particularly within our West Seneca, NY manufacturing facility. We rely on few independent contractors for additional labor and are very selective in our use of consultants.
Practices and Policies
We are an equal opportunity employer committed to inclusion and diversity and to providing a workplace free of harassment or discrimination.
Compensation and Benefits
We believe that compensation should be competitive and equitable, and should enable employees to share in our success. We recognize our people are most likely to thrive when they have the resources to meet their needs and the time and support to succeed in their professional and personal lives. In support of this, we offer a variety of benefits for employees and invest in tools and resources that are designed to support employees’ growth and development.
Inclusion and Diversity
We remain committed to our vision to build and sustain a more inclusive workforce that is representative of the communities we serve. We continue to work to increase diverse representation, foster an inclusive culture, and support equitable pay and access to opportunity for all employees.
We believe that open and honest communication among team members, managers, and leaders helps create an open, collaborative work environment, where everyone can contribute, grow and succeed. Team members are encouraged to come to their managers with questions, feedback or concerns.
Health and Safety
We are committed to protecting our team members everywhere we operate and, as such, support employees with general safety trainings. We have also taken additional health and safety measures during the COVID-19 pandemic.
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act, are filed with the SEC. Such reports and other information filed by us with the SEC are available free of charge at investors.worksport.com/stock-information when such reports are available on the SEC’s website. We periodically provide certain information for investors on our corporate website, worksport.com, and our investor relations website, investors.worksport.com. This includes press releases and other information about financial performance, information on environmental, social and governance matters, and details related to our annual meeting of shareholders. The information contained on the websites referenced in this Annual Report on Form 10-K is not incorporated by reference into this filing. Further, our references to website URLs are intended to be inactive textual references only.
Our principal corporate office and research and development (“R&D”) facility is located at 55G East Beaver Creek Rd., Richmond Hill, Ontario, L4B 1E5, Canada while our manufacturing and secondary business address is 2500 N. America Dr., West Seneca, NY 14224, USA.
Our main telephone number is (888) 554-8789. Our main website is www.worksport.com. The contents of our website are not incorporated by reference into this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
Our business is subject to many risks and uncertainties, which may affect our future financial performance. If any of the events or circumstances described below occur, our business and financial performance could be adversely affected, our actual results could differ materially from our expectations, and the price of our stock could decline. The risks and uncertainties discussed below are not the only ones we face. There may be additional risks and uncertainties not currently known to us or that we currently do not believe are material that may adversely affect our business and financial performance. You should carefully consider the risks described below, together with all other information included in this report including our financial statements and related notes, before making an investment decision. The statements contained in this report that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and investors in our securities may lose all or part of their investment.
Risks Related to Our Business
Our business, results of operations and financial condition may be adversely impacted by the continued global COVID-19 pandemic.
A significant outbreak, epidemic or pandemic of contagious diseases in any geographic area in which we operate or plan to operate could result in a health crisis adversely affecting the economies, financial markets and overall demand for our products. In addition, any preventative or protective actions that governments implement or that we take in response to a health crisis, such as travel restrictions, quarantines, or site closures, may interfere with the ability of our employees, suppliers and customers to perform their responsibilities. Such results could have a material adverse effect on our business.
The continued global COVID-19 pandemic has created significant volatility, uncertainty and economic disruption. To date, this pandemic has affected nearly all regions around the world. In the United States, businesses as well as federal, state and local governments implemented significant actions to mitigate this public health crisis. While we cannot predict the duration or scope of the COVID-19 pandemic, it may negatively impact our business and such impact could be material to our financial results, condition and outlook related to:
|●||disruption to our operations or the operations of our suppliers, through the effects of business and facilities closures, worker sickness and COVID-19 related inability to work, social, economic, political or labor instability in affected areas, transportation delays, travel restrictions and changes in operating procedures, including for additional cleaning and safety protocols;|
|●||increased volatility or significant disruption of global financial markets due in part to the COVID-19 pandemic, which could have a negative impact on our ability to access capital markets and other funding sources, on acceptable terms or at all and impede our ability to comply with debt covenants; and|
|●||the further spread of COVID-19, and the requirements to take action to mitigate the spread of the pandemic (e.g., vaccination requirements that have been and continue to be taken in response to the pandemic and enhanced health and hygiene requirements or social distancing or other measures), will impact our ability to carry out our business as usual and may materially adversely impact global economic conditions, our business, results of operations, cash flows and financial condition.|
To the extent the COVID-19 pandemic or a similar public health threat has an impact on our business, it is likely to also have the effect of heightening many of the other risks described in this “Risk Factors” section.
There is substantial doubt of our ability to continue as a going concern.
We have incurred net losses since our inception. In the twelve months ended December 31, 2022 and 2021, we incurred operating losses of $12,773,715 and $7,561,731, respectively. As at December 31, 2022, the Company has working capital of $15,870,377 and an accumulated deficit of $33,384,219. In their audit report for the fiscal year ended December 31, 2022 included in this report, our auditors have expressed their consent 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 financing. We intend to continue funding our 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 management is taking will be successful.
We are a growth stage company with a history of losses and expect to incur significant expenses and continuing losses for the foreseeable future.
We have incurred net losses since our inception. In the twelve months ended December 31, 2022 and 2021, we incurred operating losses of $12,773,715 and $7,561,731, respectively, and as of December 31, 2022, we had an accumulated deficit of $33,384,219. We believe that we will continue to incur operating and net losses in the future while we grow and reach company milestones, including bringing our TC3 tonneau cover as well as SOLIS and COR products to market, though these milestones may occur later than we expect or not at all. We do not expect to be profitable for the foreseeable future as we invest in our business, build capacity and ramp up operations, and we cannot assure you that we will ever achieve or be able to maintain profitability in the future. Even if we are able to successfully develop our products and attract customers, there can be no assurance that we will be financially successful. For example, as we expand our product portfolio, and expand internationally, we will need to manage costs effectively to sell those products at our expected margins. Failure to become profitable would materially and adversely affect the value of your investment. If we are ever to achieve profitability, it will be dependent upon the successful development and commercial introduction and acceptance of our consumer products, and our services, which may not occur.
We have only sold tonneau covers, the market size of which is limited. Our long-term results depend upon our ability to successfully introduce and market new products, which may expose us to new and increased challenges and risks.
To date, we have only sold tonneau covers, the market size of which is limited. Our growth strategy depends, in part, on our ability to successfully introduce and market new products, such as our SOLIS and COR, as well as develop new products. As we introduce new products or refine, improve or upgrade versions of existing products, we cannot predict the level of market acceptance or the amount of market share these products will achieve, if any. We cannot assure you that we will not experience material delays in the introduction of new products and services in the future. Consistent with our strategy of offering new products and product refinements, we expect to continue to use a substantial amount of capital for product refinement, research and development, and sales and marketing, of which may not provide a return on investment in the event we fail to bring potential products to market. We will need additional capital for product development and refinement, and this capital may not be available on terms favorable to us, if at all, which could adversely affect our business, prospects, financial condition, results of operations, and cash flows. If we are unable to successfully introduce, integrate, and market new products and services, our business, prospects, financial condition, results of operations, and cash flows may be materially and adversely affected.
We may not succeed in establishing, maintaining and strengthening our brand, which would materially and adversely affect customer acceptance of our products and our business, prospects, financial condition, results of operations and cash flows.
Our business and prospects heavily depend on our ability to develop, maintain and strengthen the Worksport and Terravis brands. If we are not able to establish, maintain and strengthen our brands, we may lose the opportunity to build a critical mass of customers. Our ability to develop, maintain and strengthen our brands will depend heavily on our ability to provide high quality products and engage with our customers as intended, as well as the success of our customer development and marketing efforts. The automobile accessory and parts industry is intensely competitive, and we may not be successful in building, maintaining and strengthening either or both the Worksport and Terravis brands. Many of our current and potential competitors have greater name recognition, broader customer relationships and substantially greater marketing resources than we do. If we do not develop and maintain a strong brand for either or both of our Worksport or Terravis brands, our business, prospects, financial condition, results of operations and cash flows could be materially and adversely impacted.
In addition, we could be subject to adverse publicity. In particular, given the popularity of social media, any negative publicity, whether true or not, could quickly proliferate and harm consumer perceptions and confidence in our brands. In addition, from time to time, our products may be evaluated and reviewed by third parties. Any negative reviews or reviews which compare us unfavorably to competitors could adversely affect consumer perception about our products.
The US Central Bank has provided forward looking guidance of high interest rates for the near future.
We may need to invest in additional machinery, equipment and land if demand for our products is higher than anticipated or if we secure a supplier deal with a major original equipment manufacturer (OEM). With high interest rates, it will be less financially attractive to finance such purchases, which may lead to an otherwise higher burn rate. Further, rising interest rates increase the amount that we must pay for our mortgage on our West Seneca, New York property. At the same time, it lowers the attractiveness of refinancing, despite the fact that our anticipated positive future cash flows would allow us to seek financing from a broader selection of lenders.
Continued uncertain economic conditions, including inflation and the risk of a global recession could impair our ability to forecast and may harm our business, operating results, including our revenue growth and profitability, financial condition and cash flows.
The U.S. economy is experiencing the highest rates of inflation since the 1980s. Historically, we have not experienced significant inflation risk in our business. However, our ability to raise our product prices depends on market conditions, and there may be periods during which we are unable to fully recover increases in our costs. In addition, the global economy suffers from slowing growth and rising interest rates, and many economists believe that a global recession may begin in the near future. If the global economy slows, our business would likely be adversely affected.
Also, a recession may result in job loss and lower discretionary funds among potential customers, lowering demand for automotive aftermarket accessories. Part of our consumer base for SOLIS includes workers, particularly those in manufacturing and construction environments, who may have lower job security in the event of a recession and, thus, have lower demand for the SOLIS. Commercial real estate values may also decrease, which would lower the value of our production facility in West Seneca, New York.
The US is in a state of low unemployment, and many companies that provide wage-based jobs are having trouble filling open positions.
We need to fill certain positions that do not require specialized knowledge or experience, and we will need to offer competitive pay and benefits in order to attract people as we compete with other local businesses for employment. Competing with local businesses may delay hiring time as well as production timelines. Offering more competitive compensation packages also damages our profits and sets forward looking compensation expectations.
As the international supply chain still recovers from the COVID-19 pandemic and as the international supply chain faces future uncertainty in the wake of global economic uncertainty, equipment and services that were not long ago less expensive may stay at high prices or become more expensive.
Industrial machinery such as forklifts are less available than they used to be a few years ago due to lingering supply chain shortages. Lower availability for necessary industrial machinery may increase the amount of money that we must spend for said machinery as well as result in delays in our domestic manufacturing. Further disruptions to the supply chain may also increase prices for necessary services such as international shipping for component purchasing as well as shipping of finished goods from China.
We have demonstrated historical success in less capital-intensive manufacturing in China, but we have not demonstrated success in domestic, highly capital-intensive manufacturing.
In addition to beginning a new manufacturing process, we must continuously improve our manufacturing processes in order to lower costs. We are partially reliant on third parties to assist us in properly establishing such processes and improving them due to a lack of in-house, capital-intensive domestic manufacturing experience. Lack of experience may create delays in production, cost inefficiencies in expansions of production and difficulty identifying process improvements.
We may not be able to accurately estimate the demand for our tonneau covers, which could result in inefficiencies in our production and hinder our ability to generate revenue.
If we fail to accurately predict our manufacturing requirements, we will incur the risk of having to pay for production capacities that we reserved but will not be able to use or that we will not be able to secure sufficient additional production capacities at reasonable costs in case product demand exceeds expectations. A single contract with an OEM, private label or key distributor can significantly increase demand for our products, requiring investments in expanded operational capacity including personnel, equipment and potentially facilities.
Our future growth may be limited.
Our ability to achieve our expansion objectives and to manage our growth effectively depends upon a variety of factors, including our ability to internally develop products, to attract and retain skilled employees, to successfully position and market our products, to protect our existing intellectual property, to capitalize on the potential opportunities we are pursuing with third parties, and sufficient funding. To accommodate growth and compete effectively, we will need working capital to maintain adequate inventory levels, develop additional procedures and controls and increase, train, motivate and manage our work force. There is no assurance that our personnel, systems, procedures and controls will be adequate to support our potential future operations. There is no assurance that we will generate revenues from our prospective sales partners and be able to capitalize on additional third party manufacturers.
We rely on a sole supplier for our production which may hinder our ability to grow.
We purchase all of our finished goods from one supplier source in China. We have no written agreement with this supplier. We carry significant strategic inventories of these materials to reduce the risk associated with this concentration of suppliers. Strategic inventories are managed based on demand. To date, we have been able to obtain adequate supplies of the materials used in the production of our products in a timely manner from existing sources. Although we intend to manufacture our products in the near future, the loss of this sole supplier or a delay in shipments could have a material adverse effect on our business.
We rely on a small number of customers for the majority of our sales.
The loss of any significant customer could have an adverse effect on our business. A customer is considered to be significant if they account for greater than 10% of our annual sales. For the year ended December 31, 2022, two customers made up approximately 50% (38% and 12% individually) of revenue. For the year ended December 31, 2021, three customers made up approximately 77% (33%, 29%, and 15% individually) of revenue. The loss of any of these key customers could have an adverse effect on our business.
We will need additional financing in order to grow our business.
From time to time, in order to expand operations to meet customer demand, we will need to incur additional capital expenditures. These capital expenditures are intended to be funded from third party sources, including the incurring of debt and/or the sale of additional equity securities. In addition to requiring additional financing to fund capital expenditures, we may require additional financing to fund working capital, research and development, sales and marketing, general and administrative expenditures and operating losses. The incurrence of debt creates additional financial leverage and therefore an increase in the financial risk of our operations. The sale of additional equity securities will be dilutive to the interests of current equity holders. In addition, there can be no assurance that such additional financing, whether debt or equity, will be available to us or that it will be available on acceptable commercial terms. Any inability to secure such additional financing on appropriate terms could have a materially adverse impact on our business, financial condition and operating results.
We rely on key personnel, especially Steven Rossi, our Chief Executive Officer, President and Chairman of the Board.
Our success also will depend in large part on the continued service of our key operational and management personnel, including executive staff, research and development, engineering, marketing and sales staff. Most specifically, this includes Steven Rossi, our President and Chief Executive Officer, who oversees the implementation of new products, key customer acquisition and retention, and our overall management and future growth. Any failure on our part to hire, train and retain a sufficient number of qualified professionals could impair our business.
We depend on intellectual property rights that may be infringed upon or infringe upon the intellectual property rights of others.
Our success depends to a significant degree upon our ability to develop, maintain and protect proprietary products and technologies. As of December 31, 2022, we own nine patents (including eight in the U.S. and one in Canada) and twenty-seven pending patent applications. However, patents provide only limited protection of our intellectual property. The assertion of patent protection involves complex legal and factual determinations and is therefore uncertain and potentially expensive. We cannot provide assurance that patents will be granted with respect to our pending patent applications, that the scope of any patents we might obtain will be sufficiently broad to offer meaningful protection, or that we will develop additional proprietary products that are patentable. In fact, any patents which might issue from our patent applications pending with the United States Patent and Trademark Office could be successfully challenged, invalidated or circumvented. This could result in our pending patent rights failing to create an effective competitive barrier. Losing a significant patent or failing to get a patent issued from a pending patent application we consider significant could have a material adverse effect on our business.
We may not be able to protect our intellectual property rights throughout the world, which could negatively impact our business.
Filing, prosecuting and defending patents covering our current and future product candidates and technology platforms in all countries throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we may obtain patent protection but where patent enforcement is not as strong as that in the United States. These products may compete with our products in jurisdictions where we do not have any issued or licensed patents, and any future patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our intellectual property and proprietary rights generally. Proceedings to enforce our intellectual property and proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property and proprietary rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we or any of our licensors are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition, results of operations and prospects may be adversely affected.
Our patents might not protect our technology from competitors, in which case we may not have any exclusionary advantage over competitors in selling any products that we may develop.
Our commercial success will depend in part on our ability to obtain additional patents and protect our existing patent position, as well as our ability to maintain adequate intellectual property protection for our technologies, product candidates, and any future products in the United States and other countries. If we do not adequately protect our technology, product candidates and future products, competitors may be able to use or practice them and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. The laws of some foreign countries do not protect our proprietary rights to the same extent or in the same manner as U.S. laws, and we may encounter significant problems in protecting and defending our proprietary rights in these countries. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies, product candidates and any future products are covered by valid and enforceable patents or are effectively maintained as trade secrets.
Certain aspects of our technologies are protected by the U.S. and Canadian patents and Patent Cooperation Treaty filings. In addition, we have a number of new patent applications pending. There is no assurance that the applications still pending or which may be filed in the future will result in the issuance of any patents. Furthermore, there is no assurance as to the breadth and degree of protection any issued patents might afford us. Disputes may arise between us and others as to the scope and validity of these or other patents. Any defense of the patents could prove costly and time-consuming, and there can be no assurance that we will be in a position, or deem it advisable, to carry on such a defense. A suit for patent infringement could result in increasing costs as well as delaying or halting development. Other private and public concerns, including universities, may have filed applications for, may have been issued, or may obtain additional patents and other proprietary rights to technology potentially useful or necessary to us. We are not currently aware of any such patents, but the scope and validity of such patents, if any, and the cost and availability of such rights are impossible to predict.
Any trademarks we may obtain may be infringed or successfully challenged, resulting in harm to our business.
We expect to rely on trademarks as one means to distinguish any of our products that are approved for marketing from the products of our competitors. Once we select trademarks and apply to register them, our trademark applications may not be approved. Third parties may oppose our trademark applications or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in a loss of brand recognition and could require us to devote resources to advertising and marketing new brands. Our competitors may infringe our trademarks, and we may not have adequate resources to enforce our trademarks.
Much of our intellectual property is protected as trade secrets or confidential know-how, not as a patent.
We consider proprietary trade secrets to be important to our business. This type of information must be protected diligently by us to protect its disclosure to competitors, since legal protections after disclosure may be minimal or non-existent. Accordingly, much of the value of this intellectual property is dependent upon our ability to keep our trade secrets.
To protect this type of information against disclosure or appropriation by competitors, our policy is to require our employees, consultants, contractors and advisors to enter into confidentiality agreements with us. However, current or former employees, consultants, contractors and advisers may unintentionally or willfully disclose our confidential information to competitors, and confidentiality agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Enforcing a claim that a third party obtained illegally, and is using, trade secrets is expensive, time-consuming and unpredictable. The enforceability of confidentiality agreements may vary from jurisdiction to jurisdiction.
Failure to obtain or maintain trade secret protection could adversely affect our competitive position. Moreover, our competitors may independently develop substantially equivalent proprietary information and may even apply for patent protection in respect of the same. If successful in obtaining such patent protection, our competitors could limit our use of such trade secrets.
We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.
We may also be subject to claims that former employees, suppliers, collaborators or other third parties have an ownership interest in our patents or other intellectual property. We may be subject to ownership disputes in the future arising, for example, from conflicting obligations of suppliers, consultants or others who are involved in developing our products. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and employees.
Intellectual property rights do not necessarily address all potential threats to our business.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business. The following examples are illustrative:
|●||others may be able to develop technologies that are similar to our technology platforms but that are not covered by the claims of any patents, should they issue, that we own or license;|
|●||we or our licensors might not have been the first to make the inventions covered by the issued patents or pending patent applications that we own or license;|
|●||we or our licensors might not have been the first to file patent applications covering certain aspects of our inventions;|
|●||others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;|
|●||it is possible that our pending patent applications will not lead to issued patents;|
|●||issued patents that we own or license may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges;|
|●||our competitors might conduct research and development activities in the United States and other countries that provide a safe harbor from patent infringement claims for certain research and development activities, as well as in countries where we do not have patent rights, and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;|
|●||we may not develop additional proprietary technologies that are patentable; and|
|●||the patents of others may have an adverse effect on our business.|
We may need to defend ourselves against patent or trademark infringement claims, which may be time-consuming and cause us to incur substantial costs.
Companies, organizations or individuals, including our competitors, may own or obtain patents, trademarks or other proprietary rights that would prevent or limit our ability to make, use, develop or sell our products or components, which could make it more difficult for us to operate our business. The automotive aftermarket has been characterized by significant litigation and other proceedings regarding patents, patent applications and other intellectual property rights. The situations in which we may become parties to such litigation or proceedings may include:
|●||litigation or other proceedings we may initiate against third parties to enforce our patent rights or other intellectual property rights;|
|●||litigation or other proceedings we or our licensee(s) may initiate against third parties seeking to invalidate the patents held by such third parties or to obtain a judgment that our products do not infringe such third parties’ patents; and|
|●||litigation or other proceedings third parties may initiate against us to seek to invalidate our patents.|
If third parties initiate litigation claiming that our products infringe their patent or other intellectual property rights, we will need to defend against such proceedings.
The costs of resolving any patent litigation or other intellectual property proceeding, even if resolved in our favor, could be substantial. Many of our potential competitors will be able to sustain the cost of such litigation and proceedings more effectively than we can because of their substantially greater resources. In some instances, competitors may proceed with litigation or other proceedings pertaining to infringement of their intellectual property as a means to hinder or devaluate the target defendant company, with no intention of the matter being resolved in their favor. Uncertainties resulting from the initiation and continuation of patent litigation or other intellectual property proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other intellectual property proceedings may also consume significant management time and costs. Substantial additional costs may be evident in the event that litigation or other proceedings were initiated against us because we would have to seek legal defense or counsel in the province (Canada) or state (U.S.) where the litigation or legal proceedings were filed. Failure to adequately protect our intellectual property rights could result in our competitors offering similar products, potentially resulting in the loss of some of our competitive advantage, and a decrease in our revenue which would adversely affect our business, prospects, financial condition and operating results.
Confidentiality agreements with employees and others may not adequately prevent the disclosure of trade secrets and other proprietary information.
In order to protect our proprietary technology and processes, we also rely in part on confidentiality agreements with our employees, consultants, outsourced manufacturers and other advisors. These agreements may not effectively prevent the disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
There are risks associated with outsourced production that may result in a decrease in our profit.
The possibility of delivery delays, product defects and other production-side risks stemming from our use of outsourced manufacturers cannot be eliminated. In particular, inadequate production capacity among outsourced manufacturers could result in us being unable to supply enough product amid periods of high product demand, the opportunity costs of which could be substantial.
We may not be successful in our potential business combinations.
We may, in the future, pursue acquisitions of other complementary businesses and technology licensing arrangements. We have been approached by competitors to license one or more of our tonneau cover products. We may also pursue strategic alliances and joint ventures that leverage another company’s core products and industry experience to expand our product offerings and geographic presence. We have limited experience with respect to acquiring other companies and limited experience with respect to forming collaborations, strategic alliances and joint ventures. If we were to make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business and could assume unknown or contingent liabilities. Integrating an acquired company also may require management resources that otherwise would be available for the ongoing development of our existing business.
We have competition for our market share which could harm our sales.
We participate in the automotive aftermarket equipment industry which is highly competitive for a relatively limited customer base. Companies that compete in this market are Truck Hero Group, Tonno Pro and Rugged Liner. Our current competitors are significantly better funded and have longer operating histories than we do.
In addition, some of our competitors sell their products at prices lower than ours, and we compete primarily on the basis of product quality, features, value, service, and customer relationships. Our competitive success also depends on our ability to maintain a strong brand and the belief that customers will need our products and services to meet their growth requirements. Alternatively, in the case of generic competition, competitors’ products may be of equal or better quality and sold at substantially lower prices than our products. At times, competitors may also release a generic or re-branded version of a current and successful product at a substantially reduced price in efforts to increase revenues or market share. As a result, if we fail to maintain our competitive position, this could have a material adverse effect on our business, cash flow, results of operations, financial position and prospects.
We may not have sufficient product liability insurance to cover potential damages.
The existence of any defects, errors or failures in our products or the misuse of our products could also lead to product liability claims or lawsuits against us. While we had insurance coverage of $2,000,000 for the year ended December 31, 2022, we have no assurance this insurance will be adequate to protect us from all material judgments and expenses related to potential future claims or that these levels of insurance will be available at economical prices, if at all. To that extent, product liability insurance is conditional and up for further investigation. A successful product liability claim could result in substantial costs for us. Even if we are fully insured as it relates to a claim, a claim could nevertheless diminish our brand and divert management’s attention and resources, which could have a negative impact on our business, financial condition and results of operations.
We may produce products of inferior quality which would cause us to lose customers.
Although we make an effort to ensure the quality of our light truck tonneau cover products, they could from time to time contain defects, anomalies or malfunctions that are undetectable at the time of shipment. These defects, anomalies or malfunctions could be discovered after our products are shipped to customers, resulting in the return or exchange of our products, customers’ claims for compensatory damages or discontinuation of the use of our products, which could negatively impact our operating results. We do not presently have product recall (or similar function) insurance that protects a company against broad-scale product manufacturing defects, engineering defects and the costs related to a broad product recall such as shipping, replacement or repairs. Even if in place, there is no guarantee that the full costs of any reimbursements or claims, lawsuits or litigation would be covered by such insurance.
Geopolitical conditions, including direct or indirect acts of war or terrorism, could have an adverse effect on our operations and financial results.
Our operations could be disrupted by geopolitical conditions, political and social instability, acts of war, terrorist activity or other similar events. In February 2022, Russia initiated significant military action against Ukraine. In response, the U.S. and certain other countries imposed significant sanctions and export controls against Russia, Belarus and certain individuals and entities connected to Russian or Belarusian political, business, and financial organizations, and the U.S. and certain other countries could impose further sanctions, trade restrictions, and other retaliatory actions should the conflict continue or worsen. It is not possible to predict the broader consequences of the conflict, including related geopolitical tensions, and the measures and retaliatory actions taken by the U.S. and other countries in respect thereof as well as any counter measures or retaliatory actions by Russia or Belarus in response, including, for example, potential cyberattacks or the disruption of energy exports, is likely to cause regional instability, geopolitical shifts, and could materially adversely affect global trade, currency exchange rates, regional economies and the global economy. The situation remains uncertain, and while it is difficult to predict the impact of any of the foregoing, the conflict and actions taken in response to the conflict could increase our costs, disrupt our supply chain, reduce our sales and earnings, impair our ability to raise additional capital when needed on acceptable terms, if at all, or otherwise adversely affect our business, financial condition, and results of operations.
We currently, and may in the future, have assets held at financial institutions that may exceed the insurance coverage offered by the Federal Deposit Insurance Corporation, the loss of such assets would have a severe negative affect on our operations and liquidity.
We may maintain our cash assets at certain financial institutions in the U.S. in amounts that may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000. In the event of a failure of any financial institutions where we maintain our deposits or other assets, we may incur a loss to the extent such loss exceeds the FDIC insurance limitation, which could have a material adverse effect upon our liquidity, financial condition and our results of operations.
Risks Associated with Manufacturing in China
Evolving U.S. trade regulations and policies with China may in the future have a material and adverse effect on our business, financial condition and results of operations.
Our products are sourced from China. Any restrictions or tariffs imposed on products that we or our suppliers import for sale in the United States would adversely and directly impact our cost of goods sold. In addition, changes in U.S. trade regulations and policies could have an adverse impact on trade relations between the United States and certain foreign countries, which could materially and adversely affect our relationships with our international suppliers and reduce the supply of goods available to us. Further, we cannot predict the extent to which the United States will adopt changes to existing trade regulations and policies, which creates uncertainties in planning our sourcing strategies and forecasting our margins. If additional tariffs are imposed on our products, or other retaliatory trade measures are taken, our costs could increase, and we may be required to raise our prices, which could materially and adversely affect our results.
There are risks associated with outsourced production in China and their laws which may have a material adverse effect on our financial stability.
We purchase all of our inventory from one supplier source in China. Changes in Chinese laws and regulations, or their interpretation, or the imposition of confiscatory taxation or restrictions are matters over which we have no control. While the Chinese government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization, there is no assurance that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
For example, the Chinese government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited and, in turn, our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. If our business ventures with Chinese manufacturers were unsuccessful, or other adverse circumstances arise from these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination.
Any rights we may have to specific performance or to seek an injunction under Chinese law are severely limited, and, without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations in such guises as currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises.
In that context, we may have to evaluate the feasibility of acquiring alternative or fallback manufacturing capabilities to support the production of our existing and future tonneau cover products. Such development could adversely affect our cost structure inasmuch as we would be required to support sales at an acceptable cost—and might have relatively limited time to so adapt. We have not manufactured our own soft tonneau covers in the past—and are not expecting to do so in the foreseeable future. That is because developing these technological capabilities and building or purchasing a facility will increase our expenses with no guarantee that we will be able to recover our investment in our manufacturing capabilities.
We engage in cross border sales transactions which present tax risks among other obstacles.
Cross border sales transactions carry a risk of changes in import tax and/or duties related to the import and export of our product, which can result in pricing changes, which will affect revenues and earnings. Cross border sales transactions carry other risks including, but not limited to, changing regulations, wait times, customs inspection and lost or damaged product.
We are subject to foreign currency risk which may adversely affect our net profit.
We are subject to foreign exchange risk as we manufacture our products in China, market extensively in both Canadian and U.S. markets, employee people residing in both the U.S. and Canada. Meanwhile, we report results of operations in U.S. Dollars (USD or US$). 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. While having our products manufactured in China, our manufacturers are paid in USD to better avoid the relatively greater fluctuation of the Chinese Yuan (RMB). Any large fluctuations in the exchange between the RMB and USD may cause product costs to increase, therefore affecting revenues and profits, potentially adversely.
Risks Related to the Ownership of Our Securities
We have a large number of authorized but unissued shares of our common stock which will dilute your ownership position when issued.
At December 31, 2022, our authorized capital stock consists of 299,000,000 shares of common stock, of which approximately 281,840,624 remain available for issuance, including shares of common stock issuable upon the exercise of outstanding warrants. Our management will continue to have broad discretion to issue shares of our common stock in a range of transactions, including capital-raising transactions, mergers, acquisitions and other transactions, without obtaining stockholder approval, unless stockholder approval is required under law or the rules of Nasdaq or any other trading market on which our common stock may be listed. If our management determines it be appropriate to issue shares of our common stock from the large pool of authorized but unissued shares for any purpose in the future and is not required to obtain stockholder approval, your ownership position would be diluted without your further ability to vote on that transaction.
Our common stock or warrants may be affected by limited trading volume and price fluctuations, which could adversely impact the value of our common stock or warrants.
Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market prices of our common stock or warrants without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the market prices of our common stock and warrants to fluctuate substantially. These fluctuations may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock and warrants will be stable or appreciate over time.
We currently do not intend to declare dividends on our common stock in the foreseeable future and, as a result, your returns on your investment may depend solely on the appreciation of our common stock.
We currently do not expect to declare any dividends on our common stock in the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used to provide working capital, to support our operations and to finance the growth and development of our business. Any determination to declare or pay dividends in the future will be at the discretion of our Board, subject to applicable laws and dependent upon a number of factors, including our earnings, capital requirements and overall financial conditions. In addition, terms of any future debt or preferred securities may further restrict our ability to pay dividends on our common stock. Accordingly, your only opportunity to achieve a return on your investment in our common stock may be if the market price of our common stock appreciates and you sell your shares at a profit. The market price for our common stock may never exceed, and may fall below, the price that you pay for such common stock. See Part II, Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Dividend Policy.”
An investment in our securities is speculative and there can be no assurance of any return on any such investment.
An investment in our securities is speculative and there can be no assurance that investors will obtain any return on their investment. Investors may be subject to substantial risks involved in an investment in the Company, including the risk of losing their entire investment.
We may need, but be unable, to obtain additional funding on satisfactory terms, which could dilute our stockholders or impose burdensome financial restrictions on our business.
We have relied upon cash from financing activities and, in the future, we hope to rely on revenues generated from operations to fund the cash requirements of our activities. However, there can be no assurance that we will be able to generate any significant cash from our operating activities in the future. Future financing may not be available on a timely basis, in sufficient amounts or on terms acceptable to us, if at all. Any debt financing or other financing of securities senior to the common stock will likely include financial and other covenants that will restrict our flexibility. Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition and results of operations because we could lose our existing sources of funding and our ability to secure new sources of funding could be impaired.
Our Chief Executive Officer and Chairman, Steven Rossi, has significant control over stockholder matters and the minority stockholder will have little or no control over our affairs.
Steven Rossi currently owns 100% of our outstanding Series A Preferred Stock which entitles him to 51% of the voting power of our outstanding voting equity. Subject to any fiduciary duties owed to our other stockholders under Nevada law, Mr. Rossi is able to exercise significant influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have some control over our management and policies. Mr. Rossi may have interests that are different from yours. For example, Mr. Rossi may support proposals and actions with which you may disagree. The concentration of ownership could delay or prevent a change in control of our Company or otherwise discourage a potential acquirer from attempting to obtain control of our Company, which in turn could reduce the price of our stock. In addition, Mr. Rossi could use his voting influence to maintain our existing management and directors in office, delay or prevent changes in control of our Company, or support or reject other management and Board proposals that are subject to stockholder approval, such as amendments to our employee stock plans and approvals of significant financing transactions.
We have identified material weaknesses in our internal control over financial reporting. Failure to maintain effective internal controls could cause our investors to lose confidence in us and adversely affect the market price of our common stock. If our internal controls are not effective, we may not be able to accurately report our financial results or prevent fraud.
Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires that we maintain internal control over financial reporting that meets applicable standards. We may err in the design or operation of our controls, and all internal control systems, no matter how well designed and operated, can provide only reasonable assurance that the objectives of the control system are met. Because there are inherent limitations in all control systems, there can be no assurance that all control issues have been or will be detected.
Included elsewhere in this Annual Report on Form 10-K, we disclose that our management has assessed and identified several material weaknesses in our internal and controls over financial reporting (“ICFR”) and concluded that our IFCR was not effective as of December 31, 2022. The material weaknesses included our failure to design written policies and procedures at a sufficient level of precision to support the operating effectiveness of the controls to prevent and detect potential errors. We also did not maintain adequate documentation to evidence the operating effectiveness of certain control activities. Lastly, we did not maintain appropriate access to certain systems and did not maintain appropriate segregation of duties related to processes associated within those systems.
Although we have taken several steps to remediate the material weaknesses in our IFCR and continue to do so, there can be no assurances given that our actions will be effective. Any continued failure of our internal control over financial reporting could have a material adverse effect on our stated results of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent auditors. Furthermore, investor perceptions of our Company may suffer, and this could cause a decline in the market price of our common stock.
Additionally, the expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. These increased costs will require us to divert a significant amount of money that we could otherwise use to develop our business. If we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.
New laws, regulations, and standards relating to corporate governance and public disclosure may create uncertainty for public companies, increase legal and financial compliance costs and make some activities more time consuming.
These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, may evolve over time as new guidance is provided by the courts and other bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may be adversely affected.
As a “smaller reporting company” under applicable law, we are subject to lessened disclosure requirements, which could leave our stockholders without information or rights available to stockholders of more mature companies.
For as long as we remain a “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act, we will elect to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “smaller reporting companies” including, but not limited to:
|●||being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements disclosure; and|
|●||reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements.|
We expect to take advantage of these reporting exemptions until we are no longer a “smaller reporting company.” Because of these lessened regulatory requirements, our stockholders are not provided information or rights available to stockholders of more mature companies. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.
If research analysts do not publish research about our business or if they issue unfavorable commentary or downgrade our common stock, our stock price and trading volume could decline.
The trading market for our securities may depend in part on the research and reports that research analysts publish about us and our business. If we do not maintain adequate research coverage, or if any of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, the price of our common stock and warrants could decline. If one or more of our research analysts ceases to cover our business or fails to publish reports on us regularly, demand for our securities could decrease, which could cause the price of our common stock and warrants or trading volume to decline.
Anti-takeover provisions in our charter documents and Nevada law could discourage, delay or prevent a change of control of our Company and may affect the trading price of our common stock.
We are a Nevada corporation, and the anti-takeover provisions of the Nevada Control Shares Acquisition Act may discourage, delay or prevent a change of control by limiting the voting rights of control shares acquired in a control share acquisition. In addition, our amended and restated articles of incorporation, as amended (“Articles of Incorporation”), and amended and restated bylaws (“Bylaws”) may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Among other things, our Articles of Incorporation and Bylaws:
|●||authorize the issuance of “blank check” preferred stock that could be issued by our Board in response to a takeover attempt;|
|●||provide that vacancies on our Board, including newly created directorships, may be filled only by a majority vote of directors then in office, except a vacancy occurring by reason of the removal of a director without cause shall be filled by vote of the stockholders; and|
|●||limit who may call special meetings of stockholders.|
These provisions could have the effect of delaying or preventing a change of control, whether or not it is desired by, or beneficial to, our stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
We lease approximately 20,296 square feet for our primary corporate office and R&D facility located at 55G East Beaver Creek Rd., Richmond Hill, Ontario L4B 1E5, Canada pursuant to a five-year lease, dated June 1, 2022, for a variable rate averaging $27,934 CAD per month over the lifetime of the lease. We also pay approximately $5,584 CAD in additional fees per month, which varies year to year.
We also lease approximately 14,178 square feet, originally used for R&D space and additional offices, located at 7299 E Danbro Crescent, Mississauga, Ontario L5N 6P8, Canada pursuant to a three-year lease dated April 16, 2021, and terminating on May 31st of 2024 for $23,971 CAD per month.
We have purchased an approximately 152,847 square foot facility located at 2500 N America Dr., West Seneca, NY 14224 to serve as our new OEM facility. This facility meets our OEM manufacturing needs both now and in future years, as the facility contains ample space in which to grow.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in lawsuits, claims, investigations, and proceedings, including pending opposition proceedings involving patents that arise in the ordinary course of business. We are not presently a party to any material pending or threatened legal proceedings, nor do we have any knowledge of any pending claims.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock and Public Warrant commenced trading on The Nasdaq Capital Market under the symbols “WKSP” and “WKSPW,” respectively, on August 4, 2021. Prior to trading on Nasdaq, our common stock was quoted on the OTCQB Market under the symbol “WKSP.”
Holders of Common Stock
On March 31, 2023, there were 176 holders of record of our common stock.
Stock Transfer Agent
Our transfer agent is Vstock Transfer, LLC., located at 18 Lafayette Place, Woodmere, NY 11598. Their telephone number is (212) 828-8436.
We have never paid any cash dividends on our common stock. We anticipate that we will retain funds and future earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board and will depend on our financial condition, results of operations, capital requirements, and other factors that our Board deems relevant. In addition, the terms of any future debt or credit financings may preclude us from paying dividends.
Equity Incentive Plans
In July 2015, our Board and shareholders adopted the Worksport Ltd. 2015 Equity Incentive Plan (the “2015 Plan”), effective as of July 5, 2015. The 2015 Plan provides for the grant of the following types of stock awards: (i) incentive stock options, (ii) nonstatutory stock options, (iii) stock appreciation rights, (iv) restricted stock awards, (v) restricted stock unit awards and (vi) other stock awards. The 2015 Plan is intended to help us secure and retain the services of eligible award recipients, provide incentives for such persons to exert maximum efforts for our success and that of any affiliate and provide a means by which the eligible recipients may benefit from increases in value of our common stock. The Board reserved 500,000 shares of common stock issuable upon the grant of awards under the 2015 Plan. As of December 31, 2022, zero shares of common stock were available under the 2015 Plan.
On March 31, 2021, our Board and shareholders adopted the Worksport Ltd. 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan provides for the grant of the following types of stock awards: (i) incentive stock options, (ii) nonstatutory stock options, (iii) stock appreciation rights, (iv) restricted stock awards, (v) restricted stock unit awards and (vi) other stock awards. The 2021 Plan is intended to help us secure and retain the services of eligible award recipients, provide incentives for such persons to exert maximum efforts for our success and that of any affiliate and provide a means by which the eligible recipients may benefit from increases in value of our common stock. The Board reserved 1,250,000 shares of common stock issuable upon the grant of awards under the 2021 Plan. As of December 31, 2022, 60,000 shares of common stock were available under the 2021 Plan.
In September 2022 and November 2022, our Board and shareholders, respectively, approved and adopted the Worksport Ltd. 2022 Equity Incentive Plan. The 2022 Plan authorizes the grant of the following types of stock awards: (i) incentive stock options, (ii) nonstatutory stock options, (iii) stock appreciation rights, (iv) restricted stock awards, (v) restricted stock units, (vi) performance units, (vii) performance shares and (viii) other awards as the administrator may determine. The 2022 Plan is to be administered by the Board, the Compensation Committee or any other committee appointed by the Board. The 2022 Plan is intended to (i) attract and retain the best available personnel for positions of substantial responsibility, (ii) provide incentives to individuals who perform services for us and (iii) promote the success of the business. A total of 750,000 shares of common stock have been reserved for the issuance of awards under the 2022 Plan. The 2022 Plan also contains an “evergreen formula” pursuant to which the number of shares of common stock available for issuance under the 2022 Plan will automatically increase on January 1 of each calendar year during the term of the 2022 Plan, beginning with the calendar year 2023, by an amount of shares of common stock so that the total amount of common stock available under the 2022 Plan is equal to 15% of the total number of shares of common stock outstanding on December 31st of the prior calendar year minus the total number of shares reserved and available for issuance under the 2015 Plan and 2021 Plan. As of December 31, 2022, 737,500 shares of common stock were available under the 2022 Plan.
Unregistered Sales of Equity Securities
40,000 shares of common stock issued to Exchange Listing LLC on March 17, 2022 for consulting services rendered per agreement signed on January 26, 2022.
10,000 shares of common stock issued to Zenfar Investments on January 13, 2022 for consulting services rendered per agreement signed on March 3, 2021.
10,000 common shares issued to Rafael Oliveira on April 23, 2022 for employment services rendered per agreement signed on March 7, 2022.
|●||10,000 common shares issued to Steven Obadiah on April 23, 2022 for consulting services rendered per agreement signed on February 23, 2022.|
The foregoing securities were issued in reliance on the exclusion from registration provided by Section 4(a)(2) of the Securities Act due to the fact the issuance did not involve a public offering of securities.
EQUITY PLAN INFORMATION
securities to be
exercise price of
|2015 Equity Incentive Plan:|
|Equity compensation plans approved by security holders||672,500||$||2.54||0|
|Equity compensation plans not approved by security holders||0||0||0|
|2021 Equity Incentive Plan:|
|Equity compensation plans approved by security holders||1,190,000||$||5.5||60,000|
|Equity compensation plans not approved by security holders||0||$||0||0|
|2022 Equity Incentive Plan: (1)|
|Equity compensation plans approved by security holders||12,500||$||1.60||737,500|
|Equity compensation plans not approved by security holders||0||0||0|
|(1)||The 2022 Plan also contains an “evergreen formula” pursuant to which the number of shares of common stock available for issuance under the 2022 Plan will automatically increase on January 1 of each calendar year during the term of the 2022 Plan, beginning with the calendar year 2023, by an amount of shares of common stock so that the total amount of common stock available under the 2022 Plan is equal to 15% of the total number of shares of common stock outstanding on December 31st of the prior calendar year minus the total number of shares reserved and available for issuance under the 2015 Plan and 2021 Plan.|
ITEM 6. [RESERVED].
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.
Worksport Ltd., through its subsidiaries, designs, develops, manufactures, and owns the Intellectual Property on a portfolio of tonneau cover, solar integration, portable power station, and NP (Non-Parasitic), Hydrogen-based green energy products and solutions for the automotive aftermarket accessories, power storage, residential heating, and electric vehicle-charging industries. We seek to provide consumers with next-generation automotive aftermarket accessories while capitalizing on growing consumer interest in clean energy solutions and power grid independence.
Rising Popularity of Electric Vehicles
Electric Vehicles (EVs) have been exponentially increasing in consumer interest, whether that interest take 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.
Regulatory Environment Favoring Electric Vehicles
The Build Back Better Bill was a strong indication of upcoming and favorable USA regulations. Many regulations that improve North America’s Electric Vehicle (EV) charging infrastructure or provide grants to businesses operating in the EV space will benefit us. While we are primarily focused on the light duty vehicle market, our energy products are particularly useful for electric light duty pickup trucks and, therefore, are positioned to benefit greatly from any bill that increases the prevalence of such vehicles.
Limited Competitive Landscape
Our conventional tonneau covers are engineered for enhanced user experience and resistance to wear-and-tear, making them strong and competitive products in an otherwise consolidated and saturated market. The Worksport COR, 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.
The following highlights recent material developments in our business:
In May 2022, we closed on the purchase of a commercial property for $8,125,000 in the town of West Seneca, Erie County, New York pursuant to a Purchase and Sale Agreement that we entered into with J&M Distributing, Inc. We financed $5,300,000 in connection with the closing of the Acquisition pursuant to a Loan Agreement that we entered into with Northeast Bank, of which we issued a Promissory Note to the Lender guaranteed by Worksport Ltd. and secured by the Property per a Mortgage and Security Agreement entered into with the Lender. The Property consists of two parcels of land: (i) one parcel consisting of approximately 14 acres improved by a building containing approximately 152,847 square feet; and (ii) a second parcel consisting of approximately four acres of vacant land. Currently, our manufacturing operations are in China. With the acquisition of the Property, we plan to move our manufacturing operations to the United States. We believe that by moving our manufacturing operations to the United States, we can (i) have better control over design and manufacturing quality of our products, (ii) lessen supply chain risk, (iii) decrease shipping costs, and (iv) cut overall manufacturing costs.
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, Wainwright is entitled to a commission equal to 3.0% of the gross sales price of the shares of common stock sold. As of the date of this Annual Report, no securities have been sold pursuant to the Form S-3.
|●||On November 14, 2022, our shareholders approved the Worksport Ltd. 2022 Equity Incentive Plan. A total of 750,000 shares of common stock were initially reserved for the issuance of awards under the 2022 Plan. The 2022 contains an “evergreen formula” pursuant to which the number of shares of common stock available for issuance under the 2022 Plan will automatically increase on January 1 of each calendar year during the ten-year term of the 2022 Plan, beginning with the calendar year 2023, by an amount of shares of common stock so that the total amount of common stock available under the 2022 Plan is equal to 15% of the total number of shares of common stock outstanding on December 31st of the prior calendar year minus the total number of shares reserved and available for issuance under the Worksport Ltd. 2015 Equity Incentive Plan and Worksport Ltd. 2021 Equity Incentive Plan. On January 1, 2023, the authorized number of shares of common stock of the 2022 Plan was 2,518,502.|
On November 18, 2022, we engaged Lumsden & McCormick, LLP to replace Haynie & Company as our independent registered public accounting firm.
Key Factors Affecting our Performance
As a result of a number of factors, our historical results of operations may not be comparable to our results of operations in future periods, and our results of operations may not be directly comparable from period to period. Set forth below is a brief discussion of the key factors impacting our results of operations.
The outbreak of the coronavirus, specifically identified as “COVID-19,” resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which included the implementation of travel bans, self-imposed quarantine periods, and social distancing, have caused material disruption to businesses globally, resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions – many of which have deeply impacted capital markets.
As a safety precaution, we created a policy such that any personnel exposed to an infectious disease or virus was not to report to the office until the completion of a variable length quarantine. While this resulted in fewer average R&D personnel working in our offices or labs on a given day, it likely prevented further contamination and sick leave. We do not believe this policy has impacted revenue nor timelines towards upcoming product launches; however, supply chain issues caused by COVID-19 did result in higher cost of goods sold during 2021 and 2022. While freight costs have since returned to pre-COVID-19 levels, 2021 freight costs were, in some cases, more than four times higher than those shortly before COVID-19.
The response of many governments to the COVID-19 pandemic has resulted in higher interest rates and destabilized equity markets – particularly among micro- or low-capitalization companies – effectively increasing the cost of and decreasing easy access to capital, which could negatively impact our short-term and long-term liquidity. These factors, combined with the consequences of possible future waves of the disease, could have a material impact on our liquidity, capital resources, operations, and business as well as those of the third parties on which we rely. The management and Board is constantly monitoring this situation to minimize potential losses.
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 in the component materials for the parts of our goods may impact the availability, quality and price of our products as suppliers search for alternatives to existing materials and increase the prices they charge. Our suppliers may also fail to provide consistent quality of product as they may substitute lower cost materials to maintain pricing levels. Rapid and significant changes in commodity prices may negatively affect our profit margins, and it may be difficult to mitigate worsened margins through customer pricing actions and cost reduction initiatives.
Such an inflationary environment also increases our direct cost of raw goods or processed goods for our OEM manufacturing as well as indirect costs such as overhead and rent. Due to these present and forecasted price increases and the temporary increases in ocean freight and container handling costs faced during the majority of 2022 as a result of 2021 supply chain issues, we updated our product pricing in 2022.
In addition, as central governments and the U.S. Federal Reserve increase interest rates to combat global inflation, the cost of debt financing increases. While we currently do not have material debt other than our $5.3 million mortgage on our West Seneca facility, our mortgage’s variable rate increases and decreases along with interest rates, which resulted in an increase of monthly premiums throughout 2022. We are still susceptible to variable monthly mortgage interest costs as a result of changes in interest rates. We continue to explore debt financing options at reasonable interest rates in order to strengthen our cash position.
Rising interest rates have also resulted in a shift in institutional holdings away from micro-cap equities, which has negatively influenced our stock’s trading volume. We continue to forge relationships with institutional investors and analysts in order to maintain a healthy trading volume.
Gasoline Prices and Supply Chain Issues
We faced significantly higher ocean freight, trucking, and container handling costs as well as last mile delivery costs in 2021 and 2022 than we did in previous years – all of which have increased our products’ landed costs. Higher oil and gasoline prices further increased these costs, and we are operating under the assumption most of these higher costs will remain throughout 2023.
Our transition towards domestic manufacturing and assembly is anticipated to largely offset these higher costs, as we believe we will be less exposed to higher international shipping costs. We are also identifying North American suppliers of our products’ components and will prioritize transport by rail when possible to avoid high trucking costs.
In February 2022, Russia initiated significant military action against Ukraine. In response, the U.S. and certain other countries imposed significant sanctions and export controls against Russia, Belarus and certain individuals and entities connected to Russian or Belarusian political, business, and financial organizations, and the U.S. and certain other countries could impose further sanctions, trade restrictions, and other retaliatory actions should the conflict continue or worsen. It is not possible to predict the broader consequences of the conflict, including related geopolitical tensions, and the measures and retaliatory actions taken by the U.S. and other countries in respect thereof as well as any counter measures or retaliatory actions by Russia or Belarus in response, including, for example, potential cyberattacks or the disruption of energy exports, is likely to cause regional instability and geopolitical shifts, which could materially adversely affect global trade, currency exchange rates, regional economies and the global economy. The situation remains uncertain, and while it is difficult to predict the impact of any of the foregoing, the conflict and actions taken in response to the conflict could increase our costs, reduce our sales and earnings, impair our ability to raise additional capital when needed on acceptable terms, if at all, or otherwise adversely affect our business, financial condition, and results of operations.
We are subject to foreign exchange risk as we manufacture our products in China, market extensively in both Canadian and U.S. markets, employee people residing in both the U.S. and Canada and, to date, have raised funds in Canadian Dollars. Meanwhile, we report results of operations in U.S. Dollars. Since our Canadian customers pay in Canadian Dollars, we are subject to gains and losses due to fluctuations in the USD relative to the Canadian Dollar. While having our products manufactured in China, our manufacturers are paid in USD to better avoid the relatively greater fluctuation of the Chinese Yuan. To the extent the U.S. dollar strengthens against any of these foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our operations.
Results of Operations
For the year ended December 31, 2022, revenues from our entire line of products was $116,502, as compared to $303,750 for the year ended December 31, 2021. The year-over-year sales decreased by approximately 62%. For the year ended December 31, 2022, revenue generated in Canada was $14,572, as compared to $40,683 for the same period in 2021, a decrease of 64%. For the year ended December 31, 2022, revenue generated in the United States was $101,930, compared to $263,067 for the same period in 2021, a decrease of 61%.
Revenue decreased for the year ended December 31, 2022 compared to the prior year due to our focus on establishing new business-to-consumer and business-to-business sales channels, while strengthening the support of those channels to increase customer satisfaction and enable high product turnover once domestic production begins. For business-to-consumer channels, we established our own e-commerce platform as well as listed our products on online marketplaces including eBay, Amazon, and Walmart. For business-to-business channels, we updated our terms and conditions, created improved product brochures for distributors, strategically created a Minimum Advertised Price policy to prevent our business-to-consumer channels from interfering with our business-to-business channels, established sales representation across the continental U.S. by forging relationships with various sales agencies, and more. We intend to begin domestic manufacturing in the second quarter of fiscal year 2023, barring unforeseeable delays, and gradually increase output capacity through refined production processes and increased personnel during following quarters.
Sales from online retailers of our products decreased from $263,116 in 2021 to $101,930 in 2022, a decrease of 61%, due to our focus on establishing new sales channels. Online retailers accounted for 87% of total revenue for the year ended December 31, 2022 compared to 87% for the year ended December 31, 2021. Distributor sales decreased for the year ended December 31, 2022 compared with the year ended December 31, 2021, with sales of $14,572 and $40,349, respectively. We expect to continue to grow our fields of business as we develop unique products with enhanced utility to offer to other prospective clients in the US and Canadian markets.
We currently support a network of dealers, distributors, and independent resellers, and we will continue to expand our business and online sales channels in 2023.
Cost of Sales
Cost of sales decreased by 84%, from $350,702 for the year ended December 31, 2021 to $56,967 for the year ended December 31, 2022. Our cost of sales, as a percentage of sales, was approximately 49% and 115% for the years ended December 31, 2022 and 2021, respectively. The decrease in the cost of sales as a percentage of sales was primarily due to increased efficiency associated with acquiring and manufacturing inventory for the year ended December 31, 2022, compared to the previous year.
We provide our distributors and online retailers an “all-in” wholesale price. This includes any import duty charges, taxes, and shipping charges. Discounts are applied if the distributor or retailer chooses to use their own shipping process. Certain exceptions apply on rare occasions where product is shipped outside the contiguous United Sates or from the United States to Canada. Volume discounts are offered to certain high-volume customers, and we also offer a “dock price” or “pickup program” in which clients are able to pick up product directly from our stocking warehouse.
Operating expenses increased for the year ended December 31, 2022 by $5,318,471, from $7,514,779 for the fiscal year ended December 31, 2021 to $12,833,250 for the fiscal year ended December 31, 2022, due to the following factors.
|●||General and administrative expense increased by $3,123,344 from $1,855,238 in 2021 to $4,978,582 in 2022. The increase was related to increased research and development activities and an increase in salaries as we seek to expand our operations and further develop our products.|
|●||Sales and marketing expenses increased by $1,059,574, from $1,386,692 for 2021 to $2,446,266 for 2022. The increase in sales and marketing is primarily attributable to compensation for investor relations consulting services.|
|●||Professional fees, which include accounting, legal, and consulting fees, increased from $4,268,684 in 2021 to $5,418,863 in 2022. The increase was due to the engagement of various third-party consultants to expand our business operations.|
|●||We realized a gain on foreign exchange of $10,461 for 2022, compared to a loss on foreign exchange of $4,165 for the prior year due to conversions between CAD and USD.|
Other Income and Expenses
We reported other income for the year ended December 31, 2022 of $239,301 compared to a loss of $335,354 in the prior year. The change can be attributed to an increase in the gain on settlement of debt, as well as increases in rental and interest income and a reduction in bad debt expense, which are partially offset by an increase in interest expense.
Net loss for the year ended December 31, 2022 was $12,534,414 compared to a net loss of $7,897,085 for the year ended December 31, 2021 – an increase of 59%. The increase in the net loss can be attributed to the increase in various operating expenses as we focus on expanding our operations, research and development, manufacturing, and supply chain.
Liquidity and Capital Resources; Going Concern
As of December 31, 2022, we had $14,620,757 in cash, restricted cash, and cash equivalents. We have generated only limited revenues and have relied primarily upon capital generated from public and private offerings of our securities. Since the Company’s acquisition of Worksport in fiscal year 2014, it has never generated a profit. As of December 31, 2022, we had an accumulated deficit of $33,384,219. In their audit report for the fiscal year ended December 31, 2022 included in this report, our auditors have expressed their consent as to our ability to continue as a going concern.
To date, our principal sources of liquidity consists of net proceeds from public and private securities. During the year ended December 31, 2022, we did not receive any proceeds from public offerings nor private placement offerings. Management is focused on transitioning towards revenue as our principal source of liquidity by growing our existing product offerings, as well as our customer base, to increase our revenues. We cannot give assurance that we can increase our cash balances or limit our cash consumption and thus maintain sufficient cash balances for our planned operations or future business developments. Future business development and demands may lead to cash utilization at levels greater than recently experienced. Our ability to continue as a going concern is dependent upon our ability to generate cash flows from operations and obtain financing. We intend to continue funding our 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. Subject to the foregoing, however, 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 conducted the following public and private offerings since the beginning of the 2021 fiscal year:
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, Wainwright 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, 2022, no securities have been sold pursuant to the Form S-3.
Public Underwritten Offering
On August 6, 2021, we consummated an underwritten public offering of an aggregate of 3,272,727 units, pursuant to a registration statement on Form S-1, as amended (File No. 333-256142) and a related registration statement on Form S-1 (File No: 333-258429). The public offering price was $5.50 per unit, and each unit consisted of one share of common stock and one warrant to purchase one share of common stock for $6.05 per share (110% of the unit offering price) from the date of issuance until the third anniversary of the issuance date. We received gross proceeds of approximately $18.0 million from the Public Offering, and after deducting the underwriting commissions, discounts, and offering expenses payable by us, we received net proceeds of approximately $16.1 million. We used the net proceeds for working capital, R&D, marketing, and equipment.
Regulation A+ Offering
During the year ended December 31, 2021, we sold 1,502,410 units at $2.00 per unit in a Reg A/Tier 2 public offering pursuant to a Form 1-A (File No: 24-11271) qualified by the Securities and Exchange Commission on November 9, 2020 (the “Reg A Offering”). Each unit consisted of one share of common stock and one warrant to purchase one share of common stock for $4.00 per share during the 12 months following the date of issuance. The gross proceeds from the sale of units were $3,048,199. As of December 31, 2022, we received $7,104,090 from the exercise of 1,776,023 warrants. The warrants issued pursuant to the Reg A Offering have expired.
Rule 506(b)/Reg D Private Placement
During 2021, we sold an aggregate of 2,040,990 units on substantially similar terms as the units sold in the Reg A Offering in a private placement under Section 4(a)(2) and/or Rule 506(b) of Regulation D under the Securities Act. Each unit consisted of one share of common stock and one warrant to purchase two shares of common stock for $4.00 per share during the 18 months following the date of issuance. The gross proceeds from the sale of units in the private placement were $4,081,980. As of December 31, 2022, 700,000 warrants sold in the private offering have been exercised on a cashless basis. The warrants issued pursuant to this offering have expired.
Cash Flow Activities
Cash decreased from $28,567,333 at December 31, 2021 to $14,620,757 at December 31, 2022 – a decrease of $13,946,576 or 49%. The decrease was primarily due to the acquisition of assets for domestic production, such as the building in West Seneca, NY and industrial manufacturing equipment, as well as increased spending for inventory in anticipation of launching our e-commerce platform, research and development, and overhead.
As of December 31, 2022, we had current assets of $18,332,107 (2021 - $34,032,005) and current liabilities of $2,461,730 (2021 – $1,796,789). As of December 31, 2022, we had working capital of $15,870,377 (2021 – $32,235,216) and an accumulated deficit of $33,384,219 (2021 - $20,849,805).
Net cash used by operating activities for the year ended December 31, 2022 was $7,977,960, compared to $4,210,623 in the prior year, primarily driven by a larger net loss in 2022, which was partially offset by the issuance of shares, options, and warrants for services.
Accounts receivable decreased at December 31, 2022 by $83 and increased by $2,228 in the prior year. The decrease in accounts receivable was due to lower sales in 2022 compared to 2021.
Inventory increased at December 31, 2021 by $460,969 and at December 31, 2022 by $844,600 as a result of our stockpiling inventory in anticipation of the launch of our e-commerce platform. Prepaid expenses increased by $529,438 at December 31, 2022 and by $382,067 at December 31, 2021 due to deposits for manufacturing equipment and professional services.
Accounts payable and accrued liabilities increased at December 31, 2022 and 2021 by $995,340 and $187,510, respectively.
Net cash used in investing activities for the year ended December 31, 2022 was $11,150,776 compared to $1,131,735 in the prior year. The increase in investing activities was primarily due to the purchase of the manufacturing facility and equipment.
Net cash provided by financing activities for the year ended December 31, 2022 was $5,182,160 compared to $32,801,879 in the prior year. During the year ended December 31, 2022, we received $5,300,000 in loans for the purchase of a manufacturing facility. During the year ended December 31, 2021, we received $32,852,630 of proceeds from a public offering, a private placement offering, and exercises of warrants net of share issuance cost.
Material Cash Requirements from Known Contractual and Other Obligations
The following table summarizes our contractual obligations as of December 31, 2022 and 2023:
|Operating lease obligations||$||1,518,895||$||1,025,869|
|Total Contractual Obligations||$||4,063,895||$||1,025,869|
We intend to fund our contractual obligations with working capital.
Critical Accounting Policies
Our discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses as well as related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to provisions for uncollectible accounts receivable, inventories, valuation of intangible assets, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
These accounting policies conform to accounting principles generally accepted in the United States and have been consistently applied in the preparation of the financial statements.
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, 2022 and 2021 totaling $411,016 and $0, respectively.
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 and a specific review of accounts receivable at the end of each period. At December 31, 2022 and 2021, the Company had no allowance for doubtful accounts.
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.
In accordance with 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:
|Furniture and equipment||5 years|
|Leasehold improvements||15 years|
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
|Reports of Independent Registered Public Accounting Firms||39|
|Audited Consolidated Balance Sheets at December 31, 2022 and 2021||42|
|Audited Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2022 and 2021||43|
|Audited Consolidated Statements of Shareholders’ Equity for the year ended December 31, 2022 and 2021||44|
|Audited Consolidated Statements of Cash Flow for the years ended December 31, 2022 and 2021||45|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Worksport Ltd. and Subsidiaries (the Company) as of December 31, 2022, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for the year 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, 2022, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
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, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding 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 audit 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 audit 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 financial statements. We believe that our audit provides 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.
Property, Plant and Equipment
Description of the Matter
As reported in Note 6 to the consolidated financial statements, the Company acquired a significant amount of property, plant and equipment during the year ended December 31, 2022. As of December 31, 2022, the Company’s property, plant and equipment balance, net of accumulated depreciation was approximately $11.9 million, which represents a significant portion of the Company’s total assets of approximately $32.8 million. In May 2022, the Company acquired land and building for its new warehouse facility in West Seneca, NY, with a total cost value of approximately $8.3 million.
Given the inherent uncertainty and significant judgments necessary to estimate useful lives of additions, auditing these estimates involved a focused audit effort and a high degree of auditor judgment.
How We Addressed the Matter in Our Audit
Our auditing procedures related to property, plant and equipment included the following, among others:
|●||We evaluated the appropriateness and consistency of management’s methods used to 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 the estimated useful lives and respective in-service dates of acquired assets.|
|●||We tested the accuracy of management’s schedule of property, plant and equipment.|
|●||We selected a sample of material purchases made during the year to ensure they were properly included in property, plant and equipment at the proper value.|
Description of the Matter
As discussed in Notes 11, 23, and 24 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.|
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.
March 30, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Worksport, LTD
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Worksport, LTD (the Company) as of December 31, 2021, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. 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 audit 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 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 audit, 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 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Haynie & Company
Salt Lake City, Utah
March 31, 2022
PCAOB ID Number: 457
We have served as the Company’s auditor from 2016 through November 2022.
Consolidated Balance Sheets
December 31, 2022 and 2021
|Cash and cash equivalents||$||$|
|Accounts receivable net|
|Inventory (note 5)|
|Prepaid expenses and deposits (note 8)|
|Total Current Assets|
|Investment (note 18)|
|Property and Equipment, net (note 6)|
|Right-of-use asset, net (note 19)|
|Intangible Assets, net (note 7)|
|Liabilities and Shareholders’ Deficit|
|Accounts payable and accrued liabilities||$||$|
|Payroll taxes payable|
|Related party loan (note 12)|
|Promissory notes payable (note 9)|
|Loan payable (note 20)|
|Current lease liability (note 19)|
|Total Current Liabilities|
|Long Term – Lease Liability (note 19)|
|Loan payable (note 19)|
|Series A & B Preferred Stock, $Series B issued and outstanding, respectively (note 11) par value, shares authorized, Series A and|
|Common stock, $ par value, shares authorized, and shares issued and outstanding, respectively (note 11)|
|Additional paid-in capital|
|Share subscriptions receivable||(||)||(||)|
|Share subscriptions payable|
|Cumulative translation adjustment||(||)||(||)|
|Total Shareholders’ Equity|
|Total Liabilities and Shareholders’ Equity||$||$|
The accompanying notes form an integral part of these consolidated financial statements.
Consolidated Statements of Operations and Comprehensive Loss
December 31, 2022 and 2021
|Cost of Goods Sold|
|Gross Profit (Loss)||(||)|
|General and administrative|
|Sales and marketing|
|(Gain) Loss on foreign exchange||(||)|
|Total operating expenses|
|Loss from operations||(||)||(||)|
|Other Income (Expense)|
|Bad debt expense||(||)|
|Rental income (note 25)|
|Gain on settlement of debt|
|Total other income (expense)||(||)|
|Loss per Share (basic and diluted)||$||(||)||$||(||)|
|Weighted Average Number of Shares (basic and diluted)|
The accompanying notes form an integral part of these consolidated financial statements
Consolidated Statements of Shareholders’ Equity
December 31, 2022 and 2021
|Balance at January 1, 2021||$|| ||$||$||$||(||)||$||$||(||)||$||(||)||$|
|Stock split provision||-||(||)|
|Conversion of preferred stock to common stock||(||)||(||)||(||)|
|Issuance for services and subscriptions payable||-|
|Share issuance cost||-||-||(||)||(||)|
|Issuance of shares from private placement||-|
|Warrants issuance for services||-||-|
|Conversion of convertible promissory note to shares (note 10)||-|
|Warrant exercise (note 23)||-|
|Loan repayment (note 9 and 20)||-|
|Balance at December 31, 2021||$||$||$||$||(||)||$||$||(||)||$||(||)||$|
|Warrant exercise (note 23)||-||(||)|