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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2023
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-40681
Worksport Ltd.
(Exact Name of Small Business Issuer as specified in its charter)
| Nevada | 35-2696895 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| 2500 N America Dr, West Seneca, NY | 14224 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s Telephone Number, including area code: (888) 554-8789
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Trading Symbol(s) | Name of each exchange on which registered: | ||
| Common Stock | WKSP | The Nasdaq Stock Market LLC | ||
| Warrants | WKSPW | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit post such files).
Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, as of June 30, 2023, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $35,688,619, based on a closing price of $2.44 per share of common stock.
As of March 27, 2024, the Registrant had 24,100,413 shares of common stock, par value $0.0001 per share, issued and outstanding.
Table of Contents
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., a Nevada corporation and its subsidiaries, Worksport Ltd., an Ontario, Canada corporation, Worksport USA Operations Corporation, a Colorado corporation, Worksport New York Operations Corporation, a New York corporation, and Terravis Energy, Inc., a Colorado corporation. 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.
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PART I
ITEM 1. BUSINESS
Overview
Worksport Ltd., through its subsidiaries, designs, develops, and manufactures innovative products for various markets including automotive accessories, consumer electronics, and both residential and commercial HVAC system markets. Worksport is able to monetize and protect its products through a large and growing intellectual property (“IP”) portfolio with patents and trademarks relating to, among other things, tonneau covers, solar integrated tonneau covers, portable power stations, NP (non-parasitic) hydrogen-based green energy systems, residential heating and cooling systems (heat pumps), and electric vehicle-charging stations. Worksport seeks to provide consumers with next-generation automotive accessories through the production of our innovative line of tonneau covers for light trucks while capitalizing on growing consumer interest in clean energy solutions and power grid independence through the launch of its forthcoming solar tonneau cover (Worksport SOLIS) and mobile battery generator system (Worksport COR). Worksport’s subsidiary, TerraVis Energy, is poised to revolutionize the local and global markets for efficient home and commercial heat pumps through its groundbreaking TerraVis Energy Aetherlux. This prototype heat pump, currently under rigorous development, showcases exceptional early test results that underscore its remarkable efficiency in heating and cooling across both extreme hot and cold climates.
Corporate History
The Company was incorporated in the State of Nevada on April 2, 2003 under the name Franchise Holdings International, Inc. (“FNHI”). In December 2014, FNHI acquired 100% of the outstanding equity of Worksport Ltd., an Ontario corporation formed in 2011 (“Worksport Ontario”), pursuant to which Worksport Ontario became a wholly-owned subsidiary of FNHI. In May 2020, FNHI changed its name 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 Stock Market LLC (“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 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.
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. On August 8, 2023, this corporation was dissolved due to lack of operations and activity.
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. On May 25, 2023, this corporation was dissolved due to lack of operations and activity.
April 2021 Public Offering; Nasdaq Uplisting
On August 6, 2021, we consummated a firm commitment 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 related registration statement on Form S-1 filed pursuant Rule 462(b) (File No: 333-258429) under the Securities Act. 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.”
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September 2022 At-The-Market Sales Agreement
On September 30, 2022, the Company filed a shelf registration statement on Form S-3, which was declared effective by the SEC on October 13, 2022 (“Form S-3 Registration Statement”), allowing the Company to issue up to $30,000,000 of common stock and prospectus supplement covering the offering, issuance and sale of up to $13,000,000 of common stock that may be issued and sold under an At The Market Offering Agreement dated September 30, 2022 (“ATM Agreement”), with H.C. Wainwright & Co., LLC, as the sales agent (“HCW”). Pursuant to the ATM Agreement, HCW is entitled to a commission equal to 3.0% of the gross sales price of the shares of common stock sold. As of December 30, 2023, the Company has sold and issued 604,048 shares of common stock in consideration for net proceeds of $812,551 under the ATM Agreement.
November 2023 Registered Direct Offering and Concurrent Private Offering
On November 2, 2023, we raised roughly $4.7 million from a registered direct offering and concurrent private placement before deducting the placement agent’s fees and other estimated offering expenses payable by the Company. The registered direct offering entailed the sale of 3,500,000 shares of common stock (or pre-funded warrants to purchase shares of common stock in lieu thereof) to a single institutional investor. The concurrent private placement entailed the issuance and sale of warrants to purchase up to 7,000,000 shares of common stock to the same institutional investor. The combined effective offering price for each share of common stock (or pre-funded warrant in lieu thereof) and accompanying warrant was $1.34. The warrants will become exercisable six months from issuance, expire five and a half years from the issuance date and have an exercise price of $1.34 per share. The shares of common stock (or pre-funded warrants in lieu thereof) were offered by the Company pursuant to the Company’s Form S-3 Registration Statement. The warrants issued in the concurrent private placement and the shares issuable upon exercise of such warrants were offered in a private placement under Section 4(a)(2) and/or Rule 506 of Regulation D. The 7,000,000 shares of common stock underlying the warrants were registered for resale by the institutional investor on a registration statement on Form S-1 (File No. 333-276241) filed with the SEC on December 22, 2023 and declared effective by the SEC on December 29, 2023. If at time, there is no effective registration statement available for the shares of common stock underlying the warrants, the warrants may be exercised via a “cashless exercise.” We will not receive any proceeds from any warrants exercised by a “cashless exercise.”
March 2024 Direct Offering and Concurrent Private Offering
On March 18, 2024, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with a certain institutional investor (the “Purchaser”) pursuant to which we sold, in a registered direct offering, an aggregate of (i) 2,372,240 shares (the “Shares”) of common stock and (ii) 1,477,892 pre-funded warrants (the “Pre-funded Warrants”) to purchase up to 1,477,892 shares of Common Stock (the “Pre-funded Warrant Shares”). The offering price per Share was $0.74 and the offering price per Pre-funded Warrant was $0.7399.
The Shares, Pre-funded Warrants and Pre-funded Warrants Shares were offered pursuant to our Form S-3 Registration as supplemented by a prospectus supplement and accompanying base prospectus dated March 18, 2024, filed with the SEC on March 19, 2024 pursuant to Rule 424(b)(5) promulgated under the Securities Act. The registered direct offering closed on March 20, 2024.
The Company received net proceeds of approximately $2.59 million from the offering, after deducting the estimated offering expenses payable by the Company, including the tail fees payable to Maxim Group LLC. The Company intends to use the net proceeds from the offering for general corporate purposes, including working capital.
In a concurrent private placement, we issued the Purchaser warrants to purchase an aggregate of 7,700,264 shares of common stock for $0.74 per share. Under the warrants, we are obligated to register the shares underlying the warrants on a registration statement on Form S-3 (or other applicable form). If at time, there is no effective registration statement available for the shares of common stock underlying the warrants, the warrants may be exercised via a “cashless exercise.” We will not receive any proceeds from any warrants exercised by a “cashless exercise.”
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Business Developments
The following highlights recent material developments in our business:
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In August 2023, we announced the successful dispatch of our first shipment of hard-folding tonneau covers, which are made in the U.S. with domestic and imported components. This major development follows our initiating manufacturing earlier that month and aligns with recent sizable orders, notably a $700,000 order for soft-folding covers and a staggering $1,600,000 order for hard-folding covers, both from a national U.S. customer and reseller of automotive aftermarket accessories.
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In September 2023, we announced that we had found a top-tier solar panel provider for our highly anticipated SOLIS Solar Tonneau Cover. We believe that this provider, renowned for its state-of-the-art solar panels and underlying technology, will help us set a new standard in renewable energy tech for vehicles and provide the most durable and highest quality flexible solar panels.
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In September 2023, we announced significant strides in the development of our groundbreaking COR battery system, designed to complement the launch of the SOLIS solar cover. This cutting-edge duo is poised to empower remote power supply and extend the driving range of electric pickup trucks, thereby underscoring our commitment to sustainability and innovation as a cleantech company.
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On September 19, 2023, we announced that we had secured a long-term supply agreement with an established, leading automotive aftermarket reseller in the United States.
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On January 3, 2024, we announced our strategic arrangement with NeuronicWorks Inc., a Toronto-based high-tech custom electronic product development and manufacturing company, to manufacture and assemble our COR battery system in preparation for the system’s anticipated Alpha release.
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On February 7, 2024, we announced a collaboration with Infineon Technologies AG (FSE: IFX / OTCQX: IFNNY) pursuant to which we will use Infineon’s GaN power semiconductors GS-065-060-5-B-A in the converters for our portable power stations to increase efficiency and power density.
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| ● | On February 23, 2024, we announced a new arrangement with Dix Performance North, Canada’s leading wholesaler of aftermarket car and truck products, for Dix would include our tonneau covers in their catalog. This strategic alliance is expected to make Worksport’s range of covers widely available throughout Canada, accelerate our growth, and contribute to significant sales and revenue increases. |
Products
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 and Foshan, China. Enhanced versions of our vinyl tri- and quad-fold soft tonneau covers are now available for purchase and marketed under a “Pro” designation. 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 which 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 only soft vinyl flip up cover that can be either folded against the truck’s rear window or secured like a traditional cover to avoid obstruction of the rear window, Worksport’s full bed access quad-fold soft cover when folded parallel to the back window of the truck while avoiding obstruction of the rear brake light on most truck models.
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Our soft tonneau cover line includes:
| ● | Developed |
| ○ | The Worksport SC3 – soft tri-fold introduced in 2011, first Worksport Ltd. product; | |
| ○ | The Worksport SC3 PRO –soft tri-fold with Quick Latch system introduced in 2012; | |
| ○ | The Worksport SC4 – soft quad-fold introduced in 2022; and | |
| ○ | The Worksport SC4 PRO –soft quad-fold with Quick Latch system to be introduced in 2023. |
| ● | In Development |
| ○ | The Worksport SCX – soft tri-fold with extendable frame. |
Hard Tonneau Covers
Our hard line of tonneau covers includes tri- and quad-fold, aluminum covers. Our entire line of hard folding tonneau covers is manufactured in the USA and include our Quick Latch technology to allow single-sided operation. Our hard covers’ panels are made with ultra-thick, formed aluminum that provides superior dent resistance compared to those of other hard covers, and we protect those panels with a proprietary ceramic paint technology that’s scratch- and dent-resistant. Designed to auto index (center) in the truck bed and be only 7.5mm above the truck bed, the cover provides a low profile, sleek look and yet is easy to install. Our Tough Cover (TC) line will be purchasable with or without a rail system add-on, which provides enhanced utility and enhanced weather-resistance/sealing.
Our hard tonneau cover line, all of which is in development, includes:
| ● | The Worksport TC3 – premium top-mounted hard tri-fold; |
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| ● | The Worksport TC4 – premium top-mounted hard fold with full truck bed access; |
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| ● | The Worksport AL3 – top-mounted hard tri-fold; |
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| ● | The Worksport AL4 –top-mounted hard fold with full truck bed access |
Energy Products
We are researching and developing various energy-based products, two of which are standalone items - the Worksport SOLIS tonneau cover (“SOLIS”) and the Worksport COR energy storage system (“COR”) - which can be sold together along with a Maximum Power Point Tracking (MPPT) system. 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 MPPT within this kit may be sold alongside the SOLIS as a paired offering, as we have designed a version of our MPPT with a lower voltage input to be used with generic solar panels with lower voltage ratings than our COR energy storage system.
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Worksport SOLIS
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 to forge and develop relationships with electric pickup truck manufacturers, including but not limited to Workhorse, Rivian, and Tesla as well as Toyota, Stellantis, General Motors, Ford, Nissan, Fisker, and Honda.
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 the 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.
Worksport COR
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 Nickel Manganese Cobalt (NMC) 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.
Manufacturing
As of December 31, 2023, all Worksport soft tonneau covers were manufactured in a facility located in Meizhou, China according to Worksport’s specifications, schematics and blueprints. We also began exploring and setting up production capabilities for additional soft covers at a second outsourced manufacturing facility located in Foshan, China. The newer facility in Foshan, China will have an output capacity two times greater than that of the manufacturing facility in Meizhou, China. We believe we will be able to scale production at this newer facility without sacrificing 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 of raw material suppliers who can use our production tools to continue producing our tonneau cover components in order to lower the risk that 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, installed, and tested all manufacturing equipment as well as trained all personnel necessary for phase one production. 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.
In August of 2023, we began early production of our first hard folding tonneau cover, the Worksport AL3 Pro. We have continued to develop, improve, and evolve our production methods and standards. As of March 2024, we have begun consistent production of the AL3 Pro with high repeatably and stable production quality. The AL3 Pro tonneau cover model is in active production for most major makes and models of light trucks in North America.
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Our manufacturing engineering team is continuing to develop rigs and fixtures to increase the efficiency of our manufacturing process in order to scale existing manufacturing lines before investing in additional lines and personnel, and we will continue to allocate resources towards improving manufacturing efficiency and product quality on an on-going basis.
Intellectual Property
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.
Patents
As of December 31, 2023, our patent portfolio consists of ten (10) issued U.S. utility patents, three (3) issued Canadian utility patents, and thirty-two (32) pending utility patent applications in various jurisdictions worldwide. Our portfolio further includes seven (7) design registrations in Europe and China, along with forty-five (45) pending design applications in various jurisdictions worldwide. We are also in the process of preparing and filing several other utility and design patent applications across relevant countries and jurisdictions.
Granted U.S. utility patents will expire between 2032 and 2040, excluding any patent term adjustment that might be available following the grant of the patent. If issued, pending utility patent 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.
Trademarks
As of December 31, 2023, the Company has 36 trademark registrations and 18 pending trademark applications in various jurisdictions worldwide.
The Market
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 cover include but are not limited to:
| ● | Solid One Piece Caps and Lids; |
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| ● | Retractable Covers; |
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Soft Folding & Roll-Up Covers; and |
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| ● | 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.
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Our tonneau cover revenue stream is largely proportional to sales of pickup trucks. As of late 2022, there were 284.9 million vehicles in operation in the USA1, roughly 21%, or 59.5 million, of which were pickup trucks.2 However, as a result of recent supply chain shortages, heightened 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 North America, the pickup truck market is expected to grow from $120 billion in 2022 to $160 billion by 2030, representing a compound annual growth rate of 5.9% in 2023-2030.3 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, the pickup truck market is expected to grow at a compound annual growth rate of 5.01% between 2023 and 2028, representing a $102.91 billion increase.4
Electric pickup trucks are projected to gain a larger portion of the U.S. pickup truck market share each year through 2035.1 In fact, the electric pickup truck submarket within North America is estimated to grow from $16.66 billion in 2024 to $64.65 billion in 2029, representing a compound annual growth rate of 31.15%.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 $51.80 billion in 2022 to $58.28 billion by 2026.6 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 is expected to grow at a compound annual growth rate of 8.6% from $3 billion in 2021 to $5 billion in 2027.7
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, though it has since increased by 4.6%.8 Further, the Bureau of Labor has reported an increased unemployment rate in February 2024 relative to prior months9, and the Federal Reserve has projected unemployment rates may increase in 2024 and 2025.10 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 New Vehicle Dealerships and Specialty Retailers/Installers, which constituted 17% and 14% of physical location sales, respectively, in 2023.6 For online sales, the most popular sales channels for truck bed covers include Online Only General Retailer, Specialty Retailers/Installers, and Direct from Parts Manufacturers, which constituted 22%, 19%, and 8% of online sales, respectively, in 2023.6 In the Fall of 2022, it was reported that more than half of manufacturers within the specialty-equipment industry were realizing increasing sales through their Direct Sales to Consumers online sales channel over the prior twelve months – a proportion greater than that of any other online sales channel for specialty-equipment including Online Specialty Retailers, Online-Only Retailers, and Auto Parts Chains.11 Worksport has begun selling in this sales channel and plans to invest further into doing so in the future.
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| 1. | SEMA. Future Trends Report. 2023. Retrieved from www.sema.org | |
| 2. | SEMA. Pickup Accessorization Report. 2022. Retrieved from www.sema.org | |
| 3. | Skyquest Technology. Global Pickup Truck Market Size, Share, Growth Analysis, By Truck Type (Small Size Pickup Truck, Mid-Size Pickup Truck), By Propulsion Type (Diesel Pickup Truck, Gasoline Pickup Truck) - Industry Forecast 2023-2030. 2024. Retrieved from https://www.skyquestt.com/report/pickup-truck-market | |
| 4. | GlobalNewswire. Global Pickup Truck Market Poised for Growth, Set to Expand by USD 102.91 Billion with CAGR of 5.01% from 2023-2028. 2024. Retrieved from https://www.globenewswire.com/en/news-release/2024/01/26/2818014/28124/en/Global-Pickup-Truck-Market-Poised-for-Growth-Set-to-Expand-by-USD-102-91-Billion-with-CAGR-of-5-01-from-2023-2028.html | |
| 5. | Mordor Intelligence. North America Electric Truck Market Size & Share Analysis – Growth Trends & Forecasts up to 2029. 2024. Retrieved from https://www.mordorintelligence.com/industry-reports/north-america-electric-truck-market | |
| 6. | SEMA. SEMA Market Report. 2023. Retrieved from www.sema.org | |
| 7. | Arizton. U.S. Tonneau Covers Market - Industry Outlook & Forecast 2022-2027. 2022. Retrieved from https://www.arizton.com/market-reports/us-tonneau-covers-market | |
| 8. | IBIS World. Per Capita Disposable Income. 2023. Retrieved from https://www.ibisworld.com/us/bed/per-capita-disposable-income/33/#:~:text=Following%20the%20ending%20of%20government,when%20it%20may%20potentially%20hit. |
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| 9. | Bureau of Labor Statistics. The Employment Situation – February 2024. Retrieved from https://www.bls.gov/news.release/pdf/empsit.pdf | |
| 10. | Federal Reserve Board. Summary of Economic Projections. 2023. Retrieved from https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20231213.pdf. | |
| 11. | SEMA. State of the Industry Report 2022 Fall. 2022. 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 due to grid damage or the lack of grid in remote areas. Unlike such generators, portable power stations do not generate electricity themselves, but they too can 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 3.90% between 2023 and 2032, the global Portable Power Station market size is currently valued at $4.49 billion and is expected to grow to $6.13 billion by 2032.1 Within this global market, the largest regional market is the North American market with the USA alone constituting $1.28 billion of the current market share and having a compound annual growth rate of 3.8%.1 The segments within the North American market with the largest market share and highest compound annual growth rates are power stations utilizing lithium-ion batteries and those used for off-grid power applications,2 which matches the COR system’s battery type as well as intended usage. Power stations with capacities equal to or greater than 1500 Wh trail slightly behind batteries with capacities equal to or less than 500 Wh in both market size and compound annual growth rate.2
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.
| 1. | Precedence Research. Portable Power Station Market. Retrieved from https://www.precedenceresearch.com/portable-power-station-market |
| 2. | Market Research Future. Global Portable Power Station Market Research Report. 2023. |
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Distribution
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 2024. 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 delivers to them regularly. Retail end consumers are the end users of the products.
Competition
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 causing it to cannibalize 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 have a small and effective sales team to forge strong business-to-business relationships as well as a small and effective customer support team to service both business-to-business and direct-to-consumer sales. 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, while others specialize in a few or even one Portable Power Station as to target a specific or niche submarket.
We intend to be competitive in this space by focusing on one Portable Power Station while selling additional modular batteries to allow consumers not only to determine for themselves their ideal stored energy capacity and price point 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 coils, 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.
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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 the USA, Canada, 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 design 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 continues to research and develop 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 Energy, Inc., 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 and R&D 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.
Regulations
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.
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Environmental Compliance
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.
Human Capital
We employ twenty full-time employees and two part-time employees in Canada and further employ fifty full-time 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 employees are most likely to thrive when they have resources and support to meet their needs and succeed in their professional and personal lives. In support of this, we offer a variety of benefits for employees, such as group insurance, HRAs, supplemental insurance, paid time off, and 401k benefits, and we 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.
Engagement
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 and after the COVID-19 pandemic.
Available Information
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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the U.S. Securities and Exchange Commission (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.
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Executive Offices
Our principal corporate office and manufacturing, storage, and distribution facility is located at 2500 N. America Dr., West Seneca, NY 14224, USA while our secondary business address and Canadian research and development (“R&D”) facility is located at 55G East Beaver Creek Rd., Richmond Hill, Ontario, L4B 1E5, Canada. We additionally have a US-based R&D facility located at 5232 N. 23rd St. Ozark, MO 65721.
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
Going Concern Risk Factor
The Company has incurred significant losses since its inception, including a net loss of $14,928,958 for the year ended December 31, 2023, and has an accumulated deficit of $48,313,177 as of December 31, 2023. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate positive cash flows from operations and to secure additional sources of equity and/or debt financing. Despite the Company’s intent to fund operations through equity and debt financing arrangements, there is no assurance that such financing will be available on terms acceptable to the Company, if at all.
Our independent auditors have included an explanatory paragraph in their audit report regarding the Company’s ability to continue as a going concern. This going concern risk may materially limit our ability to raise additional funds through the issuance of new debt or equity or may adversely affect the terms upon which such capital may be available. The inability to obtain sufficient financing on acceptable terms could have a material adverse effect on the Company’s financial condition, results of operations, and business prospects.
The Company is actively pursuing strategies to mitigate these risks, focusing on transitioning towards revenue generation from its existing product offerings and expanding its customer base. However, there can be no assurance that these efforts will prove successful or that the Company will achieve its intended financial stability. The failure to successfully address these going concern risks may materially and adversely affect the Company’s business, financial condition, and results of operations. Investors should consider the substantial risks and uncertainties inherent in the Company’s business before investing in the Company’s securities.
Our business, results of operations and financial condition may be adversely impacted by resurgences of the global COVID-19 pandemic or other pandemics.
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 and financial markets in which we operate as well as the 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 materially adverse effect on our business.
The continued global COVID-19 pandemic 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. We cannot predict the occurrence, duration, or scope of future COVID-19 resurgences or other pandemics, and we know from the COVID-19 pandemic that such events can have material impacts on supply networks, in-person labor availability, and global financial markets volatility.
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.
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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, 2023 and 2022, we incurred operating losses of $14,928,958 and $12,534,414, respectively, and as of December 31, 2023, we had an accumulated deficit of $48,313,177. We believe net operating losses will decrease or become net income in the near future as we ramp up sales of our soft covers and AL3 tonneau covers, although we do intend to concurrently invest further into research and development of our AL4 tonneau cover, SOLIS cover, and COR energy storage systems; the market releases for these additional product lines may occur later than we expect or not at all. We are unsure whether we will be profitable in the near future while we continue to ramp up our product offerings, bolster our sales channels, and increase output capacity, and we cannot assure you that we will ever achieve or be able to maintain profitability in the future. Even if we can successfully develop our additional 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, 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 brand. If we are not able to establish, maintain and strengthen our brand, we may lose the opportunity to build a critical mass of customers. Our ability to develop, maintain and strengthen our brand will depend heavily on our ability to provide high quality products and engage with our customers as intended, as well as depend on 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 the Worksport brand. 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, 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 brand. 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.
Risk related to outstanding loan repayment and refinancing efforts.
Our mortgage loan with Northeast Bank matures on May 10th, 2024. Failure to refinance the mortgage may result in legal proceedings being brought by the lender, up to and including foreclosure. The company has received term sheets to refinance the property and is strategically evaluating next steps.
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. High 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.
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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.
While U.S. inflation rates have come down from their 2022 highs, the U.S. economy is still experiencing higher than target inflation rates, and high levels of inflation persist in many countries around the world. 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 elevated interest rates, and many economists are still unsure whether 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.
Our business and operations would suffer in the event of computer system failures, cyberattacks or a deficiency in our cybersecurity or a natural disaster.
There are growing risks related to the security, confidentiality and integrity of personal and corporate information stored and transmitted electronically due to increasingly diverse and sophisticated threats to networks, systems and data security. Potential attacks span a spectrum from attacks by criminal hackers, hacktivists, and nation state or state-sponsored actors, to employee malfeasance and human or technological error. Cyberattacks against companies have increased in frequency and potential harm over time, and the methods used to gain unauthorized access constantly evolve, making it increasingly difficult to anticipate, prevent, and/or detect incidents successfully in every instance.
Despite the implementation of security measures, our internal computer systems, and those of third parties on which we rely (including our vendors, contractors and other third-party partners who process information on our behalf or have access to our systems), are vulnerable to damage from computer viruses, malware, ransomware, phishing attacks and other forms of social engineering, denial-of-service attacks, third party or employee theft or misuse and other negligent actions, natural disasters, terrorism, war, telecommunication and electrical failures, cyberattacks or cyber-intrusions over the internet, security incidents, disruptions, attachments to emails, persons inside our organization, or persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through cyberattacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our product development programs. To the extent that any disruption or security breach was to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur material legal claims (including class claims) and liability, substantial remediation costs, regulatory enforcement, liability under data protection laws, additional reporting requirements and damage to our reputation, and the further development of our product candidates could be delayed.
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 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 scaling timelines. Offering more competitive compensation packages also damages our profits and sets forward-looking compensation expectations.
We have demonstrated historical success in less capital-intensive manufacturing in China, but we have not demonstrated success in low-cost, domestic, highly capital-intensive manufacturing.
While we have begun manufacturing in our West Seneca production facility, we are still increasing manufacturing efficiencies by decreasing direct labor, overhead, materials, and scrap costs. Doing so currently demands manufacturing engineering resources, supply chain research, and purchasing negotiations. We may require the assistance of or rely on the availability of third parties to assist us in properly establishing improved processes due to a lack of in-house, capital-intensive domestic manufacturing experience. Lack of experience may create delays and cost inefficiencies in production scaling and difficulty identifying necessary 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 the event 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.
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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 to acquire sufficient funding whether internally or externally. 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 higher revenues from our prospective sales partners nor be able to capitalize on additional third-party manufacturers.
We rely on two suppliers for the production of our outsourced finished goods which may hinder our ability to grow.
We purchase all of our soft tonneau covers from two supplier sources in China. We carry significant strategic inventories of these finished goods to reduce the risk associated with this concentration of suppliers. Strategic inventories are managed based on demand. While we are now manufacturing hard covers in the United States, the loss of one or both of these suppliers or a delay in shipments could have a material adverse effect on our soft tonneau cover sales and 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, 2023, the Company had one significant customer accounting for 93% of the Company’s revenue. For the year ended December 31, 2022, two customers made up approximately 50% (38% and 12% individually) of prior year 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.
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We depend on intellectual property rights that may be infringed upon, and we may 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, 2023, we own thirteen utility patents, seven design registrations, and seventy-four pending utility and design 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.
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Certain aspects of our technologies are protected by patents, patent applications, and trade secrets. 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 entities, 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 our products from our competitors’ products. 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 on 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.
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 illegally obtained, 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.
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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 enforce their patents and/or 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.
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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 and suppliers 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.
There are risks associated with domestic production that may result in slower or more expensive production.
Prior to August of 2023, we had no experience in the domestic manufacturing of tonneau covers. Domestic production entails far more detailed sourcing of raw materials as well as hiring and training of personnel. Domestic production increases our susceptibility to domestic low-wage labor shortages and subjects us to higher thresholds of compliance with local labor and business laws.
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 include Real Truck (formerly Truck Hero), Truck Accessories Group, and Agri-Cover, Inc., among others. Many of 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.
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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, 2023, we have no assurance that 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 high 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 April 2023, the paramilitary Rapid Support Forces within Sudan began fighting the Sudanese Armed Forces over tensions related to the paramilitary’s transition towards civilian rule. In October 2023, Hamas initiated an attack on Israel that has resulted in a war in Gaza, emboldened Houthi attacks against commercial cargo ships in the Red Sea, and waning or paused diplomatic progress between Israel and its neighboring countries. Tensions and wars persist in many other countries, including, but not limited to, Ethiopia and Myanmar.
In response to Russia’s invasion of Ukraine, 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 this conflict nor those of other global conflicts, although such consequences can include related rising geopolitical tensions, rising regional instability, geopolitical shifts, cyberattacks or the disruption of energy exports for the parties involved, neighboring parties, or supporting parties of these conflicts or their resulting sanctions. Such consequences could materially adversely affect global trade, currency exchange rates, regional economies and the global economy. These situations remain uncertain, and while it is difficult to predict the impact of any of the foregoing, these conflicts and actions taken in response to these conflicts 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.
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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 (“FDIC”), 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 soft tonneau covers and some raw materials are sourced from China. Any restrictions or tariffs imposed on products that we or our suppliers import for sale or production 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 our soft tonneau cover finished goods from two suppliers 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.
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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 and suppliers are 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 soft tonneau cover products. Such a 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 adapt. We have not manufactured our own soft tonneau covers in the past and are not planning to do so in the short term. 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, and 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 soft tonneau covers 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 existing ownership positions when issued.
At December 31, 2023, our authorized capital stock consists of 299,000,000 shares of common stock, of which approximately 278,679,497 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.
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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.
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.
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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 controls over financial reporting (“ICFR”) and concluded that our IFCR was not effective as of December 31, 2023. 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.
The requirements of being a public company may strain our resources, divert management’s attention and affect our results of operations.
As a public company in the United States, we face increased legal, accounting, administrative and other costs and expenses. We are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002 (the “Sarbanes Oxley-Act”). The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. For example, Section 404 requires that our management report on the effectiveness of our internal controls structure and procedures for financial reporting. Section 404 compliance may divert internal resources and will take a significant amount of time and effort to complete. If we fail to maintain compliance under Section 404, we could be subject to sanctions or investigations by Nasdaq, the SEC, or other regulatory authorities. Furthermore, investor perceptions of our Company may suffer, and this could cause a decline in the market price of our common stock. 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. We may need to hire a number of additional employees with public accounting and disclosure experience in order to meet our ongoing obligations as a public company, particularly if we become fully subject to Section 404 and its auditor attestation requirements, which will increase costs, and evaluate the costs of our current service providers. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. A number of those requirements will require us to carry out activities we have not done previously. Our management team and other personnel will need to devote a substantial amount of time to new compliance initiatives and to meeting the obligations that are associated with being a public company, which may divert attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.
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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 with 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; |
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| ● | 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.
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 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 decision to declare or pay dividends in the future will be at the discretion of our Board, subject to applicable laws and dependent upon several 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.”
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
We acknowledge the increasing importance of cybersecurity in today’s digital and interconnected world. Cybersecurity threats pose significant risks to the integrity of our systems and data, potentially impacting our business operations, financial condition and reputation.
As a smaller reporting company, we currently do not have formalized cybersecurity measures, a dedicated cybersecurity team or specific protocols in place to manage cybersecurity risks. Our approach to cybersecurity is in the developmental stage, and we have not yet conducted comprehensive risk assessments, established an incident response plan or engaged with external cybersecurity consultants for assessments or services.
Given our current stage of cybersecurity development, we have not experienced any significant cybersecurity incidents to date. However, we recognize that the absence of a formalized cybersecurity framework may leave us vulnerable to cyberattacks, data breaches and other cybersecurity incidents. Such events could potentially lead to unauthorized access to, or disclosure of, sensitive information, disrupt our business operations, result in regulatory fines or litigation costs and negatively impact our reputation among customers and partners.
We are in the process of evaluating our cybersecurity needs and developing appropriate measures to enhance our cybersecurity posture. This includes considering the engagement of external cybersecurity experts to advise on best practices, conducting vulnerability assessments and developing an incident response strategy. Our goal is to establish a cybersecurity framework that is commensurate with our size, complexity and the nature of our operations, thereby reducing our exposure to cybersecurity risks.
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In addition, the Board will oversee any cybersecurity risk management framework and a dedicated committee of the Board or an officer appointed by the Board will review and approve any cybersecurity policies, strategies and risk management practices.
Despite our efforts to improve our cybersecurity measures, there can be no assurance that our initiatives will fully mitigate the risks posed by cyber threats. The landscape of cybersecurity risks is constantly evolving, and we will continue to assess and update our cybersecurity measures in response to emerging threats.
For a discussion of potential cybersecurity risks affecting us, please refer to the “Risk Factors” section.
ITEM 2. PROPERTIES
On May 4, 2022, we purchased an approximately 152,847 square foot facility located at 2500 N America Dr., West Seneca, NY 14224 to serve as our primary corporate office and manufacturing facility. This facility meets our OEM manufacturing needs both now and in future years, as the facility contains ample space in which to grow.
We lease approximately 20,296 square feet for our secondary corporate office and electrical 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 not inclusive of additional fees, which also vary and averaged $7,019 CAD per month in 2023.
We 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 also lease approximately 3,200 square feet for our primary design engineering/R&D facility located at 5232 N. 23rd St. Ozark, MO 65721 pursuant to a twelve-month lease dated June 1, 2023, and terminating on the May 31st of 2024 for $3,250 USD per month. We have extended this lease for an additional twelve months such that it is to terminate on May 31st of 2025 for $3,350 USD per month.
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 such pending claims.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
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 27, 2024, there were 170 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.
Dividend Policy
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 decision 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.
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Unregistered Sales of Equity Securities
| ● | Warrants to purchase 7,000,000 shares of common stock of the Company at an exercise price of $1.34 per share, subject to adjustment for reverse stock splits, recapitalizations and reorganizations, which are exercisable six months from November 2, 2023, or May 2, 2024, until the date that is five and a half years from November 2, 2023, or May 7, 2029. | |
| ● | Warrants to purchase 7,700,264 shares of common stock of the Company at an exercise price of $0.74 per share, subject to adjustment for reverse stock splits, recapitalizations and reorganizations, which are exercisable six months after the date of issuance, or September 20, 2024, until the five and a half-year anniversary date of the date of issuance, or September 20, 2029. |
The foregoing securities were issued in reliance on the exclusion from registration provided by Section 4(a)(2) and/or Rule 506 of Regulation D promulgated under the Securities Act due to the fact the issuance did not involve a public offering of securities.
Securities Authorized For Issuance Under Equity Compensation Plans
See Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters—Equity Incentive Plans” of this Annual Report on Form 10-K.
Equity Incentive Plans
See Item 11 “Executive Compensation” of this Annual Report on Form 10-K.
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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.
Overview
Worksport Ltd., through its subsidiaries, designs, develops, manufactures, and owns the Intellectual Property on a portfolio of tonneau cover, solar integration, portable power station, and NP (Non-Parasitic), Hydrogen-based green energy products and solutions for the automotive aftermarket accessories, power storage, residential heating, and electric vehicle-charging industries. We seek to provide consumers with next-generation automotive aftermarket accessories while capitalizing on growing consumer interest in clean energy solutions and power grid independence.
Rising Popularity of Electric Vehicles
Electric Vehicles (EVs) have been exponentially increasing in consumer interest, whether that interest takes the form of vehicle pre-orders, sales, or investments. As we begin marketing our Worksport SOLIS and COR, 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 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.
Business Developments
The following highlights recent material developments in our business:
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In August 2023, we announced the successful dispatch of our first shipment of hard-folding tonneau covers, which are made in the U.S. with domestic and imported components. This major development follows our initiating manufacturing earlier that month and aligns with recent sizable orders, notably a $700,000 order for soft-folding covers and a staggering $1,600,000 order for hard-folding covers, both from a national U.S. customer and reseller of automotive aftermarket accessories.
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In September 2023, we announced that we had found a top-tier solar panel provider for our highly anticipated SOLIS Solar Tonneau Cover. We believe that this provider, renowned for its state-of-the-art solar panels and underlying technology, will help us set a new standard in renewable energy tech for vehicles and provide the most durable and highest quality flexible solar panels.
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In September 2023, we announced significant strides in the development of our groundbreaking COR battery system, designed to complement the launch of the SOLIS solar cover. This cutting-edge duo is poised to empower remote power supply and extend the driving range of electric pickup trucks, thereby underscoring our commitment to sustainability and innovation as a cleantech company.
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| ● | On September 19, 2023, we announced that we had secured a long-term supply agreement with an established, leading automotive aftermarket reseller in the United States. |
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On January 3, 2024, we announced our strategic arrangement with NeuronicWorks Inc., a Toronto-based high-tech custom electronic product development and manufacturing company, to manufacture and assemble our COR battery system in preparation for the system’s anticipated Alpha release.
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On February 7, 2024, we announced a collaboration with Infineon Technologies AG (FSE: IFX / OTCQX: IFNNY) pursuant to which we will use Infineon’s GaN power semiconductors GS-065-060-5-B-A in the converters for our portable power stations to increase efficiency and power density.
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| ● | On February 23, 2024, we announced a new arrangement with Dix Performance North, Canada’s leading wholesaler of aftermarket car and truck products, for Dix would include our tonneau covers in their catalog. This strategic alliance is expected to make Worksport’s range of covers widely available throughout Canada, accelerate our growth, and contribute to significant sales and revenue increases. |
Key Factors Affecting our Performance
As a result of a number of factors, our historical results of operations may not be comparable to our results of operations in future periods, and our results of operations may not be directly comparable from period to period. Set forth below is a brief discussion of the key factors impacting our results of operations.
COVID-19
The outbreak of the coronavirus, specifically identified as “COVID-19,” resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which included the implementation of travel bans, self-imposed quarantine periods, and social distancing, have caused material disruption to businesses globally, resulting in an economic slowdown. Global equity markets experienced significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions – many of which have deeply impacted capital markets.
As a safety precaution, we created a policy such that any personnel exposed to an infectious disease or virus was not to report to the office until the completion of a variable length quarantine. While this resulted in fewer personnel working in our offices or labs on a given day, it likely prevented further contamination and sick leave. We do not believe this policy has impacted revenue nor timelines towards upcoming product launches; however, supply chain issues caused by COVID-19 did result in higher cost of goods sold during 2021 and 2022. While freight costs have since returned to pre-COVID-19 levels, 2021 freight costs were, in some cases, more than four times higher than those shortly before COVID-19.
The supply chain for certain raw materials has been disproportionately, negatively impacted when compared to supply chains of other raw materials. The supply chain for power electronics, specifically, is still facing supply chain issues as a result of COVID-19, for the globe faced a simultaneous supply shock and heightened demand for these goods – increasing the prices for such raw materials while simultaneously slowing suppliers’ order fulfillments. Further, due to such shortages, many suppliers of power electronics have focused their attention on large customers such as those more directly aligned within the electric vehicle supply chain as compared to companies on the outskirts of this supply chain such as Worksport. This particular result of COVID-19 primarily affects the sourcing of components for the Worksport COR. In order to mitigate these supply chain issues, we have invested more resources into sourcing power electronics in the interest of finding reliable suppliers with manageable lead times and competitive pricing.
The response of many governments to the COVID-19 pandemic has resulted in higher interest rates and destabilized equity markets – particularly among micro- or low-capitalization companies – effectively increasing the cost of and decreasing easy access to capital, which could negatively impact our short-term and long-term liquidity. These factors, combined with the consequences of possible future waves of the disease, could have a material impact on our liquidity, capital resources, operations, and business as well as those of the third parties on which we rely. The management and Board are constantly monitoring this situation to minimize potential losses.
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Climate Change
Climate change threatens to cause many foreseeable as well as unforeseeable ramifications. In cautious preparation for those that are foreseeable, we have strategically begun domestic manufacturing operations in Western New York – an economically growing region not immediately threatened by climate change to the same extent as other regions and possibly one that may benefit from future population migrations within the United States of America. Further, we intend to lower our own carbon footprint by investing in energy-saving measures in our factory in West Seneca, NY. Considering climate change may also exacerbate geopolitical tensions, we are working to diversify our supply chain and lower our reliance on any particular region or country for raw materials in order to lower our exposure to climate change-induced economic or political instability.
We believe our Worksport SOLIS and Worksport COR products will be received positively by the public for their resilience to, and even increased utility as a result of, Climate Change. However, we acknowledge the potentially negative environmental impacts of poor battery recycling and increasing demand for precious metals. We are actively researching ways to lower such environmental impacts.
Inflation
Prices of certain commodity products, including raw materials, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations, trade restrictions and tariffs. Increasing prices of the component materials for parts of our goods may impact the availability, quality and price of our products as suppliers search for alternatives to existing materials and increase the prices they charge. Our suppliers may also fail to provide consistent quality of product as they may substitute lower cost materials to maintain pricing levels. Rapid and significant changes in commodity prices may negatively affect our profit margins, and it may be difficult to mitigate worsened margins through customer pricing actions and cost reduction initiatives.
Such an inflationary environment also increases our direct cost of raw goods or processed goods for our OEM manufacturing as well as indirect costs such as overhead and rent. Due to these present and forecasted price increases and the temporary increases in ocean freight and container handling costs faced during the majority of 2022 as a result of 2021 supply chain issues, we updated our product pricing in 2022.
Additionally, as central banks and the U.S. Federal Reserve increase interest rates to combat global inflation, the cost of debt financing increases. While we currently do not have material debt other than our $5.3 million mortgage on our West Seneca facility, our mortgage’s variable rate increases and decreases along with interest rates, which resulted in an increase of monthly premiums throughout 2022 and 2023. We are still susceptible to variable monthly mortgage interest costs as a result of changes in interest rates. We continue to explore debt financing options at reasonable interest rates in order to strengthen our cash position.
Rising interest rates have also resulted in a shift in institutional holdings away from micro-cap equities, which has negatively influenced our stock’s trading volume. We continue to forge relationships with institutional investors and analysts in order to maintain a healthy trading volume.
Gasoline Prices and Supply Chain Issues
We faced significantly higher ocean freight, trucking, and container handling costs as well as last mile delivery costs in 2021 and 2022 than we did in previous years – all of which have increased our products’ landed costs. Higher oil and gasoline prices further increased these costs, and while such prices have come down from their 2022 highs, we continue to closely monitor gasoline and shipping costs. While the Freight Rate Index has significantly increased since late 2023 as a result of Houthi attacks against cargo ships in the Red Sea and the concurrent decline in activity across the Panama Canal, the shipping routes used by Worksport have not faced dramatic price hikes. Regardless, Worksport is closely monitoring international shipping costs.
Our transition towards domestic manufacturing and assembly is anticipated to largely offset these higher costs, as we believe we will be less exposed to higher international shipping costs. We are also identifying North American suppliers of our products’ components and will prioritize transport by rail when possible to avoid high trucking costs.
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Geopolitical Conditions
In February 2022, Russia initiated significant military action against Ukraine. In response, the U.S. and certain other countries imposed significant sanctions and export controls against Russia, Belarus and certain individuals and entities connected to Russian or Belarusian political, business, and financial organizations, and the U.S. and certain other countries could impose further sanctions, trade restrictions, and other retaliatory actions should the conflict continue or worsen. It is not possible to predict the broader consequences of these conflicts, including related geopolitical tensions, and the measures and retaliatory actions taken by the U.S. and other countries in respect thereof as well as whether any counter measures or retaliatory actions in response, including, for example, potential cyberattacks or the disruption of energy exports, are likely to cause regional instability and geopolitical shifts, which could materially adversely affect global trade, currency exchange rates, regional economies and the global economy. These situations remain uncertain, and while it is difficult to predict the impact of any of the foregoing, the conflicts and actions taken in response to these conflicts could increase our costs, reduce our sales and earnings, impair our ability to raise additional capital when needed on acceptable terms, if at all, or otherwise adversely affect our business, financial condition, and results of operations.
In addition, while we do not have any direct operations or significant sales in the Middle East nor Africa, geopolitical tensions and ongoing conflicts in these regions, particularly in Gaza, northern Israel and southern Lebanon, the Red Sea, Sudan, and Ethiopia, may lead to further global economic instability and fluctuating energy prices that could materially affect our business. It is not possible to predict the broader consequences of these conflicts, including related geopolitical tensions, and the measures and actions taken by other countries in respect thereof, which could materially and adversely affect global trade, currency exchange rates, regional economies and the global economy. While it is difficult to predict the impact of any of the foregoing, these conflicts may increase our costs, disrupt our supply chain, reduce our sales and earnings, impair our ability to raise additional capital when needed on acceptable terms, if at all, or otherwise adversely affect our business, financial condition and results of operations.
Foreign Currencies
We are subject to foreign exchange risk as we manufacture certain products and components in China, market extensively in both Canadian and U.S. markets, employ people residing in both the U.S. and Canada and, to date, have raised funds in Canadian Dollars. Meanwhile, we report results of operations in U.S. Dollars. Since our Canadian customers pay in Canadian Dollars, we are subject to gains and losses due to fluctuations in the USD relative to the Canadian Dollar. Our manufacturers in China are paid in USD to better avoid the relatively greater fluctuation of the Chinese Yuan. To the extent the U.S. dollar strengthens against any of these foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our operations.
Results of Operations
Revenue
For the year ended December 31, 2023, revenues from the entire line of our products were $1,529,632, as compared to $116,502 for the year ended December 31, 2022. Year-over-year sales increased by approximately 1,213%. For the year ended December 31, 2023, revenue generated in Canada was $6,811, as compared to $14,572 for the same period in 2022, a decrease of 53%. For the year ended December 31, 2023, revenue generated in the United States was $1,522,821, compared to $101,930 for the same period in 2022, an increase of 1,394%.
Revenue increased the year ended December 31, 2023 compared to the same period the prior year due to increased sales of soft tonneau covers to a private label partner during the year ended December 31, 2023. Worksport continues to focus on establishing new business-to-consumer and business-to-business sales channels while strengthening the support of those channels to increase customer satisfaction and enable high product turnover. For business-to-consumer channels, we have configured our product offerings in a manner conducive with cost-effective marketing, allowing us to securely invest in marketing during 2024. For business-to-business channels, we have created all necessary marketing/sales materials and policies, and we are now actively presenting our product offerings to various dealers, jobbers, and retailers across the USA and Canada. We intend to gradually increase output capacity through refined production processes and increased personnel.
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Sales from online retailers of our products increased from $101,930 in 2022 to $104,352 in 2023, an increase of 2%. Online retailers accounted for 7% of total revenue for the year ended December 31, 2023 compared to 87% for the year ended December 31, 2022. Distributor sales decreased for the year ended December 31, 2023 compared with the year ended December 31, 2022 with sales of $6,811 and $14,572, respectively. Private label sales accounted for 93% or $1,418,869 of total revenue for the year ended December 31, 2023. We expect to continue to grow our fields of business as we develop unique products with enhanced utility to offer to other prospective clients in the U.S. and Canadian markets.
Currently, we work closely with two distributors in Canada, and we are close to setting up a distribution network within the USA. This does not include multiple independent online retailers. We currently support a network of dealers and distributors, and we will continue to expand our business and online sales channels in 2024.
Cost of Sales
Cost of sales increased by 2,163%, from $56,967 for the year ended December 31, 2022 to $1,289,118 for the year ended December 31, 2023. Our cost of sales, as a percentage of sales, was approximately 84% and 49% for the years ended December 31, 2023 and 2022, respectively. The increase in the cost of sales as a percentage of sales was primarily due to increased sales to private labels at a lower agreed upon sales price compared to online retail sales. We consistently secure a 20% gross margin on soft covers sold to private labels, as these soft covers are drop shipped from our Chinese suppliers at a fixed cost. However, our margins on domestically manufactured hard covers is dependent on the cost of raw materials, which fluctuates, as well as overhead, which is expected to decrease in future quarters as we realize manufacturing efficiencies and allocate more existing human capital and machinery resources away from design engineering and testing towards production. Our overhead per domestic unit was particularly high during the year ended December 31, 2023 due to this allocation of resources.
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 inventory directly from our stocking warehouse.
Operating Expenses
Operating expenses increased for the year ended December 31, 2023 by $2,143,925, from $12,833,250 for the fiscal year ended December 31, 2022 to $14,977,175 for the fiscal year ended December 31, 2023, due to the following factors.
| ● | General and administrative expense increased by $4,665,098 from $4,978,582 in 2022 to $9,643,680 in 2023. The increase was related to increased research and development activities, increased employment of production personnel including engineers, machine operators, and assembly people, and increases in wages and salaries as we seek to expand our operations and further develop our products. | |
| ● | Sales and marketing expenses decreased by $963,212, from $2,446,266 for 2022 to $1,483,054 for 2023. The decrease in sales and marketing is primarily attributable to the completion of several marketing agreements and lower cost of in-house marketing campaigns to create brand and product awareness. | |
| ● | Professional fees, which include accounting, legal, and consulting fees, decreased from $5,418,863 in 2022 to $3,853,134 in 2023. The decrease in professional fees was due to the completion of consulting engagements with various third-party consultants. | |
| ● | We realized a gain on foreign exchange of $2,693 during 2023, compared to a gain on foreign exchange of $10,461 for the prior year due to conversions between CAD and USD. |
\Other Income and Expenses
We reported other expenses for the year ended December 31, 2023 of $192,297 compared to other income of $239,301 the prior year. The increase in other expenses can be attributed to higher interest expense in the current period compared to the prior period, offset by interest income and rental income.
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Net Loss
Net loss for the year ended December 31, 2023 was $14,928,958 compared to a net loss of $12,534,414 for the year ended December 31, 2022 – an increase of 19%. The increase in the net loss can be attributed to the increase in various operating expenses as we focus on expanding our operations, research and development, manufacturing, and supply chain.
Liquidity and Capital Resources
As of December 31, 2023, we had $3,365,778 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. During the year ended December 31, 2023, we had net losses of $14,928,958 (2022 - $12,534,414). As of December 31, 2023, the Company had working capital of $1,956,894 (2022 – $15,870,377) and had an accumulated deficit of $48,313,177 (2022 - $33,384,219).
In their audit report, our independent auditors expressed that there is substantial doubt as to our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to generate cash flows from operations and obtain equity and/or debt financing. We intend to continue funding operations through equity and debt financing arrangements, which may be insufficient to fund our capital expenditures, working capital and other cash requirements in the long term. There can be no assurance that the steps our management is taking will be successful.
To date, our principal sources of liquidity consist of net proceeds from public and private securities offerings and cash exercises of outstanding warrants. During the year ended December 31, 2023, the Company received net proceeds of $4,475,869 from offerings. Management is focused on transitioning towards revenue as our principal source of liquidity by growing our existing product offerings and customer base. We cannot give assurance that we can increase our cash balances or limit our cash consumption and thus maintain sufficient cash balances for our planned operations or future business developments. Future business development and demands may lead to cash utilization at levels greater than recently experienced. We may need to raise additional capital in the future. However, we cannot ensure that we will be able to raise additional capital on acceptable terms, or at all. Subject to the foregoing, we believe our current cash balances coupled with anticipated cash flow from operating activities will be sufficient to meet our working capital requirements for at least one year from the date of issuance of the accompanying consolidated financial statements.
We have conducted the following public and private offerings since the beginning of the 2023 fiscal year:
Public Offering
On September 30, 2022, we filed a shelf registration statement on Form S-3 (File No. 333-267696), which was declared effective by the SEC on October 13, 2022, containing a base prospectus covering the offering, issuance and sale by us of up to $30,000,000 of our common stock and prospectus supplement covering the offering, issuance and sale by us of up to $13,000,000 of our common stock that may be issued and sold under an At The Market Offering Agreement dated as of September 30, 2022. Pursuant to the ATM Agreement, H.C. Wainwright & Co., LLC is entitled to a commission equal to 3.0% of the gross sales price of the shares of common stock sold. As of December 31, 2023, the Company has issued 99,127 shares for net proceeds of $214,238.
Public Underwritten Offering
On November 2, 2023, the Company closed a sale of 1,925,000 shares of common stock and 1,575,000 pre-funded warrants for a total net proceeds of $4,261,542. In association with the sale, the Company also issued 7,000,000 warrants convertible for 7,000,000 shares of common stock at an exercise price of $1.34. The warrants are exercisable six months after issuance and will expire five and a half years from the issuance date.
September 2022 At-The-Market Sales Agreement
On September 30, 2022, the Company filed a shelf registration statement on Form S-3, which was declared effective by the SEC on October 13, 2022 (“Form S-3 Registration Statement”), allowing the Company to issue up to $30,000,000 of common stock and prospectus supplement covering the offering, issuance and sale of up to $13,000,000 of common stock that may be issued and sold under an At The Market Offering Agreement dated September 30, 2022 (“ATM Agreement”), with H.C. Wainwright & Co., LLC, as the sales agent (“HCW”). Pursuant to the ATM Agreement, HCW is entitled to a commission equal to 3.0% of the gross sales price of the shares of common stock sold. As of December 31, 2023, the Company has sold and issued 604,048 shares of common stock in consideration for net proceeds of $812,551 under the ATM Agreement.
November 2023 Registered Direct Offering and Concurrent Private Offering
On November 2, 2023, we raised roughly $4.7 million from a registered direct offering and concurrent private placement before deducting the placement agent’s fees and other estimated offering expenses payable by the Company. The registered direct offering entailed the sale of 3,500,000 shares of common stock (or pre-funded warrants to purchase shares of common stock in lieu thereof) to a single institutional investor. The concurrent private placement entailed the issuance and sale of warrants to purchase up to 7,000,000 shares of common stock to the same institutional investor. The combined effective offering price for each share of common stock (or pre-funded warrant in lieu thereof) and accompanying warrant was $1.34. The warrants will become exercisable six months from issuance, expire five and a half years from the issuance date and have an exercise price of $1.34 per share. The shares of common stock (or pre-funded warrants in lieu thereof) were offered by the Company pursuant to the Company’s Form S-3 Registration Statement. The warrants issued in the concurrent private placement and the shares issuable upon exercise of such warrants were offered in a private placement under Section 4(a)(2) and/or Rule 506 of Regulation D. The 7,000,000 shares of common stock underlying the warrants were registered for resale by the institutional investor on a registration statement on Form S-1 (File No. 333-276241) filed with the SEC on December 22, 2023 and declared effective by the SEC on December 29, 2023. If at time, there is no effective registration statement available for the shares of common stock underlying the warrants, the warrants may be exercised via a “cashless exercise.” We will not receive any proceeds from any warrants exercised by a “cashless exercise.”
March 2024 Direct Offering and Concurrent Private Offering
On March 18, 2024, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with a certain institutional investor (the “Purchaser”) pursuant to which we sold, in a registered direct offering, an aggregate of (i) 2,372,240 shares (the “Shares”) of common stock and (ii) 1,477,892 pre-funded warrants (the “Pre-funded Warrants”) to purchase up to 1,477,892 shares of Common Stock (the “Pre-funded Warrant Shares”). The offering price per Share was $0.74 and the offering price per Pre-funded Warrant was $0.7399. The Shares, Pre-funded Warrants and Pre-funded Warrants Shares were offered pursuant to our Form S-3 Registration as supplemented by a prospectus supplement and accompanying base prospectus dated March 18, 2024, filed with the SEC on March 19, 2024 pursuant to Rule 424(b)(5) promulgated under the Securities Act. The registered direct offering closed on March 20, 2024.
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The Company received net proceeds of approximately $2.59 million from the offering, after deducting the estimated offering expenses payable by the Company, including the tail fees payable to Maxim Group LLC. The Company intends to use the net proceeds from the offering for general corporate purposes, including working capital.
In a concurrent private placement, we issued the Purchaser warrants to purchase an aggregate of 7,700,264 shares of common stock for $0.74 per share. Under the warrants, we are obligated to register the shares underlying the warrants on a registration statement on Form S-3 (or other applicable form). If at the time of exercise of the Warrant there is no effective registration statement available for the shares of common stock underlying the warrants, the warrants may be exercised via a “cashless exercise.” We will not receive any proceeds from any warrants exercised by a “cashless exercise.”
Cash Flow Activities
Cash decreased from $14,620,757 at December 31, 2022 to $3,365,778 at December 31, 2023 – a decrease of $11,254,979 or 77%. The decrease was primarily due to the acquiring of assets for domestic production, such as industrial manufacturing equipment, as well as increasing spending on production personnel, and for raw materials in anticipation of domestic production, research and development, and overhead.
As of December 31, 2023, we had current assets of $9,123,506 (2022 - $18,332,107) and current liabilities of 7,166,612 (2022 – $2,461,730). As of December 31, 2023, we had working capital of $1,956,894 (2022 – $15,870,377) and an accumulated deficit of $48,313,177 (2022 - $33,384,219).
Operating Activities
Net cash used by operating activities for the year ended December 31, 2023 was $11,930,580, compared to $7,977,960 in the prior year, driven by a larger net loss during the year ended December 31, 2023, and partially offset by the issuance of shares, options, and warrants for services.
Accounts receivable increased at December 31, 2023 by $400,525 and decreased by $83 in the prior year. The increase in accounts receivable was due to higher sales to private labels near the end of the year in 2023 compared to that of 2022.
Inventory increased at December 31, 2023 by $2,285,120 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 and our purchasing of raw materials for domestic production. Prepaid expenses increased by $776,703 at December 31, 2023 and by $529,438 at December 31, 2022 due to deposits made by us for the purchase of manufacturing equipment and inventory.
Accounts payable and accrued liabilities decreased at December 31, 2023 by $577,124 and increased at December 31, 2022 by $995,340, respectively.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2023 was $3,756,364 compared to $11,150,776 in the prior year. The decrease in investing activities was primarily due to the purchase of a manufacturing facility in 2022.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2023 was $4,431,965 compared to $5,182,160 in the prior year. During the year ended December 31, 2023 the Company received net proceeds of $4,475,869 from the sale of shares and pre-funded warrants. During the year ended December 31, 2022, we received a $5,300,000 loan for the purchase of a manufacturing facility.
Material Cash Requirements from Known Contractual and Other Obligations
The following table summarizes our contractual obligations as of December 31, 2023 and 2022:
| Contractual Obligations | December 31, 2023 | December 31, 2022 | ||||||
| Operating lease obligations | $ | 1,082,319 | $ | 1,518,895 | ||||
| Equipment purchases | $ | 59,815 | $ | 2,545,000 | ||||
| Total Contractual Obligations | $ | 1,142,134 | $ | 4,063,895 | ||||
We intend to fund our contractual obligations with working capital.
Off-Balance Sheet Arrangements
None.
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.
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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, 2023 and 2022 totaling $730,802 and $411,016, respectively.
Receivables - Trade accounts receivable are stated at the amount the Company expects to collect. Receivables are reviewed individually for collectability. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, allowances may be required.
The Company offers credit terms on the sale of the Company’s products to a significant majority of the Company’s customers and requires no collateral from these customers. The Company performs ongoing credit evaluations of customers’ financial condition and, if needed, maintains an allowance for doubtful accounts receivable based upon the Company’s historical experience, forecasted economic conditions, and a specific review of accounts receivable at the end of each period. At December 31, 2023 and 2022, the Company had no allowance for doubtful accounts.
Inventory - Inventory is stated at the lower of cost or net realizable value, with cost being determined on a weighted average basis. Cost includes purchase price of materials, freight, and related costs required to bring the goods to Company warehouses.
Revenue Recognition – In accordance with Accounting Standards Codification (ASC) 606 Revenue from Contracts with Customers, sales are recognized when (1) products are shipped, with no right of return except for defective products, and the title and risk of loss has passed to customers; and (2) when they are delivered based on the terms of the sale, and there is an identifiable contract with a customer with defined performance obligations, the transaction price is determinable, and the entity has fulfilled its performance obligation. Revenue related to shipping and handling costs billed to customers is included in net sales, and the related shipping and handling costs are included in cost of goods sold.
Property and Equipment - Capital assets are recorded at cost and are depreciated using the straight-line method over the following estimated useful lives:
| Furniture and equipment | 5 years | |
| Automobile | 5 years | |
| Computers | 3 years | |
| Leasehold improvements | 15 years | |
| Manufacturing equipment | 5-15 years | |
| Building | 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Worksport Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Worksport Ltd. and Subsidiaries (the Company) as of December 31, 2023 and 2022, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial condition of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit, that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Inventory
Description of the Matter
As of December 31, 2023, the Company’s inventory balance was $3.6 million. As reported in Note 5, inventory has increased significantly over the past year as the Company began to stockpile inventory due to its start of domestic production during 2023. The Company evaluates its inventory for obsolescence on an ongoing basis by considering historical usage as well as requirements for future orders.
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Given the inherent uncertainty and significant judgments necessary to value inventory and its related obsolescence, auditing management’s estimates involved a high degree of auditor judgment.
How We Addressed the Matter in Our Audit
Our auditing procedures related to inventory valuation included the following, among others:
| ● | We evaluated the appropriateness and consistency of management’s methods used to value inventory and develop its estimates. | |
| ● | We evaluated the reasonableness of judgments made and significant assumptions used by management relating to key estimates. | |
| ● | We inquired of management relative to write-offs of inventory during the year. | |
| ● | We tested the completeness and accuracy of management’s inventory detail. | |
| ● | We developed an independent expectation of the obsolescence reserve based on our knowledge of the Company’s inventory, including analysis of slow-moving items and historical usage and compared it to actual. | |
| ● | We performed a lower of cost or net realizable value analysis by selecting a sample of items included in inventory at year-end. | |
| ● | We selected a sample of purchases made throughout the year to ensure they were included in inventory at the proper weighted-average value. | |
| ● | We selected a sample of purchases made before and after the year end to ensure proper cut-off was achieved. | |
| ● | During our physical inventory observation, we toured the Company’s facility and examined inventory on hand to determine the completeness and existence of ending inventory. | |
| ● | We examined management’s overhead analysis and performed procedures to test its completeness and accuracy. |
Shareholders’ Equity and Related Transactions
Description of the Matter
As discussed in Notes 9, 18, and 19 to the consolidated financial statements, the Company has issued a significant amount of equity securities. The tracking of these transactions can be complicated and require management to estimate the value of equity securities using a Black Scholes option pricing model. We identified the fair market value of equity transactions to be a critical audit matter, as the calculations can be complex and subject to error.
How We Addressed the Matter in Our Audit
Our auditing procedures related to equity transactions included the following, among others:
| ● | We evaluated the appropriateness and consistency of management’s methods used to develop its estimates. | |
| ● | We gained an understanding of management’s process to record the equity transactions. | |
| ● | We obtained management’s calculations and tested the clerical accuracy and inputs used. | |
| ● | We agreed the basic terms to source agreements and considered key assumptions. | |
| ● | We recalculated the recorded values and conversion amounts. |
Going Concern
Description of the Matter
As discussed in Note 3 to the consolidated financial statements, the Company has experienced recurring net losses that raise substantial doubt about the Company’s ability to continue as a going concern. Upon analysis of the Company’s current financial situation and projected outlooks, we believe there is substantial doubt about the Company’s ability to continue as a going concern.
How We Addressed the Matter in Our Audit
Our auditing procedures related to going concern included the following, among others:
| ● | We obtained the Company’s evaluation of its ability to continue as a going concern and evaluated the Company’s plans to address these concerns. | |
| ● | We analyzed the Company’s current state of operations. | |
| ● | We evaluated the Company’s current and projected cash flow. |
We have served as the Company’s auditor since 2022.
/s/ Lumsden & McCormick, LLP
Buffalo, New York
March 27, 2024
PCAOB ID Number: 130
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Worksport Ltd.
Consolidated Balance Sheets
December 31, 2023 and 2022
| 2023 | 2022 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 3,365,778 | $ | 14,620,757 | ||||
| Accounts receivable, net | 463,122 | 62,601 | ||||||
| Other receivable | 165,865 | 268,032 | ||||||
| Inventory (note 5) | 3,631,492 | 1,346,372 | ||||||
| Prepaid expenses and deposits (note 8) | 1,497,249 | 2,034,345 | ||||||
| Total Current Assets | 9,123,506 | 18,332,107 | ||||||
| Investment (note 14) | 90,731 | 24,423 | ||||||
| Property and Equipment, net (note 6) | 14,483,436 | 11,900,672 | ||||||
| Right-of-use asset, net (note 15) | 917,354 | 1,238,055 | ||||||
| Intangible Assets, net (note 7) | 1,338,889 | 1,268,873 | ||||||
| Total Assets | $ | 25,953,916 | $ | 32,764,130 | ||||
| Liabilities and Shareholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 1,451,181 | $ | 2,028,305 | ||||
| Payroll taxes payable | 85,010 | - | ||||||
| Related party loan (note 10) | 2,192 | 46,096 | ||||||
| Loan payable (note 16) | 5,300,000 | - | ||||||
| Current lease liability (note 15) | 328,229 | 387,329 | ||||||
| Total Current Liabilities | 7,166,612 | 2,461,730 | ||||||
| Long Term – Lease Liability (note 15) | 608,761 | 884,146 | ||||||
| Loan payable (note 16) | - | 5,300,000 | ||||||
| Total Liabilities | 7,775,373 | 8,645,876 | ||||||
| Shareholders’ Equity | ||||||||
| Series A & B Preferred Stock, $0.0001 par value, 100,100 shares authorized, 100 Series A and 0 Series B issued and outstanding, respectively (note 9) | - | - | ||||||
| Common stock, $0.0001 par value, 299,000,000 shares authorized, 20,320,503 and 17,159,376 shares issued and outstanding, respectively (note 9) | 2,032 | 1,716 | ||||||
| Additional paid-in capital | 64,685,693 | 56,919,625 | ||||||
| Share subscriptions receivable | (1,577 | ) | (1,577 | ) | ||||
| Share subscriptions payable | 1,814,152 | 591,289 | ||||||
| Accumulated deficit | (48,313,177 | ) | (33,384,219 | ) | ||||
| Cumulative translation adjustment | (8,580 | ) | (8,580 | ) | ||||
| Total Shareholders’ Equity | 18,178,543 | 24,118,254 | ||||||
| Total Liabilities and Shareholders’ Equity | $ | 25,953,916 | $ | 32,764,130 | ||||
The accompanying notes form an integral part of these consolidated financial statements.
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Worksport Ltd.
Consolidated Statements of Operations and Comprehensive Loss
December 31, 2023 and 2022
| 2023 | 2022 | |||||||
| Net Sales | $ | 1,529,632 | $ | 116,502 | ||||
| Cost of Goods Sold | 1,289,118 | 56,967 | ||||||
| Gross Profit | 240,514 | 59,535 | ||||||
| Operating Expenses | ||||||||
| General and administrative | 9,643,680 | 4,978,582 | ||||||
| Sales and marketing | 1,483,054 | 2,446,266 | ||||||
| Professional fees | 3,853,134 | 5,418,863 | ||||||
| Gain on foreign exchange | (2,693 | ) | (10,461 | ) | ||||
| Total operating expenses | 14,977,175 | 12,833,250 | ||||||
| Loss from operations | (14,736,661 | ) | (12,773,715 | ) | ||||
| Other Income (Expense) | ||||||||
| Interest expense | (616,214 | ) | (488,704 | ) | ||||
| Interest income | 239,353 | 212,290 | ||||||
| Rental income (note 20) | 184,564 | 213,383 | ||||||
| Gain on settlement of debt | - | 302,332 | ||||||
| Total other income (expense) | (192,297 | ) | 239,301 | |||||
| Net Loss | (14,928,958 | ) | (12,534,414 | ) | ||||
| Loss per Share (basic and diluted) | $ | (0.84 | ) | $ | (0.73 | ) | ||
| Weighted Average Number of Shares (basic and diluted) | 17,689,911 | 17,078,480 | ||||||
The accompanying notes form an integral part of these consolidated financial statements
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Worksport Ltd.
Consolidated Statements of Shareholders’ Equity
December 31, 2023 and 2022
| Preferred Stock | Common Stock | Additional Paid-in | Share Subscriptions | Share Subscription | Accumulated | Cumulative Translation |
Total Stockholders’ Equity |
|||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Receivable | Payable | Deficit | Adjustment | (Deficit) | |||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 100 | $ | - | 16,951,034 | $ | 1,696 | $ | 54,608,472 | $ | (1,577 | ) | $ | 430,116 | $ | (20,849,805 | ) | $ | (8,580 | ) | $ | 34,180,322 | |||||||||||||||||||
| Share issuance | - | - | 45,000 | 4 | 260,096 | - | (260,100 | ) | - | - | - | |||||||||||||||||||||||||||||
| Warrant exercise (note 18) | - | - | 73,342 | 7 | (7 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||
| Issuance for services and subscriptions payable | - | - | 90,000 | 9 | 2,051,064 | - | 421,273 | - | - | 2,472,346 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (12,534,414 | ) | - | (12,534,414 | ) | ||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 100 | $ | - | 17,159,376 | $ | 1,716 | $ | 56,919,625 | $ | (1,577 | ) | $ | 591,289 | $ | (33,384,219 | ) | $ | (8,580 | ) | $ | 24,118,254 | |||||||||||||||||||
| Issuance for services and subscriptions payable | - | - | 250,000 | 25 | 3,271,084 | - | 1,222,863 | - | - | 4,493,972 | ||||||||||||||||||||||||||||||
| Shares issued (note 9) | - | - | 2,024,127 | 202 | 4,475,578 | - | - | - | - | 4,475,780 | ||||||||||||||||||||||||||||||
| Warrant exercise (note 18) | - | - | 887,000 | 89 | - | - | - | - | - | 89 | ||||||||||||||||||||||||||||||
| Stock option forfeiture (note 19) | - | - | - | - | 19,406 | - | - | - | - | 19,406 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (14,928,958 | ) | - | (14,928,958 | ) | ||||||||||||||||||||||||||||
| Balance at December 31, 2023 | 100 | $ | - | 20,320,503 | $ | 2,032 | $ | 64,685,693 | $ | (1,577 | ) | $ | 1,814,152 | $ | (48,313,177 | ) | $ | (8,580 | ) | $ | 18,178,543 | |||||||||||||||||||
The accompanying notes form an integral part of these consolidated financial statements
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Worksport Ltd.
Consolidated Statements of Cash Flows
December 31, 2023 and 2022
| 2023 | 2022 | |||||||
| Operating Activities | ||||||||
| Net Loss | $ | (14,928,958 | ) | $ | (12,534,414 | ) | ||
| Adjustments to reconcile net loss to net cash from operating activities: | ||||||||
| Shares, options and warrants issued for services | 5,754,717 | 4,899,433 | ||||||
| Depreciation and amortization | 1,109,742 | 486,582 | ||||||
| Change in operating lease | (13,784 | ) | 10,584 | |||||
| Accrued interest | - | 27,564 | ||||||
| Gain on settlement of debt | - | (302,332 | ) | |||||
| Adjustments to reconcile net income loss to cash provided by (used in) operating activities | (8,078,283 | ) | (7,412,583 | ) | ||||
| Changes in operating assets and liabilities (note 13) | (3,852,297 | ) | (565,377 | ) | ||||
| Net cash used in operating activities | (11,930,580 | ) | (7,977,960 | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Investments | (66,308 | ) | - | |||||
| Purchase of intangible assets | - | (103,329 | ) | |||||
| Purchase of property and equipment | (3,690,056 | ) | (11,047,447 | ) | ||||
| Net cash used in investing activities | (3,756,364 | ) | (11,150,776 | ) | ||||
| Financing Activities | ||||||||
| Proceeds from issuance of common shares, net of issuance cost | 4,475,869 | - | ||||||
| Proceeds from loan payable | - | 5,300,000 | ||||||
| Related party loan | (43,904 | ) | 10,547 | |||||
| Repayments on loan and promissory notes payable | - | (128,387 | ) | |||||
| Net cash provided by financing activities | 4,431,965 | 5,182,160 | ||||||
| Change in cash | (11,254,979 | ) | (13,946,576 | ) | ||||
| Cash and cash equivalents - beginning of year | 14,620,757 | 28,567,333 | ||||||
| Cash and cash equivalents end of year | $ | 3,365,778 | $ | 14,620,757 | ||||
| Supplemental Disclosure of non-cash activities | ||||||||
| Shares issued for purchase of intangible assets | $ | 72,466 | $ | 575,000 | ||||
| Cashless warrant exercise | $ | - | $ | 37,000 | ||||
| Supplemental Disclosure of cash flow information | ||||||||
| Income tax paid | $ | - | $ | - | ||||
| Interest paid | $ | 626,000 | $ | 479,000 | ||||
The accompanying notes form an integral part of these consolidated financial statements.
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
1. Nature of Operations
Worksport Ltd. (together with its subsidiaries, the “Company”) was incorporated in the State of Nevada on April 2, 2003 under the name Franchise Holdings International, Inc. (“FNHI”). In May 2020, FNHI changed its name to Worksport Ltd. During the year ended December 31, 2014, the Company completed a reverse acquisition transaction (the “Reverse Acquisition”) with TruXmart Ltd. (“TruXmart”). On May 2, 2018, Truxmart legally changed its name to Worksport Ltd. (“Worksport”). Worksport designs and distributes truck tonneau covers in Canada and the United States.
Terravis Energy, Inc. (“Terravis”) was incorporated in the State of Colorado on May 5, 2021. On August 20, 2021, the Company was issued 100 common shares at par value of $0.0001 per share for a controlling interest in Terravis. During the year ended December 31, 2022, the Company was issued an additional 9,990,900 common shares of Terravis at par value of $0.0001 per share.
On January 20, 2022, the board of directors of Terravis and the board of directors of the Company, as the sole stockholder of Terravis, adopted the Terravis Energy, Inc. 2022 Equity Incentive Plan (the “Terravis 2022 Plan”). Under the Terravis 2022 Plan, Terravis’ board of directors or a committee designated by the board of directors may grant incentive stock options, nonqualified stock options, shares of restricted stock, restricted stock units, performance shares, performance units and stock appreciation rights to eligible participants consisting of employees of Terravis, member of Terravis’ board of directors and advisors and consultants to Terravis. The Terravis board of directors authorized and reserved 1,500,000 shares of Terravis common stock under the Terravis 2022 Plan, subject to adjustment for any stock splits of Terravis’s common stock or reorganization, recapitalization, or acquisition of Terravis.
On April 6, 2022, Terravis issued Lorenzo Rossi and Steven Rossi, both of whom are members of Terravis’s board of directors, were granted non-qualified stock options under the Terravis 2022 Plan exercisable for 750,000 and 250,000 shares of Terravis’s common stock, respectively, with exercise prices of $0.01 per share exercisable from the date of grant until the tenth anniversary of the date of grant.
On April 12, 2022, Steven Rossi, William Caragol, and Ned L. Siegel, all of whom are members of Terravis’s board of directors, were granted non-qualified stock options under the Terravis 2022 Plan exercisable for 250,000, 50,000, and 50,000 shares of Terravis’s common stock, respectively, with exercise prices of $0.01 per share exercisable from the date of grant until the tenth anniversary of the date of grant.
On November 4, 2022, Terravis filed an amendment to its articles of incorporation with the Colorado Secretary of State, pursuant to which the Terravis board of directors attached a certificate of designation designating 1,000 shares of its authorized preferred stock as Series A Preferred Stock with a par value $0.0001 per share. According to the certificate of designation, holders of the Series A Preferred Stock do not have any dividend, conversion or liquidation rights. Unless otherwise prohibited by law or the Series A Preferred Stock certificate of designation, the Series A Preferred Stock shall vote together with the outstanding shares of common stock of Terravis as one class on any matter put forth before the common stockholders. For so long the Series A Preferred Stock is outstanding, the holders of the Series A Preferred Stock shall be entitled to 51% of the total votes on all matters regardless of the actual number of shares of Series A Preferred Stock then outstanding, and the holders of the common stock and any other shares of capital stock of Terravis entitled shall be entitled to their proportional share of the remaining 49% of the total votes based on their respective voting power. On November 4, 2022, the Company issued 1,000 shares of Series A Preferred Stock to Lorenzo Rossi, the President of Terravis and the Chief Executive Officer and President of the Company.
During the year ended December 31, 2022, Worksport New York Operations Corporation and Worksport USA Operations Corporation were incorporated in the state of New York and Colorado, respectively. During the year ended, the Company was issued 1,000 common shares at par value of $0.0001 of Worksport USA Operations Corporation. On April 1, 2022, the Company was issued 10,000 common shares of Worksport New York Operations Corporation.
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
2. Basis of Presentation and Business Condition
a) Statement of Compliance
The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) as issued by the Financial Accounting Standards Board (“FASB”).
b) Basis of Measurement
The Company’s financial statements have been prepared on an accrual basis.
c) Consolidation
The Company’s consolidated financial statements consolidate the accounts of the Company. All intercompany transactions, balances and unrealized gains or losses from intercompany transactions have been eliminated upon consolidation.
d) Functional and Presentation Currency
These consolidated financial statements are presented in United States Dollars. The functional currency of the Company and all its subsidiaries is the United States Dollar. For purposes of preparing these consolidated financial statements, transactions denominated in Canadian Dollar were converted to United States Dollar at the spot rate. Transaction gains and losses resulting from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized as incurred in the accompanying consolidated statement of operations and comprehensive loss.
e) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
3. Going Concern
As of December 31, 2023, the Company had $3,365,778 in cash and cash equivalents. The Company has generated only limited revenues and has relied primarily upon capital generated from public and private offerings of its securities. Since the Company’s acquisition of Worksport in fiscal year 2014, it has never generated a profit. As of December 31, 2023, the Company had an accumulated deficit of $48,313,177.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. During the year ended December 31, 2023, the Company had net losses of $14,928,958 (2022 - $12,534,414). As of December 31, 2023, the Company had working capital of $1,956,894 (2022 – $15,870,377) and had an accumulated deficit of $48,313,177 (2022 - $33,384,219). The Company has not generated profit from operations since inception and to date has relied on debt and equity financing for continued operations. The Company’s ability to continue as a going concern is dependent upon the ability to generate cash flows from operations and obtain equity and/or debt financing. The Company intends to continue funding operations through equity and debt financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements in the long term. There can be no assurance that the steps management is taking will be successful.
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
3. Going Concern (continued)
The Company has historically operated at a loss, although that may change as sales volumes increase and margins improve. As of December 31, 2023, the Company had working capital of $1,956,894 (2022 – $15,870,377) and an accumulated deficit of $48,313,177 (2022 - $33,384,219). As of December 31, 2023, the Company had cash and cash equivalents of $3,365,778 (2022 - $14,620,757). Despite the Company having mostly completed its purchasing of large manufacturing machinery, operational costs are expected to remain elevated and, thus, further decrease cash and cash equivalents. Concurrently, the Company intends to continue its ramp-up of manufacturing and increasing sales volumes in 2024, which should mitigate the effects of operational costs on cash and cash equivalents; this view is supported by the fact that the manufacturing facility of the Company was completed for initial production output in 2023 and has started to generate revenue in the third quarter of 2023.
The Company has successfully raised cash, and it is positioned to do so again if deemed necessary or strategically advantageous. During the year ended December 31, 2021, the Company, through its Reg-A public offering, private placement offering, underwritten public offering, and exercises of warrants, raised an aggregate of approximately $32,500,000. On September 30, 2022, the Company filed a shelf registration statement on Form S-3, which was declared effective by the SEC on October 13, 2022, allowing the Company to issue up to $30,000,000 of common stock and prospectus supplement covering the offering, issuance and sale of up to $13,000,000 of common stock that may be issued and sold under an At The Market Offering Agreement dated September 30, 2022 (“ATM Agreement”), with H.C. Wainwright & Co., LLC, as the sales agent (“HCW”). Pursuant to the ATM Agreement, HCW is entitled to a commission equal to 3.0% of the gross sales price of the shares of common stock sold. As of December 31, 2023, the Company has sold and issued 99,127 shares of common stock in consideration for net proceeds of $214,238 under the ATM Agreement.
On November 2, 2023, the Company closed a sale of 1,925,000 shares of common stock and 1,575,000 pre-funded warrants for a total net proceeds of $4,261,542. In association with the sale, the Company also issued 7,000,000 warrants convertible for 7,000,000 shares of common stock at an exercise price of $1.34. The warrants are exercisable six months after issuance and will expire five and a half years from the issuance date.
To date, the Company’s principal sources of liquidity consist of net proceeds from public and private securities offerings and cash exercises of outstanding warrants. During the year ended December 31, 2023, the Company received nominal proceeds from public offerings, private placement offerings, and from the exercise of any outstanding warrants or options. Management is focused on transitioning towards revenue as its principal source of liquidity by growing existing product offerings as well as the Company’s customer base. The Company cannot give assurance that it can increase its cash balances or limit its cash consumption and thus maintain sufficient cash balances for planned operations or future business developments. Future business development and demands may lead to cash utilization at levels greater than recently experienced. The Company may need to raise additional capital in the future. However, the Company cannot provide assurances it will be able to raise additional capital on acceptable terms, or at all.
The Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Still, certain factors indicate the existence of a material uncertainty that cast substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. These adjustments could be material.
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
4. Significant Accounting Policies
Cash and Cash Equivalents - Cash and cash equivalents includes cash on account and demand deposits with maturities of three months or less. Cash and cash equivalents in financial institutions may exceed insured limits at various times during the year and subject the Company to concentrations of credit risk. Cash and cash equivalents include restricted cash at December 31, 2023 and 2022 totaling $730,802 and $411,016 (see note 16).
Receivables - Trade accounts receivable are stated at the amount the Company expects to collect. Receivables are reviewed individually for collectability. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, allowances may be required.
The Company offers credit terms on the sale of the Company’s products to a significant majority of the Company’s customers and requires no collateral from these customers. The Company performs ongoing credit evaluations of customers’ financial condition and, if needed, maintains an allowance for doubtful accounts receivable based upon the Company’s historical experience, forecasted economic conditions, and a specific review of accounts receivable at the end of each period. At December 31, 2023 and 2022, the Company had no allowance for doubtful accounts.
Inventory - Inventory is stated at the lower of cost or net realizable value, with cost being determined on a weighted average basis. Cost includes purchase price of materials, freight, and related costs required to bring the goods to Company warehouses.
Research and Development – Research and development costs are expensed as incurred and are included in general and administrative expense in the accompanying financial statements.
Warranties - The Company currently offers a limited lifetime warranty against defective products out-of-the-box. Customers who are not satisfied with their purchase may attempt to have their purchases reimbursed outside of the warranty period.
Revenue Recognition – In accordance with Accounting Standards Codification (ASC) 606 Revenue from Contracts with Customers, sales are recognized when (1) products are shipped, with no right of return except for defective products, and the title and risk of loss has passed to customers; and (2) when they are delivered based on the terms of the sale, and there is an identifiable contract with a customer with defined performance obligations, the transaction price is determinable, and the entity has fulfilled its performance obligation. Revenue related to shipping and handling costs billed to customers is included in net sales, and the related shipping and handling costs are included in cost of goods sold.
Property and Equipment - Capital assets are recorded at cost and are depreciated using the straight-line method over the following estimated useful lives:
Schedule of Estimated Useful Lives of Property and Equipment
| Furniture and equipment | 5 years | |
| Automobile | 5 years | |
| Computers | 3 years | |
| Leasehold improvements | 15 years | |
| Manufacturing equipment | 5-15 years | |
| Building | 15 years |
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
4. Significant Accounting Policies (continued)
Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of the performance commitment date or performance completion date.
Income Taxes - Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between taxable income and pretax financial income, and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Tax positions initially need to be recognized in the financial statements when it is more likely than not the positions will be sustained upon examination by the tax authorities.
Foreign Currency Items - Transactions denominated in foreign currencies are initially recorded in the functional currency using exchange rates in effect at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using exchange rates in effect at the dates of the transactions. All exchange gains and losses are included in the statement of operations and comprehensive loss.
Financial Instruments - FASB ASC 825, Disclosures about Fair Value of Financial Instruments, requires disclosures of the fair value of financial instruments. The carrying value of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities, approximates their fair values because of the short-term maturities of these instruments. The carrying value of the loan payable approximates fair value as its interest rate fluctuates with market interest rates.
Related Party Transactions - All transactions with related parties are in the normal course of operations and are measured at the exchange amount.
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
4. Significant Accounting Policies (continued)
Intangible Assets and Impairment – Patents and other intangibles are amortized using the straight-line method over their estimated useful lives. Intangible assets, such as trademarks with indefinite lives, are not amortized. Intangible assets are evaluated for impairment at least annually or when events or circumstances arise that indicate the existence of impairment. The Company evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. When indicators of impairment exist, the Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment, and actual results may differ from assumed and estimated amounts. During the years ended December 31, 2023 and 2022, the Company had no impairment losses related to intangible assets.
Sales Taxes – Certain jurisdictions impose a sales tax on Company sales to nonexempt customers. The Company collects these taxes from customers and remits the entire amount as required by the applicable law. The Company excluded from revenues and expenses the tax collected and remitted.
Lease Accounting - On January 1, 2019, the Company adopted ASC 842, which requires lessees to recognize operating leases on the balance sheet as right-of-use assets and lease liabilities based on the value of the discounted future lease payments. Expanded disclosures about the nature and terms of lease agreements are required and are included in note 15.
Recent Accounting Pronouncements
Any recently issued Accounting Standards Codification guidance has either been implemented or is not significant to the Company.
5. Inventory
Inventory consists of the following at December 31, 2023 and 2022:
Schedule of Inventory
| 2023 | 2022 | |||||||
| Finished goods | $ | 1,717,669 | $ | 1,200,759 | ||||
| Promotional items | 101,660 | 50,790 | ||||||
| Raw materials | 1,812,163 | 94,823 | ||||||
| Inventory | $ | 3,631,492 | $ | 1,346,372 | ||||
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
6. Property and Equipment
Major classes of property and equipment at December 31, 2023 and 2022 are as follows:
Schedule of Property and Equipment
| 2023 | 2022 | |||||||
| Equipment | 2,784,098 | 2,344,946 | ||||||
| Manufacturing equipment | 3,260,679 | - | ||||||
| Furniture | 146,049 | 143,449 | ||||||
| Product molds | 524,476 | 122,675 | ||||||
| Computers | 84,070 | 78,885 | ||||||
| Leasehold improvements | 861,332 | 675,751 | ||||||
| Building | 6,079,410 | 6,079,410 | ||||||
| Land | 2,239,405 | 2,239,405 | ||||||
| Automobile | 168,497 | 168,497 | ||||||
| Deposits | - | 605,000 | ||||||
| Less accumulated depreciation | (1,664,580 | ) | (557,346 | ) | ||||
| Property and Equipment, net | $ | 14,483,436 | $ | 11,900,672 | ||||
During the years ended December 31, 2023 and 2022, the Company recognized depreciation expense of $1,107,292 and $484,073, respectively.
During the year ended December 31, 2022, the Company completed the purchase of a manufacturing facility and land for $6,079,410 and $2,239,405, respectively. The Company has and continues to produce soft tonneau covers in Meizhou, China and Foshan, China, and it began producing hard tonneau covers in its West Seneca manufacturing facility in 2023. The Company believes that by doing so it (i) has better control over design and manufacturing quality of its products, (ii) mitigates supply chain risk, (iii) decreases shipping costs, (iv) cuts overall manufacturing costs, and (v), by on-shoring production, participates in creating positive social externalities including employment in its largest market: the United States.
7. Intangible Assets
Intangible assets consist of costs incurred to establish the patent rights related to the quick latch and soft vinyl quad-fold tonneau cover technologies, Worksport trademarks, licenses, and software costs. The Company’s utility patents and design registrations were issued between 2014 and 2023. The patents and software will be amortized on a straight-line basis. At December 31, 2023, the software has not been placed into service. The Company’s trademark, licenses, and other indefinite life intangible assets are reassessed every year for impairment; the Company has determined that impairment is not necessary for the current year ended December 31, 2023. The change in intangible assets for the years ended December 31, 2023 and 2022 are as follows:
Schedule of Change in Intangible Assets
| 2023 | 2022 | |||||||
| Patent | 62,706 | 62,706 | ||||||
| License | 103,329 | 103,329 | ||||||
| Trademark | 5,150 | 5,150 | ||||||
| Software | 1,150,000 | 1,077,534 | ||||||
| Other | 29,451 | 29,451 | ||||||
| Less accumulated amortization | (11,747 | ) | (9,297 | ) | ||||
| Intangible Assets, net | $ | 1,338,889 | $ | 1,268,873 | ||||
Amortization expense for the years ended December 31, 2023 and 2022 was $2,450 and $2,509, respectively.
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
7. Intangible Assets (continued)
Estimated amortization of the patent and software over the next five years and beyond December 31, 2023 is as follows:
Schedule of Amortization of patent
| 2024 | $ | 232,508 | ||
| 2025 | $ | 232,508 | ||
| 2026 | $ | 232,508 | ||
| 2027 | $ | 232,508 | ||
| 2028 and later | $ | 282,674 |
8. Prepaid expenses and deposits
As of December 31, 2023 and 2022, prepaid expenses and deposits consists of the following:
Schedule of Prepaid Expenses and Deposits
| 2023 | 2022 | |||||||
| Consulting, services and advertising | $ | 5,215 | $ | 1,313,799 | ||||
| Insurance | - | 20,781 | ||||||
| Deposits | 1,492,034 | 699,765 | ||||||
| Prepaid expenses and deposits, net | $ | 1,497,249 | $ | 2,034,345 | ||||
As of December 31, 2023, prepaid expense and deposit consists of $5,215 (2022 - $1,313,799) in prepaid consulting, services and advertising for third party consultants through the issuance of shares and stock options. Deposits primarily include prepayments for raw materials used in the manufacturing of finished goods.
9. Shareholders’ Equity
During year ended December 31, 2023, the following transactions occurred:
During the year ended December 31, 2023, the Company sold 99,127 shares of common stock for a total net proceeds of $214,238. The sale of shares was in connection with the shelf registration statement on Form S-3 effective on October 13, 2022, allowing the Company to issue up to $30,000,000 of common stock and prospectus supplement covering the offering, issuance and sale of up to $13,000,000 of common stock that may be issued and sold under an At The Market Offering Agreement dated as of September 30, 2022.
The Company recognized consulting expense of $1,222,863 to share subscriptions payable from restricted shares and stock options to be issued. As of December 31, 2023, the restricted shares have not been issued. During the same period, the Company issued 250,000 shares of common stock for consulting services valued at $635,000.
During the year ended December 31, 2023, the Company closed a sale of 1,925,000 shares of common stock for $2,579,500. The Company incurred share issuance expense of $428,300. In association with the sale of common shares, the Company also issued 1,575,000 pre-funded warrants and 7,000,000 warrants. Refer to note 18.
Refer to notes 18 and 19 for additional shareholders’ equity (deficit).
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
9. Shareholders’ Equity (continued)
During year ended December 31, 2022, the following transactions occurred:
The Company issued 10,000 common shares to a consultant for services received valued at $86,000, of which $66,329 was issued from share subscriptions payable. During the same period, the Company issued 80,000 common shares for consulting, advisory services, and employee compensation valued at $240,000.
The Company issued 45,000 shares of restricted stock to members of the board valued at $260,100 from share subscriptions payable.
The Company recognized consulting expense of $487,602 to share subscriptions payable from restricted shares and stock options to be issued. As of December 31, 2022, the restricted shares have not been issued.
Refer to note 18 and 19 for additional disclosures of shareholders’ equity.
For the years ended December 31, 2023 and 2022, the Company was authorized to issue 299,000,000 shares of its common stock with a par value of $0.0001. All shares were ranked equally with regards to the Company’s residual assets. During 2023 and 2022, the Company was authorized to issue 100 shares of its Series A and 100,000 of its Series B Preferred Stock with a par value of $0.0001. Series A Preferred Stock have voting rights equal to 299 shares of common stock, per share of Preferred Stock. Series B Preferred Stock have voting rights equal to 10,000 shares of common stock, per share of Preferred Stock.
10. Related Party Transactions
During the year ended December 31, 2023, the Company recorded salaries expense of $374,864 (2022 - $387,308) related to services rendered to the Company by its CEO. During the same period the Company recorded salaries expense of $271,601 (2022 - $265,858) to an officer and director of the Company. As of December 31, 2023 and 2022, the Company has a payable of $2,192 and $46,096 to the CEO.
Refer to note 9 and 19 for additional related party transactions.
11. Income Taxes
a) The income tax expense for the years ended December 31, 2023 and 2022 is reconciled per the schedule below:
Schedule of Reconciliation of Income Tax
| 2023 | 2022 | |||||||
| Loss before income taxes | $ | (14,929,000 | ) | $ | (12,534,000 | ) | ||
| State income taxes, net of federal benefits | (746,000 | ) | (627,000 | ) | ||||
| Non-deductible portion of meals and entertainment | 14,000 | 41,000 | ||||||
| Share base compensation | 1,901,000 | - | ||||||
| Interest and penalty | - | 100,000 | ||||||
| Adjusted net loss for tax purposes | (13,760,000 | ) | (13,020,000 | ) | ||||
| Statutory rate | 21 | % | 21 | % | ||||
| Income tax benefit | (2,889,000 | ) | (2,734,000 | ) | ||||
| Increase in valuation allowance | 2,889,000 | 2,734,000 | ||||||
| Provision for income taxes | $ | - | $ | - | ||||
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
11. Income Taxes (continued)
b) Deferred Income Tax Assets
The tax effects of temporary differences that give rise to the deferred income tax assets at December 31, 2023 and 2022 are as follows:
Schedule of Deferred Income Tax Assets
| 2023 | 2022 | |||||||
| Net operating loss carry forwards | $ | 6,005,000 | $ | 3,784,000 | ||||
| Amortization and depreciation | 120,000 | (98,000 | ) | |||||
| Change in operating lease | (3,000 | ) | (2,000 | ) | ||||
| Share base compensation | 1,415,000 | 964,000 | ||||||
| Deferred tax assets, gross | 7,537,000 | 4,648,000 | ||||||
| Deferred tax assets not recognized | (7,537,000 | ) | (4,648,000 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
Deferred income taxes within each jurisdiction on the balance sheets at December 31, 2023 and 2022 are as follows:
Schedule of Deferred Income Taxes Within Each Jurisdiction
| 2023 | 2022 | |||||||
| United States | $ | 4,201,000 | $ | 2,103,000 | ||||
| Canada | 3,336,000 | 2,545,000 | ||||||
| Valuation allowance | (7,537,000 | ) | (4,648,000 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
c) Cumulative Net Operating Losses
The Company has non-capital losses carried forward of approximately $28,594,000 available to reduce future years’ taxable income. These losses will expire as follows:
Schedule of Cumulative Non-capital Losses
| United States | Canada | Total | ||||||||||
| 2034 | $ | 53,000 | $ | 183,000 | $ | 236,000 | ||||||
| 2035 | 161,000 | 368,000 | 529,000 | |||||||||
| 2036 | 868,000 | 262,000 | 1,130,000 | |||||||||
| 2037 | 1,472,000 | 59,000 | 1,531,000 | |||||||||
| 2038 | - | 520,000 | 520,000 | |||||||||
| 2039 | - | 193,000 | 193,000 | |||||||||
| 2040 | - | 718,000 | 718,000 | |||||||||
| 2041 | - | 3,000,000 | 3,000,000 | |||||||||
| 2042 | - | 4,100,000 | 4,100,000 | |||||||||
| 2043 | - | 3,140,000 | 3,140,000 | |||||||||
| Non-capital losses carried forward Total | $ | 2,554,000 | $ | 12,543,000 | $ | 15,097,000 | ||||||
| Never expire | $ | 13,497,000 | $ | - | $ | 13,497,000 | ||||||
Net operating loss carryforwards of approximately $28,594,000 may be offset against future taxable income. No tax benefit from these losses have been reported in the December 31, 2023 consolidated financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
11. Income Taxes (continued)
Due to change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
The Company complies with the provisions of FASB ASC 740 in accounting for its uncertain tax positions. ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more –likely –than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company has determined that the Company has no significant uncertain tax positions requiring recognition under ASC 740.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company had no accruals for interest and tax penalties at December 31, 2023 and 2022.
The Company does not expect the amount of unrecognized tax benefits to materially change within the next twelve months.
The Company is required to file income tax returns in the U.S. and Canadian Federal jurisdictions, as well as various states and in the province of Ontario. The Company is no longer subject to income tax examinations by tax authorities for tax years ending before December 31, 2020 in the United States and for tax years ending before December 31, 2014 in Canada.
12. Financial Instruments
Credit Risk
The Company is exposed to credit risk on the accounts receivable from its customers. To reduce its credit risk, the Company has adopted credit policies which include the analysis of the financial position of its customers and the regular review of their credit balances. The Company incurred bad debt expense of $0 during each of the years ended December 31, 2023 and 2022.
Currency Risk
The Company is exposed to currency risk on its sales and purchases denominated in Canadian Dollars. The Company actively manages these risks by adjusting its pricing to reflect currency fluctuations and purchasing foreign currency at advantageous rates.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its obligations associated with financial liabilities. The Company relies on its cash reserves, cash flows generated from operations, and injections of capital through the issuance of the Company’s capital stock to settle its liabilities when they become due.
Interest Rate Risk
The Company is exposed to interest rate risk due to the variable interest rate of its mortgage, which is equal to the Prime Rate plus two hundred twenty-five basis points (2.25%) per annum.
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
12. Financial Instruments (continued)
Concentration of Supplier Risk
The Company has historically purchased all of its soft tonneau cover finished goods from Meizhou, China, and it began purchasing soft tonneau cover finished goods from a second supplier in Foshan, China in late 2023. The Company carries significant strategic inventories of these materials and is increasing its purchasing from the supplier in Foshan to lower supplier concentration risk. Further, the Company has established domestic assembly of its hard tonneau cover product line to further reduce the risk associated with this concentration of finished good suppliers. Strategic inventories are managed based on demand. To date, the Company has been able to obtain adequate supplies of the materials used in the production of its products in a timely manner from existing sources. The loss of these key suppliers or a delay in shipments could have an adverse effect on its business.
Concentration of Customer Risk
A customer is considered to be significant if they account for greater than 10% of the Company’s annual sales. The loss of any key customer could have an adverse effect on the Company’s business.
For the year ended December 31, 2023, 93% of the Company’s revenue is comprised of one customer. For the year ended December 31, 2022, two customers made up 50% (38% and 12% individually) of revenue.
13. Changes in Cash Flows from Operating Assets and Liabilities
The changes to the Company’s operating assets and liabilities for the years ended December 31, 2023 and 2022 are as follows:
Schedule of Changes in Operating Assets and Liabilities
| 2023 | 2022 | |||||||
| Decrease (increase) in accounts receivable | $ | (400,521 | ) | $ | 83 | |||
| Decrease (increase) in other receivable | 102,167 | (83,311 | ) | |||||
| Decrease (increase) in inventory | (2,285,120 | ) | (844,600 | ) | ||||
| Decrease (increase) in prepaid expenses and deposits | (776,709 | ) | (529,438 | ) | ||||
| Increase (decrease) in lease liability | - | 8,738 | ||||||
| Increase (decrease) in payroll taxes payable | 85,010 | (112,189 | ) | |||||
| Increase (decrease) in accounts payable and accrued liabilities | (577,124 | ) | 995,340 | |||||
| Changes in operating assets and liabilities | $ | (3,852,297 | ) | $ | (565,377 | ) | ||
14. Investment
| a) | During the year ended December 31, 2019, the Company entered into an agreement to purchase 10,000,000 shares of a privately owned US-based mobile phone development company for $50,000 – representing a 10% equity stake. The shares have been issued to the Company. As of December 31, 2023 and 2022, the Company had advanced a total of $24,423 and is advancing tranches of capital as required by the Company. | |
| b) | During the year ended December 31, 2023, the Company purchased $66,308 ($90,000 CAD) of Guaranteed Investment Certificate (“GIC”). The GIC bears a variable interest rate and matured on February 27, 2024. The anticipated earned interest on the GIC at maturity is $2,818 ($3,825 CAD). |
15. Operating Lease Obligations
During the year ended December 31, 2019, the Company signed a lease agreement for warehouse space to commence on August 1, 2019 and end on July 31, 2022 with monthly lease payments of $2,221. During the year ended December 31, 2021, the Company entered into a second lease agreement for warehouse space to commence on June 1, 2021 and end on May 31, 2024 with monthly lease payments of $19,910.
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
15. Operating Lease Obligations (continued)
During the year ended December 31, 2022, the Company signed a lease agreement for approximately 20,296 square feet to be used as its then primary, now secondary corporate office and R&D facility pursuant to a five-year lease, dated June 1, 2022, for a variable rate averaging $22,101 per month over the lifetime of the lease. The Company also pays approximately $4,418 in additional fees per month, which varies year to year.
During the year ended December 31, 2023, the Company signed a lease agreement for office space to be used as an R&D facility pursuant to a one-year lease with an option to extend the lease for an additional year, dated June 1, 2023, for a monthly rent of $3,350.
The Company has accounted for its leases upon adoption of ASC 842 whereby it recognizes a lease liability and a right-of-use asset at the date of initial application beginning January 1, 2019. The lease liability is measured at the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate of 10%. The Company has measured the right-of-use asset at an amount equal to the lease liability.
The Company’s right-of-use asset and lease liability as of December 31, 2023 and 2022 is as follows:
Schedule Right-of-use Asset
| December 31, 2023 | December 31, 2022 | |||||||
| Right-of-use asset | $ | 917,354 | $ | 1,238,055 | ||||
| Current lease liability | $ | 328,229 | $ | 387,329 | ||||
| Long-term lease liability | $ | 608,761 | $ | 884,146 | ||||
The following is a summary of the Company’s total lease costs:
Schedule of Lease Costs
| December 31, 2023 | December 31, 2022 |
|
||||||
| Operating lease cost | $ | 488,463 | $ | 409,179 | ||||
The following is a summary of cash paid in 2023 and 2022 for amounts included in the measurement of lease liabilities:
Schedule of Measurement of Lease Liabilities
| December 31, 2023 | December 31, 2022 | |||||||
| Operating cashflow | $ | 515,776 | $ | 400,130 | ||||
Maturities of lease liability are as follows:
Future minimum lease payments as of December 31, 2023:
Schedule of Future Minimum Lease Payments
| 2024 | $ | 400,999 | ||
| 2025 | 286,395 | |||
| 2026 | 277,767 | |||
| 2027 | 117,158 | |||
| Total future minimum lease payments | 1,082,319 | |||
| Less: amount representing interest | (145,329 | ) | ||
| Present value of future payments | 936,990 | |||
| Current portion | 328,229 | |||
| Long term portion | $ | 608,761 |
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
16. Loans payable
| a) | On May 4, 2022, the Company entered into a secured loan agreement (the “Loan Agreement”) with an external banking entity relating to the Company’s purchase of a 152,847 square-foot building situated on two parcels of land aggregating 18 acres of land located in West Seneca, New York (collectively, the “Property”) for a total purchase price of $8,150,000 on May 6, 2022. Under the terms of the Loan Agreement, the Company procured a total principal sum of $5,300,000, bearing an interest rate of the prime rate plus 2.25% annually, for the Company’s purchase of the Property and covering associated costs. To ensure the loan’s servicing over its duration, the Company allocated $667,409 into a specially designated account. By the close of December 31, 2023, this account’s balance had risen to $730,802, which is recorded under cash and cash equivalents in the concurrent financial statements. As of December 31, 2023, the outstanding principal and the accrued interest was an aggregate of $5,331,889. This outstanding balance and accrued interest are due on May 20, 2024. The Company disclosed the material terms of the Loan Agreement in a Current Report on Form 8-K filed with the Securities and Exchange Commission on May 11, 2022. | |
| b) | During the year ended December 31, 2020, the Company received $28,387 ($40,000 CAD) interest-free from the Government of Canada as part of the COVID-19 small business relief program. Repaying the balance of the loan on or before December 31, 2023 resulted in loan forgiveness of 25 percent (25%). As of September 30, 2022, the Company made the repayment of $28,387 ($40,000 CAD) and, as of February 14, 2023, received the forgiven debt of $7,493 ($10,000 CAD). As at December 31, 2023 and 2022, there are no amounts owing, and the loan has been fully settled. |
For the year ended December 31, 2023, loss per share is $0.84 (basic and diluted) compared to that of the year ended December 31, 2022 of $0.73 (basic and diluted) using the weighted average number of shares of 17,689,911 (basic and diluted) and 17,078,480 (basic and diluted), respectively.
There are 299,000,000 shares authorized with 20,320,503 and 17,159,376 shares issued and outstanding, as at December 31, 2023 and 2022, respectively. The computation of loss per share is based on the weighted average number of shares outstanding during the period in accordance with ASC Topic No. 260, “Earnings Per Share.” Shares underlying the Company’s outstanding warrants and convertible promissory notes were excluded due to the anti-dilutive effect they would have on the computation. As of December 31, 2023, the Company has 11,627,924 warrants convertible to 11,927,924 common shares, 570,212 restricted stock to be issued, and 5,063,856 stock options exercisable for 5,063,856 common shares for a total underlying common shares of 17,561,922. As of December 31, 2022, the Company has 3,939,924 warrants convertible to 4,239,924 common shares, 1,940,000 restricted stock to be issued, and 785,000 stock options exercisable for 785,000 common shares for a total underlying common shares of 7,669,924.
18. Warrants
During the year ended December 31, 2023, in connection to the sale of 1,925,000 shares of common stock the Company also sold 1,575,000 pre-funded warrants and 7,000,000 warrants convertible for 8,575,000 shares of common stock at an exercise price of $0.0001 and $1.34, respectively. The Company received net proceeds of $2,110,342 associated with the sale of the pre-funded warrants. The pre-funded warrants are exercisable immediately with no expiration date. The warrants are exercisable six months after issuance and will expire five and a half years from the issuance date.
During the year ended December 31, 2023, 887,000 pre-funded warrants were exercised for 887,000 shares of common stock for $89.
During the year ended December 31, 2023, the Company and a stock options holder agreed to cancel all 400,000 stock options in exchange for extending the exercisable period of 300,000 warrants to December 31, 2024. Later in the year ended December 31, 2023, the expiration date for these warrants was extended to December 31, 2026, and the stock option holder was issued an additional 400,000 restricted stock units.
During the year ended December 31, 2022, an aggregate of 250,121 warrants were exercised primarily on a cashless basis for 73,321 common shares, and 1,599,179 Reg-A public offering and private placement warrants expired.
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
18. Warrants (continued)
During the year ended December 31, 2022, the Company and a warrant holder reached an agreement to extend the exercisable period of 300,000 warrants, convertible to 2 shares of common stock each, for an additional 12 months.
During the year ended December 31, 2021, the Company and warrant holder reached an agreement to amend a previous warrant agreement. The Company issued an additional 150,000 warrants for a total of 250,000 warrants valued at $37,000. The exercisable period of the warrants was also amended to a period of five years beginning on January 14, 2021. The warrants are convertible to 1 share of common stock, each exercisable at $2 per share. During the year ended December 31, 2022, the warrants were exercised on a cashless basis for 73,321 shares of common stock.
During the year ended December 31, 2021, the Company issued 130,909 representative warrants to the Company’s underwriters. The representative warrants were not exercisable until January 30, 2022. The representative warrants are exercisable for 130,909 shares of common stock at $6.05 per share until August 3, 2024. As of December 31, 2022, the Company recognized a value of $273,993 for the representative warrants to share issuance cost.
As of December 31, 2023, the Company has the following warrants outstanding:
Schedule of Warrants Exercise Price
| Exercise price | Number outstanding | Remaining Contractual Life (Years) | Expiry date | |||||||||
| $ | 6.05 | 3,446,515 | 0.60 | August 6, 2024 | ||||||||
| $ | 6.05 | 130,909 | 0.59 | August 3, 2024 | ||||||||
| $ | 4.00 | 300,000 | 3.00 | December 31, 2026 | ||||||||
| $ | 2.40 | 62,500 | 1.22 | March 20, 2025 | ||||||||
| $ | 1.34 | 7,000,000 | 5.34 | May 2, 2029 | ||||||||
| $ | 0.0001 | 688,000 | N/A | Never – see note 22 | ||||||||
| 11,627,924 | 2.04 | |||||||||||
Schedule of Warrants Activity
| December 31, 2023 | December 31, 2022 | |||||||||||||||
| Number of warrants | Weighted average price | Number of warrants | Weighted average price | |||||||||||||
| Balance, beginning of year | 3,939,924 | $ | 5.84 | 5,652,827 | $ | 5.14 | ||||||||||
| Issuance | 8,575,000 | $ | 1.09 | 130,909 | $ | 6.05 | ||||||||||
| Expired | - | $ | - | (1,593,691 | ) | $ | (4.00 | ) | ||||||||
| Exercise | (887,000 | ) | $ | 0.0001 | (250,121 | ) | $ | (2.00 | ) | |||||||
| Balance, end of period | 11,627,924 | $ | 2.78 | 3,939,924 | $ | 5.84 | ||||||||||
Under the Company’s 2015, 2021 and 2022 Equity Incentive Plans, the number of shares of common stock reserved for issuance under the option plan shall not exceed 10% of the issued and outstanding shares of common stock of the Company, have a maximum term of 10 years, and vest at the discretion of the Board of Directors.
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
19. Stock Options and Performance Share Units (continued)
All equity-settled, share-based payments are ultimately recognized as an expense in the statement of operations with a corresponding credit to “Additional Paid in Capital.” If vesting periods or other non-market vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognized in the current period. No adjustment is made to any expense recognized in prior periods if share options ultimately exercised are different than that estimated on vesting.
Performance Share Units
On May 1, 2023, the Company and Steven Rossi reached an agreement to modify 1,600,000 restricted stock units and 400,000 performance stock units (“PSUs”) issued on November 11, 2022, and December 29, 2021, respectively, and replace them with 2,000,000 stock options, as described below.
On November 11, 2022, 400,000 and 300,000 PSUs granted on December 29, 2021, as described below, were modified to include new terms pertaining to the PSU vesting schedule. The PSUs vest in 5% increments according to the modified schedule that correlates with the Company’s stock price. The first 5% of the PSUs vest upon the Company’s stock price closing at $2.25, 50% will have vested at a closing price of $5.31, and 100% will have vested at a closing price of $13.76 as measured using the volume weighted average of the Company’s common stock for ten (10) consecutive trading days, with over $100,000 of trading volume on each of those days. The fair value of the PSUs was estimated to be $1,254,460. As of December 31, 2023, 75,000 PSUs of the remaining 300,000 PSUs had vested, and the Company recognized $155,314 (2022 - $35,100) in consulting expenses.
On December 29, 2021, the Company granted 400,000 and 300,000 PSUs to the Company’s Chief Executive Officer and a director, respectively. The PSUs were to vest in 5% increments according to a schedule that correlates with the Company’s stock price. The first 5% of the PSUs was to have vested upon the Company’s stock price closing at $3.00, 50% was to have vested at a closing price of $16.50, and 100% was to have vested at a closing price of $31.50. The fair value of the PSUs was estimated to be $1,344,570. As December 31, 2023, no PSUs have vested, and the Company recognized $0 (2022 - $232,312) in consulting expenses.
Stock Options
The Company uses the Black-Scholes option pricing model to determine fair value of stock options on the grant date.
During the year ended December 31, 2023, the Company issued 1,500,000 stock options to Steven Rossi. The stock options have an exercise price of $1.584 and an expiration date of October 31, 2033. The stock options shall vest as follows: 20% shall vest upon the Company achieving annual run rate revenue of $10,000,000, measured by $2,500,000 of quarterly revenue; (ii) an additional 20% shall vest upon the Company achieving annual run rate revenue of $20,000,000, measured by $5,000,000 of quarterly revenue; (iii) an additional 20% shall vest upon the Company achieving annual run rate revenue of $30,000,000, measured by $7,500,000 of quarterly revenue; (iv) an additional 20% shall vest upon the Company achieving annual run rate revenue of $40,000,000, measured by $10,000,000 of quarterly revenue; and (v) an additional 20% shall vest upon the Company achieving annual run rate revenue of $50,000,000, measured by $12,500,000 of quarterly revenue. During the year ended December 31, 2023 the Company recognized $374,547 in related wages and salary.
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
19. Stock Options and Performance Share Units (continued)
During the year ended December 31, 2023, the Company issued 12,100 and 25,000 stock options to employees with an exercise price of $1.70 and $1.44, respectively. The stock options will expire 10 years from the grant date. 12,100 stock options shall vest in two equal installments on the second and third anniversary of the grant date. 25,000 stock options shall vest on October 31, 2025. The total fair value of the options on the grant date was estimated to be $56,496. The Company recognized $4,144 in wages and salary during the year ended December 31, 2023.
During the year ended December 31, 2023, the Company issued 321,150 stock options to employees, consultants and directors with an exercise price ranging from $2.55 to $4.20. 108,750 of the stock options shall expire 5 years after grant date and vest in two equal installments on the first and second anniversary of the grant date. 155,400 of the stock options shall expire 10 years after grant date and vest in two equal installments on the first and second anniversary of the grant date. The fair value of the options on the grant date was estimated to be $1,116,856. During the year ended December 31, 2023, 49,500 stock options were cancelled upon the departure of employees. The Company recognized $386,606 in wages and salary and consulting expenses during the year ended December 31, 2023.
During the year ended December 31, 2023, the Company issued 2,000,000 stock options to Steven Rossi. The stock options have an exercise price of $1.74 and an expiration date of May 1, 2033. The options shall vest in increments of 10% for each dollar that the Company’s stock price increases between $2.00 and $11.00, as measured using the volume weighted average of the Company’s common stock for ten consecutive trading days. The fair value of the options on the grant date was estimated to be $2,821,572. The Company recognized $714,798 in wages and salary during the year ended December 31, 2023.
During the year ended December 31, 2023, the Company issued 75,000 stock options to an employee with an exercise price of $2.43 and expiring on May 18, 2033. The options shall vest in two installments, 25,000 on May 18, 2024, and 50,000 on August 1, 2024. The fair value of the options on the grant date was estimated to be $182,025. The Company recognized $37,632 in wages and salary expenses during the year ended December 31, 2023.
During the year ended December 31, 2023, the Company issued 65,000 stock options to employees and a consultant with an exercise price of $1.53 and expiring on March 14, 2033. The options shall vest in two equal installments on March 14, 2024, and 2025. The fair value of the options on the grant date was estimated to be $98,670. The Company recognized $33,683 in wages and salary and consulting expenses during the year ended December 31, 2023. During the year ended December 31, 2023, 15,000 stock options were cancelled upon the departure of employees; as a result the Company recognized $19,406 in wages and salary expense during the period.
During the year ended December 31, 2023, the Company issued 85,106 stock options to an employee with an exercise price of $1.53 and expiring on March 14, 2033. The options shall vest in two installments; a) one fiscal quarter in which the Company generates $3,600,000 in sales with at least 20% unit margin and b) one fiscal quarter in which the Company generates $5,400,000 in sales with at least 30% unit margin. The fair value of the options on the grant date was estimated to be $129,191. The Company recognized $45,476 in wages and salary expenses during the year ended December 31, 2023.
During the year ended December 31, 2023, the Company issued 300,000 stock options to a consultant with an exercise price of $1.66 and expiring on January 30, 2028. 150,000 of the stock options shall vest on January 30, 2023, and 75,000 of the stock options shall each vest on March 1, 2023 and September 1, 2023. The fair value of the options on the grant date was estimated to be $486,600. The Company recognized $486,600 in consulting expenses during the year ended December 31, 2023.
During the year ended December 31, 2023, the Company issued 360,000 stock options to directors with an exercise price of $1.66 and expiring on January 30, 2033. The options shall vest in six equal installments on January 30, 2023, July 31, 2023, January 30, 2024, July 30, 2024, January 30, 2025, and July 30, 2025. The fair value of the options on the grant date was estimated to be $592,560. The Company recognized $217,542 in consulting expenses during the year ended December 31, 2023.
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
19. Stock Options and Performance Share Units (continued)
During the year ended December 31, 2022, the Company granted 10,000 and 50,000 options to advisors with an exercise price of $2.19 and $2.37, respectively, expiring on February 7, 2027, and May 5, 2032, respectively. The options vested immediately upon issuance. The fair values of the options on the grant date were estimated to be $21,780 and $261,400, respectively. The Company recognized $0 (2022 - $283,180) in consulting expenses during the year ended December 31, 2023.
During the year ended December 31, 2022, the Company granted 12,500 options to a consultant with an exercise price of $1.60 expiring on November 29, 2032. The options are earned in four equal installments on February 27, 2023, May 29, 2023, August 29, 2023, and November 27, 2023. The options shall vest one year after being earned on February 27, 2024, May 29, 2024, August 29, 2024, and November 27, 2024. The fair value of the options on the grant date was estimated to be $18,725. The Company recognized $17,083 (2022 - $1,642) in consulting expenses during the year ended December 31, 2023.
During the year ended December 31, 2022, Terravis Energy, Inc., a subsidiary of the Company, granted an aggregate of 1,350,000 of Terravis Energy, Inc. stock options to its officers and directors. The stock options have an exercise price of $0.01 and will expire on April 12, 2032. The options vested immediately upon issuance. The fair value of the options on the grant date was estimated to be immaterial.
On July 23, 2021, the Company granted 15,000 options to a director with an exercise price of $5.50 and an expiry date of July 23, 2026. The stock options vested on January 1, 2022. The fair value of the options on the grant date was estimated to be $129,480. The Company recognized $0 (2022 - $799) to consulting expenses during the year ended December 31, 2023.
On August 6, 2021, the Company granted 140,000 options to directors, advisors, and officers with an exercise price of $5.50 and an expiry date of August 6, 2026. The stock options vested on January 1, 2022. The fair value of the options on the grant date was estimated to be $754,189. The Company recognized $0 (2022 - $5,105) to consulting expenses during the year ended December 31, 2023.
On September 1, 2021, the Company granted 400,000 options to a consultant with an exercise price of $5.32 and an expiry date of September 1, 2026. 100,000 shall vest on March 1, 2022, 100,000 shall vest on September 1, 2022, 100,000 shall vest on March 1, 2023, and 100,000 shall vest on September 1, 2023. The fair value of the options on the grant date was estimated to be $2,112,000. The Company recognized $87,514 (2022 - $1,058,917) to consulting expenses during the year ended December 31, 2023. During the year ended December 31, 2023, the Company and the stock options holder reached an agreement to cancel all 400,000 stock options in exchange for extending the exercisable period of 300,000 warrants to December 31, 2024.
On October 7 and November 2, 2021, the Company granted advisors 5,000 and 62,500 options with exercise prices of $5.50 and $5.24, respectively. The options will expire on October 7, 2026, and November 2, 2026, respectively. The stock options fully vested on January 1, 2022. The fair value of the options on the grant date was estimated to be $353,230. The Company recognized $0 (2022 - $32,856) to consulting expenses during the year ended December 31, 2023.
On December 29, 2021, the Company granted an aggregate of 90,000 options to members of the board with an exercise price of $2.51. The options will expire on December 29, 2026. For each of these three option grants, 10,000 vested on December 29, 2022, 10,000 shall vest on December 29, 2023, and 10,000 shall vest on December 29, 2024. The fair value of the options on the grant date was estimated to be $224,280. The Company recognized $75,170 (2022 - $73,941) in consulting expenses during the year ended December 31, 2023.
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
19. Stock Options and Performance Share Units (continued)
| December 31, 2023 | December 31, 2022 | |||||||||||||||
| Number of stock options | Weighted average price | Number of stock options | Weighted average price | |||||||||||||
| Balance, beginning of year | 785,000 | $ | 4.74 | 712,500 | $ | 5.00 | ||||||||||
| Granted | 4,743,356 | $ | 1.80 | 72,500 | $ | 2.21 | ||||||||||
| Cancelled | (464,500 | ) | $ | (5.02 | ) | - | $ | - | ||||||||
| Balance, end of period | 5,063,856 | $ | 1.96 | 785,000 | $ | 4.74 | ||||||||||
| Range of Exercise prices | Outstanding | Weighted average life (years) | Weighted average exercise price | Exercisable on December 31, 2023 | ||||||||||||||||
| Stock options | $ | 1.44 – 5.50 | 5,063,856 | 8.63 | $ | 1.96 | 1,162,500 | |||||||||||||
Schedule of Stock Options Activity
| December 31, 2023 | December 31, 2022 | |||||||||||||||
| Number of stock options | Weighted average price | Number of stock options | Weighted average price | |||||||||||||
| Balance, beginning of year | 1,350,000 | $ | 0.01 | - | $ | - | ||||||||||
| Granted | - | $ | - | 1,350,000 | $ | 0.01 | ||||||||||
| Balance, end of period | 1,350,000 | $ | 0.01 | 1,350,000 | $ | 0.01 | ||||||||||
| Range of Exercise prices | Outstanding | Weighted average life (years) | Weighted average exercise price | Exercisable on December 31, 2023 | ||||||||||||||||
| Stock options | $ | 0.01 | 1,350,000 | 8.28 | $ | 0.01 | 1,350,000 | |||||||||||||
20. Rental Income
During the year ended December 31, 2022, the Company entered into a sublease agreement for its warehouse in Mississauga, Ontario, Canada. The sublease commenced on September 15, 2022 and will end on May 31, 2024 at $15,515 ($19,992 CAD) per month.
During the year ended December 31, 2022, the Company entered into a lease agreement in relation to its West Seneca property. Initially, the Company entered into a lease agreement with a third-party from July 1 to December 31, 2022 at $33,750 per month. Subsequently, on September 23, 2022, a mutual agreement was reached to terminate the lease agreement.
During the year ended December 31, 2023, the Company recognized rental income of $184,564 (2022 - $213,383).
21. Legal Proceedings
There are no legal proceedings except for routine litigation incidental to the business.
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Worksport Ltd.
Notes to the Consolidated Financial Statements
December 31, 2023 and 2022
22. Subsequent Events
The Company has evaluated subsequent events through March 27, 2024, which is the date the financial statements were available to be issued. The following events occurred after year-end:
| ● | On January 11, 2024, the Company issued 53,194 of restricted stock to an employee. | |
| ● | On February 5, 2024, the remaining 688,000 pre-funded warrants issued in October of 2023 were exercised for 688,000 shares of common stock for $0.0001 per share, for an aggregate of $69. | |
| ● | On February 7, 2024, the Company issued 1,343 shares of common stock for services received valued at $2,000. | |
| ● | Subsequent to the year ended December 31, 2023, the Company granted 68,800 stock options to employees. 8,300 of these options shall vest 50% on July 17, 2025 and 50% on July 17, 2026; the remainder shall vest in two equal installments on the second and third anniversary of the grant date. The exercise price of the stock options ranges from $0.62 to $1.41. 8,300 stock options will expire 5 years from grant date and 60,500 stock options will expire 10 years from grant date. | |
| ● | Subsequent to the year ended December 31, 2023, the Company issued 504,921 shares of common stock for net proceeds of $566,118. | |
| ● | On March 18, 2024, Worksport entered into a securities purchase agreement with a single institutional investor to purchase 3,850,132 shares of common stock (or pre-funded warrants to purchase shares of common stock in lieu thereof) in a registered direct offering. The offering was consummated on March 20, 2024. In a concurrent private placement, the Company also agreed to issue and sell to the investor warrants to purchase up to 7,700,264 shares of common stock. The combined effective offering price for each share of common stock (or pre-funded warrant in lieu thereof) and accompanying warrant is $0.74. The warrants will become exercisable six months from issuance, expire five and a half years from the issuance date and have an exercise price of $0.74 per share. The gross proceeds to the Company from the registered direct offering and concurrent private placement are estimated to be approximately $2.8 million before deducting the placement agent’s fees and other estimated offering expenses payable by the Company. |
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Disclosure controls and procedures are controls and other procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on our management’s evaluation (with the participation of the individuals serving as our principal executive officer and principal financial officer) of our disclosure controls and procedures as required by Rules 13a-15 and 15d-15 under the Exchange Act, each of the individuals serving as our principal executive officer and principal financial officer has concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2023, the end of the period covered by this Annual Report on Form 10-K.
Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including the individuals serving as our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.
Management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework). Based on this assessment, our management concluded that, as of December 31, 2023, our internal control over financial reporting was not effective based on those criteria due to material weaknesses in our internal control over financial reporting described below.
Material Weakness in Internal Control over Financial Reporting
We have not designed 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.
These control deficiencies resulted in several misstatements to the preliminary financial statements that were corrected and/or deemed immaterial in the aggregate prior to issuance of the financial statements. These control deficiencies create a reasonable possibility that a material misstatement to the financial statements will not be prevented or detected on a timely basis, and therefore we concluded that the deficiencies represent material weaknesses in our internal control over financial reporting and our internal control over financial reporting was not effective as of December 31, 2023.
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Remediation Plan
During the year ended December 31, 2023, we continued to enhance our internal control over financial reporting in an effort to remediate the material weaknesses described above. Measures taken in this remediation included investing in additional accounting personnel, establishing a clearer organizational structure, implementing additional enterprise resource planning system modules, and formalizing internal processes and procedures.
Our remediation process includes, but is not limited to:
| ● | Investing in IT systems to enhance our operational and financial reporting and internal controls. | |
| ● | Enhancing the organizational structure to support financial reporting processes and internal controls. | |
| ● | Providing guidance, education and training to employees relating to our accounting policies and procedures. | |
| ● | Further developing and documenting detailed policies and procedures regarding business processes for significant accounts, critical accounting policies and critical accounting estimates. | |
| ● | Establishing effective general controls over IT systems to ensure that information produced can be relied upon by process level controls is relevant and reliable. |
We expect to remediate these material weaknesses in 2024. However, we may discover additional material weaknesses that may require additional time and resources to remediate.
Attestation Report on Internal Control over Financial Reporting.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to the deferral allowed for smaller reporting companies.
Changes in Internal Control over Financial Reporting
Other than with respect to the remediation efforts discussed above, there was no change in our internal control over financial reporting that occurred during the fourth quarter of 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Set forth below is a list of the names, ages and positions of our executive officers and directors as of March 27, 2024:
| Name: | Age | Position(s): | Director or Executive Officer Since: | |||
| Steven Rossi | 38 |
Chief Executive Officer, President, Secretary, Chair of the Board of Directors (Principal Executive Officer) |
November 7, 2014 | |||
| Michael Johnston | 43 |
Chief Financial Officer (Principal Financial and Accounting Officer) |
December 5, 2017 | |||
| Lorenzo Rossi | 69 | Director | December 9, 2014 | |||
| Craig Loverock | 53 | Independent Director* | April 22, 2019 | |||
| William Caragol | 57 | Independent Director# | June 30, 2021 | |||
| Ned L. Siegel | 72 | Independent Director† | June 30, 2021 |
* Audit Committee Chair
# Compensation Committee Chair
† Nominating and Corporate Governance Chair
A brief description of the background and business experience of our executive officers and directors for the past five years is as follows:
Steven Rossi has served as the Chief Executive Officer, President, Secretary and Chair of the Board of Directors of the Company since November 7, 2014. Mr. Rossi founded Worksport Ontario, a wholly owned operating entity of the Company, in 2011. Steven Rossi has over two decades of business experience. Prior to founding Worksport, he founded two automotive based companies in 2005 and 2006, respectively, and managed and grew their respective operations for several years. Since founding Worksport Ontario in 2011, Mr. Rossi has been granted numerous patents across the United States and Canada. He has assigned all patents exclusively to Worksport. Mr. Rossi attended the University of Toronto from 2005 to 2007, majoring in Life Science, pausing his post-secondary education to begin his career as an entrepreneur, visionary, and founder. Through his prior experiences, Steven possesses the knowledge and experience in establishing, managing, and growing automotive companies that aid him in efficiently and effectively identifying and executing the Company’s strategic priorities. As our Chief Executive Officer, President, Chair and founder, Mr. Rossi brings to the Board extensive knowledge of the Company’s products, structure, history, and culture as well as years of expertise in the industry and is qualified to be a member of the Company’s Board of Directors.
Michael Johnston CPA, CA, has been serving as the Chief Financial Officer of the Company since December 5, 2017. Mr. Johnston has been a partner with Forbes Andersen LLP, Chartered Professional Accountants, since January 2012 and offers over 19 years of experience advising both private and public companies. His responsibilities include assisting Steven Rossi in developing new business, maintaining operating budgets and ensuring adequate cash flow. Mr. Johnston was appointed by the Board for his extensive knowledge of the Company’s products and his financial and accounting expertise. Mr. Johnston holds a graduate degree from the University of Western Ontario.
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Lorenzo H. Rossi has served as Director of the company since December 9, 2014, and he has since been a cornerstone of leadership and expertise, significantly shaping the Company’s strategic and governance frameworks with a keen focus on excellence and innovation. His strategic acumen, particularly as Chair of Finance for Canada’s second-largest Catholic school board, has demonstrated his ability to drive educational excellence while maintaining fiscal discipline. Mr. Rossi has also contributed valuable insights from his tenure as a Board Director for a TSX-listed biometric company, enhancing his understanding of corporate strategies in technology and security. His extensive experience as a Continuing Education High School Principal for 23 years further showcases his leadership in educational development and his commitment to fostering academic achievements.
With academic qualifications that include a Doctorate in Theology (ThD), a Master of Education (M.Ed.) in Computer Science, a Bachelor of Education (B.Ed.), and a Bachelor of Arts (B.A.), Mr. Rossi’s diverse educational background underpins his strategic decision-making and commitment to lifelong learning. Lorenzo H. Rossi’s tenure embodies strategic leadership, innovation, and a commitment to operational excellence, making him an integral asset to the Company’s leadership team. His contributions are pivotal in driving the Company’s strategic initiatives, optimizing performance, and enhancing shareholder value.
Craig Loverock, CPA, CA, has been serving as a member of the Board of the Company since April 22, 2019. Mr. Loverock has also served as the Chair of the Audit Committee since April 22, 2019. Mr. Loverock is a licensed CPA (Chartered Professional Accountant) and received his Chartered Accountant designation from the Institute of Chartered Accountants, Ontario in 1997, and has over 25 years’ experience in accounting and finance roles in Canada, the United States and England. Mr. Loverock has been the Chief Financial Officer and Corporate Secretary at Contagious Gaming Inc. since November 30, 2015, and currently serves as the Chief Financial Officer of Stronach International Inc. From January 2018 to April 2023, he served as the Chief Financial Officer of Sproutly Canada, Inc. From October 2014 to May 2015, he served as the Chief Financial Officer of VoiceTrust Inc. From November 2012 to October 2014, he served as the Chief Financial Officer and Chief Compliance officer of Quartz Capital Group Ltd. The Board believes that Mr. Loverock’s vast professional experience, education, and professional credentials qualify him to serve as a member of the Company’s Board of Directors and as a member of the Board’s committees.
William Caragol was appointed a director June 30, 2021. Mr. Caragol is the Chief Financial Officer of Mainz Biomed, N.V. (NASDAQ: MYNZ) since July of 2021. From 2018 to the present, Mr. Caragol has also been Managing Director of Quidem LLC, a corporate advisory firm. Since 2015, Mr. Caragol has been Chairman of the Board of Thermomedics, Inc., a medical diagnostic equipment company. Since July 2023, Mr. Caragol has also been on the board of directors and has been Chairman of the audit committee of Janover, Inc. (NASDAQ: JNVR), and he served on the board of directors of Greenbox POS (NASDAQ: GBOX) from 2021 to April 2023. Since November 2021, Mr. Caragol has also served as the Chief Operating Officer of Iron Horse Acquisitions Corp. (NASDAQ: IROH). Mr. Caragol earned a B.S. in business administration and accounting from Washington & Lee University and is a member of the American Institute of Certified Public Accountants. The Board believes that Mr. Caragol’s vast experience as a member of several publicly traded companies’ board of directors, his education, and professional credentials qualify him to serve as a member of the Company’s Board Directors and as a member of the Board’s committees.
Ambassador Ned L. Siegel was appointed a director June 30, 2021. Ambassador Siegel is the President of The Siegel Group, a multi-disciplined international business management advisory firm he founded in 1997 in Boca Raton, Florida, specializing in real estate, energy, utilities, infrastructure, financial services, oil & gas and cyber & secure technology. Mr. Ambassador Siegel has served since 2013 as Of Counsel to the law firm of Wildes & Weinberg, P.C. From October 2007 until January 2009, he served as the United States Ambassador to the Commonwealth of The Bahamas. Prior to his Ambassadorship, in 2006, he served with Ambassador John R. Bolton at the United Nations in New York, as the Senior Advisor to the U.S. Mission and as the United States Representative to the 61st Session of the United Nations General Assembly. From 2003 to 2007, Mr. Ambassador Siegel served on the Board of Directors of the Overseas Private Investment Corporation (OPIC), which was established to help U.S. businesses invest overseas, fostering economic development in new and emerging markets, complementing the private sector in managing the risk associated with foreign direct investment and supporting U.S. foreign policy. Appointed by Governor Jeb Bush, Mr. Ambassador Siegel served as a Member of the Board of Directors of Enterprise Florida, Inc. (EFI) from 1999-2004. EFI is the state of Florida’s primary organization promoting statewide economic development through its public-private partnership.
Ambassador Siegel presently serves on the Board of Directors of the following companies: Janover Inc., La Rosa Holdings Corp. and Bannix Acquisition Corp. He also presently serves in an advisory capacity to the U.S. Medical Glove Company,
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Ambassador Siegel received a B.A. from the University of Connecticut in 1973 and J.D. from the Dickinson School of Law in 1976. In December 2014, he received an honorary degree of Doctor of Business Administration from the University of South Carolina.
The Board believes that Mr. Ambassador Siegel’s vast professional experience, education, and professional credentials qualify him to serve as a member of the Company’s Board Directors, and as a member of the Board’s committees.
Advisory Board
The following members comprise our Advisory Board as of March 27, 2024:
| Name: | Age | |
| Yosi Behar | 80 | |
| Sengkee Ahn | 53 | |
| Mike Timmons | 48 | |
| Thomas DiNanno | 56 |
Yosi Behar joined the Company’s Advisory Board on October 7, 2021. As Founder of The Behar Group, Yosi Behar has been an active real estate representative and broker in Ontario, Canada for over 40 years with overwhelming success. He has coordinated and completed numerous transactions for such companies as Bell Canada, Runnymede Development Corporation Limited, Imperial Oil, Sun Life Assurance Company of Canada, Tribute Homes, Royop Corporation, Petro-Canada, Royal Bank of Canada, The Bank of Montreal, Liberty Developments, Minuk Construction, and Metrus Development. His current mandates include acting as real estate advisor for Volvo Canada, Volkswagen, Land Rover/Jaguar, Lexus/Toyota, Honda/Acura, Hyundai, Mazda, BMW, Mercedes-Benz, Subaru, Kia, Mitsubishi, Ford, General Motors, Chrysler, and Nissan. He prides himself on his impeccable reputation for service, integrity, perseverance, and loyalty to his valued clientele.
Sengkee Ahn joined the Company’s Advisory Board on June 30, 2021. Sengkee Ahn has almost three decades of experience advising and working with some of the wealthiest organizations and individuals in Canada. He currently serves as Managing Director at a large Canadian Chartered Bank. Previously, Mr. Ahn was the CFO for one of the largest alternative nicotine companies in North America and, before that, was Senior Vice President of Corporate Development for a large cannabis company in Southwestern Ontario. He spent over 20 years at RBC and CIBC, holding various senior positions in wealth management, Capital Markets, and Commercial Banking.
Mike Timmons joined the Company’s Advisory Board on June 30, 2021. Mike Timmons is Vice President of Sales and Marketing for EGR, Inc., a global OEM manufacturer, where he is leading the efforts to relaunch the brand in the Aftermarket space. Previously, Mike Timmons was VP of Jeep & Off-Road for Truck Hero, Inc (now RealTruck), leading brands like Rugged Ridge, Omix-ADA, and other aftermarket leading brands where he developed & oversaw core business practices that improved branding and new product development approaches.
Thomas DiNanno joined the Company’s Advisory Board on February 17, 2022. Thomas DiNanno has held several key U.S. Government positions with focuses in areas of national security and infrastructure. His experience and expertise are intended to influence the Company’s ongoing efforts in the government sector. Mr. DiNanno is a contributing advisor to Hudson Institute, a 501(c)(3) organization that guides public policy makers and global leaders in government and business through publications, conferences, policy briefings, and recommendations. Prior to joining Hudson Institute, he served as a professional staff member on the House Permanent Select Committee on Intelligence as well as acting Assistant Secretary of State of the Arms Control, Verification and Compliance Bureau from 2018-2021. Mr. DiNanno has served in several key government capacities, including Assistant Administrator for the Department of Homeland Security’s Federal Emergency Management Agency (FEMA), where he oversaw National Preparedness initiatives and grants focused on counterterrorism.
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Term of Office
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until their resignation or removal in accordance with our bylaws. Our officers are appointed by our Board of Directors and hold office until removed by the Board of Directors.
Members of our advisory board do not have any voting power and serve at the pleasure of the Board.
Family Relationships
Lorenzo Rossi and Steven Rossi are father and son. Other than the foregoing, there are no other family relationships between any of our directors or executive officers.
Involvement in Legal Proceedings
To our knowledge, there have been no material legal proceedings that would require disclosure under the federal securities laws that are material to an evaluation of the ability of our directors or executive officers.
Code of Business Conduct and Ethics
Our Board has adopted a written code of business conduct and ethics (“Code”) that applies to our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions. One of our investor webpages, investors.worksport.com/leadership-and-governance, displays a current copy of the Code and all disclosures that are required by law in regard to any amendments to, or waivers from, any provision of the Code.
Insider Trading Policy
All officers, directors and employees of, and consultants and contractors to, us or any of our subsidiaries are subject to our Insider Trading Policy. The Insider Trading Policy prohibits the unauthorized disclosure of any nonpublic information acquired in the workplace and the misuse of material nonpublic information in the trading of our securities. To ensure compliance with the Insider Trading Policy and applicable federal and state securities laws, all officers, directors and employees of, and consultants and contractors to, us or any of our subsidiaries must refrain from the sale or purchase of our securities except in specific designated trading windows or pursuant to 10b5-1 trading plans that were preapproved. Even during a trading window period, certain insiders, including our named executive officers and directors, must comply with our designated pre-clearance policy prior to trading in our securities.
Director Independence and Board Committees
An “independent director” is defined generally as a director that is not an officer or employee of the Company or its subsidiaries or any other individual having a relationship which, in the opinion of the Company’s Board, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Steven Rossi, Lorenzo Rossi, Craig Loverock, William Caragol and Ned L. Siegel serve as members of our Board of Directors. Our Board has determined that Craig Loverock, William Caragol and Ned L. Siegel are “independent directors” as defined in The Nasdaq Stock Market LLC (“Nasdaq”) listing rules and under Rule 10-A-3(b)(1) of the Exchange Act and applicable SEC rules.
Audit Committee. We currently have a standing Audit Committee. Under the Nasdaq listing standards and applicable SEC rules, we are required to have at least three members of the Audit Committee, all of whom must be independent and financially literate, and one member of the Audit Committee must qualify as an “audit committee financial expert” as defined in applicable SEC rules. Messrs. Craig Loverock, William Caragol and Ned L. Siegel serve as members of our Audit Committee. Mr. Loverock serves as the Audit Committee Chairman. Craig Loverock qualifies as an “audit committee financial expert” under the SEC rules.
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We have adopted an Audit Committee charter, which details the purpose and principal functions of the Audit Committee, including to:
| ● | appoint, compensate, and oversee the work of any registered public accounting firm employed by us; | |
| ● | resolve any disagreements between management and the auditor regarding financial reporting; | |
| ● | pre-approve all auditing and non-audit services; | |
| ● | retain independent counsel, accountants, or others to advise the Audit Committee or assist in the conduct of an investigation; | |
| ● | seek any information it requires from employees – all of whom are directed to cooperate with the Audit Committee’s requests – or external parties; | |
| ● | meet with our officers, external auditors, or outside counsel, as necessary; and | |
| ● | oversee that management has established and maintained processes to assure our compliance with all applicable laws, regulations and corporate policies. |
Compensation Committee. We have a standing Compensation Committee. Under the Nasdaq listing standards and applicable SEC rules, we are required to have at least two members of the Compensation Committee, all of whom must be independent. William Caragol, Craig Loverock and Ned L. Siegel serve as members of our Compensation Committee. Mr. Caragol serves as the Compensation Committee Chairman.
We have adopted a Compensation Committee charter, which details the purpose and responsibility of the Compensation Committee, including to:
| ● | discharge the responsibilities of the Board relating to compensation of our directors, executive officers and key employees; | |
| ● | assist the Board in establishing appropriate incentive compensation and equity-based plans and to administer such plans; | |
| ● | oversee the annual process of evaluation of the performance of our management; and | |
| ● | perform such other duties and responsibilities as enumerated in and consistent with the Compensation Committee’s charter. |
The Compensation Committee’s charter permits the committee to retain or receive advice from a compensation consultant and outlines certain requirements to ensure the consultant’s independence or certain circumstances under which the consultant need not be independent. However, as of the date hereof, we have not retained such a consultant.
Nominating and Corporate Governance Committee. We have a standing Nominating and Corporate Governance Committee. Craig Loverock, William Caragol and Ned L. Siegel serve as members of the Nominating and Corporate Governance. Ned L. Siegel serves as the Nominating and Corporate Governance Committee Chairman.
We have adopted a Nominating and Corporate Governance Committee charter, which details the purpose and responsibilities of the Nominating and Corporate Governance Committee, including to:
| ● | assist the Board by identifying qualified candidates for director nominees, and to recommend to the Board of Directors the director nominees for the next annual meeting of shareholders; | |
| ● | lead the Board in its annual review of its performance; |
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| ● | recommend director nominees to the Board for each committee of the Board; and | |
| ● | develop and recommend to the Board corporate governance guidelines applicable to us. |
Meetings of the Board of Directors
During our fiscal year ended December 31, 2023, the Board met from time to time informally and acted by written consent on numerous occasions.
Indemnification and Limitation on Liability of Directors
Our articles of incorporation limit the liability of our directors to the fullest extent permitted by Nevada law. Nothing contained in the provisions will be construed to deprive any director of his or her right to all defenses ordinarily available to the director nor will anything herein be construed to deprive any director of any right he or she may have for contribution from any other director or other person.
At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or permitted. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth all compensation awarded to, earned by, or paid during the years ended December 31, 2023 and 2022 in all capacities for our “named executive officers” which include: (i) all individuals serving as our principal executive officer or acting in a similar capacity during the last completed fiscal year (“PEO”), regardless of compensation level; (ii) our two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the last completed fiscal year and whose total compensation for the last fiscal year exceeded $100,000; and (iii) up to two additional individuals for whom disclosure would have been provided under (ii), except that the individual was not serving as an executive officer of the company at the end of the last completed fiscal year.
Summary Compensation Table
| Name and Position | Fiscal Year Ended December 31, | Salary ($) | Stock Awards ($) | Stock Options ($) |
Total ($) |
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| Steven Rossi, Chief Executive Officer, | 2023 | 374,239 | (1) | - | 4,978,572 | (2) | 5,352,811 | |||||||||||||
| President | 2022 | 323,667 | (3) | 3,040,000 | (4) | - | 3,363,667 | |||||||||||||
(1) Steven Rossi’s gross salary in 2023 was $304,569.57 ($411,000.10 CAD), and he received $69,214.30 ($93,400.94 CAD) in vacation payouts. He additionally received contributions towards health, dental, and vision coverage equaling $454.90 ($613.86 CAD) in the same year. The payments were made in CAD, of which was converted to USD using the 2023 average exchange rate of 0.741045.
(2) On May 1, 2023, we granted Steven Rossi 2,000,000 NQSO Stock Options with a strike price of $1.74 and a vesting schedule based on market capitalization. On July 21, 2023, we granted Steven Rossi 50,000 NQSO stock options with a strike price of $3.61 to be vested 50% one year from grant date and 50% two years from grant date. On October 31, 2023, we granted Steven Rossi 1,500,000 ISO Stock Options with a strike price of $1.44 to be vested upon completion of revenue milestones.
(3) Steven Rossi accrued $23,745 ($32,160 CAD) in unused vacation during 2022, which was paid out to Steven Rossi during 2023. His gross salary in 2022 was $298,943 ($404,888 CAD), and he received contributions towards health, dental, and vision coverage equaling $979 ($1,326 CAD) in the same year. The payments were made in CAD, which was converted to USD using the exchange rate of 0.738334 at December 31, 2022.
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(4) On November 11, 2022, we granted Steven Rossi 1,600,000 restricted stock units that vest in equal installments of 200,000 pursuant to the completion of eight milestones. For one of these 200,000 installments, Steven Rossi has the opportunity to earn the greater of 200,000 restricted shares or the number of restricted shares equal to 3% of the value of a material accretive acquisition. The value at the grant date based upon the probable outcome of such conditions for the 1,600,000 restricted stock units was $3,040,000. On May 1, 2023, this award was cancelled, and in consideration for this and his service to the corporation Steven Rossi was granted a non-qualified stock option to purchase up to an aggregate of two million (2,000,000) shares of common stock of the Corporation.
Employment Agreements
We entered into an employment agreement with Steven Rossi, our Chief Executive Officer, effective May 10, 2021 (the “Employment Agreement”).
The term of the Employment Agreement commenced on May 10, 2021 (the “Effective Date”) and continues until the fifth (5th) anniversary thereof (the “Initial Term”), unless terminated earlier pursuant to the terms of the Employment Agreement; provided that, on such fifth (5th) anniversary of the Effective Date and each third annual anniversary thereafter (such date and each annual anniversary thereof, a “Renewal Date”), the Employment Agreement will be automatically renewed, upon the same terms and conditions, for successive periods of three (3) years (each, a “Renewal Term”), unless either party provides written notice of its intention not to extend the term of the Agreement at least 90 days prior to the applicable Renewal Date.
Mr. Rossi’s annual base salary will be $300,000 (“Base Salary”), and Mr. Rossi shall be entitled to an annual bonus (“Bonus”) equal to 50% of his Base Salary, provided that certain performance goals are met. The performance goals will be established on an annual basis by the Compensation Committee of the Board of Directors of the Company.
The Employment Agreement may be terminated by the Company with or without “Cause” (as defined below) or by the Executive with or without “Good Reason” (as defined below).
The term “Cause” includes discharge by Company on account of the occurrence of one or more of the following events:
| (i) | Executive’s continued refusal or failure to perform (other than by reason of Disability) Executive’s material duties and responsibilities to the Company; | |
| (ii) | a material breach of the Employment Agreement; | |
| (iii) | an intentional and material breach of the Confidential Information, Assignment of Intellectual Property or Restricted Activities sections of the Employment Agreement; | |
| (iv) | willful, grossly negligent or unlawful misconduct by Executive which causes material harm to the Company or its reputation; | |
| (v) | any conduct engaged in that is materially detrimental to the business or reputation of the Company; | |
| (vi) | the Company is directed in writing by regulatory or governmental authorities to terminate the employment of Executive or Executive engages in activities that (i) are not approved or authorized by the Board, and (ii) cause actions to be taken by regulatory or governmental authorities that have a material adverse effect on the Company; or | |
| (vii) | a conviction, plea of guilty, or plea of nolo contendere by Executive, of or with respect to a criminal offense which is a felony or other crime involving dishonesty, disloyalty, fraud, embezzlement, theft or similar action(s) (including, without limitation, acceptance of bribes, kickbacks or self-dealing), or the material breach of Executive’s fiduciary duties with respect to the Company. |
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The term “Good Reason” generally includes a reduction in the Base Salary, a reduction in job title, position or responsibility, a material breach by the Company of the Employment Agreement, or a material relocation in worksite.
In the event the Employment Agreement is terminated by the Company other than for Cause or by Mr. Rossi for Good Reason, Mr. Rossi will receive an amount equal to his Base Salary at the rate in effect as of the date immediately preceding such termination until the earlier of (i) the expiration date of the Term or (ii) the first anniversary of the date of termination; provided that if the date of termination is after the first anniversary of the Effective Date, Mr. Rossi will receive the Base Salary and accrued benefits for 18 months following the effective date of termination. Mr. Rossi shall also be entitled to receive earned but not paid Bonuses and any pro rata portion of the amount of Executive’s Bonus for the year in which termination occurs that would have been payable based on actual performance determined under the terms of the Bonus as then in effect for such year, and expenses incurred through the date of termination and any other benefits accrued but not paid. Notwithstanding the foregoing, Mr. Rossi’s right to receive any unearned compensation is conditioned on Mr. Rossi’s execution and delivery to the Company a general release of claims.
If the date of termination for Good Reason is after the end of a calendar year but prior to such time as Mr. Rossi’s Bonus, if any, is paid, then Mr. Rossi will receive a Bonus as determined by the Compensation Committee prorated for the time of employment during such year of termination.
Mr. Rossi has the right under the Employment Agreement to terminate his employment for other than Good Reason upon 30 days’ written notice to the Company. If Mr. Rossi terminates the Employment Agreement for other than Good Reason, Mr. Rossi will receive an amount equal to his base salary, earned but not paid plus expenses incurred through the date of termination and any other benefits accrued but not paid.
If a Change in Control (as defined below) occurs and Mr. Rossi’s employment is terminated by the Company for any reason other than Cause or disability or Mr. Rossi terminates for Good Reason, Mr. Rossi will receive a non-prorated severance equal to two times his Base Salary and Bonus for the year of termination and all vested and accrued benefits up to the date of termination. If Mr. Rossi holds any non-vested option awards at the date of termination in connection with a Change in Control, all options not vested will vest and become exercisable until the earlier of three (3) years following termination or the expiration of the options as granted. If Mr. Rossi holds any restricted securities at the date of termination in connection with a Change in Control, all restrictions will lapse, and all such securities will be unrestricted, vested and immediately payable. All of Mr. Rossi’s performance-based goals will also be deemed met in connection with termination by Change in Control in calculating bonus and other awards.
The term “Change in Control” generally means a transaction that occurs whereby more than 50% of the Company’s voting power is acquired by a third party, the consummation involving the Company of a merger, consolidation, reorganization or business combination or the sale of substantially all of the Company’s assets to a third party.
Pursuant to the clawback provisions of the Employment Agreement, any amounts payable under the Employment Agreement are subject to any policy (whether in existence as of the Effective Date or later adopted) established by the Company providing for clawback or recovery of amounts that were paid to Mr. Rossi. The Company will make any determination for clawback or recovery in its sole discretion and in accordance with any applicable law or regulation.
The Employment Agreement provides that the Company shall indemnify Mr. Rossi to the fullest extent permitted by law for all amounts (including, without limitation, judgments, fines, settlement payments, expenses and reasonable out-of-pocket attorneys’ fees) incurred or paid by Executive in connection with any action, suit, investigation or proceeding, or threatened action, suit, investigation or proceeding, arising out of or relating to the performance by Executive of services for, or the acting by Executive as a director, officer or Executive of, the Company or any subsidiary of the Company.
In addition to the foregoing, pursuant to the terms of the Employment Agreement, Mr. Rossi amended the Company’s Series A Preferred Stock Certificate of Designation to eliminate his right to convert his Series A Preferred Stock into 51% of the outstanding Common Stock of the Company. In consideration for Mr. Rossi agreeing to terminate his conversion rights, the Company issued Mr. Rossi an aggregate of 1,717,535 unregistered shares of Common Stock.
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The table below set forth the outstanding equity awards held by our named executive officers at of December 31, 2023.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2023
| Option Awards | Stock Awards | ||||||||||||||||||||||
| Name | Number of securities underlying exercised options (#) | Number of securities underlying unexercised options (#) exercisable | Equity incentive plan awards: Number of securities underlying unexercised unearned options (#) | Option exercise price ($) | Option expiration date | Number of shares or units of stock that have not vested (#) | Market value of shares of units of stock that have not vested ($) | ||||||||||||||||
| Steven Rossi, CEO & Pres. (PEO) |
3,650,000(1)(2)(3)(4)
|
1.75 | (1)(2)(3)(4) | - | - | ||||||||||||||||||
| (1) | On August 6, 2021, we granted Steven Rossi an incentive stock option to purchase 100,000 shares of common stock for $5.50 per share under the Worksport Ltd. 2021 Equity Incentive Plan. The option vests 100% on the grant date. The expiration date of the option is August 6, 2026. | |
| (2) | On July 21, 2023, we granted Steven Rossi a non-qualified stock option to purchase 50,000 shares of common stock for $3.61 per share under the Worksport Ltd. 2022 Equity Incentive Plan. The option vests 50% on the first annual anniversary of the grant date, and the other 50% vests on the second annual anniversary of the grant date. The expiration date of the option is July 21, 2028. | |
| (3) |
On May 1, 2023, we granted Steven Rossi a non-qualified stock option to purchase 2,000,000 shares of common stock for $1.74 per share. Vesting is based upon the achievement of either the Company’s Market Capitalization or the Company’s Share Price. The grant vests in ten tranches. The first tranche vests once the Company either maintains a volume weighted average price of $2.00 or more for 10 consecutive trading days or reaches a market capitalization of $38,000,000, and an additional tranche representing 10% of the option grant vests for each dollar by which the volume weighted average price increases or for each additional $17,000,000 in which the Company’s market capitalization increases.
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| (4) | On October 31, 2023, we granted Steven Rossi an incentive stock option to purchase 1,500,000 shares of common stock for $1.44 per share. Vesting is based upon the achievement of revenue-based milestones. The first tranche representing 20% of the option vests upon the achieving of an annual run rate revenue of $10,000,000 as measured by $2,500,000 of quarterly revenue, and an additional 20% vests for each $10,000,000 increase in annual run rates, each represented by an additional $2,500,000 of quarterly revenue. |
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Equity Incentive Plans
2015 Equity Incentive Plan
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, 2023, zero shares of common stock remain available under the 2015 Plan.
2021 Equity Incentive 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, 2023, 15,000 shares of common stock were available under the 2021 Plan.
2022 Equity Incentive 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”). 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 (vii) 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 our 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, 2023, 967,791 shares of common stock were available under the 2022 Plan. The number of shares of common stock authorized under the 2022 Plan as of January 1, 2024 was 3,033,107.
Term
The 2022 Plan shall be in effect upon the adoption by the Board and remain in effect until the 10th anniversary of the date the Board approves and adopts the 2022 Plan, unless terminated earlier by the Board.
Lapsed Awards
If awards are surrendered, terminated, or expire without being exercised in whole or in part, new awards may be granted covering the shares of common stock not issued under such lapsed awards, subject to any restrictions that may be imposed by the Code.
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Adjustment in Shares of Common Stock
In the event that any dividend or other distribution (whether in the form of cash, shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of shares or other securities of the Company, or other change in the corporate structure of the Company affecting the shares occurs, the administrator, in order to prevent diminution or enlargement of the benefits or potential benefits intended to be made available under the 2022 Plan, will adjust the number and class of shares that may be delivered under the 2022 Plan and/or the number, class, and price of shares covered by each outstanding award, and the numerical share limits therein.
Non-Transferability
Unless determined otherwise by the administrator, an award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the participant, only by the participant. If the administrator makes an award transferable, such award may only be transferred (i) by will, (ii) by the laws of descent and distribution, (iii) to a revocable trust or (iv) as permitted by Rule 701 of the Securities Act of 1933, as amended (the “Securities Act”).
Limitation on Number of Shares Subject to Awards
The maximum aggregate amount of cash that may be paid in cash during any calendar year (measured from the date of any payment) with respect to one or more awards payable in cash is $100,000.
Amendments to the 2022 Plan
The administrator may at any time amend, alter, suspend, or terminate the 2022 Plan. We will obtain shareholder approval of any 2022 Plan amendment to the extent necessary and desirable to comply with applicable laws. No amendment, alteration, suspension, or termination of the 2022 Plan will impair the rights of any participant, unless mutually agreed otherwise between the participant and the administrator, in which case such an agreement must be in writing and signed by the participant and the Company. Termination of the 2022 Plan will not affect the administrator’s ability to exercise the powers granted to it hereunder with respect to awards granted under the 2022 Plan prior to the date of such termination.
Options
Exercise Price
The per share exercise price for the shares to be issued pursuant to exercise of an option will be determined by the administrator but will be no less than 100% of the fair market value per share on the date of grant. In addition, in the case of an incentive stock option granted to an employee who, at the time the incentive stock option is granted, owns stock representing more than 10% of the voting power of all classes of our stock or any parent or subsidiary, the per share exercise price will be no less than 110% of the fair market value per share on the date of grant. Notwithstanding the foregoing, options may be granted with a per share exercise price of less than 100% of the fair market value per share on the date of grant pursuant to a transaction described in, and in a manner consistent with, Section 424(a) of the Code.
Grant of Options
Each option will be designated in the award agreement as either an incentive stock option or a non-qualified stock option. However, notwithstanding such designation, to the extent that the aggregate fair market value of the shares with respect to which incentive stock options are exercisable for the first time by the participant during any calendar year (under all plans of the Company and any parent or subsidiary) exceeds $100,000, such options will be treated as non-qualified stock options. Incentive stock options will be taken into account in the order in which they were granted. The fair market value of the shares will be determined as of the time the option with respect to such shares is granted.
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Exercise of Option
Any option granted hereunder will be exercisable according to the terms of the 2022 Plan and at such times and under such conditions as determined by the administrator and set forth in the award agreement. An option may not be exercised for a fraction of a share. An option will be deemed exercised when we receive: (i) notice of exercise (in such form as the administrator specifies from time to time) from the person entitled to exercise the option, and (ii) full payment for the shares with respect to which the option is exercised (together with any applicable withholding taxes).
Effect of Termination of Employment or Death or Disability
If a participant ceases to be a service provider, other than upon the participant’s termination as the result of the participant’s death or disability, the participant may exercise his, her, or its option within such period of time as is specified in the award agreement to the extent that the option is vested on the date of termination (but in no event later than the expiration of the term of such option as set forth in the award agreement). In the absence of a specified time in the award agreement, the option will remain exercisable for three months following the participant’s termination. Unless otherwise provided by the administrator, if on the date of termination the participant is not vested as to his, her, or its entire option, the shares covered by the unvested portion of the option will revert to the 2022 Plan. If after termination the participant does not exercise his, her, or its option within the time specified by the administrator, the option will terminate, and the shares covered by such option will revert to the 2022 Plan.
If a participant ceases to be a service provider as a result of the participant’s disability, the participant may exercise his or her option within such period of time as is specified in the award agreement to the extent the option is vested on the date of termination (but in no event later than the expiration of the term of such option as set forth in the award agreement). In the absence of a specified time in the award agreement, the option will remain exercisable for six (6) months following the participant’s termination. Unless otherwise provided by the administrator, if on the date of termination the participant is not vested as to his or her entire option, the shares covered by the unvested portion of the option will revert to the 2022 Plan. If after termination the participant does not exercise his or her option within the time specified herein, the option will terminate, and the shares covered by such option will revert to the 2022 Plan.
If a participant dies while a service provider, the option may be exercised within such period of time as is specified in the award agreement to the extent that the option is vested on the date of death (but in no event may the option be exercised later than the expiration of the term of such option as set forth in the award agreement), by the participant’s designated beneficiary, provided such beneficiary has been designated prior to participant’s death in a form acceptable to the administrator. If no such beneficiary has been designated by the participant, then such option may be exercised by the personal representative of the participant’s estate or by the person(s) to whom the option is transferred pursuant to the participant’s will or in accordance with the laws of descent and distribution. In the absence of a specified time in the award agreement, the option will remain exercisable for six (6) months following participant’s death. Unless otherwise provided by the administrator, if at the time of death participant is not vested as to his or her entire option, the shares covered by the unvested portion of the option will continue to vest in accordance with the award agreement. If the option is not so exercised within the time specified herein, the option will terminate, and the shares covered by such option will revert to the 2022 Plan.
Change of Control
In the event of a merger of the Company with or into another corporation or other entity or a change in control, each outstanding option will be treated as the administrator determines without a participant’s consent.
Stock Appreciation Rights
Grant of Stock Appreciation Rights
Subject to the terms and conditions of the 2022 Plan, a stock appreciation right may be granted to service providers at any time and from time to time as will be determined by the administrator, in its sole discretion.
Number of Shares
The administrator will have complete discretion to determine the number of stock appreciation rights granted to any participant.
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Exercise Price and Other Terms
The administrator, subject to the provisions of the 2022 Plan, will have complete discretion to determine the terms and conditions of stock appreciation rights granted under the 2022 Plan; provided, however, that the exercise price will be not less than 100% of the fair market value of a share on the date of grant.
Agreement, Expiration, and Payment
Each stock appreciation right grant will be evidenced by an award agreement that will specify the exercise price, the term of the stock appreciation right, the conditions of exercise, and such other terms and conditions as the administrator, in its sole discretion, will determine. A stock appreciation right granted under the 2022 Plan will expire upon the date determined by the administrator, in its sole discretion, and set forth in the award agreement; provided, however, that the term will be no more than 10 years from the date of grant thereof. Upon exercise of a stock appreciation right, a participant will be entitled to receive payment from the Company in an amount determined by multiplying: (i) the difference between the fair market value of a share on the date of exercise over the exercise price; times (ii) the number of shares with respect to which the stock appreciation right is exercised. At the discretion of the administrator, the payment upon stock appreciation right exercise may be in cash, in shares of equivalent value, or in some combination thereof.
Restricted Stock
Grant of Restricted Stock
Subject to the terms and provisions of the 2022 Plan, the administrator, at any time and from time to time, may grant shares of restricted stock to service providers in such amounts as the administrator, in its sole discretion, will determine.
Agreement
Each award of restricted stock will be evidenced by an award agreement that will specify the period of restriction, the number of shares granted, and such other terms and conditions as the administrator, in its sole discretion, will determine. Unless the administrator determines otherwise, the Company as escrow agent will hold shares of restricted stock until the restrictions on such shares have lapsed.
Transferability
Except as provided otherwise in the 2022 Plan, shares of restricted stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable period of restriction. The administrator, in its sole discretion, may impose such other restrictions on shares of restricted stock as it may deem advisable or appropriate.
Voting Rights
During the period of restriction, service providers holding shares of restricted stock granted hereunder may exercise full voting rights with respect to those shares, unless the administrator determines otherwise.
Dividends, Other Distributions, and Return
During the period of restriction, service providers holding shares of restricted stock will be entitled to receive all dividends and other distributions paid with respect to such shares unless otherwise provided in the award agreement. If any such dividends or distributions are paid in shares, the shares will be subject to the same restrictions on transferability and forfeitability as the shares of restricted stock with respect to which they were paid. On the date set forth in the award agreement, the restricted stock for which restrictions have not lapsed will revert to the Company and again will become available for grant under the 2022 Plan.
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Restricted Stock Units
Grant of Restricted Stock Units
Restricted stock units may be granted at any time and from time to time as determined by the administrator. Each restricted stock unit grant will be evidenced by an award agreement that will specify such other terms and conditions as the administrator, in its sole discretion, will determine, including all terms, conditions, and restrictions related to the grant, the number of restricted stock units and the form of payout, which may be left to the discretion of the administrator.
Vesting Criteria and Other Terms
The administrator will set vesting criteria in its discretion, which, depending on the extent to which the criteria are met, will determine the number of restricted stock units that will be paid out to the participant. After the grant of restricted stock units, the administrator, in its sole discretion, may reduce or waive any restrictions for such restricted stock units. Each award of restricted stock units will be evidenced by an award agreement that will specify the vesting criteria, and such other terms and conditions as the administrator, in its sole discretion will determine. The administrator, in its discretion, may accelerate the time at which any restrictions will lapse or be removed. Upon meeting the applicable vesting criteria, the participant will be entitled to receive a payout as specified in the award agreement. On the date set forth in the award agreement, all unearned restricted stock units will be forfeited to us.
Performance Units and Performance Shares
Grant of Performance Units/Shares
Performance units and performance shares may be granted to service providers at any time and from time to time, as will be determined by the administrator, in its sole discretion. The administrator will have complete discretion in determining the number of performance units/shares granted to each participant.
Value of Performance Units/Shares
Each performance unit will have an initial value that is established by the administrator on or before the date of grant. Each performance share will have an initial value equal to the fair market value of a share on the date of grant.
Performance Objections and Other Terms
The administrator will set performance objectives or other vesting provisions. The administrator may set vesting criteria based upon the achievement of Company-wide, business unit, or individual goals (including, but not limited to, continued employment), or any other basis determined by the administrator in its discretion. Each award of performance units/shares will be evidenced by an award agreement that will specify the performance period, and such other terms and conditions as the administrator, in its sole discretion, will determine. After the applicable performance period has ended, the holder of performance units/shares will be entitled to receive a payout of the number of performance units/shares earned by the participant over the performance period, to be determined as a function of the extent to which the corresponding performance objectives or other vesting provisions have been achieved. After the grant of a performance unit/share, the administrator, in its sole discretion, may reduce or waive any performance objectives or other vesting provisions for such performance unit/share. On the date set forth in the award agreement, all unearned or unvested performance units/shares will be forfeited to the Company, and again will be available for grant under the 2022 Plan.
Compensation of Directors
Directors are permitted to receive fixed fees and other compensation for their services as directors. The Board has the authority to fix the compensation of directors.
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During 2023, Steven Rossi, Lorenzo Rossi, Craig Loverock, Bill Caragol, and Ned L. Siegel were compensated for their services.
Director Compensation (1)
As of December 31, 2023
| Name |
Fees ($) |
Stock ($) |
Option ($) |
Non-Equity ($) |
All Other ($) |
Total ($) |
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| Craig Loverock | 34,197 | (1) | - | 224,363 | (3) | - | - | 258,560 | ||||||||||||||||
| William Caragol | 60,000 | - | 224,363 | (3) | - | - | 284,363 | |||||||||||||||||
| Ned L. Siegel | 60,000 | - | 224,363 | (3) | - | - | 284,363 | |||||||||||||||||
| Lorenzo Rossi | 270,824 | (2) | - | - | - | 903 | (2) | 271,727 | ||||||||||||||||
(1) Payments were made in CAD and converted to USD per the exchange rate as of the date of each bill, of which include $11,456.51, $11,382.77, $11,366.40, and $11,542.10 on March 31, 2023, July 1, 2023, October 1, 2023, and December 31, 2023, respectively.
(2) Lorenzo Rossi’s gross salary in 2023 was $236,921.13 ($319,712.20 CAD), and he received $33,903.28 ($45,750.63 CAD) in vacation payouts. He additionally received contributions towards health, dental, and vision coverage equaling $902.78 ($1,218.25 CAD) in the same year. The payments were made in CAD, of which was converted to USD using the 2023 average exchange rate of 0.741045.
(3) During the year ended December 31, 2023, each of the three independent directors were granted 120,000 and 7,500 shares of common stock issuable upon the exercise of vested options at a price of $1.66 and $3.61 per share until January 30, 2033 and July 21, 2028, respectively.
Clawback Policy
On October 2, 2023, our Board adopted an executive compensation recoupment policy consistent with the requirements of the Exchange Act Rule 10D-1 and the Nasdaq listing standards thereunder, to help ensure that incentive compensation is paid based on accurate financial and operating data, and the correct calculation of performance against incentive targets. Our policy addresses recoupment of amounts from performance-based awards paid to all corporate officers, including awards under our equity incentive plans, in the event of a financial restatement to the extent that the payout for such awards would have been less, or in the event of fraud, or intentional, willful or gross misconduct that contributed to the need for a financial restatement.
Policies and Practices for Granting Certain Equity Awards
Our policies and practices regarding the granting of equity awards are carefully designed to ensure compliance with applicable securities laws and to maintain the integrity of our executive compensation program. The Compensation Committee is responsible for the timing and terms of equity awards to executives and other eligible employees.
The timing of equity award grants is determined with consideration to a variety of factors, including but not limited to, the achievement of pre-established performance targets, market conditions and internal milestones. The Company does not follow a predetermined schedule for the granting of equity awards; instead, each grant is considered on a case-by-case basis to align with the Company’s strategic objectives and to ensure the competitiveness of our compensation packages.
In determining the timing and terms of an equity award, the Board or the Compensation Committee may consider material nonpublic information to ensure that such grants are made in compliance with applicable laws and regulations. The Board’s or the Compensation Committee’s procedures to prevent the improper use of material nonpublic information in connection with the granting of equity awards include oversight by legal counsel and, where appropriate, delaying the grant of equity awards until the public disclosure of such material nonpublic information.
The Company is committed to maintaining transparency in its executive compensation practices and to making equity awards in a manner that is not influenced by the timing of the disclosure of material nonpublic information for the purpose of affecting the value of executive compensation. The Company regularly reviews its policies and practices related to equity awards to ensure they meet the evolving standards of corporate governance and continue to serve the best interests of the Company and its shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial ownership of our common stock as of the date of this report by (a) each shareholder who is known to us to beneficially own more than 5% of our common stock, (b) directors, (c) our executive officers, and (d) all executive officers and directors as a group. Beneficial ownership is determined according to the SEC rules, and generally means that person has beneficial ownership of a security if he or she possesses sole or shared voting or investment power of that security and includes options, warrants and other securities convertible or exercisable into shares of common stock, provided that such securities are currently exercisable or convertible within 60 days of March 27, 2024. Each director or officer, as the case may be, has furnished us with information with respect to their beneficial ownership. Except as otherwise indicated, all persons listed below have (i) sole voting power and investment power with respect to their common stock, except to the extent that authority is shared by spouses under applicable law, and (ii) record and beneficial ownership with respect to their common stock.
| Name and Address of Beneficial Owner (1) | Number of Shares of Common Stock Beneficially Owned | Percentage of Common Stock Beneficially Owned (2) | ||||||
| Directors and Executive Officers: | ||||||||
| Steven Rossi —CEO, President, and Chairman | 2,592,539 | (3) | 10.71 | % | ||||
| Michael Johnston —CFO | — | — | ||||||
| Lorenzo Rossi —Director | — | — | ||||||
| Craig Loverock —Director | 90,000 | (4) | * | % | ||||
| William Caragol —Director | 90,000 | (5) | * | % | ||||
| Ned L. Siegel —Director | 90,000 | (6) | * | % | ||||
| All officers and directors as a group (6 persons) | 2,862,539 | 11.72 | % | |||||
| 5%+ Shareholders: | ||||||||
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*Less than 1%.
(1) Unless otherwise indicated, the address for each person is c/o Worksport Ltd., 2500 N America Drive, West Seneca, NY 14224.
(2) Based on 24,100,413 shares of common stock outstanding as of March 27, 2024.
(3) Includes 100,000 shares of common stock issuable upon the exercise of vested options at a price of $5.5 per share until August 6, 2021. Mr. Rossi also owns 100 shares of Series A Preferred Stock entitling him to 51% of the voting power of the corporation. Mr. Rossi also has option grants amounting to 3,500,000 of issuable stock upon the completion of milestones deemed unlikely to be completed in the near future.
(4) Includes (i) 15,000 shares of restricted shares of common stock granted on September 6, 2021 and that vested on September 6, 2021, (ii) 15,000 shares of common stock issuable upon the exercise of vested options at a price of $5.50 per share until July 23, 2026, (iii) 20,000 shares of common stock issuable upon the exercise of vested options at a price of $2.51 per share until December 29, 2026 and (iv) 40,000 shares of common stock issuable upon the exercise of vested options at a price of $1.66 per share until January 30, 2033.
(5) Includes (i) 15,000 shares of restricted shares of common stock granted on September 6, 2021 and that vested on January 1, 2022, (ii) 15,000 shares of common stock issuable upon the exercise of vested options at a price of $5.50 per share until August 6, 2026, (iii) 20,000 shares of common stock issuable upon the exercise of vested options at a price of $2.51 per share until December 29, 2026 and (iv) 40,000 shares of common stock issuable upon the exercise of vested options at a price of $1.66 per share until January 30, 2033.
(6) Includes (i) 15,000 shares of restricted shares of common stock granted on September 6, 2021 and that vested on January 1, 2022, (ii) 15,000 shares of common stock issuable upon the exercise of vested options at a price of $5.50 per share until August 6, 2026, (iii) 20,000 shares of common stock issuable upon the exercise of vested options at a price of $2.51 per share until December 29, 2026 and (iv) 40,000 shares of common stock issuable upon the exercise of vested options at a price of $1.66 per share until January 30, 2033.
Securities Authorized For Issuance Under Equity Compensation Plans
Equity Compensation Plan Information
(As of December 31, 2023)
| Plan Category: | Number of securities to be issued upon exercise of outstanding options, warrants and rights: |
Weighted average exercise price of outstanding options, warrants and rights: |
Number of securities remaining available for future issuance: |
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| 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 | |||||||||
| Total | 672,500 | $ | 2.54 | 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 | ||||||||
| Total | 1,190,000 | 5.5 | 60,000 | |||||||||
| 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 | |||||||||
| Total | 12,500 | $ | 1.60 | 737,500 | ||||||||
| Total | 1,875,000 | $ | 4.41 | 797,500 | ||||||||
| (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 1st 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. The number of shares of common stock authorized under the 2022 Plan as of January 1, 2024 was 3,033,107. |
Changes in Control
There are no arrangements, to our knowledge, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The following is a summary of transactions entered since January 1, 2022 to which we have been a party in which the amount involved exceeded or will exceed $120,000 (or, if less, 1% of the average of our total assets amounts as of December 31, 2023), and in which any of our directors, executive officers or, to our knowledge, beneficial owners of more than 5% of our capital stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and other arrangements, which are described under “Executive and Director Compensation.” We also describe below certain other transactions with our directors, executive officers and stockholders.
Forbes Anderson Limited, an accounting firm based in Ontario, Canada and managed by Worksport’s Chief Financial Officer, Michael Johnston, received $130,639 ($176,290 CAD) based on the 2023 average exchange rate for services rendered within the year ending December 31, 2023.
Controlling Persons
Mr. Rossi owns 100% of the outstanding shares of Series A Preferred Stock of the Company. The shares of Series A Preferred Stock collectively have 51% voting power of the outstanding securities of the Company which thereby renders Mr. Rossi the ability to elect members of our Board of Directors. The Company is not aware of any other agreements or understandings by a person or group of persons that could be construed as a controlling person.
Related Person Transaction Policy
Under our policy, if a transaction has been identified as a related person transaction, including any transaction that was not a related person transaction when originally consummated or any transaction that was not initially identified as a related person transaction prior to consummation, our management must present information regarding the related person transaction to our Audit Committee, or, if Audit Committee approval would be inappropriate, to another independent body of our Board, for review, consideration and approval or ratification. The presentation must include a description of, among other things, the material facts, the interests, direct and indirect, of the related persons, the benefits to us of the transaction and whether the transaction is on terms that are comparable to the terms available to or from, as the case may be, an unrelated third party or to or from employees generally. Under the policy, we will collect information that we deem reasonably necessary from each director, executive officer and, to the extent feasible, significant shareholder to enable us to identify any existing or potential related person transactions and to effectuate the terms of the policy. In addition, under our code of business conduct and ethics, our employees and directors will have an affirmative responsibility to disclose any transaction or relationship that reasonably could be expected to give rise to a conflict of interest. In considering related person transactions, our Audit Committee, or other independent body of our Board, will take into account the relevant available facts and circumstances including, but not limited to:
| ● | the risks, costs and benefits to us; | |
| ● | the impact on a director’s independence in the event that the related person is a director, immediate family member of a director or an entity with which a director is affiliated; | |
| ● | the availability of other sources for comparable services or products; and | |
| ● | the terms available to or from, as the case may be, unrelated third parties or to or from employees, generally. |
The policy requires that, in determining whether to approve, ratify or reject a related person transaction, our Audit Committee, or other independent body of our Board of Directors, must consider, in light of known circumstances, whether the transaction is in, or is not inconsistent with, our best interests and those of our shareholders, as our Audit Committee, or other independent body of our Board, determines in the good faith exercise of its discretion.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Our former independent auditor Haynie & Company billed an aggregate of $100,200 for the fiscal year ended December 31, 2022, for professional services rendered for the audit of our 2021 annual financial statements and review of the financial statements included in our quarterly reports. On November 15, 2022, Haynie & Company resigned as the Company’s independent public accountants.
During the year ended 2021 and for the period from January 1, 2022 until November 15, 2022, we engaged Haynie & Company as our independent registered accounting firm. On November 18, 2022, we appointed Lumsden & McCormick, LLP to serve as our independent auditor. Our independent auditor billed an aggregate of $35,250 through December 31, 2023 for professional services rendered for the audit of our 2023 annual financial statements. We incurred fees from both Haynie & Company as well as Lumsden & McCormick, LLP for the years ended December 31, 2023 and 2022, as discussed below:
| Fiscal Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Audit Fees | $ | 123,250 | $ | 58,150 | ||||
| Audit-Related Fees (1) | $ | 60,546 | $ | 51,700 | ||||
| Tax Fees | $ | 22,365 | $ | - | ||||
| All Other Fees | $ | 9,925 | $ | - | ||||
| Total | $ | 216,086 | $ | 109,850 | ||||
| (1) | Fees incurred in conjunction with consents for various registration statements filed during years. |
Audit fees consist of fees related to professional services rendered in connection with the audit of our annual financial statements. All other fees relate to professional services rendered in connection with the review of the quarterly financial statements.
Our policy is to pre-approve all audit and permissible non-audit services performed by the independent accountants. These services may include audit services, audit-related services, tax services and other services. Under our Audit Committee’s policy, pre-approval is generally provided for particular services or categories of services, including planned services, project-based services and routine consultations. In addition, the Audit Committee may also pre-approve particular services on a case-by-case basis. Our Audit Committee approved all services that our independent accountants provided to us in the past two fiscal years.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report on Form 10-K:
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†Management compensatory plan.
*Filed herewith.
**Furnished herewith and not to be incorporated by reference into any filing of Worksport Ltd. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K.
| (1) | Filed as an exhibit to the Company’s Form 10-Q filed April 24, 2009. | |
| (2) | Filed as an exhibit to the Company’s Form 1-A filed on July 15, 2020. | |
| (3) | Filed as an exhibit to the Company’s Form 8-K filed on December 17, 2014. | |
| (4) | Filed as an exhibit to the Company’s Form S-1 filed on July 21, 2015. | |
| (5) | Filed as an exhibit to the Company’s Form 1-A/A filed on September 10, 2020. | |
| (6) | Filed as an exhibit to the Company’s Form 1-A/A filed on September 29, 2020. | |
| (7) | Filed as an exhibit to the Company’s Form 8-K filed on May 12, 2021. | |
| (8) | Filed as an exhibit to the Company’s Registration Statement on Form S-1 filed on May 14, 2021. | |
| (9) | Filed as an exhibit to the Company’s Form 8-K filed July 2, 2021. | |
| (10) | Filed as an exhibit to the Company’s Registration Statement on Form S-1/A filed on July 8, 2021. | |
| (11) | Filed as an exhibit to the Company’s Registration Statement on Form S-1/A filed on July 16, 2021. | |
| (12) |
Filed as an exhibit to the Company’s Registration Statement on Form S-3 filed on September 30, 2022.
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| (13) |
Filed as an exhibit to the Company’s Form 10-Q for the fiscal quarter ended September 30, 2022 filed November 14, 2022.
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| (14) | Filed as an exhibit to the Company’s Form 8-K filed November 21, 2022. | |
| (15) | Filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed on March 31, 2023. | |
| (16) | Filed as an exhibit to the Company’s Form 8-K filed on November 3, 2023. | |
| (17) | Filed as an exhibit to the Company’s Form 8-K filed on March 20, 2024. |
ITEM 16. FORM 10-K SUMMARY.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| WORKSPORT LTD | |
| Dated: March 28, 2024 | /s/ Steven Rossi |
| Steven Rossi | |
| President, Chief Executive Officer, and Chairman of the Board of Directors (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Steven Rossi | President, Chief Executive Officer and | March 28, 2024 | ||
| Steven Rossi | Chairman of the Board of Directors(Principal Executive Officer) | |||
| /s/ Michael Johnston | Chief Financial Officer | March 28, 2024 | ||
| Michael Johnston | (Principal Financial Officer and Principal Accounting Officer) | |||
| /s/ Lorenzo Rossi | Director | March 28, 2024 | ||
| Lorenzo Rossi | ||||
| /s/ Craig Loverock | Director | March 28, 2024 | ||
| Craig Loverock | ||||
| /s/ William Caragol | Director | March 28, 2024 | ||
| William Caragol | ||||
| /s/ Ned L. Siegel | Director | March 28, 2024 | ||
| Ned L. Siegel |
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Exhibit 10.29
LOAN AGREEMENT
Dated: As of May 4, 2022
Between
WORKSPORT NEW YORK OPERATIONS CORPORATION
as (“Borrower”)
and
NORTHEAST BANK
as (“Lender”)
$5,300,000.00 TERM LOAN
(i) 2500 North America Drive, West Seneca, New York, and (ii) V/L North America Drive, West Seneca, New York
TABLE OF CONTENTS
| Page | |||
| 1. | BACKGROUND. | 1 | |
| 1.1. | Defined Terms | 1 | |
| 1.2. | Borrower | 1 | |
| 1.3. | Land and Improvements; Property | 1 | |
| 1.4. | Use of Loan Proceeds | 1 | |
| 1.5. | Guaranties and Indemnities | 1 | |
| 1.6. | Loan | 1 | |
| 2. | LOAN PROVISIONS. | 2 | |
| 2.1. | Amount of Loan | 2 | |
| 2.2. | Interest Rate and Payment Terms | 2 | |
| 2.3. | Acceleration | 2 | |
| 2.4 | Term of Loan; Extension Right | 2 | |
| 3. | LOAN AND SECURITY DOCUMENTS. | 2 | |
| 4. | CONTINUING AUTHORITY OF AUTHORIZED REPRESENTATIVES | 3 | |
| 5. | LENDER’S CONSULTANTS. | 3 | |
| 6. | LOAN DISBURSEMENT. | 3 | |
| 7. | WARRANTIES AND REPRESENTATIONS | 3 | |
| 7.1. | Intentionally Deleted. | 3 | |
| 7.2. | Authorization | 3 | |
| 7.3. | Legal Agreements | 4 | |
| 7.4. | Financial Information | 4 | |
| 7.5. | No Litigation | 4 | |
| 7.6. | Good Title and No Liens | 4 | |
| 7.7. | Use of Proceeds | 4 | |
| 7.8. | Information | 4 | |
| 7.9. | Deferred Compensation and ERISA | 4 | |
| 7.10. | Leases | 5 | |
| 7.11. | Compliance With Legal Requirements | 5 | |
| 7.12. | Required Licenses and Permits | 5 | |
| 7.13. | Curb Cuts and Utility Connections | 5 | |
| 7.14. | No Default | 5 | |
| 7.15. | No Broker or Finder. | 5 | |
| 7.16. | Guarantor’s Warranties and Representations | 5 | |
| 7.17. | Condemnation/Casualty | 5 | |
| 7.18. | Other Indebtedness | 5 | |
| 7.19. | Special Assessments | 5 | |
| 7.20. | Subsidiaries | 5 | |
| 7.21. | Solvency | 5 | |
| 7.22. | Flood Zone | 5 | |
| 7.23. | Compliance with Anti-Corruption Laws; Anti-Money Laundering Laws | 6 | |
| 7.24. | Property Management Contract. | 6 | |
| 7.25. | Patriot Act | 6 | |
| 7.26. | No Required Consents. | 6 | |
| 7.27. | Investment Company Act of 1940. | 6 | |
| 8. | COVENANTS | 6 | |
| 8.1. | Notices | 6 | |
| 8.2. | Financial Statements and Reports | 6 | |
| 8.3. | Payment of Taxes and Other Obligations | 7 | |
| 8.4. | Conduct of Business; Compliance With Law | 7 | |
| 8.5. | Insurance | 7 | |
| 8.6. | Restrictions on Liens, Transfers and Additional Debt. | 8 | |
| 8.7. | Limits on Guaranties and Distributions. | 8 | |
| 8.8. | Restrictions on Investments | 9 | |
| 8.9. | Indemnification Against Payment of Brokers’ Fees | 9 | |
| 8.10. | Limitations On Certain Transactions | 9 | |
| 8.11. | Property Management Contract | 9 | |
| 8.12. | Deposit of Proceeds; Other Bank Accounts | 9 | |
| 8.13. | Place for Records; Inspection | 10 | |
| 8.14. | Costs and Expenses | 10 | |
| 8.15. | Compliance with Legal Requirements; Zoning | 10 | |
| 8.16. | Indemnification | 11 | |
| 8.17. | Leasing Matters | 11 | |
| 8.18. | Debt Service Coverage Ratio | 12 | |
| 8.19. | Replacement Documentation | 12 | |
| 8.20. | Compliance with Anti-Corruption Laws; Beneficial Ownership Regulation, Anti-Money Laundering Laws and Sanctions. | 12 | |
| 8.21. | Interest Reserve. | 13 | |
| 8.22. | Intentionally Deleted. | 13 | |
| 9. | SPECIAL PROVISIONS. | 13 | |
| 9.1. | Right to Contest. | 13 | |
| 9.2. | Recourse Provisions | 14 | |
| 10. | EVENTS OF DEFAULT | 14 | |
| 10.1. | Default and Events of Default | 14 | |
| 10.2. | Grace Periods and Notice | 16 | |
| 10.3. | Certain Lender Remedies | 16 | |
| 10.4. | Written Waivers | 16 | |
| 11. | ADDITIONAL REMEDIES OF LENDER. | 17 | |
| 11.1. | Remedies | 17 | |
| 11.2. | Reimbursement | 17 | |
| 11.3. | Power of Attorney | 17 | |
| 12. | SECURITY INTEREST AND SET-OFF. | 17 | |
| 12.1. | Security Interest | 17 | |
| 12.2. | Set-Off and Debit | 18 | |
| 12.3. | Right to Freeze | 18 | |
| 12.4. | Additional Rights | 18 | |
| 13. | CASUALTY AND TAKING. | 18 | |
| 13.1. | Casualty and Obligation To Repair | 18 | |
| 13.2. | Adjustment of Claims | 18 | |
| 13.3. | Payment and Application of Insurance Proceeds | 18 | |
| 13.4. | Conditions To Release of Insurance Proceeds | 19 | |
| 13.5. | Taking | ||
| 19 | |||
| 14. | GENERAL PROVISIONS. | 19 | |
| 14.1. | Notices | 19 | |
| 14.2. | Limitations on Assignment | 20 | |
| 14.3. | Further Assurances | 20 | |
| 14.4. | Parties Bound | 20 | |
| 14.5. | Waivers, Extensions and Releases | 20 | |
| 14.6. | Governing Law; Consent to Jurisdiction; Mutual Waiver of Jury Trial. | 21 | |
| 14.7. | Survival | 21 | |
| 14.8. | Cumulative Rights | 21 | |
| 14.9. | Claims Against Lender. | 22 | |
| 14.10. | Obligations Absolute | 22 | |
| 14.11. | Table of Contents, Title and Headings | 22 | |
| 14.12. | Counterparts | 22 | |
| 14.13. | Patriot Act Notice | 23 | |
| 14.14. | Right to Transfer, Assign, Participate | 23 | |
| 14.15. | Time Of the Essence | 23 | |
| 14.16. | No Oral Change | 23 | |
| 14.17. | Severability | 23 | |
| Exhibit A | - | Definitions | ||
| Exhibit B | - | Ownership Interests | ||
| Exhibit C | - | Authorized Representatives | ||
| Exhibit D | - | Required Property, Hazard and Other Insurance |
LOAN AGREEMENT
This Loan Agreement (hereinafter, the “Loan Agreement” or “Agreement”) is made and entered into as of May 4, 2022 by and between WORKSPORT NEW YORK OPERATIONS CORPORATION, a New York corporation, having a mailing address 2500 North America Drive, West Seneca, New York 14224 (hereinafter, the “Borrower”), and NORTHEAST BANK, having a place of business at 200 Berkeley Street, 17th Floor, Boston, Massachusetts 02116 (hereinafter, the “Lender”).
WITNESSETH:
1. BACKGROUND.
1.1. Defined Terms. Capitalized terms used in this Agreement are defined either in Exhibit A, or in specific sections of this Agreement, or in another Loan Document, as referenced in Exhibit A.
1.2. Borrower. Borrower is a corporation incorporated under the laws of the New York. The sole shareholder of the Borrower is Worksport Ltd. and as further described on Exhibit B attached hereto.
1.3. Land and Improvements; Property. Borrower is the owner of certain land located at (i) 2500 North America Drive, West Seneca, New York (“Parcel 1”), and (ii) V/L North America Drive, West Seneca, New York (“Parcel 2”, collectively with Parcel 1, the “Land”), and more particularly described in the Mortgage (together with all structures, buildings, additions, extensions, modifications, and all other improvements of any kind whatsoever, and replacements of any of the foregoing, now or hereafter located at or upon the Land, the “Improvements”). The Land and Improvements are collectively called the “Property.”
1.4. Use of Loan Proceeds. Borrower has applied to Lender for a loan of FIVE MILLION THREE HUNDRED THOUSAND AND 00/100 DOLLARS ($5,300,000.00) (“Loan”) the proceeds of which are to be used to finance the acquisition of the Property and to pay costs and expenses incident to closing the Loan.
1.5. Guaranties and Indemnities. As an inducement to Lender to make the Loan, WORKSPORT LTD. (“Guarantor”), has
agreed to furnish certain guaranties and indemnities.
1.6. Loan. Subject to all of the terms, conditions and provisions of this Agreement, and of the agreements and instruments referred to herein, Lender agrees to make the Loan and Borrower agrees to accept and repay the Loan.
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2. LOAN PROVISIONS.
2.1. Amount of Loan. The Loan shall be in the amount of FIVE MILLION THREE HUNDRED THOUSAND AND 00/100 DOLLARS ($5,300,000.00).
2.2. Interest Rate and Payment Terms. The Loan shall be payable as to interest and principal in accordance with the provisions of the Note. The Note also provides for interest at a Default Rate, late payments charges and prepayment rights, fees and costs. All payments and prepayments of interest, principal and fees shall be made in lawful money of the United States in immediately available funds, without counterclaim or set off and free and clear of, and without any deductions or withholding for, any taxes or other payments (including, without limitation, any Minimum Return). Borrower shall pay to Lender at the closing of the Loan an origination fee in an amount equal to one percent (1.00%) of the amount of the Loan.
2.3. Acceleration. The Loan may be accelerated, at the option of Lender, following an Event of Default. Upon such an acceleration, all principal, accrued interest and costs and expenses shall be due and payable together with interest on such principal at the Default Rate and any applicable prepayment charge or fee.
2.4 Term of Loan; Extension Right. The Loan shall be for an initial term (“Initial Term”) commencing on the date hereof and ending on May 10, 2024 (“Initial Maturity Date”). Borrower shall have the option to extend the term of the Loan (the “Extension Term”) to May 10, 2025 (“Extended Maturity Date”), which shall be conditioned upon the following:
2.4. 2.4.1 No Default. No Default or Event of Default shall exist as of the date of the notice required under Section 2.4.2 herein and as of the Initial Maturity Date for extension to the Extension Term;
2.4.2 Notice From Borrower. Borrower shall have given Lender written notice of Borrower’s request to have Lender exercise the extension option at least thirty (30) days before the Initial Maturity Date for an extension to the Extension Maturity Date;
2.4.3 Additional Documents. Borrower shall have executed and delivered to Lender such agreements and documents as Lender may reasonably require incident to the extension, including, without limitation, any and all documents required to satisfy compliance with Sanctions laws, Beneficial Ownership Regulation, “know-your-customer”, OFAC checks, and Anti-Money Laundering Laws, including the Patriot Act;
2.4.4 Material Adverse Change. No condition or event shall exist which, in Lender’s sole opinion, has or would be reasonably likely to have a Material Adverse Effect with respect to the Borrower, Guarantor and/or the Property;
2.4.5 Before End of Term. Each of the foregoing conditions are satisfied not later than, and on, the Initial Maturity Date for extension to the Extended Maturity Date.
If Lender determines that the conditions to extension have been satisfied, Lender shall so notify Borrower in writing and, so long as no default or Event of Default exists, the term shall be extended until the Extended Maturity Date without further action by any party.
3. LOAN AND SECURITY DOCUMENTS. The Loan shall be made, evidenced, administered, secured and governed by all of the terms, conditions and provisions of the following “Loan Documents”, each of the same the Borrower and Guarantor where applicable, agree to provide and maintain, and such Loan Documents may be hereafter amended, restated, renewed, replaced, supplemented or otherwise modified from time to time, consisting of: (i) this Loan Agreement; (ii) the $5,300,000.00 promissory note payable to Lender issued by the Borrower (the “Note”); (iii) the Mortgage and related UCC financing statements; (iv) the Assignment of Leases and Rents; (v) the Assignment of Contracts; (vi) the Guaranty; (vii) the Environmental Indemnity; and (viii) any other documents, instruments, or agreements executed to further evidence or secure the Loan. Each of the Loan Documents listed in items (i) through (ix), inclusive is dated of even date herewith. The Mortgage, Assignment of Leases and Rents, Environmental Indemnity, Guaranty and Assignment of Contracts are sometimes collectively referred to as the “Security Documents”. The Borrower authorizes the Lender at any time and from time to time to file financing statements, continuation statements, and amendments thereto describing the Collateral without the signatures of the Borrower.
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4. CONTINUING AUTHORITY OF AUTHORIZED REPRESENTATIVES. Lender is authorized to rely upon the continuing authority of the persons, officers, signatories or agents hereafter designated (“Authorized Representatives”) to bind Borrower with respect to all matters pertaining to the Loan and the Loan Documents including, but not limited to, the selection of interest rates. Such authorization may be changed only upon written notice to Lender accompanied by evidence, reasonably satisfactory to Lender, of the authority of the person giving such notice and such notice shall be effective not sooner than five (5) Business Days following receipt thereof by Lender. The present Authorized Representatives are listed on Exhibit C. Lender shall have a right of approval, not to be unreasonably withheld or delayed, over the identity of the Authorized Representatives so as to assure Lender that each Authorized Representative is a responsible and senior official of Borrower.
5. LENDER’S CONSULTANTS. Lender shall have the right to employ its own personnel, or one or more engineers, architects, builders or other construction specialists, environmental advisors, scientists, accountants, and attorneys to act as an advisor to Lender in connection with the Loan (each of which shall be a “Lender’s Consultant”). The functions of a Lender’s Consultant shall include, without limitation: (i) inspection and physical review of the Property; (ii) review and analysis of any work to be done in connection with the Property; (iii) review and analysis of environmental matters; and (iv) review and analysis of financial and legal matters. The reasonable costs and fees of Lender’s Consultants shall be the obligation of the Borrower upon accrual and paid by Borrower upon demand therefor. Notwithstanding the foregoing, so long as no Event of Default has occurred, Borrower shall not be responsible for the costs and fees of a Lender’s Consultant more than twice in any twelve (12) month period. Borrower shall provide Lender’s Consultants with continuing access to all aspects of the Property and books and records related thereto at reasonable times during the day and upon at least five (5) days’ prior written notice to Borrower. Neither Lender nor any of its Consultants shall have liability to Borrower, Guarantor, or any third party, on account of: (i) services performed by Lender’s Consultant; (ii) any failure or neglect by Lender’s Consultant to properly perform services; or (iii) any approval or disapproval of work, plans or other matters. Neither Lender nor Lender’s Consultant shall have any obligation regarding proper performance of work related to the Property. Borrower shall have no rights under or relating to any agreement, report, or similar document prepared by any Lender’s Consultant for Lender.
6. LOAN DISBURSEMENT. Lender shall, subject to compliance with all of the other terms, conditions and provisions of this Agreement, make disbursement of the Loan proceeds entirely at closing.
7. WARRANTIES AND REPRESENTATIONS. Borrower warrants and represents to Lender for the express purpose of inducing Lender to enter into this Agreement, to make the Loan, and to otherwise complete all of the transactions contemplated hereby, that as of the date of this Agreement and at all times thereafter until the Loan has been repaid and all Obligations to Lender have been satisfied, as follows:
7.1. [Intentionally Deleted].
7.2. Authorization
7.2.1 Borrower is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of New York and has all requisite power and authority to own its property and carry on its business. Borrower has all requisite power and authority to execute and deliver and to perform all of its obligations under the Loan Documents to which it is a party. As of the date hereof, the information included in the Beneficial Ownership Certification is true and correct in all respects.
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7.2.2 Guarantor is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada and has all requisite power and authority to own its property and carry on its business. Guarantor has all requisite power and authority to execute and deliver and to perform all of its obligations under the Loan Documents to which it is a party. As of the date hereof, the information included in the Beneficial Ownership Certification is true and correct in all respects.
7.3. Legal Agreements. The Loan Documents constitute, or when executed, shall constitute, the legal, valid and binding obligations of such Person; and all such agreements are enforceable against such Person in accordance with their respective terms, subject to the effect of bankruptcy, insolvency, reorganization or other similar laws affecting the rights and remedies of creditors generally and the effect of general principles of equity.
7.4. Financial Information. True, accurate and complete financial statements of Borrower and Guarantor have been delivered to Lender and the same fairly present the financial condition of Borrower and Guarantor as of the dates thereof and no material and adverse change has occurred in such financial condition since the dates thereof in all material respects. All financial statements of Borrower and Guarantor hereafter furnished to Lender shall be true, accurate and complete and shall fairly present the financial condition of Borrower and Guarantor as of the dates thereof in all material respects. Borrower and Guarantor have filed all required tax returns, has paid all due and payable taxes, assessments and other governmental charges levied or imposed upon it or upon any of its income or profits or upon any of its property.
7.5. No Litigation. There is no litigation now pending or threatened, against Borrower or Guarantor which if adversely decided could materially impair the ability of Borrower or Guarantor to pay and perform its obligations hereunder or under the other Loan Documents.
7.6. Good Title and No Liens. Borrower is the lawful owner of the Property and of areas over, under or on which utility or passage easements are required to make use of the Property and parking as contemplated by the Loan Documents, and is and will be the lawful owner of the Property, free and clear of all liens and encumbrances of any nature whatsoever, except for the matters, if any, which are listed as Permitted Title Exceptions in the Mortgage.
7.7. Use of Proceeds. The proceeds of the Loan shall be used solely and exclusively as described in Section 1.4 herein No portion of the proceeds of the Loan shall be used directly or indirectly, and whether immediately, incidentally or ultimately (i) to purchase or carry any margin stock, or to extend credit to others for the purpose thereof, or to repay or refund indebtedness previously incurred for such purpose, (ii) for any purpose which would violate or is inconsistent with the provisions of regulations of the Board of Governors of the Federal Reserve System including, without limitation, Regulations G, T, U and X thereof, (iii) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any applicable Anti-Corruption Laws, (iv) for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Country, or (v) in any manner that would result in the violation of any Sanctions by any Person.
7.8. Information. No material information furnished or to be furnished by or on behalf of such Person for the purposes of or in connection with this Agreement or any transaction contemplated hereby contains or shall contain any untrue statement of a material fact or omits or shall omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they are made, not materially misleading. Such Person has disclosed to the Bank in writing all existing material information of which such Person has knowledge which does, or would reasonably be expected to, adversely affect the business or financial condition of such Person.
7.9. Deferred Compensation and ERISA. Borrower does not have any pension, profit sharing, stock option, insurance or other arrangement or plan for employees covered by Title IV of the Employment Retirement Security Act of 1974, as now or hereafter amended (“ERISA”) except as may be designated to Lender in writing by Borrower from time to time (“ERISA Plan”) and no “Reportable Event” as defined in ERISA has occurred and is now continuing with respect to any such ERISA Plan. The granting of the Loan, the performance by Borrower of its obligations under the Loan Documents and Borrower’s conducting of its operations do not and will not violate any provisions of ERISA.
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7.10. Leases. True and complete copy of all Leases of the Property which are now in effect (and all guaranties thereof) has been delivered to Lender. Such Lease has not been further amended or changed in any respect and are in full force and effect, enforceable in accordance with the terms thereof, subject, however, to the terms of the Loan Documents.
7.11. Compliance With Legal Requirements. The Borrower and the Property complies with, and shall continue to comply with, all material Legal Requirements and any and all covenants, conditions, restrictions or other matters which materially affect the Obligations or the Property.
7.12. Required Licenses and Permits. All Licenses and Permits which are reasonably required in order to operate the Property in the usual course of business have been, or will be, duly and properly obtained, and will remain in full force and effect, and have been, and shall be complied with, in all material respects.
7.13. Curb Cuts and Utility Connections. All required curb cuts, utility connections and Licenses and Permits therefor have been duly obtained and are in full force and effect and all utility services as reasonably required for water, gas, electric, telephone, sewer and storm drainage and sanitary waste disposal are and shall be available as a matter of right and to an extent adequate to serve the Property for their intended uses.
7.14. No Default. No Default exists under any of the Loan Documents. There is no Default on the part of Borrower or Guarantor under this Agreement or any of the other Loan Documents and no event has occurred and is continuing which could constitute a Default under any Loan Document.
7.15. No Broker or Finder. Borrower hereby represents to Lender that it has not dealt with any financial advisors, brokers, underwriters, placement agents, agents or finders in connection with the Loan, except for Dominion Lending Centres – The Westlake Team. Borrower shall pay any fee or commission earned by Dominion Lending Centres – The Westlake Team in connection with the Loan and Borrower shall indemnity and hold Lender harmless from claims of any kind arising by reason of execution hereof and the consummation of the transactions contemplated hereby.
7.16. Guarantor’s Warranties and Representations. Borrower has no reason to believe that any warranties or representations made in writing by Guarantor to Lender are untrue, incomplete or misleading in any material respect.
7.17. Condemnation/Casualty. There are no condemnation proceedings or the like pending or, to the Borrower’s best knowledge, threatened in writing against the Property or any portion thereof nor has there occurred any casualty at the Property.
7.18. Other Indebtedness. Borrower has no financial obligation under any indenture, debt instrument, mortgage, deed of trust, loan agreement or the like other than such indebtedness arising under the Loan Documents or Permitted Additional Debt.
7.19. Special Assessments. As of the date hereof there are no pending, or to the Borrower’s best knowledge, proposed special or other assessments for public improvements or otherwise affecting the Property, not shown in current real estate tax bills, copies of which have been provided to Lender.
7.20. Subsidiaries. Borrower does not have any subsidiaries.
7.21. Solvency. Neither Borrower nor any Guarantor is insolvent and neither Borrower nor any Guarantor will be rendered insolvent by the transaction contemplated under the Loan Documents.
7.22. Flood Zone. As determined by the flood hazard certificate obtained by Lender in connection with the Loan, no portion of the Property is located in any special flood and wetlands hazard area designated as such by any Governmental Authorities.
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7.23. Compliance with Anti-Corruption Laws; Anti-Money Laundering Laws and Sanctions. Borrower has implemented and maintains in effect policies and procedures designed to ensure compliance by Borrower and its managers, officers, employees and agents with Anti-Corruption Laws, Anti-Money Laundering Laws and applicable Sanctions, and Borrower and its officers, managers, and, its employees and agents, are in compliance with Anti-Corruption Laws, Anti-Money Laundering Laws and applicable Sanctions. None of Borrower, Guarantor, or, any of their respective Affiliates, managers, officers, employees or agents is a Sanctioned Person. Borrower will not, directly or knowingly indirectly, use the proceeds of the Loan in any manner that would violate any Anti-Corruption Law, Anti-Money Laundering Law or applicable Sanctions.
7.24. Property Management Contract. There is no management agreement in existence with respect to the operation and/or management of the Property.
7.25. Patriot Act. To the extent required, each of Borrower and Guarantor is in compliance, in all material respects, with the (i) the Trading with the Enemy Act, as amended, and each of the foreign assets control regulations of the United States Treasury Department (31 C.F.R., Subtitle B, Chapter V, as amended) and any other applicable enabling legislation or executive order relating thereto, and (ii) the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act of 2001). To the best of Borrower's and Guarantor's knowledge, no part of the proceeds of the Loan will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended.
7.26. No Required Consents. The execution, delivery and performance of the Loan Documents and the transactions contemplated thereby do not require any approval or consent of, or filing (other than the recording of the Mortgage and UCC Financing Statements) or registration with, any governmental or other agency or authority, or any other party.
7.27. Investment Company Act of 1940. Borrower is not subject to regulation under the Investment Company Act of 1940 or any statute or regulation limiting its ability to incur Indebtedness for money borrowed as contemplated by the Loan Documents.
8. COVENANTS. BORROWER COVENANTS AND AGREES THAT FROM THE DATE HEREOF AND SO LONG AS ANY INDEBTEDNESS REMAINS UNPAID HEREUNDER, OR ANY OF THE LOAN OR OTHER OBLIGATIONS REMAINS OUTSTANDING, AS FOLLOWS:
8.1. Notices. Borrower shall, with reasonable promptness, but in all events within three (3) days after it has actual knowledge thereof, notify Lender in writing of the occurrence of any act, event or condition which constitutes a Default under any of the Loan Documents. Such notification shall include a written statement of any remedial or curative actions which Borrower proposes to undertake to cure or remedy such Default. Borrower shall promptly notify Lender in writing of (i) any litigation which is not covered by insurance and (ii) of any other litigation against Borrower, Guarantor or the Property.
8.2. Financial Statements and Reports. Borrower shall keep adequate records and books of account in accordance with generally acceptable accounting principles. Borrower shall furnish or cause to be furnished to Lender from time to time, the following financial statements and reports and other information, all in form, manner of presentation and substance acceptable to Lender:
8.2.1 Annual Statements. Within one hundred twenty (120) days following the end of each fiscal year, Borrower shall provide (i) management-prepared financial statements certified by Borrower as having been prepared in accordance with past practice and being true, correct and complete in all material respects, such financial statements to include and to be supplemented by such detail and supporting date and schedules as Lender may from time to time reasonably determine and such financial statements shall be certified by the manager of the Borrower, (ii) an operating statement and (iii) certified rent rolls.
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8.2.2 Data Requested. Within one hundred-twenty (120) days following the end of each calendar year, such other financial data or information as Lender may reasonably request with respect to the Property or Borrower, including, but not limited to, certified rent rolls, aged receivables, operating statements, aged payables, leases, budgets, forecasts, reserves, cash flow projections, and physical condition of the Property. Upon request of Lender, such financial data or information of Borrower or the Property, including, without limitation, certified rent rolls and operating statements shall be delivered quarterly to Lender within thirty (30) days following the end of the applicable calendar quarter.
8.2.3 Tax Returns. Within thirty (30) days of filing in each calendar year, complete copies of all federal tax returns and supporting schedules of Borrower. Notwithstanding the foregoing, to the extent any such tax return is filed after April 15th of any calendar year, upon request of Lender, Borrower shall furnish to Lender a copy of the applicable executed extension form by April 30th of such calendar year.
8.2.4 Guarantor’s Statements. The financial statements and reports required to be furnished by Guarantor as set forth in the Guaranty, including, without limitation:
(i) Annually, within one hundred twenty (120) days after the end of the fiscal year of Guarantor, consolidated financial statements setting forth the assets, liabilities and net worth of Guarantor and accompanied by supplementary schedules indicating the total debt on any assets shown on a net investment basis, all to be in reasonable detail, prepared and certified to Lender’s reasonable approval.
(ii) Annually, within thirty (30) days after filing, complete copies of federal income tax returns for each Guarantor, including all schedules attached thereto.
(iii) Guarantor shall further furnish the Lender with such other financial information as the Lender may reasonably request from time to time.
8.2.5 Lease Notices. Concurrently with the giving thereof and within five (5) Business Days after receipt thereof, copies of all notices, other than routine correspondences, given or received with respect to any Leases.
8.2.6 Additional Information. Borrower shall further furnish the Lender with such other financial information as the Lender may reasonably request from time to time.
8.3. Payment of Taxes and Other Obligations. Subject to the right to contest set forth in Section 9.1, Borrower shall duly pay and discharge, or cause to be paid and discharged, before the same shall become overdue, all taxes, assessments and other governmental charges payable by it, or with respect to the Property, as well as all claims or obligations for labor, materials, supplies or services or for borrowed funds in any amount.
8.4. Conduct of Business; Compliance With Law. As an express inducement to Lender to make and maintain the Loan, Borrower agrees at all times prior to payment and satisfaction of all Obligations to be and remain a Single Purpose Entity. Borrower shall operate the Property and conduct its affairs in a lawful manner and in compliance with all Legal Requirements (including without limitation, Access Laws (as defined in the Mortgage) applicable thereto and all provisions of ERISA.
8.5. Insurance. Borrower shall at all times maintain, or cause to be maintained, in full force and effect the insurance coverages set forth in Exhibit D and, to the extent applicable, shall cause Lender to be designated as mortgagee/loss payee/additional insured, in accordance with the requirements of Exhibit D. All insurance premiums shall be paid annually, in advance, and Lender shall be provided with evidence of such payment of insurance premiums prior to closing and thereafter at least thirty (30) days prior to each annual renewal or replacement of such coverages.
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8.6. Restrictions on Liens, Transfers and Additional Debt.
8.6.1 Prohibited Transactions. Except for Permitted Transactions Borrower shall not: (i) create or incur, or suffer to be created or incurred, or to exist, any encumbrance, mortgage, pledge, lien, charge or other security interest of any kind upon the Property (or any portion thereof) and/or any of its assets of any character whether or not related to the Property, or any portion thereof, whether now owned or hereafter acquired or upon the proceeds or products thereof; (ii) create or incur any indebtedness for borrowed funds whether secured or unsecured either directly or as a guarantor except for the Loan; (iii) directly or indirectly permit any sale, transfer, exchange, assignment, lien, charge or pledge of or grant of any security interest in any direct or indirect ownership interests in Borrower; (iv) sell, convey, transfer, assign or exchange the Property (or any portion thereof) and/or any of its assets of any character whether or not related to the Property, or any portion thereof, whether now owned or hereafter acquired; or (v) divide, merge or acquire any corporation into multiple entities or multiple series of the same entity pursuant to any applicable law, including, without limitation, pursuant to New York Corporation law, as amended from time to time.
8.6.2 Permitted Transactions. The term “Permitted Transactions” means Permitted Transfers, Permitted Additional Debt, Permitted Title Exceptions and the Approved Leases.
8.6.3 Permitted Transfers. The term “Permitted Transfers” shall mean: (i) the Security Documents and other agreements in favor of Lender; (ii) transactions, whether outright or as security, for which Lender’s prior written consent has been obtained, which consent may be withheld, granted or granted conditionally, subject to such protective and other conditions as Lender may require in its sole and absolute discretion; (iii) sales or dispositions in the ordinary course of business of worn, obsolete or damaged items of personal property or fixtures which are suitably replaced.
8.6.4 Permitted Additional Debt. The term “Permitted Additional Debt” shall mean: (i) transactions, whether secured or unsecured, for which Lender’s prior written consent has been obtained, which consent may be withheld, granted or granted conditionally subject to such protective and other conditions as Lender may require in its sole and absolute discretion; and (ii) indebtedness incurred in the ordinary course of business for the purchase of goods or services which are unsecured and payable, without interest, within thirty (30) days of billing and not evidenced by a promissory note or similar instrument.
8.6.5 Additional Funds. All funds required for the operation of the Property in excess of those available from ordinary cash flow of the Property shall be provided by Borrower or Guarantor, as additional equity contributions or by Permitted Additional Debt.
8.6.6 Right to Accelerate Loan. The Loan shall become due and payable in full, and the Lender shall have the right to accelerate the Loan and declare an Event of Default, at the option of Lender, upon any breach or violation of the provisions of Section 8.6.
8.6.7 Lender’s Options. Lender may, at its option, in lieu of accelerating the Loan, and in its sole and absolute discretion, agree to waive compliance with the provisions of this Section 8.6. in any instance upon compliance with such terms and conditions as Lender may impose. Except for Permitted Transfers which do not require the consent of Lender, Lender may grant or withhold, or conditionally grant, its consent to any proposed transfer in its sole and absolute discretion.
8.7. Limits on Guaranties and Distributions.
8.7.1 Limits. Borrower shall not guarantee to anyone other than Lender the obligations of any person or entity. Borrower shall not pay or distribute any money or distribute any property (in any form) to its direct or indirect members, in any capacity, or to any Guarantor, or to any Affiliate or related party, except for Permitted Distributions.
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8.7.2 Permitted Distributions. The term “Permitted Distributions” means revenue generated by or derived from the Property may be distributed to the shareholders of the Borrower, provided (i) all expenses, attributable to the ownership and operation of the Property then due and payable have been fully paid and satisfied, (ii) all amounts then due to Lender under the Loan Documents have been paid, (iii) no Default or Event of Default is then occurring or would otherwise result from such distribution, and (iv) such payment or distribution is in the ordinary course of business and in accordance with such Person’s organizational documents.
8.8. Restrictions on Investments. Borrower will not make or permit to exist or to remain outstanding any Investment out of proceeds of the Loan or the proceeds of the Property except an Investment in assets as to which Lender has a perfected first lien mortgage or security interest and which are in: (i) marketable direct or guaranteed general obligations of the United States of America which mature within one year from the date of purchase by Borrower; (ii) bank deposits, certificates of deposits and banker’s acceptances, or other obligations in or of Lender or other banks located within and chartered by the United States of America or a state having assets over $500,000,000.00; and (iii) personal property acquired in the normal and ordinary course of Borrower’s present business and in connection with the Property.
All such Investments shall be made in a manner which assures that Lender shall have and maintain a perfected first lien security interest therein.
8.9. Indemnification Against Payment of Brokers’ Fees. Borrower agrees to defend, indemnify and save harmless Lender from and against any and all liabilities, damages, penalties, costs, and expenses, relating in any manner to any brokerage or finder’s fees in respect of the Loan.
8.10. Limitations On Certain Transactions. Borrower agrees to the following limitations:
8.10.1 No Merger or Acquisition. Borrower shall not dissolve or liquidate, nor merge or consolidate with or otherwise acquire all or substantially all of the assets of any other entity.
8.10.2 Contracts of a Material or Significant Nature. Borrower shall not enter into any merger or consolidation agreements. Except for contracts otherwise complying with this Agreement, Borrower shall not enter into any other contracts, agreements or purchase orders, which would involve the expenditure of more than $200,000.00 in any instance or $400,000.00 in the aggregate in any year without Lender’s prior written consent, which consent shall not be unreasonably withheld or delayed, but which consent may be conditioned upon a demonstration by Borrower to Lender’s reasonable satisfaction that the contract, agreement or purchase order is reasonable and that Borrower has adequate resources to pay and perform the same. For the avoidance of doubt: (i) all customary costs and expenses incurred in connection with the ownership of the Property, including, without limitation, all taxes and assessments against the Property, premiums for insurance policies, utilities, and standard maintenance costs shall not be included in the foregoing; and (ii) neither Worksport, Ltd. and/or Worksport USA Operations Corporation shall be under any duty or obligation to notify Lender of incurring any expense, except for items disclosed by Guarantor as part of the annual financial reporting requirements set forth in Section 8.2.4 of this Agreement.
8.11. Property Management Contract. Borrower shall not enter into any management agreement with respect to the operation and/or management of the Property, without the prior written approval of Lender.
8.12. Deposit of Proceeds; Other Bank Accounts.
8.12.1 Banking Relationships. During the term of the Loan and so long as any part of the Obligations is outstanding, Borrower and its Affiliates shall maintain a banking relationship with Lender. Borrower shall establish and maintain all operating accounts, deposit accounts, the Interest Reserve and any other accounts established with Lender in accordance with the terms of this Agreement.
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8.12.2 Security Interest. The Borrower grants to the Lender, a continuing lien on and security interest in any and all deposits, accounts or other sums at any time credited by or due from the Lender to the Borrower, including, without limitation, operating accounts, deposit accounts, the Interest Reserve, and any cash, securities, instruments, or other property of the Borrower in the possession of the Lender whether for safekeeping or otherwise, or in transit to or from the Lender (regardless of the reason the Lender has received the same or whether the Lender has conditionally released the same) as security for the full and punctual payment and performance of all of the liabilities and obligations of the Borrower to the Lender and such deposits and other sums may be applied or set off against such liabilities and obligations of the Borrower to the Lender at any time upon the occurrence of an Event of Default, whether or not such are then due, whether or not demand has been made and whether or not other collateral is then available to the Lender.
8.13. Place for Records; Inspection. Borrower shall maintain all of its business records at the address specified at the beginning of this Agreement. Upon five (5) Business Days’ prior notice and at reasonable times during normal business hours Lender shall have the right (through such agents or Consultants as Lender may designate) to visit and inspect the Property, to examine Borrower’s property and make copies of and abstracts from Borrower’s books of account, correspondence and other records and to discuss its financial and other affairs with any of its members and any accountants hired by Borrower, it being agreed that Lender shall use reasonable efforts to not divulge information obtained from such examination to others except in connection with Legal Requirements and in connection with administering the Loan, enforcing its rights and remedies under the Loan Documents and in the conduct, operation and regulation of its banking and lending business (which may include, without limitation, the transfer of the Loan or of participation interests therein). Any transferee of the Loan or any holder of a participation interest in the Loan shall be entitled to deal with such information in the same manner and in connection with any subsequent transfer of its interest in the Loan or of further participation interests therein.
8.14. Costs and Expenses. Borrower shall pay all reasonable costs and expenses (excluding salaries or wages of full time employees of Lender) of any nature incurred by Lender at any time and from time to time in connection with the implementation of the Loan, the administration of the Loan, the negotiation or entering into of any “workout” of the Loan, any modification of the Loan, the exercise or enforcement of Lender’s powers, rights and/or remedies under the Loan Documents, including, without limitation, reasonable outside legal counsel fees and disbursements, allocated costs of in-house legal counsel, accounting fees, consulting fees, brokerage fees, appraisal fees, inspection fees, plan review fees, travel costs, fees and out-of-pocket costs of independent engineers and consultants, court costs, receiver’s fees, management fees and costs incurred in the repair, maintenance and operation of, taking possession of or selling all or any part of the Property, all filing, registration or recording fees, taxes and other charges, and all costs and expenses incident to the execution, acknowledgment, delivery and recording and/or filing of the Mortgage, any other Loan Documents, any mortgage supplemental hereto or thereto, any security instrument with respect to the Collateral, and any instrument of further assurance, and all Federal, state, county and municipal stamp taxes and other taxes, duties, impositions, assessments and charges arising out of or in connection with the execution and delivery of the Mortgage, any other Loan Documents or any mortgage supplemental hereto or thereto, any security instrument with respect to any other Collateral, any other Loan Document or any instrument of further assurance, and any costs and expenses required to be paid under this Agreement, the Mortgage, or any other Loan Document (collectively, “Expenses”). Borrower’s obligations to pay Expenses shall include, without limitation, all reasonable attorneys’ fees and other costs and expenses reasonably incurred for preparing and conducting litigation or dispute resolution arising from any breach by Borrower or any Guarantor of any covenant, warranty, representation or agreement under any one or more of the Loan Documents, including, without limitation, in connection with any bankruptcy, insolvency, reorganization, liquidation or similar debtor relief event, action or proceeding and any claim of the Lender or against the Lender filed in connection therewith.
8.15. Compliance with Legal Requirements; Zoning. Borrower shall comply with all Legal Requirements applicable to the Property, Borrower, or both. Borrower shall not, without the Lender’s prior consent, seek, make, suffer, consent to or acquiesce in any change or variance in any zoning or land use laws or other conditions of current use of the Property or any portion thereof in any way. Borrower shall not use or permit the use of any portion of the Property in any manner that could result in such use becoming a non-conforming use (to the extent the Property is not a non-conforming use as of the date of this Agreement) under any zoning or land use law or any other applicable law or modify any agreements in any material respect relating to zoning or land use matters or relating to the joinder or merger of lots for zoning, land use or other purposes, without the prior written consent of the Lender, not to be unreasonably withheld, conditioned, or delayed. Without limiting the foregoing, in no event shall Borrower take any action that would reduce or impair either (a) the number of parking spaces at the Property such that the same would not be in accordance with Applicable Laws, or (b) access to the Property from adjacent public roads. Further, without the Lender’s prior written consent, Borrower shall not file or subject any part of the Property to any declaration of condominium or co-operative or convert any part of the Property to a condominium, co-operative or other direct or indirect form of multiple ownership and governance.
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8.16. Indemnification. Borrower shall at all times, both before and after repayment of the Loan, at its sole cost and expense defend, indemnify, exonerate and save harmless Lender, and all those claiming by, through or under Lender (each an “Indemnified Party”) against and from all damages, losses, liabilities, obligations, penalties, claims, litigation, demands, defenses, judgments, suits, proceedings, costs, disbursements or expenses of any kind whatsoever, including, without limitation, reasonable attorneys’ fees and experts’ fees and disbursements, which may at any time (including, without limitation, before or after discharge or foreclosure of the Mortgage) be imposed upon, incurred by or asserted or awarded against any Indemnified Party and arising from or out of: (i) any Hazardous Materials or any violation of, or failure to comply with, any Environmental Legal Requirements all as more particularly provided for in the Environmental Indemnity with respect to the Property or any other Collateral; (ii) any liability for damage to person or property arising out of any violation of any Legal Requirement applicable to the Property, Borrower, or both, (iii) any act, omission, negligence or conduct at the Property, or arising or claimed to have arisen, out of any act, omission, negligence or conduct of Borrower or any contractor, sub-contractor, tenant, occupant, invitee or Affiliate thereof, which is in any way related to the Property; or (iv) any liability, loss, damage and expense, including reasonable attorneys’ fees, which it may or shall incur (or be imposed upon) by reason of the execution of this Agreement and any other Loan Document, the making of the Loan and/or any commercially reasonable action taken in good faith by Lender hereunder or under the other Loan Documents, including, without limitation, the exercise of the Lender’s rights and remedies under the Loan Documents.
Notwithstanding the foregoing, an Indemnified Party shall not be entitled to indemnification in respect of claims arising from (a) acts of its own gross negligence or willful misconduct to the extent that such gross negligence or willful misconduct is determined by the final judgment of a court of competent jurisdiction, not subject to further appeal, in proceedings to which such Indemnified Party is a proper party or (b) set facts or circumstances first arising after the date on which Lender or other purchaser acquires title to the Property following the completion of a final non-appealable judgment for the foreclosure of the Mortgage or the grant by Borrower (and acceptance by the Lender) of a deed in lieu of foreclosure.
8.17. Leasing Matters.
8.17.1 Lender’s Approval Required.
(i) With respect to any Major Lease, Borrower shall not modify, amend or terminate any existing leases or subleases, or consent to the assignment or subleasing of any Major Lease, or enter into any new Major Lease with respect to the Property, without Lender’s prior written consent in each instance, which consent shall not be unreasonably withheld, conditioned or delayed. Notwithstanding the foregoing, Borrower may modify or amend the Worksport Lease and/or the Sonwil Lease without the prior written consent of Lender, provided that Worksport Lease and/or the Sonwil Lease amendment or modification (A) does not shorten the term of Worksport Lease or the Sonwil Lease or reduce the demised space thereunder in the aggregate; (B) does not provide for rent (on both a gross and net basis) which is less on a per square foot basis, after amortizing free rent, tenant improvements, rental concessions and other inducements, than the current aggregate average rent for the Property as of the date hereof; (C) the amended Worksport Lease and Sonwil Lease is and continues to be on market terms and conditions; (D) such amendments to the Worksport Lease and/or the Sonwil Lease are made on forty eight (48) hours’ notice (by email) to Lender (with Borrower’s certification as to items (A), (B) and (C) above.
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(ii) With respect to any leases that are not Major Leases, Borrower shall be able to modify or amend such leases, or consent to the assignment of subleasing of such leases, or enter into any new leases with respect to the Property, without Lender’s prior written consent in each instance, provided that Lender shall be provided with a full and complete copy of any such lease and any amendment or modification thereof. Notwithstanding the foregoing, any lease terminations or lease concessions under a Major Lease or non-Major Lease shall require the Lender’s prior written consent in each instance, which consent shall not be unreasonably withheld, conditioned or delayed.
(iii) [Intentionally Omitted]
(iv) With respect to any Lease existing and approved by Lender as of the date hereof, or any modification or amendment of any existing Lease, or any new lease, which has been so approved by Lender, shall be an “Approved Lease”.
8.17.2 Borrower’s Requests Any request by Borrower for an approval from Lender with respect to leasing matters shall be accompanied, at a minimum, by the following: (i) the proposed lease or amendment or modification thereof complete with all applicable schedules and exhibits; (ii) a complete copy of any proposed guaranty; and (iii) any other documentation that Lender reasonably requires.
8.17.3 Lender Response Lender shall act on requests from Borrower for any approval under this Section 8.17 in a commercially reasonable manner and shall use commercially reasonable efforts to respond to any such request within ten (10) days following Lender’s receipt thereof. Lender’s response may consist of an approval or disapproval of the request, or a conditional approval thereof subject to specified conditions, or a request for further data or information, or any combination thereof. In order to expedite the processing of requests for such approvals, Borrower agrees to provide Lender with as much advance information as is possible in a commercially reasonable manner in advance of Borrower’s formal request for an approval.
8.17.4 SNDAs and Estoppels. Lender shall have the right to require each commercial tenant and/or subtenant to execute and deliver to Lender a subordination, non-disturbance of possession and attornment agreement (“SNDA Agreement”) in form, content and manner of execution acceptable to Lender and, from time to time, an estoppel certificate in form and manner of execution acceptable to Lender.
8.18. Debt Service Coverage Ratio. The Debt Service Coverage determined on each applicable Calculation Date shall not be less than 1.20 to 1.00 (the “DSCR Covenant”). The DSCR Covenant shall be tested at Lender’s option on any Calculation Date. It may be an Event of Default, at Lender’s sole discretion, if (i) Borrower fails to comply with any tested DSCR Covenant that is tested in accordance with the preceding sentence or (ii) Borrower has failed to give Lender sufficient reports to enable Lender to make the necessary calculations in order to determine compliance with any tested DSCR Covenant.
8.19. Replacement Documentation. Upon receipt of an affidavit of an officer of Lender as to the loss, theft, destruction or mutilation of the Note or any other security document which is not of public record, and, in the case of any such loss, theft, destruction or mutilation, upon surrender and cancellation of such Note or other security document, Borrower will issue, in lieu thereof, a replacement Note or other security document in the same principal amount thereof and otherwise of like tenor.
8.20. Compliance with Anti-Corruption Laws; Beneficial Ownership Regulation, Anti-Money Laundering Laws and Sanctions. Borrower will (a) maintain in effect and enforce policies and procedures reasonably designed to ensure compliance by Borrower and its managers, officers, employees and agents with all Anti-Corruption Laws, Anti-Money Laundering Laws and applicable Sanctions, (b) promptly notify Lender that previously received a Beneficial Ownership Certification of any change in the information provided in the Beneficial Ownership Certification that would result in a change to the list of beneficial owners identified therein, and (c) promptly upon the request of Lender, provide Lender any information or documentation requested by it for purposes of complying with the Beneficial Ownership Regulation
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8.21. Interest Reserve.
1. 2. 3. 4. 5. 6. 7. 8.8.1. 8.2. 8.3. 8.4. 8.5. 8.6. 8.7. 8.8. 8.9. 8.10. 8.11. 8.12. 8.13. 8.14. 8.15. 8.16. 8.17. 8.18. 8.19. 8.20. 8.21. 8.21.1 Establishment of Interest Reserve. Borrower shall simultaneously with the closing of the Loan, establish an account maintained with and pledged to Lender as cash collateral for the Loan (the “Interest Reserve”), and deposit from the Loan proceeds into such Interest Reserve an amount equal to Six Hundred Seventeen Thousand Nine Hundred Sixty Five and 28/100 Dollars ($617,965.28); approximately twenty four (24) months of debt service on the Loan (such amount and any future amounts deposited in the Interest Reserve, the “Interest Reserve Funds”).
8.21.2 Disbursement of Interest Reserve Funds. The Interest Reserve Funds shall remain in place for the term of the Loan, but may be disbursed by Lender on a monthly basis for the payment of debt service on the Loan (subject to the Minimum Balance Requirement) and for no other purpose (subject to Lender’s rights under Section 8.21.4). For the avoidance of doubt, Borrower shall not be permitted to draw down on the Interest Reserve and, after the Interest Reserve reaches the Minimum Balance Requirement, Borrower shall make all monthly payments of debt service under the Loan.
8.21.3 Replenishment of Interest Reserve. Borrower shall all times maintain a minimum balance in the Interest Reserve equal to six (6) months of non-default interest on the outstanding principal balance of the Loan, calculated at the highest Effective Interest Rate (as defined in the Note) in effect during the term of the Loan (the “Minimum Balance Requirement”). Borrower must within five (5) days of notice of any Minimum Balance Requirement shortfall from Lender, deposit additional funds in the Interest Reserve such that the balance of the Interest Reserve shall be sufficient, in Lender’s sole discretion, to satisfy the Minimum Balance Requirement.
8.21.4 Event of Default. In the event of any Event of Default under this Agreement or under any of the other Loan Documents, at the option of Lender, any Interest Reserve Funds may be used by Lender to reduce the Obligations.
8.22. 9. SPECIAL PROVISIONS.
9.1. Right to Contest.
9.1.1 Taxes and Claims by Third Parties. Notwithstanding the provisions of Section 8.3 which obligate Borrower to pay taxes and other obligations to third parties when due, it is agreed that any tax, assessment, charge, levy, claim or obligation to a third party (expressly excluding an obligation created under the Loan Documents) need not be paid while the validity or amount thereof shall be contested currently, diligently and in good faith by appropriate proceedings and if Borrower shall have adequate unencumbered (except in favor of Lender) cash reserves with respect thereto, and provided that (a) such contest does not create a default by landlord under any lease assigned to Lender, (b) there is no reason to believe that the contest will not be resolved prior to the Maturity Date, and (c) no Event of Default exists; and provided, further, that Borrower shall pay all taxes, assessments, charges, levies or obligations: (i) immediately upon the commencement of proceedings to enforce any lien which may have attached as security therefor, unless such proceeding is stayed by proper court order pending the outcome of such contest; and (ii) as to claims for labor, materials or supplies, prior to the imposition of any lien on the Property unless the lien is discharged or bonded as set forth in Section 10.1.4.
9.1.2 Legal Requirements. Borrower may contest any claim, demand, levy or assessment under any Legal Requirements by any person or entity if: (i) the contest is based upon a material question of law or fact raised by Borrower in good faith; (ii) Borrower properly commences and thereafter diligently pursues the contest; (iii) the contest will not materially impair the ability to ultimately comply with the contested Legal Requirement should the contest not be successful and the conduct of the contest will not materially interfere with the ability to obligate all tenants under Approved Leases to pay rent without offset; (iv) Borrower demonstrates to Lender’s reasonable satisfaction that Borrower has the financial capability to undertake and pay for such contest and any corrective or remedial action then or thereafter reasonably likely to be necessary; (v) if the likely cost of complying with the Legal Requirement in the event the contest is not successfully resolved, as determined in good faith by Lender, is more than $100,000.00, there is no reason to believe that the contest will not be resolved prior to the Maturity Date; (vi) no Event of Default exists; and (vii) if the contest relates to an Environmental Legal Requirement, in addition to the foregoing conditions, the contest will not materially impair the taking of any required remedial action.
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9.2. Recourse Provisions. Borrower shall be fully liable for the Loan and the Obligations of Borrower to Lender.
10. EVENTS OF DEFAULT.The following provisions deal with Default, Events of Default, notice, grace and cure periods, and certain rights of Lender following an Event of Default.
10.1. Default and Events of Default. The term “Default” as used herein or in any of the other Loan Documents means a default of the Borrower’s obligation, or any fact or circumstance which constitutes, or upon the lapse of time, or giving of notice, or both, could constitute, an Event of Default. Each of the following events, unless cured within any applicable grace period set forth or referred to below in this Section 10.1, or in Section 10.2, shall constitute an “Event of Default”:
10.1.1 Generally. A default by Borrower in the performance of any term, provision or condition of this Agreement to be performed by Borrower, or a breach, or other failure to satisfy, any other term, provision, condition, covenant or warranty under this Agreement and such default remains uncured beyond any applicable specific grace period provided for in this Agreement, or as set forth in Section 10.2 below;
10.1.2 Note, Mortgage and Other Loan Documents. A default by Borrower in the performance of any term or provision of the Note, or of the Mortgage, or of any of the other Loan Documents, or a breach, or other failure to satisfy, any other term, provision, condition, representation or warranty under the Note, the Mortgage or any other Loan Document, and the specific grace period, if any, allowed for the default in question shall have expired without such default having been cured;
10.1.3 Financial Status and Insolvency.
A. Borrower shall: (i) admit in writing its inability to pay its debts generally as they become due; (ii) file a petition in bankruptcy or a petition to take advantage of any insolvency act; (iii) make an assignment for the benefit of creditors; (iv) consent to, or acquiesce in, the appointment of a receiver, liquidator or trustee of itself or of the whole or any substantial part of its properties or assets; (v) file a petition or answer seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the Federal Bankruptcy laws or any other applicable law; (vi) have a court of competent jurisdiction enter an order, judgment or decree appointing a receiver, liquidator or trustee of Borrower, or of the whole or any substantial part of the property or assets of Borrower, and such order, judgment or decree shall remain unvacated or not set aside or unstayed for fifteen (15) days; (vii) have a petition filed against it seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the Federal Bankruptcy laws or any other applicable law and such petition shall remain undismissed for fifteen (15) days; (viii) have, under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction assume custody or control of Borrower or of the whole or any substantial part of its property or assets and such custody or control shall remain unterminated or unstayed for fifteen (15) days; (ix) have an attachment or execution levied against any substantial portion of the property of Borrower or against any portion of the Collateral which is not discharged or dissolved by a bond within fifteen (15) days; or (x) cease any material portion of its business operations as presently conducted; or
B. any such event described in (A.) shall occur with respect to any Guarantor or any owner of Borrower; or
10.1.4 Liens. A lien for the performance of work, or the supply of materials, or a notice of contract, or an attachment, judgment, execution or levy is filed against the Land or the Improvements and remains unsatisfied or is not discharged or dissolved by a bond (or by cash collateral acceptable to Lender) for a period of fifteen (15) days after the filing thereof.
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10.1.5 Trustee Process. A writ or other process naming Lender as trustee for any assets of Borrower or any Guarantor is served upon the Lender.
10.1.6 Breach of Representation or Warranty. Any statement, representation or warranty made by Borrower or Guarantor herein or in any other instrument or document relating to the Loan or the Property shall be determined by Lender to be false or misleading in any material respect when made, or any warranty shall be materially breached, or Borrower commits fraud.
10.1.7 Default Under Assigned Contract. Borrower defaults under any contract assigned to Lender and such default is not cured within the grace period applicable thereto such that the contracting party obtains the right to terminate the contract or to claim material damages.
10.1.8 Guaranty Default. A default by Guarantor in the performance of any term or provision of this Agreement or any other Loan Document to which Guarantor is a party, or the breach, or any other failure to satisfy any other term, provision, condition or warranty imposed upon the Guarantor in this Agreement or in any other Loan Document to which Guarantor is a party or by which Guarantor is bound.
10.1.9 Death or Dissolution of Guarantor. The death or dissolution of any Guarantor or Borrower, provided that with respect to any such Guarantor, unless within sixty (60) days of such death or dissolution a replacement guarantor acceptable to Lender in its sole and absolute discretion enters into a Guaranty and Environmental Indemnity on the same terms and conditions of the deceased and dissolved Guarantor.
10.1.10 Security. The Liens created pursuant to the Security Documents shall at any time not constitute a valid and perfected first priority Lien on the collateral intended to be covered thereby in favor of Lender, free and clear of all other Liens, or except for expiration in accordance with its terms, any of the Security Documents shall for whatever reason be terminated or cease to be in full force and effect, or the enforceability thereof shall be contested by Borrower or any of its affiliates.
10.1.11 Invalidity of Loan Documents A final non-appealable judgment is entered finding that the Loan Documents are invalid or unenforceable or if Borrower or Guarantor, in any judicial or quasi-judicial case, action or proceeding directly or indirectly contests the validity or enforceability of the Loan Documents or takes any action, directly or indirectly, that contests or hinders, delays, obstructs or interferes with the pursuit of any rights or remedies by Lender (including the commencement and/or prosecution of a foreclosure action, judicial or non-judicial, the appointment of a receiver for the Property or any portion thereof, the right to take possession of the Collateral or any portion thereof or any enforcement of the terms of the Assignment of Leases and Rents) after an Event of Default.
10.1.12 Judgment. A judgment for the payment of money is entered against Borrower or against any Guarantor, and Borrower or Guarantor fails to discharge the same, or fails to cause it to be discharged or bonded off to Lender’s reasonable satisfaction within thirty (30) days from the date of the entry of such judgment.
10.1.13 Material Adverse Change. The existence or occurrence at any time of one or more conditions or events or there is any change in Borrower’s financial condition which, in Lender’s reasonable and good faith opinion, has or would be reasonably be likely to have a Material Adverse Effect.
10.1.14 Lease. (i) A default or event of default on the part of Borrower under any Major Lease and the expiration of any applicable periods of notice and cure, or (ii) Borrower defaults under Section 8.17.1 herein.
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10.2. Grace Periods and Notice. As to each of the foregoing events the following provisions relating to grace periods and notice shall apply:
10.2.1 No Notice or Grace Period. There shall be no grace period and no notice provision with respect to:
A. nonpayment of scheduled interest, and installments of principal prior to maturity, when due;
B. nonpayment of principal at maturity;
C. nonpayment of any other monetary obligations hereunder, under any other Loan Documents when due;
D. defaults under Sections 10.1.3 (Financial Status and Insolvency), 10.1.4 (Liens), 10.1.6 (Breach of Representation or Warranty), 10.1.8 (Guarantor Default), 10.1.9 (Death of or Guarantor), 10.1.11 (Invalidity of Loan Documents), or 10.1.12 (Judgment);
E. nonmonetary defaults which are not reasonably capable of being cured, including, without limitation, the DSCR Covenant; and
F. breaches or defaults under Sections 8.4 (Conduct of Business; Compliance with Law), 8.5 (Insurance), 8.6 (Restrictions on Liens, Transfers and Additional Debt), 8.7 (Limits on Guaranties and Distributions), and 8.20 (Compliance With Anti-Corruption Laws; Anti-Money Laundering Laws and Sanctions).
10.2.2 Nonmonetary Defaults Capable of Cure. As to nonmonetary defaults, unless there is a specific shorter or longer grace period provided for in this Loan Agreement or in another Loan Document, there shall be a thirty (30) day grace period following notice from Lender. However, where there is an emergency situation in which there is danger to person or property such curative action shall be commenced as promptly as possible.
10.3. Certain Lender Remedies. If an Event of Default shall occur:
10.3.1 Accelerate Debt. Lender may declare the Obligations and indebtedness evidenced by the Note and secured by the Mortgage immediately due and payable (provided that, in the case of a voluntary petition in bankruptcy filed by Borrower or (after the expiration of the grace period, if any, set forth in Section 10.2 above) an involuntary petition in bankruptcy filed against Borrower, such acceleration shall be automatic); and
10.3.2 Pursue Remedies. Lender may pursue any and all remedies provided for hereunder, or under any one or more of the other Loan Documents.
10.4. Written Waivers. If a Default or an Event of Default is waived by Lender, in its sole discretion, pursuant to a specific written instrument executed by an authorized officer of Lender, the Default or Event of Default so waived shall be deemed to have never occurred.
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11. ADDITIONAL REMEDIES OF LENDER.
11.1. Remedies. Upon the occurrence of an Event of Default, whether or not the Obligations and the indebtedness evidenced by the Note and secured by the Mortgage shall be due and payable or Lender shall have instituted any foreclosure or other action for the enforcement of the Mortgage, the Note or the other Loan Documents, Lender may, in addition to any other remedies which Lender may have hereunder or under the other Loan Documents, and not in limitation thereof, and in Lender’s sole and absolute discretion:
11.1.1 Enter and Perform. Enter upon the Property to perform obligations under leases, or to operate, maintain, repair and improve the Property and employ watchmen to protect the Property, all at the risk, cost and expense of Borrower, consent to such entry being hereby given by Borrower;
11.1.2 Discontinue Work. At any time discontinue any work commenced in respect of the Property or change any course of action undertaken by it and not be bound by any limitations or requirements of time whether set forth herein or otherwise;
11.1.3 Exercise Rights. Exercise the rights of Borrower under any contract or other agreement in any way relating to the Property and take over and use all or any part of the labor, materials, supplies and equipment contracted for by Borrower, whether or not previously incorporated into the realty; and
11.1.4 Other Actions. In connection with any work or action undertaken by Lender pursuant to the provisions of the Loan Documents, (i) engage builders, contractors, architects, engineers and others for the purpose of furnishing labor, materials and equipment, (ii) pay, settle or compromise all bills or claims which may become liens against the property constituting the Collateral, or which have been or may be incurred in any manner in connection with the Property or for the discharge of liens, encumbrances or defects in the title of the Property or the Collateral, (iii) take or refrain from taking such action hereunder as Lender may from time to time determine, and (iv) engage marketing and leasing agents and real estate brokers to advertise, lease or sell portions or all of the Property or other Collateral upon such terms and conditions as Lender may in good faith determine.
11.2. Reimbursement. Borrower shall be liable to Lender for all sums paid or incurred pursuant to any of the Loan Documents whether the same shall be paid or incurred pursuant to this section or otherwise, and all payments made or liabilities incurred by Lender hereunder of any kind whatsoever shall be paid by Borrower to Lender upon demand with interest at the Default Rate as provided in this Agreement or the Note from the date of payment by Lender to the date of payment to Lender and repayment of such sums with such interest shall be secured by the applicable Security Documents.
11.3. Power of Attorney. For the purpose of exercising the rights granted by this Section 11, as well as any and all other rights and remedies of Lender, Borrower hereby irrevocably constitutes and appoints Lender (or any agent designated by Lender) its true and lawful attorney-in-fact, upon and following any Event of Default and at any time during the continuance, to execute, acknowledge and deliver any instruments and to do and perform any acts permitted hereunder or by law in the name and on behalf of Borrower.
12. SECURITY INTEREST AND SET-OFF.
12.1. Security Interest. Borrower and Guarantor hereby grant to Lender a lien, security interest and right of setoff, as security for all Obligations, and all other obligations and liabilities to Lender, whether now existing or hereafter arising, upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Lender or any entity under the control of Lender, or in transit to any of them.
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12.2. Set-Off and Debit. (a) The Borrower grants to the Lender a continuing lien on and security interest in any and all deposits or other sums at any time credited by or due from Lender to the Borrower any cash, securities, instruments or other property of the Borrower and each endorser and guarantor hereof in the possession of Lender, whether for safekeeping or otherwise, or in transit to or from the Lender (regardless of the reason the Lender had received the same or whether the Lender has conditionally released the same) as security for the full and punctual payment and performance of all of the liabilities and obligations of the Borrower to the Lender upon the occurrence of an Event of Default and such deposits and other sums may be applied or set off against such liabilities and obligations of the Borrower or any endorser or guarantor hereof to the Lender at any time, whether or not such are then due, whether or not demand has been made and whether or not other collateral is then available to the Lender.
(b) (i) If any payment is not made when due under any of the Loan Documents, after giving regard to applicable grace periods, if any, or (ii) if any Event of Default or other event which would entitle Lender to accelerate the Loan occurs, or (iii) at any time, whether or not any Default or Event of Default exists in the event any attachment, trustee process, garnishment, or other levy or lien is, or is sought to be, imposed on any property of Borrower; then, in any such event, any such deposits, balances or other sums credited by or due from Lender to Borrower may to the fullest extent not prohibited by applicable law at any time or from time to time, without regard to the existence, sufficiency or adequacy of any other collateral, and without notice or compliance with any other condition precedent now or hereafter imposed by statute, rule of law or otherwise, all of which are hereby waived, be set off, debited and appropriated, and applied by Lender against any or all of Borrower’s Obligations irrespective of whether demand shall have been made and although such Obligations may be unmatured, in such manner as Lender in its sole and absolute discretion may determine. Within five (5) Business Days of making any such set off, debit or appropriation and application, Lender agrees to notify Borrower thereof, provided the failure to give such notice shall not affect the validity of such set off, debit or appropriation and application. ANY AND ALL RIGHTS TO REQUIRE LENDER TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE LOAN, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE BORROWER OR ANY GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
12.3. Right to Freeze. Lender shall also have the right, at its option, upon the occurrence of any event which would entitle Lender to set off or debit as set forth in Section 12.2, to freeze, block or segregate any such deposits, balances and other sums so that Borrower may not access, control or draw upon the same.
12.4. Additional Rights. The rights of Lender under this Section 12 are in addition to, and not in limitation of, other rights and remedies, including other rights of set off, which Lender may have.
13. CASUALTY AND TAKING.
13.1. Casualty and Obligation To Repair. In the event of any damage or destruction to the Property or the other Collateral by reason of fire or other hazard or casualty (collectively, a “Casualty”), Borrower shall give immediate written notice thereof to Lender and proceed with reasonable diligence, in full compliance with all Legal Requirements and the other requirements of the Loan Documents, to repair, restore, rebuild or replace the affected property (collectively, the “Repair Work”).
13.2. Adjustment of Claims. All insurance claims shall be adjusted by Borrower, at Borrower’s sole cost and expense, but subject to Lender’s prior written approval which approval shall not be unreasonably withheld; provided that if any Default exists under any of the Loan Documents, Lender shall have the right to adjust and compromise such claims without the approval of Borrower.
13.3. Payment and Application of Insurance Proceeds. All proceeds of insurance shall be paid to Lender and, at Lender’s option, be applied to Borrower’s Obligations or released, in whole or in part, to pay for the actual cost of repair, restoration, rebuilding or replacement (collectively, “Cost To Repair”). In the event any such insurance proceeds shall be used to reduce the Obligations, the same shall be applied by Lender, after the deduction therefrom and repayment to Lender of any and all costs incurred by Lender in the recovery thereof (including reasonable attorneys’ fees and disbursements), in any manner it shall designate.
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13.4. Conditions To Release of Insurance Proceeds. If Lender elects to release insurance proceeds, Lender may impose reasonable conditions on such release which shall include, but not be limited to, the following: (i) Prior written approval by Lender, which approval shall not be unreasonably withheld or delayed of plans, specifications, cost estimates, contracts and bonds for the restoration or repair of the loss or damage; (ii) Waivers of liens (including, without limitation, with respect to any liens or instruments under the State of New York lien law), architect’s certificates, contractor’s sworn statements and other evidence of costs, payments and completion as Lender may reasonably require; (iii) If the Cost To Repair does not exceed $100,000.00, the funds to pay therefor shall be released to Borrower, otherwise, funds shall be released upon final completion of the Repair Work, unless Borrower requests earlier funding, in which event partial monthly disbursements equal to 90% of the value of the work completed shall be made prior to final completion of the repair, restoration or replacement and the balance of the disbursements shall be made upon full completion and the receipt by Lender of satisfactory evidence of payment and release of all liens; (iv) Determination by Lender that the undisbursed balance of such proceeds on deposit with Lender, together with additional funds deposited for the purpose by Borrower, shall be at least sufficient to pay for the remaining Cost To Repair, free and clear of all liens and claims for lien; (v) All work to comply with the standards, quality of construction and Legal Requirements applicable to the original construction of the Property; (vi) The absence of any Default or Event of Default under any Loan Documents; and (vii) satisfactory evidence that any Major Lease will still be in full force and effect after restoration has been completed
13.5. Taking.
13.5.1 Notice of Taking. Borrower, immediately upon obtaining knowledge of the institution of any proceedings for the condemnation of the Property or any part thereof, will notify Lender of the pendency of such proceedings. Lender (i) may participate in any such proceedings and Borrower from time to time will deliver to Lender all instruments requested by it to permit such participation, and (ii) may be represented by counsel selected by Lender (at Borrower’s expense).
13.5.2 Assignment/Payment of Award. Any award or compensation payable has been assigned under the Mortgage by Borrower to Lender and shall be paid to Lender; and Borrower, upon request by Lender, shall make, execute and deliver any and all instruments requested for the purpose of confirming the assignment of the aforesaid awards and compensation to Lender free and clear of any liens, charges or encumbrances of any kind or nature whatsoever. Lender shall be under no obligation to question or challenge the amount of any such award or compensation and may accept the same in the amount in which the same shall be paid.
13.5.3 Application of Proceeds. The proceeds of any award or compensation so received shall, at the option of Lender, either be applied toward the payment of the Obligations notwithstanding the fact that the Obligations may not then be due and payable, and/or to the restoration of the Improvements (in the case of a partial taking or temporary condemnation that affects the Improvements in such a way that restoration is required to such Improvements) in accordance with Section 13.4 of the Loan Agreement. In the event that any portion of the condemnation awards or compensation shall be used to reduce the Obligations, the same shall be applied by Lender in any manner it shall designate, in its discretion, including but not limited to, application of such award or compensation to the then unpaid installments of the principal balance due under the Note in the inverse order of their maturity such that the regular payments under the Note shall not be reduced or altered in any manner. Lender shall not be limited to the interest paid on the proceeds of any award or compensation, but shall be entitled to the payment by Borrower of interest at the applicable rate provided for in the Note.
14. GENERAL PROVISIONS.
14.1. Notices. Any notice or other communication in connection with this Loan Agreement, the Note, the Mortgage, or any of the other Loan Documents, shall be in writing, and (i) deposited in the United States Mail, postage prepaid, by registered or certified mail, or (ii) hand delivered by any commercially recognized courier service or overnight delivery service such as Federal Express, addressed:
If to Lender:
Northeast Bank
200 Berkeley Street, 17th Floor
Boston, Massachusetts 02116
Attention: Legal Department
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with copies by regular mail or such hand delivery to:
Donovan LLP
152 Madison Avenue, 14th Floor
New York, New York 10016
Attention: Nicholas T. Donovan, Esq.
If to Borrower:
Worksport New York Operations Corporation
2500 North America Drive
West Seneca, New York 14224
Attention: Steven Rossi
with copies by regular mail or such hand delivery to:
Zdarsky, Sawicki & Agostinelli LLP
1600 Main Place Tower, 350 Main Street
Buffalo, New York 14202
Attention: Daniel J. Bobbett, Esq.
Any such addressee may change its address for such notices to such other address in the United States as such addressee shall have specified by written notice given as set forth above. All periods of notice shall be measured from the deemed date of delivery. Lender shall be fully entitled to rely upon any facsimile or other electronic transmission or other writing purported to be sent by any Authorized Representative as being genuine and authorized.
A notice shall be deemed to have been given, delivered and received for the purposes of all Loan Documents upon the earliest of: (i) if sent by such certified or registered mail, on the third Business Day following the date of postmark, or (ii) if hand delivered at the specified address by such courier or overnight delivery service, when so delivered or tendered for delivery during customary business hours on a Business Day, or (iii) if so mailed, on the date of actual receipt as evidenced by the return receipt, or (iv) if so delivered, upon actual receipt.
14.2. Limitations on Assignment. Borrower may not assign this Agreement or the monies due thereunder or convey or, except for a Permitted Transaction, encumber the Property or other Collateral or any interest therein without the prior written consent of Lender in each instance.
14.3. Further Assurances. Borrower shall upon request from Lender from time to time execute, seal, acknowledge and deliver such further instruments or documents which Lender may reasonably require to better perfect and confirm its rights and remedies hereunder, under the Note, under the Mortgage and under each of the other Loan Documents.
14.4. Parties Bound The provisions of this Agreement and of each of the other Loan Documents shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns, except as otherwise prohibited by this Agreement or any of the other Loan Documents. This Agreement is a contract by and between Borrower and Lender for their mutual benefit, and no third person shall have any right, claim or interest against either Lender or Borrower by virtue of any provision hereof.
14.5. Waivers, Extensions and Releases. Lender may at any time and from time to time waive any one or more of the conditions contained herein or in any of the other Loan Documents, or extend the time of payment of the Loan, or release portions of the Collateral from the provisions of this Agreement and from the Mortgage or any other Security Document, but any such waiver, extension or release shall be deemed to be made in pursuance and not in modification hereof, and any such waiver in any instance, or under any particular circumstance, shall not be considered a waiver of such condition in any other instance or any other circumstance.
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14.6. Governing Law; Consent to Jurisdiction; Mutual Waiver of Jury Trial.
14.6.1 Substantial Relationship. It is understood and agreed that all of the Loan Documents were negotiated, executed and delivered in the State of New York, which State the parties agree has a substantial relationship to the parties and to the underlying transactions embodied by the Loan Documents.
14.6.2 Place of Delivery. Borrower agrees to furnish to Lender at the Lender’s office in Boston, Massachusetts all further instruments, certifications and documents to be furnished hereunder.
14.6.3 Governing Law. This Agreement and the other Loan Documents and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Agreement or any other Loan Document (except, as to any other Loan Document, as expressly set forth therein) and the transactions contemplated hereby and thereby shall be governed by, and construed in accordance with, the law of the State of New York, without giving effect to principles applicable to conflicts of laws, including without limitation New York General Obligations Law § 5-1401.
14.6.4 Consent to Jurisdiction. Borrower hereby consents to personal jurisdiction in any state or Federal court located within the State of New York for any and all issues arising either directly or indirectly in any action or proceeding between Borrower and Lender or their respective successors and assigns, out of or in any way connected with this Agreement, pursuant to New York General Obligations Law § 5-1402. BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS LOAN AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORKOR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON BORROWER BY MAIL AT THE ADDRESS SET FORTH IN THIS LOAN AGREEMENT. BORROWER HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT FORUM.
14.6.5 Jury Trial Waiver. BORROWER AND LENDER MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON THIS LOAN AGREEMENT, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS LOAN AGREEMENT OR ANY OTHER LOAN DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR BORROWER AND LENDER TO ENTER INTO THE TRANSACTIONS CONTEMPLATED HEREBY.
14.7. Survival. All representations, warranties, covenants and agreements of Borrower, or Guarantor, herein or in any other Loan Document, or in any notice, certificate, or other paper delivered by or on behalf of Borrower or Guarantor pursuant hereto are significant and shall be deemed to have been relied upon by Lender notwithstanding any investigation made by Lender or on its behalf and shall survive the delivery of the Loan Documents and the making of the Loan and each advance pursuant thereto. No review or approval by Lender, or by its Consultants or representatives, of any plans and specifications, opinion letters, certificates by professionals or other item of any nature shall relieve Borrower or anyone else of any of the obligations, warranties or representations made by or on behalf of Borrower or Guarantor, or any one or more of them, under any one or more of the Loan Documents.
14.8. Cumulative Rights. All of the rights of Lender hereunder and under each of the other Loan Documents and any other agreement now or hereafter executed in connection herewith or therewith, shall be cumulative and may be exercised singly, together, or in such combination as Lender may determine in its sole good faith judgment.
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14.9. Claims Against Lender.
14.9.1 Borrower Must Notify. Lender shall not be in default under this Agreement, or under any other Loan Document, unless a written notice specifically setting forth the claim of Borrower shall have been given to Lender within thirty (30) days after Borrower first had actual knowledge or actual notice of the occurrence of the event which Borrower alleges gave rise to such claim and Lender does not remedy or cure the default, if any there be, with reasonable promptness thereafter. Such actual knowledge or actual notice shall refer to what was actually known by, or expressed in a written notification furnished to, any of the persons or officials referred to in Exhibit D as Authorized Representatives.
14.9.2 Remedies. If it is determined by the final order of a court of competent jurisdiction, which is not subject to further appeal, that Lender has breached any of its obligations under the Loan Documents and has not remedied or cured the same with reasonable promptness following notice thereof, Lender’s responsibilities shall be limited to: (i) where the breach consists of the failure to grant consent or give approval in violation of the terms and requirements of a Loan Document, the obligation to grant such consent or give such approval and to pay Borrower’s reasonable costs and expenses including, without limitation, reasonable attorneys’ fees and disbursements in connection with such court proceedings; and (ii) the case of any such failure to grant such consent or give such approval, or in the case of any other such default by Lender, where it is also so determined that Lender acted in bad faith, or that Lender’s default constituted gross negligence or willful misconduct, the payment of any actual, direct, compensatory damages sustained by Borrower as a result thereof plus Borrower’s reasonable costs and expenses, including, without limitation, reasonable attorneys’ fees and disbursements in connection with such court proceedings.
14.9.3 Limitations. In no event, however, shall Lender be liable to Borrower or to Guarantor or anyone else for other damages such as, but not limited to, indirect, speculative or punitive damages whatever the nature of the breach by Lender of its obligations under this Loan Agreement or under any of the other Loan Documents. In no event shall Lender be liable to Borrower or to Guarantor or anyone else unless a written notice specifically setting forth the claim of Borrower shall have been given to Lender within the time period specified above.
14.10. Obligations Absolute. Except to the extent prohibited by applicable law which cannot be waived, the Obligations of Borrower under the Loan Documents shall be absolute, unconditional and irrevocable and shall be paid strictly in accordance with the terms of the Loan Documents under all circumstances whatsoever, including, without limitation, the existence of any claim, set off, defense or other right which Borrower may have at any time against Lender whether in connection with the Loan or any unrelated transaction.
14.11. Table of Contents, Title and Headings. Any Table of Contents, the titles and the headings of sections are not parts of this Loan Agreement or any other Loan Document and shall not be deemed to affect the meaning or construction of any of their provisions.
14.12. Counterparts. This Loan Agreement and each of the other Loan Documents may be executed in several counterparts, each of which when executed and delivered is an original, but all of which together shall constitute one instrument. In making proof of this Agreement or any other Loan Document, it shall not be necessary to produce or account for more than one such counterpart which is executed by the party against whom enforcement of such loan agreement is sought. Delivery of a signature page to, or an executed counterpart of, this document or any other Loan Document by facsimile, email transmission of a scanned image, or other electronic means, shall be effective as delivery of an originally executed counterpart. The parties hereto agree that “execution,” “signed,” “signature,” and words of like import in this document shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based record keeping system, as the case may be, to the extent and as provided for in any applicable law, including, without limitation, Electronic Signatures in Global and National Commerce Act, the Uniform Electronic Transactions Act or the Uniform Commercial Code, and the parties hereto hereby waive any objection to the contrary; provided that (x) nothing herein shall require Lender to accept electronic signature counterparts in any form or format and (y) Lender reserves the to require, at any time and at its sole discretion, the delivery of manually executed counterpart signature pages to this Agreement and the other Loan Documents and the parties hereto agree to promptly deliver such manually executed counterpart signature pages.
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14.13. Patriot Act Notice. Lender is subject to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56) (signed into law October 26, 2001)) (the “Patriot Act”) and hereby notifies the Borrower that pursuant to the requirements of the Act, it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow Lender to identify the Borrower in accordance with the Act.
14.14. Right to Transfer, Assign, Participate and Pledge. Lender reserves the unrestricted right at any time or from time to time, and without Borrower’s or any Guarantor’s consent, to transfer, assign and/or grant participation interests in the Loan, and Borrower and Guarantor agree that it shall execute, or cause to be executed, such documents, including without limitation, amendments to this Agreement and to any other documents, instruments and agreements executed in connection herewith as Lender shall deem necessary to effect the foregoing. Additionally, the Lender may at any time pledge all or any portion of its interest and rights under this Agreement and the other Loan Documents (including all or any portion of the Note) to any of the twelve (12) Federal Reserve Banks organized under §4 of the Federal Reserve Act, 12 U.S.C. §341. No such pledge or the enforcement thereof shall release the Lender from its obligations hereunder or under any of the other Loan Documents.
14.15. Time Of the Essence. Time is of the essence of each provision of this Agreement and each other Loan Document.
14.16. No Oral Change. (a) This Agreement and each of the Loan Documents is intended by the parties as the final, complete and exclusive statement of the transactions evidenced by this Agreement and the other Loan Documents; all prior or contemporaneous promises, agreements, and understandings, whether oral or written, are deemed to be superseded by this Agreement and each of the other Loan Documents, and no party is relying on any promise, agreement or understanding not set forth in this Agreement or any of the other Loan Documents, and (b) This Loan Agreement and each of the other Loan Documents may only be amended, terminated, extended or otherwise modified by a writing signed by the party against which enforcement is sought (except no such writing shall be required for any party which, pursuant to a specific provision of any Loan Document, is required to be bound by changes without such party’s assent); in no event shall any oral agreements, promises, actions, inactions, knowledge, course of conduct, course of dealings or the like be effective to amend, terminate, extend or otherwise modify this Loan Agreement or any of the other Loan Documents.
14.17. Severability. The provisions of this Agreement are severable, and if any one clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction.
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IN WITNESS WHEREOF this Agreement has been duly executed and delivered as a sealed instrument as of the date set forth above.
| BORROWER: | ||
| WORKSPORT NEW YORK OPERATIONS CORPORATION | ||
| By: | /s/Steven Rossi | |
| Steven Rossi | ||
| President | ||
| LENDER: | ||
| NORTHEAST BANK | ||
| By: | /s/Brian Doherty | |
| Name: | Brian Doherty | |
| Title: | Managing Director | |
EXHIBITS:
| Exhibit A | - | Definitions |
| Exhibit B | - | Ownership Interests |
| Exhibit C | - | Authorized Representatives |
| Exhibit D | - | Required Hazard Property and Other Insurance |
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EXHIBIT A TO LOAN AGREEMENT
DEFINITIONS
The definitions of terms in this Agreement shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” The word “will” shall be construed to have the same meaning and effect as the word “shall.” Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, restated, renewed, replaced, supplemented or otherwise modified from time to time (subject to any restrictions on such amendments, restatements, renewals, replacements, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (c) the words “herein,” “hereof” and “hereunder,” and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement, (e) any reference to any law or regulation herein shall, unless otherwise specified, refer to such law or regulation as amended, modified or supplemented from time to time and (f) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. All terms defined in this Agreement shall have the defined meanings when used in any other Loan Document unless otherwise defined therein. As used herein or in any other Loan Document, accounting terms relating to the Borrower, to the extent not defined, shall have the respective meanings given to them under GAAP. Any reference to “value” of assets or property means the lower of cost or market value of such assets or property, determined in accordance with GAAP.
Affiliate means with respect to any Person, (a) any Person which, directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with such Person, or (b) any Person who is a director or officer (i) of such Person, (ii) of any Subsidiary of such Person, or (iii) any person described in clause (a) above. For purposes of this definition, control of a Person means the power, direct or indirect, (x) to vote 5% or more of the Capital Stock having ordinary voting power for the election of directors (or comparable equivalent) of such Person, or (y) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. Control may be by ownership, contract, or otherwise.
Agreement as defined in the Preamble.
Anti-Corruption Laws means all laws, rules, and regulations of any jurisdiction applicable to Borrower from time to time concerning or relating to bribery or corruption.
Anti-Money Laundering Laws means any and all laws, statutes, regulations or obligatory government orders, decrees, ordinances or rules applicable to Borrower related to terrorism financing or money laundering, including any applicable provision of the Patriot Act and The Currency and Foreign Transactions Reporting Act (also known as the “Bank Secrecy Act,” 31 U.S.C. §§ 5311-5330 and 12 U.S.C. §§ 1818(s), 1820(b) and 1951-1959).
Approved Lease as defined in Section 8.17.1.
Assignment of Contracts shall mean that certain first priority Collateral Assignment and Security Agreement in Respect of Contracts, Licenses and Permits of even date herewith, with respect to any and all contracts, agreements, Licenses, permits and warranties now owned or hereafter acquired by Borrower and related in any manner to the Property.
Assignment of Leases and Rents shall mean that certain first priority collateral assignment of leases and rents with respect to all leases, subleases and occupancy rights of the Property and all income and profits to be derived from the operation and leasing of the Property.
Authorized Representatives as defined in Section 4 and listed on Exhibit C.
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Beneficial Ownership Certification means a certification regarding beneficial ownership as required by the Beneficial Ownership Regulation.
Beneficial Ownership Regulation means 31 C.F.R. § 1010.230.
Borrower as defined in the Preamble.
Business Day shall mean any day of the year on which offices of Lender are not required or authorized by law to be closed for business in Boston, Massachusetts. If any day on which a payment is due is not a Business Day, then the payment shall be due on the next day following which is a Business Day. Further, if there is no corresponding day for a payment in the given calendar month (i.e., there is no “February 30th”), the payment shall be due on the last Business Day of the calendar month.
Calculation Date means the end of each calendar year during the term of the Loan, commencing with May 10, 2023.
Calculation Period means each successive trailing twelve (12) month period ending on a Calculation Date.
Capital Stock means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all other ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing.
Casualty as defined in Section 13.1.
Change in Law. The occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any governmental authority or (c) the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) by any governmental authority; provided that notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (y) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a “Change in Law” to the extent enacted adopted or issued after the date hereof.
Collateral shall mean the property described in the Mortgage and other Security Documents.
Cost To Repair as defined in Section 13.3.
Debt Service Coverage means the ratio for the Calculation Period of: (A) Net Operating Income to (B) Debt Service on the Loan.
Debt Service on the Loan means the actual payments of principal and/or interest paid or payable during the Calculation Period with respect the Loan.
Default as defined in Section 10.1.
Dollars means lawful money of the United States.
DSCR Covenant as defined in Section 8.18.
Environmental Indemnity shall mean that certain compliance and indemnification agreement with respect to environmental matters from the Indemnitors.
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Environmental Legal Requirements as defined in the Environmental Indemnity.
ERISA and ERISA Plan each as defined in Section 7.9.
Event of Default as defined in Section 10.1.
Expenses as defined in Section 8.14.
Extended Maturity Date as defined in Section 2.4.
Extension Term as defined in Section 2.4.
Governmental Authority means the government of the United States of America or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).
Guarantor as defined in Section 1.5.
Guaranty shall mean that certain unconditional, continuing guaranty from Guarantor guaranteeing certain obligations.
Hazardous Materials as defined in the Environmental Indemnity.
Improvements as defined in Section 1.3.
Indemnified Party as defined in Section 8.16.
Indemnitors shall mean collectively, Borrower and Guarantor.
Initial Maturity Date as defined in Section 2.4.
Initial Term as defined in Section 2.4.
Interest Reserve as defined in Section 8.21.1.
Interest Reserve Funds as defined in Section 8.21.
Investment means the acquisition of any real or tangible personal property or of any stock or other security, any loan, advance, bank deposit, money market fund, contribution to capital, extension of credit (except for accounts receivable arising in the ordinary course of business and payable in accordance with customary terms), or purchase or commitment or option to purchase or otherwise acquire real estate or tangible personal property or stock or other securities of any party or any part of the business or assets comprising such business, or any part thereof.
Land as defined in Section 1.3.
Lease(s) means any and all leases and subleases now or hereafter entered into at the Property or any portion thereof.
Legal Requirements means all applicable federal, state, county and local laws, by-laws, rules, regulations, codes and ordinances, and the requirements of any governmental agency or authority having or claiming jurisdiction with respect thereto, including, but not limited to, those applicable to taxation, zoning, subdivision, building, health, fire, safety, sanitation, the protection of the handicapped (including, without limitation, Access Laws (as defined in the Mortgage)), and environmental matters and shall also include all orders and directives of any court, governmental agency or authority having or claiming jurisdiction with respect thereto.
Lender as defined in the Preamble.
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Lender’s Consultant as defined in Section 5.
Licenses and Permits means all licenses, permits, authorizations and agreements issued by or agreed to by any governmental authority, or by a private party pursuant to a Permitted Title Exceptions, and including, but not limited to, building permits, occupancy permits and such special permits, variances and other relief as may be required pursuant to Legal Requirements which may be applicable to the Property.
Loan as defined in Section 1.4.
Loan Agreement as defined in the Preamble.
Loan Documents as defined in Section 3.
MAI means Member of the Appraisers Institute.
Major Lease means the certain lease agreement between Borrower, as landlord, and Worksport USA Operations Corporation, as tenant, dated of even date herewith, for a portion of the Property and any other lease for space at the Property in excess of 25,000 rentable square feet of the Property.
Material Adverse Effect means a material adverse effect with respect to (a) the business, assets, properties, financial condition, stockholders’ equity, contingent liabilities, prospects, material agreements or results of operations of Borrower or Guarantor, (b) Borrower’s or Guarantor’s ability to pay and perform the Obligations in accordance with the terms hereof and the other Loan Documents, (c) the validity or enforceability of this Agreement or any of the other Loan Documents or the rights and remedies, liens, security interests or collateral of Lender hereunder or thereunder, or (d) the value, occupancy rates, rental cash flow or other similar conditions of the Property.
Maturity Date shall mean the Initial Maturity Date or the Extended Maturity Date, as the context may permit, or such earlier date on which the final payment of principal of the Note becomes due and payable as provided in this Agreement or the Note, whether at the Initial Maturity Date or Extended Maturity Date, as applicable, by declaration of acceleration, or otherwise.
Minimum Balance Requirement as defined in Section 8.21.3.
Minimum Return as defined in the Note.
Mortgage shall mean that certain first priority mortgage and security agreement (the on (i) the Property, (ii) all land, improvements, furniture, fixtures, goods, equipment, and other assets (including, without limitation, accounts, contracts, contract rights, Licenses and Permits, general intangibles, documents and instruments), including all after-acquired property, owned, or in which Borrower has or obtains any interest, in connection with the Property; (iii) all insurance proceeds and other proceeds therefrom, and (iv) all other assets of Borrower whether now owned or hereafter acquired and whether or not related to the Property.
Net Operating Income means all Operating Revenue minus all Operating Expenses.
Note as defined in Section 3.
Obligations means the payment of the entire principal of the Note and the interest, and any and all other sums payable, and all other monetary and non-monetary obligations and liabilities of Borrower to Lender under the Note, the Mortgage and any other Loan Documents as well as, without limitation, all loans, advances, indebtedness, notes, liabilities, and all other amounts, in each case, liquidated or unliquidated, owing by Borrower to Lender of each and every kind, nature and description, whether arising under this Agreement or otherwise, and whether secured or unsecured, direct or indirect (that is, whether the same are due directly by Borrower to Lender; or are due indirectly by Borrower to Lender or any Affiliate of Lender as endorser, guarantor or other surety, or as borrower of obligations due third persons which have been endorsed or assigned to Lender), absolute or contingent, due or to become due, now existing or hereafter arising or contracted, including, without limitation, payment when due of all amounts outstanding respecting any of the Loan Documents, and the performance and observance of all the other provisions hereof and of the Note and the other Loan Documents.
OFAC means the U.S. Department of the Treasury’s Office of Foreign Assets Control.
Operating Expenses means, for the trailing 12-month period preceding the applicable Calculation Date, all actual expenditures of all kinds made with respect to the operation and management of the Property in the normal course of business including, but not limited to, expenditures for taxes, insurance, repairs, replacements, maintenance, management fees equal to the greater of actual management fees or 3% of all revenues, licensing fees, professional fees, salaries, advertising expenses, professional fees, franchise fees, wages and utility costs, operational equipment, amounts payable with respect to the Property under or with respect to any Permitted Title Exceptions and reasonable additions to, or creations of, reserves for repairs and replacements and for capital expenditures required to comply with Legal Requirements or Approved Leases or amendments thereto, but expressly excluding: (a) any debt service on the Loan , (b) expenditures made out of reserves previously created, and (c) any non-recurring capital expenditures.
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Operating Revenue means, for the trailing 3-month period preceding the applicable Calculation Date, annualized all income collected from the ownership and operation of the Property from whatever source, including, without limitation, gross receipts, rents, utility charges, escalations, service fees or charges, parking fees, and Approved Leases.
Patriot Act as defined in Section 14.13.
Payment Date as defined in the Note.
Permitted Additional Debt as defined in Section 8.6.4.
Permitted Distributions as defined in Section 8.7.2.
Permitted Title Exceptions as defined in the Mortgage.
Permitted Transactions as defined in Section 8.6.2.
Permitted Transfers as defined in Section 8.6.3.
Person means an individual, a partnership, a corporation, a limited liability company, a corporation, a business trust, a joint stock company, a trust, an unincorporated association, a Governmental Authority or any other entity of whatever nature (including, without limitation, a joint venture).
Property as defined in Section 1.3.
Registered Land Surveyor means a land surveyor or engineer licensed as such in the jurisdiction where the Property is situated.
Reportable Event as defined in Section 7.9.
Sanctioned Country means, at any time, a country, territory or region which is itself, or whose government is, the subject or target of any Sanctions broadly prohibiting dealings with such government, country, territory or region (including, currently, Crimea, Cuba, Iran, North Korea, Sudan and Syria).
Sanctioned Person means, at any time, (a) any Person listed in any Sanctions-related list of designated Persons maintained by OFAC (including, without limitation, OFAC’s Specially Designated Nationals and Blocked Persons List and OFAC’s Consolidated Non-SDN List) or the U.S. Department of State, or that is otherwise the subject or target of any Sanctions, (b) any Person located, organized or resident in a Sanctioned Country, or (c) any Person (i) owned 50% or more, in the aggregate, or 20% or more, individually, directly or indirectly, or (ii) Controlled, by any such Person or Persons described in clauses (a) and (b).
Sanctions means any and all economic or financial sanctions, sectoral sanctions, secondary sanctions, trade embargoes and anti-terrorism laws enacted, imposed, enforced, promulgated or administered by OFAC, the U.S. Department of State, or any other relevant sanctions authority.
Security Documents as defined in Section 3.
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Single Purpose Entity: A limited liability company or limited partnership which, at all times since its formation and thereafter, (a) was organized solely for the purpose of owning the Property, (b) has not and will not engage in any business unrelated to the ownership of the Property, (c) has not and will not have any assets other than those related to the Property, (d) except as otherwise expressly permitted by the Loan Documents has not and will not engage in, seek or consent to any dissolution, winding up, liquidation, consolidation, merger, asset sale, transfer of membership interests, or amendment of its operating agreement or limited liability company certificate, (e) has not and will not fail to correct any known misunderstanding regarding the separate identity of such entity, (f) has not done and will not do any of the following: (I) file a bankruptcy, insolvency or reorganization petition or otherwise seek any relief under any laws relating to the relief from debts or the protection of debtors generally; (II) seek or consent to the appointment of a receiver, liquidator, assignee, trustee, custodian or any similar official for such entity or all or any portion of such entity’s properties; (III) make any assignment for the benefit of such entity’s creditors’ or (IV) take any action that might cause such entity to become insolvent, (g) has maintained and will maintain its accounts, books and records separate from any other person or entity, (h) has not and will not commingle its funds or assets with those of any other entity, (i) has held and will hold its assets in its own name, (j) has conducted and will conduct its business in its name, (k) has paid and will pay its liabilities, including salaries of any employees, out of its own funds and assets, (l) has observed and will observe all limited liability company and limited partnership formalities, (m) has maintained and will maintain an arms-length relationship with its Affiliates, (n) has no indebtedness other than as expressly permitted under the Loan Documents, (o) except as expressly permitted by this Agreement, has not and will not assume or guarantee or become obligated for the debts of any other entity or person, or hold out its credit as being available to satisfy the obligations of any other entity or person, (p) will not acquire obligations or securities of its members, (q) has allocated and will allocate fairly and reasonably shared expenses and uses separate stationary, invoices and checks, (r) except as expressly permitted by this Agreement, has not and will not pledge its assets for the benefit of any other person or entity, (s) has held and identified itself and will hold itself out and identify itself as a separate and distinct entity under its own name and not as a division or part of any other person or entity, (t) has not made and will not make loans to any person or entity, (u) has not and will not identify its members, partners or any Affiliates of any of them as a division or part of it, (v) has not entered and will not enter into or be a party to, any transaction with its members, partners or its Affiliates (including the managing member and/or general partner) except in the ordinary course of its business and on terms which are intrinsically fair and are not less favorable to it than would be obtained in a comparable arms-length transaction with an unrelated third party, (w) has paid and will pay the salaries of its own employees from its own funds, and (x) has maintained and will maintain adequate capital in light of its contemplated business operation
SNDA Agreement as defined in Section 8.17.4.
Sonwil Lease means that certain Commercial Lease number 2022-02 entered into between Borrower, as successor to J&M Distributing Co., Inc., as landlord, and Sonwil Distribution, as tenant, dated March 16, 2022 for space at the Property, as the same has been amended by lease modification dated April 7, 2022.
Worksport Lease means the certain Lease entered into between Borrower, as landlord, and Worksport USA Operations Corporation, as tenant, dated May 4, 2022, for space at the Property
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EXHIBIT B TO LOAN AGREEMENT
OWNERSHIP INTERESTS
Worksport Ltd. holder of 10,000 shares, equal to 100% of the shares of Borrower
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EXHIBIT C TO LOAN AGREEMENT
AUTHORIZED REPRESENTATIVE
Steven Rossi
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EXHIBIT D TO LOAN AGREEMENT
REQUIRED PROPERTY, HAZARD AND OTHER INSURANCE
Borrower shall at all times provide and maintain the following insurance coverages with respect to the Property and the Collateral issued by companies qualified to do business in the State of New York or other applicable jurisdictions, having a Best’s Rating of not less than A and otherwise acceptable to Lender in its sole discretion:
(i) physical insurance on an all-risk basis without exception (including, without limitation, flood required if property is in a “Special Flood Hazard Area” A or V), vandalism and malicious mischief, earthquake, collapse, boiler explosion, sprinkler coverage, cost of demolition, increased costs of construction and the value of the undamaged portion of the building and soft costs coverage) covering all the real estate, fixtures and personal property to the extent of the full insurable value thereof, on a builder’s risk non-reporting form prior to completion and occupancy to Occupy Endorsement, having replacement cost and agreed amount endorsements (with deductibles not in excess of 1% of insurable value);
(ii) rent loss or business interruption insurance in an amount equal to one year’s projected rentals or gross revenues;
(iii) public liability insurance, with underlying and umbrella coverages totaling not less than $1,000,000.00 per occurrence and $2,000,000.00 in the aggregate or such other amounts as may be determined by Lender from time to time;
(iv) automobile liability insurance (including non-owned automobile) with a coverage of $1,000,000 per occurrence during construction;
(v) worker’s compensation, employer’s liability and other insurance required by law;
(vi) during any period of restoration, replacement or rebuilding with respect to the Property, insurance covering those risks required to be covered by the general contractor, or an applicable contractor or a sub-contractor, under any plans and specifications, the construction contracts, or any of the other construction documents;
(vii) during any period of restoration, replacement or rebuilding with respect to the Property, errors and omissions or similar coverages from the architect and consulting engineers in limits and written by companies satisfactory to Lender; and
(viii) such other insurance coverages in such amounts as Lender may request consistent with the customary practices of prudent developers and owners of similar properties.
An actual insurance policy or certified copy thereof, or a certificate of insurance or other evidence of property coverage in the form of Acord 27 (Evidence of Property Coverage), Acord 25 (Certificate of Insurance), or a 30-day binder (with proof of payment) in form acceptable to Lender with an unconditional undertaking to deliver the policy or a certified copy within thirty (30) days, shall be delivered at closing of the Loan, prior to the first advance of the Loan and upon each renewal or replacement of such insurance. Notwithstanding the foregoing, an actual insurance policy or certified copy thereof is required for flood insurance.
Flood insurance shall be provided if the property or the collateral is located in a flood prone, flood risk or flood hazard area as designated pursuant to the Federal Flood Disaster Protection Act of 1973, as amended, and the Regulations thereunder, or if otherwise reasonably required by Lender.
Lender shall be named as first mortgagee on policies of all-risk-type insurance on the Property, as lender loss payee on the Collateral and its contents, and as first mortgagee on rent-loss or business interruption coverages related thereto.
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Except with respect to public liability insurance, as to which Lender shall be named as an additional insured with respect to the Property or the Collateral, all other required insurance coverages shall have a so-called “Mortgagee’s endorsement” or “Lender’s loss-payable endorsement” which shall provide in substance as follows:
| A. | Loss or damage, if any, under the policy shall be paid to Lender and its successors and assigns (which shall be collectively referred to herein as “Lender”) in whatever form or capacity its interest may appear and whether said interest be vested in said Lender in its individual or in its disclosed or undisclosed fiduciary or representative capacity, or otherwise, or vested in a nominee or trustee of said Lender. | |
| B. | The insurance under the policy, or under any rider or endorsement attached thereto, as to the interest only of Lender, its successors and assigns, shall not be invalidated nor suspended: |
| (a) | by any error, omission or change respecting the ownership, description, possession or location of the subject of the insurance or the interests therein or the title thereto; or | |
| (b) | by the commencement of foreclosure or similar proceedings or the giving of notice of sale of any of the property covered by the policy by virtue of any mortgage, deed of trust, or security interest; or | |
| (c) | by any breach of warranty, act, omission, neglect, or noncompliance with any provisions of the policy by the named insured, or anyone else, whether before or after a loss, which under the provisions of the policy of insurance, would invalidate or suspend the insurance as to the named insured, excluding, however, any acts or omissions of Lender while exercising active control and management of the insured property. |
| C. | Insurer shall provide Lender with not less than thirty (30) days’ prior written notice of cancellation of the policy (for non-payment or any other reason) or of the non-renewal thereof. | |
| D. | The insurer reserves the right to cancel the policy at any time, but only as provided by its terms. However, in such case the policy shall continue in force for the benefit of Lender for thirty (30) days after written notice of such cancellation is received by Lender and shall then cease. | |
| E. | Should legal title to and beneficial ownership of any of the property covered under the policy become vested in Lender or its agents, successors or assigns, insurance under the policy shall continue for the term thereof for the benefit of Lender. | |
| F. | All notices herein provided to be given by the insurer to Lender in connection with this policy and Lender’s loss payable endorsement shall be mailed to or delivered to Lender by certified or registered mail, return receipt requested, as follows: |
Property Insurance:
Northeast Bank, ISAOA ATIMA
PO Box 671
Carmel, IN 46082
Liability Insurance:
Northeast Bank, ISAOA ATIMA
35 Canal Street
PO Box 1707
Lewiston, ME 04241
Flood Insurance:
Northeast Bank, ISAOA ATIMA
35 Canal Street
PO Box 1707
Lewiston, ME 04241
| C- |
Exhibit 19.1
WORKSPORT LTD. INSIDER TRADING POLICY
Dated: October 24, 2023
Purpose
This Insider Trading Policy (this “Policy”) provides guidelines with respect to transactions in the securities of Worksport Ltd., a Nevada corporation (the “Company”), and the handling of confidential information about the Company and the companies with which the Company does business.
The Company’s Board of Directors (“Board”) has adopted this Policy to promote compliance with federal, state, and foreign securities laws that prohibit certain persons who are aware of material nonpublic information about a company from: (i) trading in securities of that company (e.g., purchasing and selling of securities, including purchases and sales of options and warrants on securities, as well as short sales); or (ii) providing material nonpublic information to other persons who may trade on the basis of that information.
Persons Subject to the Policy
This Policy applies to all officers of the Company and its subsidiaries, all members of the Board and all employees of the Company and its subsidiaries. The Company may also determine that other persons should be subject to this Policy, such as contractors or consultants who have access to material nonpublic information. This Policy also applies to family members, other members of a person’s household and entities controlled by a person covered by this Policy, as described below.
Transactions Subject to the Policy
This Policy applies to transactions in the Company’s securities (collectively referred to in this Policy as “Company Securities”), including the Company’s common stock, options to purchase common stock, or any other type of securities that the Company may issue, including, but not limited to, preferred stock, convertible debentures and warrants, as well as derivative securities that are not issued by the Company, such as exchange-traded put or call options or swaps relating to the Company’s Securities. There are certain exceptions that are discussed in this Policy under “Transactions Under Company Plans,” “Transactions Not Involving a Purchase or Sale,” and “Rule 10b5-1 Plans.”
Individual Responsibility
Persons subject to this Policy have ethical and legal obligations to maintain the confidentiality of information about the Company and to not engage in transactions in Company Securities while in possession of material nonpublic information.
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Persons subject to this Policy must not engage in illegal trading and must avoid the appearance of improper trading. Each individual is responsible for making sure that he or she complies with this Policy, and that any family member, household member, or entity whose transactions are subject to this Policy, as discussed below, also comply with this Policy.
In all cases, the responsibility for determining whether an individual is in possession of material nonpublic information rests with that individual, and any action on the part of the Company, the Compliance Officer, or any other employee or director pursuant to this Policy or otherwise does not in any way constitute legal advice or insulate an individual from liability under applicable securities laws.
You could be subject to severe legal penalties and disciplinary action by the Company for any conduct prohibited by this Policy or applicable securities laws, as described below in more detail under the heading “Consequences of Violations.”
Administration of the Policy
The Company’s General Counsel shall serve as the Compliance Officer for the purposes of this Policy. The Compliance Officer is authorized to consult with the Company’s securities counsel without notice and at such times as he may deem necessary or appropriate at the expense of the Company. All determinations and interpretations by the Compliance Officer shall be final and not subject to further review. The duties of the Compliance Officer include, but are not limited to, the following:
| ● | assisting with implementation and enforcement of this Policy; | |
| ● | circulating this Policy to all employees and ensuring that this Policy is amended as necessary to remain up-to-date with insider trading laws; | |
| ● | ensuring that the Company obtain and maintain written acknowledgments from employees that they have read the policy; | |
| ● | overseeing the responses to questions from individual employees; | |
| ● | providing for employee training sessions; | |
| ● | ensuring that relevant files on policy compliance and implementation are maintained; | |
| ● | pre-clearing all trading in securities of the Company in accordance with the procedures as discussed in this Policy under “Pre-Clearance Procedures”; | |
| ● | providing approval of any Rule 10b5-1 plans as discussed in this Policy under “Rule 10b5-1 Plans” and any prohibited transactions as discussed in this Policy; and | |
| ● | providing a reporting system with an effective whistleblower protection mechanism. |
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Statement of Policy
It is the policy of the Company that no director, officer, or other employee of the Company (or any other person designated by this Policy or by the Compliance Officer as subject to this Policy) who is aware of material nonpublic information relating to the Company may, directly, or indirectly through family members or other persons or entities:
| 1. | Engage in transactions in Company Securities, except as otherwise specified in this Policy under the headings “Transactions Under Company Plans,” “Transactions Not Involving a Purchase or Sale,” and “Rule 10b5-1 Plans”; | |
| 2. | Recommend the purchase or sale of any Company Securities; | |
| 3. | Disclose material nonpublic information to persons within the Company whose jobs do not require them to have that information, or outside of the Company to other persons, including, but not limited to, family, friends, business associates, investors, and expert consulting firms, unless any such disclosure is made in accordance with the Company’s policies regarding the protection or authorized external disclosure of information regarding the Company; or | |
| 4. | Assist anyone engaged in the above activities. |
In addition, it is the policy of the Company that no director, officer, or other employee of the Company or any other person designated as subject to this Policy who, in the course of working for the Company, learns of material nonpublic information about a company with which the Company does business, including a customer or supplier of the Company, may trade in that company’s securities until the information becomes public or is no longer material.
There are no exceptions to this Policy, except as specifically noted herein. Transactions that may be necessary or justifiable for independent reasons (such as the need to raise money for an emergency expenditure), or small transactions, are not excepted from this Policy. The securities laws do not recognize any mitigating circumstances, and, in any event, even the appearance of an improper transaction must be avoided to preserve the Company’s reputation for adhering to the highest standards of conduct.
Definition of Material Nonpublic Information
Information is considered “material” if a reasonable investor would consider that information important in making a decision to buy, hold, or sell securities. Any information that could be expected to affect a company’s stock price, whether it is positive or negative, should be considered material. There is no bright-line standard for assessing materiality; rather, materiality is based on an assessment of all of the facts and circumstances and is often evaluated by enforcement authorities with the benefit of hindsight.
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While it is not possible to define all categories of material information, some examples of information that ordinarily would be regarded as material are:
| ● | Projections of future earnings or losses, or other earnings guidance; | |
| ● | Changes to previously announced earnings guidance, or decisions to suspend earnings guidance; | |
| ● | A pending or proposed merger, acquisition, or tender offer; | |
| ● | A pending or proposed acquisition or disposition of a significant asset; | |
| ● | A pending or proposed joint venture; | |
| ● | A Company restructuring; | |
| ● | Significant related party transactions; | |
| ● | A change in dividend policy, the declaration of a stock split, or an offering of additional securities; | |
| ● | Bank borrowings or other financing transactions out of the ordinary course of business; | |
| ● | The establishment of a repurchase program for Company Securities; | |
| ● | A change in the Company’s pricing or cost structure; | |
| ● | Major marketing changes; | |
| ● | A change in management; | |
| ● | A change in auditors or notification that the auditor’s report may no longer be relied upon; | |
| ● | Development of a significant new product, process, or service; | |
| ● | Pending or threatened significant litigation, or the resolution of such litigation; | |
| ● | Impending bankruptcy or the existence of severe liquidity problems; | |
| ● | The gain or loss of a significant customer or supplier; | |
| ● | The results of clinical trials or testing of the Company’s products or services; |
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| ● | A significant cybersecurity incident, such as a data breach, or any other significant disruption in the Company’s operations or loss, potential loss, breach, or unauthorized access of its property or assets, whether at its facilities or through its information technology infrastructure; or | |
| ● | The imposition of an event-specific restriction on trading in the Company’s Securities or the securities of another company or the extension or termination of such restriction. |
Information that has not been disclosed to the public is generally considered to be nonpublic information. In order to establish that the information has been disclosed to the public, it may be necessary to demonstrate that the information has been widely disseminated. Information generally would be considered widely disseminated if it has been disclosed through the Dow Jones “broad tape,” newswire services, a broadcast on widely-available radio or television programs, publication in a widely-available newspaper, magazine or news website, or public disclosure documents filed with the Securities and Exchange Commission (“SEC”) that are available on the SEC’s website, or subject to the Compliance Officer’s determination, disclosure on the Company’s website, or through social media.
By contrast, information would likely not be considered widely disseminated if it is available only to the Company’s employees. Nonpublic information may also include: (i) information available to a select group of analysts or brokers or institutional investors; (ii) undisclosed facts that are the subject of rumors, even if the rumors are widely circulated; and (iii) information that has been entrusted to the Company on a confidential basis until a public announcement of the information has been made and enough time has elapsed for the market to respond to a public announcement of the information (normally two (2) trading days).
Once information is widely disseminated, it is still necessary to provide the investing public with sufficient time to absorb the information. As a general rule, information should not be considered fully absorbed by the marketplace until after the second (2nd) business day after the day on which the information is released. If, for example, the Company were to make an announcement on a Monday, you should not trade in Company Securities until Thursday. Depending on the particular circumstances, the Company may determine that a longer or shorter period should apply to the release of specific material nonpublic information. For purposes of this Policy, a “business day” is any day that The Nasdaq Stock Market LLC is open for trading.
As with questions of materiality, if you are not sure whether information is considered public, you should either consult with the Compliance Officer or assume that the information is nonpublic and treat it as confidential.
Transactions by Family Members and Others
This Policy applies to your family members who reside with you (including a spouse, a child, a child away at college, stepchildren, grandchildren, parents, stepparents, grandparents, siblings, and in-laws), anyone else who lives in your household, and any family members who do not live in your household but whose transactions in Company Securities are directed by you or are subject to your influence or control, such as parents or children who consult with you before they trade in Company Securities (collectively referred to as “Family Members”).
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You are responsible for the transactions of these other persons and therefore should make them aware of the need to confer with you before they trade in Company Securities, and you should treat all such transactions for the purposes of this Policy and applicable securities laws as if the transactions were for your own account.
This Policy does not, however, apply to personal securities transactions of Family Members where the purchase or sale decision is made by a third party not controlled by, influenced by or related to you or your Family Members.
Transactions by Entities that You Influence or Control
This Policy applies to any entities that you influence or control, including any corporations, partnerships, or trusts (collectively referred to as “Controlled Entities”), and transactions by these Controlled Entities should be treated for the purposes of this Policy and applicable securities laws as if they were for your own account.
Transactions Under Company Plans
This Policy does not apply in the case of the following transactions, if currently applicable, except as specifically noted:
Stock Option Exercises
This Policy does not apply to the exercise of an employee stock option acquired pursuant to the Company’s plans, or to the exercise of a tax withholding right pursuant to which a person has elected to have the Company withhold shares subject to an option to satisfy tax withholding requirements. This Policy does apply, however, to any sale of stock as part of a broker-assisted cashless exercise of an option, or any other market sale for the purpose of generating the cash needed to pay the exercise price of an option.
Restricted Stock Awards
This Policy does not apply to the vesting of restricted stock, or the exercise of a tax withholding right pursuant to which you elect to have the Company withhold shares of stock to satisfy tax withholding requirements upon the vesting of any restricted stock. The Policy does apply, however, to any market sale of restricted stock.
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401(k) Plan
This Policy does not apply to purchases of Company Securities in the Company’s 401(k) plan resulting from your periodic contribution of money to the plan pursuant to your payroll deduction election.
This Policy does apply, however, to certain elections you may make under the 401(k) plan, including: (i) an election to increase or decrease the percentage of your periodic contributions that will be allocated to the Company stock fund; (ii) an election to make an intra-plan transfer of an existing account balance into or out of the Company stock fund; (iii) an election to borrow money against your 401(k) plan account if the loan will result in a liquidation of some or all of your Company stock fund balance; and (iv) an election to pre-pay a plan loan if the pre-payment will result in allocation of loan proceeds to the Company stock fund. It should be noted that sales of Company Securities from a 401(k) account are also subject to Rule 144, and therefore affiliates should ensure that a Form 144 is filed when required.
Employee Stock Purchase Plan
This Policy does not apply to purchases of Company Securities in the employee stock purchase plan resulting from your periodic contribution of money to the plan pursuant to the election you made at the time of your enrollment in the plan. This Policy also does not apply to purchases of Company Securities resulting from lump sum contributions to the plan, provided that you elected to participate by lump sum payment at the beginning of the applicable enrollment period.
This Policy does apply, however, to your election to participate in the plan for any enrollment period, and to your sales of Company Securities purchased pursuant to the plan.
Dividend Reinvestment Plan
This Policy does not apply to purchases of Company Securities under the Company’s dividend reinvestment plan resulting from your reinvestment of dividends paid on Company Securities.
This Policy does apply, however, to voluntary purchases of Company Securities resulting from additional contributions you choose to make to the dividend reinvestment plan, and to your election to participate in the plan or increase your level of participation in the plan. This Policy also applies to your sale of any Company Securities purchased pursuant to the plan.
Other Similar Transactions
Any other purchase of Company Securities from the Company or sales of Company Securities to the Company are not subject to this Policy.
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Transactions Not Involving a Purchase or Sale
Bona fide gifts are not transactions subject to this Policy, unless the person making the gift has reason to believe that the recipient intends to sell the Company Securities while the officer, employee, or director is aware of material nonpublic information, or the person making the gift is subject to the trading restrictions specified below under the heading “Additional Procedures” and the sales by the recipient of the Company Securities occur during a blackout period.
Further, transactions in mutual funds that are invested in Company Securities are not transactions subject to this Policy.
Special and Prohibited Transactions
Certain transactions are of concern not only because of insider trading considerations, but also because of the appearance created by the transaction and the potential repercussions that the transaction may have with investors, regulators, and others.
Accordingly, the Company has determined that there is a heightened legal risk and/or the appearance of improper or inappropriate conduct if the persons subject to this Policy engage in certain types of transactions. It therefore is the Company’s policy that any persons covered by this Policy may not engage in any of the following transactions, or should otherwise consider the Company’s preferences as described below.
Short-Term Trading
Short-term trading of Company Securities may be distracting to the person and may unduly focus the person on the Company’s short-term stock market performance instead of the Company’s long-term business objectives. For these reasons, any director, officer, or other employee of the Company who purchases Company Securities in the open market may not sell any Company Securities of the same class during the six (6) months following the purchase or vice versa. Directors and officers should note the short-term trading restrictions of Section 16(b) of the Securities Exchange Act of 1934, as amended (“Exchange Act”).
Short Sales
Short sales of Company Securities (i.e., the sale of a security that the seller does not own) may evidence an expectation on the part of the seller that the securities will decline in value, and therefore have the potential to signal to the market that the seller lacks confidence in the Company’s prospects. In addition, short sales may reduce a seller’s incentive to seek to improve the Company’s performance. For these reasons, short sales of Company Securities are prohibited. In addition, Section 16(c) of the Exchange Act prohibits officers and directors from engaging in short sales. (Short sales arising from certain types of hedging transactions are governed by the paragraph below captioned “Hedging Transactions.”)
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Publicly-Traded Options
Given the relatively short term of publicly-traded options, transactions in options may create the appearance that a director, officer, or employee is trading based on material nonpublic information and focus a director’s, officer’s, or other employee’s attention on short-term performance at the expense of the Company’s long-term objectives. Accordingly, transactions in put options, call options, or other derivative securities, on an exchange or in any other organized market, are prohibited by this Policy. (Option positions arising from certain types of hedging transactions are governed by the next paragraph below.)
Hedging Transactions
Hedging or monetization transactions can be accomplished through a number of possible mechanisms, including through the use of financial instruments such as prepaid variable forwards, equity swaps, collars, and exchange funds. Such transactions may permit a director, officer, or employee to continue to own Company Securities obtained through employee benefit plans or otherwise, but without the full risks and rewards of ownership. When that occurs, the director, officer, or employee may no longer have the same objectives as the Company’s other shareholders. Therefore, directors, officers, and employees are prohibited from engaging in any such transactions.
Margin Accounts and Pledged Securities
Securities held in a margin account as collateral for a margin loan may be sold by the broker without the customer’s consent if the customer fails to meet a margin call. Similarly, securities pledged or hypothecated as collateral for a loan may be sold in foreclosure if the borrower defaults on the loan. Because a margin sale or foreclosure sale may occur at a time when the pledgor is aware of material nonpublic information or otherwise is not permitted to trade in Company Securities, directors, officers, and other employees are prohibited from holding Company Securities in a margin account and are strongly discouraged from pledging Company Securities as collateral for a loan. Any person wishing to enter into a legitimate loan pledge arrangement must first submit the proposed transaction in writing for approval by the Compliance Officer at least two (2) weeks prior to the proposed execution of documents evidencing the proposed transaction and must set forth a justification for the proposed transaction and clearly demonstrate the financial capacity to repay the loan without resorting to the pledged securities. The person making the request shall have no other contact with the Compliance Officer on that matter and the Compliance Officer’s decision shall be final and binding. (Pledges of Company Securities arising from certain types of hedging transactions are governed by the paragraph above captioned “Hedging Transactions.”)
Standing and Limit Orders
Standing and limit orders, except standing and limit orders under approved Rule 10b5-1 Plans, as described below, create heightened risks for insider trading violations similar to the use of margin accounts. There is no control over the timing of purchases or sales that result from standing instructions to a broker, and as a result the broker could execute a transaction when a director, officer, or other employee is in possession of material nonpublic information. The Company therefore discourages placing standing or limit orders on Company Securities. If a person subject to this Policy determines that they must use a standing order or limit order, the order should be limited to short duration and should otherwise comply with the restrictions and procedures outlined below under the heading “Additional Procedures.”
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Additional Procedures
The Company has established additional procedures in order to assist the Company in the administration of this Policy, to facilitate compliance with laws prohibiting insider trading while in possession of material nonpublic information, and to avoid the appearance of any impropriety. These additional procedures are applicable only to those individuals described below.
Pre-Clearance Procedures
The persons designated by the Compliance Officer as being subject to these procedures, as well as the Family Members and Controlled Entities of such persons, may not engage in any transaction in Company Securities without first obtaining pre-clearance of the transaction from the Compliance Officer.
A written request for pre-clearance should be submitted to the Compliance Officer at least two (2) business days in advance of the proposed transaction. The Compliance Officer is under no obligation to approve a transaction submitted for pre-clearance, and may determine not to permit the transaction. If a person seeks preclearance and permission to engage in the transaction is denied, then he or she should refrain from initiating any transaction in Company Securities, and should not inform any other person of the restriction.
When a request for pre-clearance is made, the requestor should carefully consider whether he or she may be aware of any material nonpublic information about the Company, and should describe fully those circumstances to the Compliance Officer. The requestor should also indicate whether he or she has effected any non-exempt “opposite-way” transactions within the past six months, and should be prepared to report the proposed transaction on an appropriate Form 4 or Form 5. The requestor should also be prepared to comply with SEC Rule 144 and file Form 144, if necessary, at the time of any sale.
All pre-cleared trades must be effected within five (5) business days of receipt of pre-clearance unless an exception is granted. Transactions not effected within the time limit are subject to pre-clearance again. Within three (3) business days after the execution of the transaction, the requestor shall notify the Compliance Officer of the date and size of the transaction.
The Compliance Officer shall document and maintain records relating to the pre-clearing request, the date of grant or denial, and other pertinent information.
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Blackout Periods
The persons designated by the Compliance Officer as subject to this restriction, as well as their Family Members or Controlled Entities, may not conduct any transactions involving the Company’s Securities (other than as specified by this Policy), during a “Blackout Period” beginning the last day of each fiscal quarter and ending after the close of business on the second (2nd) trading day following the date of the public release of the Company’s earnings results for that quarter. In other words, these persons may only conduct transactions in Company Securities during the “Window Period” beginning on the third (3rd) trading day following the public release of the Company’s quarterly earnings until the last trading day of the each fiscal quarter.
It is worth noting that due to the SEC filing deadlines for the Company’s annual report on Form 10-K and quarterly report on Form 10-Q for the first fiscal quarter ended March 31st, the Trading Window for the fourth quarter will not reopen until the opening of the third trading day after the Company files its quarterly report on Form 10-Q for the fiscal quarter ended March 31st – resulting in a Blackout Period of approximately four and a half months from the last trading day before December 31st.
Under certain very limited circumstances, a person subject to this restriction may be permitted to trade during a Blackout Period, but only if the Compliance Officer, with the advice of securities counsel if requested by the Compliance Officer, concludes that the person does not in fact possess material nonpublic information and may otherwise trade.
Persons wishing to trade during a Blackout Period must make such request in writing to the Compliance Officer for approval at least three (3) business days in advance of any proposed transaction involving Company Securities. All such trades are subject to the pre-clearance procedures set forth above under “Pre-Clearance Procedures.”
Event-Specific Trading Restriction Periods
From time to time, an event may occur that is material to the Company and is known by only a few executives or directors (e.g., negotiation of mergers, acquisitions or dispositions, investigation and assessment of cybersecurity incidents, or new product developments). The involved directors or officers shall promptly notify the Compliance Officer of such event. While such event remains material and nonpublic, the Company may impose special blackout periods (“Special Blackout Period”) during which executive officers, directors, and such other persons designated by the Compliance Officer, together with their family members, are prohibited from trading in the Company’s securities. If the Company imposes a Special Blackout Period, it will notify those affected and will not announce its existence other than to those who are aware of the event giving rise to the Special Blackout Period. If you know of the event, then even if the Compliance Officer has not designated you as a person who should not trade due to an event-specific restriction, you should not trade while you are aware of material nonpublic information. Exceptions will not be granted during an event-specific trading restriction period. Any person made aware of the existence of a Special Blackout Period should not disclose its existence to any other person.
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In addition, the Company’s financial results may be sufficiently material in a particular fiscal quarter that, in the judgment of the Compliance Officer, designated persons should refrain from trading in Company Securities even later than the typical Blackout Period described above.
Exceptions
The quarterly trading restrictions and event-specific trading restrictions do not apply to those transactions to which this Policy does not apply, as described above under the headings “Transactions Under Company Plans” and “Transactions Not Involving a Purchase or Sale.” Further, the requirement for pre-clearance, the quarterly trading restrictions, and event-specific trading restrictions do not apply to transactions conducted pursuant to approved Rule 10b5-1 plans, described under the heading “Rule 10b5-1 Plans.”
Rule 10b5-1 Plans
Rule 10b5-1 under the Exchange Act provides a defense from insider trading liability under Rule 10b-5. In order to be eligible to rely on this defense, a person subject to this Policy must enter into a Rule 10b5- 1 plan for transactions in Company Securities that meets certain conditions specified in Rule 10b-5-1 (a “Rule 10b5-1 Plan”). If the plan meets the requirements of Rule 10b5-1, Company Securities may be purchased or sold without regard to certain insider trading restrictions.
To comply with the Policy, a Rule 10b5-1 Plan must be approved by the Compliance Officer and meet the requirements of Rule 10b5-1 and the Company’s “Guidelines for Rule 10b5-1 Plans,” which may be obtained from the Compliance Officer. In general, a Rule 10b5-1 Plan must be entered into at a time when the person entering into the plan is not aware of material nonpublic information. Once the plan is adopted, the person must not exercise any influence over the amount of securities to be traded, the price at which they are to be traded, or the date of the trade. The plan must either specify the amount, pricing, and timing of transactions in advance or provide a third party irrevocable authority to effect such transactions at its own discretion, so long as the third party does not possess material inside information about the Company at the time of the transaction.
Any Rule 10b5-1 Plan must be submitted in writing for approval by the Compliance Officer no less than five (5) business days prior to the entry into the Rule 10b5-1 Plan. No further pre-approval of transactions conducted pursuant to the Rule 10b5-1 Plan will be required.
The Company may, on a case-by-case basis, announce publicly (whether by press release, on the Company website, or otherwise) that a key insider has established a pre-arranged plan at the time the plan is entered into, in order to mitigate potentially adverse publicity if a programmed trade on behalf of that insider occurs on some later date when the insider is in possession of material nonpublic information about the Company.
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Post-Termination Transactions
This Policy continues to apply to transactions in Company Securities even after termination of service to the Company. If an individual is in possession of material nonpublic information when his or her service terminates, that individual may not trade in Company Securities until that information has become public or is no longer material.
Consequences of Violations
The purchase or sale of securities while aware of material nonpublic information, or the disclosure of material nonpublic information to others who then trade in the Company’s Securities, is prohibited by the federal and state laws. Insider trading violations are pursued vigorously by the SEC, U.S. attorneys, and state enforcement authorities as well as the laws of foreign jurisdictions.
In addition, a person who “tips” others may also be liable for transactions by the tippees to whom he or she has disclosed material nonpublic information. Tippers can be subject to the same penalties and sanctions as the tippees, and the SEC has imposed large penalties even when the tipper did not profit from the transaction.
Punishment for insider trading violations is severe, and could include significant fines and imprisonment. While the regulatory authorities concentrate their efforts on the individuals who trade, or who “tip” inside information to others who trade, the federal securities laws also impose potential liability on companies and other “controlling persons” if they fail to take reasonable steps to prevent insider trading by company personnel.
The SEC can seek substantial civil penalties from any person who, at the time of an insider trading violation, “directly or indirectly controlled the person who committed such violation,” which would apply to the Company and/or management and supervisory personnel. These controlling persons may be held liable for up to the greater of $2.3 million or three times the amount of the profits gained or losses avoided. Even for violations that result in a small or no profit, the SEC can seek penalties from a company and/or its management and supervisory personnel as controlling persons.
In addition, an individual’s failure to comply with this Policy may subject the individual to Company- imposed sanctions, including dismissal for cause, whether or not the employee’s failure to comply results in a violation of law. Needless to say, a violation of law, or even an SEC investigation that does not result in prosecution, can tarnish a person’s reputation and irreparably damage a career. Given the severity of the potential penalties, compliance with this Policy is absolutely mandatory.
Company Assistance
Any person who has a question about this Policy or its application to any proposed transaction may obtain additional guidance from the Compliance Officer, who can be reached by telephone at 888-554-8789 or via e-mail at nchoksi@worksport.com.
Certification
All persons subject to this Policy must certify their understanding of, and intent to comply with, this Policy. Please complete and sign the accompanying Certification page and return to the Company’s Office Administrator at: jtrickey@worksport.com.
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Exhibit 21.1
List of Subsidiaries of Worksport Ltd.
| Name of Subsidiary | Jurisdiction of Organization | |
| Worksport Ltd. | Ontario | |
| Worksport USA Operations Corporation | Colorado | |
| Worksport New York Operations Corporation | New York | |
| Terravis Energy, Inc. | Colorado |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors of
Worksport Ltd.
We consent to the incorporation by reference in the registration statement on Form S-3 (File No. 333-267696), the registration statement on Form S-8 (File No. 333-258897), and the registration statement on Form S-8 (File No. 333-271263) of our report dated March 27, 2024 with respect to our audit of the consolidated financial statements of Worksport Ltd. as of and for the year ended December 31, 2023, which report is included in this Annual Report on Form 10-K of Worksport Ltd. for the year ended December 31, 2023.
/s/ Lumsden McCormick, LLP
Buffalo, New York
March 27, 2024
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven Rossi, certify that:
1. I have reviewed this Annual Report on Form 10-K of Worksport Ltd;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
| Dated: March 28, 2024 | /s/ Steven Rossi |
| Steven Rossi | |
| President, Chief Executive Officer and Chairman of the Board of Directors | |
| (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael Johnston, certify that:
1. I have reviewed this Annual Report on Form 10-K of Worksport Ltd;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
| Dated: March 28, 2024 | /s/ Michael Johnston |
| Michael Johnston | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Worksport Ltd. (the “Registrant”) on Form 10-K for the period ended December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof, I, Steven Rossi, Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Annual Report on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and | |
| 2. | The information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Worksport Ltd |
| Dated: March 28, 2024 | /s/ Steven Rossi |
| Steven Rossi | |
| President, Chief Executive Officer and Chairman of the Board of Directors | |
| (Principal Executive and Accounting Officer) |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Worksport Ltd. and will be retained by Worksport Ltd. and furnished to the Securities and Exchange Commission or its Staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Worksport Ltd. (the “Registrant”) on Form 10-K for the period ended December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof, I, Michael Johnston, the Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Annual Report on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and | |
| 2. | The information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Worksport Ltd |
| Dated: March 28, 2024 | /s/ Michael Johnston |
| Michael Johnston | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Worksport Ltd. and will be retained by Worksport Ltd. and furnished to the Securities and Exchange Commission or its Staff upon request.
Exhibit 97.1
WORKSPORT LTD.
CLAWBACK POLICY
Introduction
The Board of Directors (“Board”) of Worksport Ltd. (the “Company”) believes that it is in the best interests of the Company and its shareholders to adopt this policy which provides for the recoupment of certain executive compensation in the event of an accounting restatement resulting from material noncompliance with financial reporting requirements under the federal securities laws (the “Policy”). This Policy is designed to comply with Section 10D of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rule 10D-1 promulgated under the Exchange Act (“Rule 10D-1”) and Listing Rule 5608 of The Nasdaq Stock Market LLC (“Nasdaq”).
Administration
This Policy shall be administered by the Board or, if so designated by the Board, the Compensation Committee of the Board (the “Compensation Committee”) or the Audit Committee of the Board (the “Audit Committee”), or any special committee comprised of members of the Compensation Committee or Audit Committee (the “Administrator”). Any determinations made by the Administrator shall be final and binding on all affected individuals. Subject to any limitation at applicable law, the Administrator may authorize and empower any officer or employee of the Company to take any and all actions necessary or appropriate to carry out the purpose and intent of this Policy (other than with respect to any recovery under this Policy involving such officer or employee).
Covered Executives
This Policy applies to the Company’s current and former executive officers, as determined by the Administrator in accordance with Section 10D of the Exchange Act and the listing standards of the national securities exchange on which the Company’s securities are listed, and such other senior executives/employees who may from time to time be deemed subject to the Policy by the Administrator (each, a “Covered Executive”).
For the purposes of this Policy, “executive officers” shall include persons subject to reporting and short-swing liability provisions of Section 16 under the Exchange Act. This shall include the Company’s president, principal financial officer, principal accounting officer (or if there is no such accounting officer, the controller), any vice president in charge of a principal business unit, division, or function (such as sales, administration, or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the Company and any person identified under Regulation S-K Rule 401(b) in the Company’s annual reports and proxy statements. Executive officers of a parent or subsidiary are deemed executive officers of the listed company if they perform such policy-making functions for the listed company or such parent or subsidiary. The policy-making function is not intended to include policy-making functions that are not significant.
Recoupment; Accounting Restatement
In the event the Company is required to prepare an accounting restatement of its financial statements due to the Company’s material noncompliance with any financial reporting requirement under the securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period, the Administrator will require, as promptly as it reasonably can, reimbursement or forfeiture of any Incentive Compensation, as defined below, received by any Covered Executive during the three completed fiscal years immediately preceding the date on which the Company is required to prepare an accounting restatement (the “Restatement Date”), so long as the Incentive Compensation received by such Covered Executive is in excess of what would have been awarded or vested after giving effect to the accounting restatement. The amount to be recovered will be the excess of Incentive Compensation paid to the Covered Executive based on the erroneous data in the original financial statements over the Incentive Compensation that would have been paid to the Covered Executive had it been based on the restated results, without respect to any taxes paid.
The Restatement Date is defined as the earlier of (i) the date the Board, a Board committee, or management (if no Board action is required) concludes, or reasonably should have concluded, that the Company is required to prepare an accounting restatement or (ii) the date a court, regulator, or other legally authorized body directs the Company to prepare an accounting restatement.
Incentive Compensation
For purposes of this Policy, “Incentive Compensation” means any of the following; provided that, such compensation is granted, earned, or vested based wholly or in part on the attainment of a financial reporting measure:
| ● | Annual bonuses and other short- and long-term cash incentives. | |
| ● | Stock options. | |
| ● | Stock appreciation rights. | |
| ● | Restricted stock. | |
| ● | Restricted stock units. | |
| ● | Performance shares. | |
| ● | Performance units. | |
| ● | Non-equity incentive plan awards. |
Financial reporting measures include any measure that is determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements, and any measure that is derived wholly or in-part from such measure. The following examples (and any measures derived therefrom) are non-exhaustive:
| ● | Company stock price. | |
| ● | Total shareholder return. | |
| ● | Revenues. | |
| ● | Net income. | |
| ● | Operating income. | |
| ● | Earnings before interest, taxes, depreciation, and amortization (EBITDA). | |
| ● | Funds from operations and adjusted funds from operations. | |
| ● | Liquidity measures such as working capital or operating cash flow. | |
| ● | Return measures such as return on invested capital or return on assets. | |
| ● | Earnings measures such as earnings per share. | |
| ● | Profitability of one or more reportable segments. |
| ● | Financial Ratios such as accounts receivable turnover and inventory turnover rates. | |
| ● | Sales per square foot or same store sales, where sales is subject to an accounting restatement. | |
| ● | Revenue per user or average revenue per user. | |
| ● | Cost per employee, where cost is subject to any accounting restatement. | |
| ● | Any of such financial reporting measures relative to a peer group, where the Company’s financial reporting measure is subject to an accounting restatement; and tax basis income. | |
| ● | Capital raised through debt or equity financing. | |
| ● | Reductions in accounts receivables. |
For the avoidance of doubt, Incentive Compensation does not include annual salary, compensation awarded based on completion of a specified period of service, or compensation awarded based on subjective standards, strategic measures, or operational measures.
Incentive Compensation includes incentive-based compensation received by a person:
| ● | after beginning service as an executive officer; | |
| ● | who serves as an executive officer at any time during the performance period for the incentive-based compensation; | |
| ● | who served as an executive officer while the Company has a class of securities listed on a national securities exchange; and | |
| ● | who serves as an executive officer during the three fiscal years preceding the Restatement Date. |
For the avoidance of doubt, subsequent changes in a Covered Executive’s employment status, including retirement or termination of employment, do not affect the Company’s rights to recover Incentive-Based Compensation pursuant to this Policy.
Excess Incentive Compensation: Amount Subject to Recovery
The amount to be recovered will be the excess of the Incentive Compensation paid to the Covered Executive based on the erroneous data over the Incentive Compensation that would have been paid to the Covered Executive had it been based on the restated results, as determined by the Administrator. Incentive Compensation is deemed “received” during the fiscal period during which the financial reporting measure specified in the incentive-based compensation award is attained, even if payment or grant of the Incentive Compensation occurs after the end of the period.
If the Administrator cannot determine the amount of excess Incentive Compensation received by the Covered Executive directly from the information in the accounting restatement, then it will make its determination based on a reasonable estimate of the effect of the accounting restatement.
Method of Recoupment
The Administrator will determine, in its sole discretion, the method for recouping excess Incentive Compensation hereunder, which may include, without limitation:
| (a) | requiring reimbursement of cash Incentive Compensation previously paid; |
| (b) | seeking recovery of any gain realized on the vesting, exercise, settlement, sale, transfer, or other disposition of any equity-based awards; | |
| (c) | offsetting the recouped amount from any compensation otherwise owed by the Company to the Covered Executive; | |
| (d) | cancelling outstanding vested or unvested equity awards; and/or | |
| (e) | taking any other remedial and recovery action permitted by law, as determined by the Administrator. |
No Indemnification of Covered Executives
The Company shall not indemnify any current or former Covered Executive against the loss of any incorrectly awarded Incentive Compensation, and shall not pay, or reimburse any Covered Executive for premiums for any insurance policy to fund such executive’s potential recovery obligations.
Indemnification of the Administrator
Any members of the Administrator who assist in the administration of this Policy, shall not be personally liable for any action, determination, or interpretation made with respect to this Policy and shall be fully indemnified by the Company to the fullest extent under applicable law and Company policy with respect to any such action, determination or interpretation. The foregoing sentence shall not limit any other rights to indemnification of the Administrator under applicable law or Company policy.
Interpretation
The Administrator is authorized to interpret and construe this Policy and to make all determinations necessary, appropriate, or advisable for the administration of this Policy. It is intended that this Policy be interpreted in a manner that is consistent with the requirements of Section 10D of the Exchange Act, Rule 10D-1, Nasdaq Listing Rule 5608, and any other applicable rules or standards adopted by the Securities and Exchange Commission or any national securities exchange on which the Company’s securities are then listed.
Effective Date
This Policy shall be effective as of the date it is adopted by the Administrator (the “Effective Date”) and shall apply to Incentive Compensation that is approved, awarded, or granted to any Covered Executive on or after that date.
Amendment; Termination
The Board may amend this Policy from time to time in its discretion and shall amend this Policy as it deems necessary to reflect final regulations adopted by the Securities and Exchange Commission under Section 10D of the Exchange Act, Rule 10D-1 and Nasdaq Listing Rule 5608 and to comply with any other rules or standards adopted by a national securities exchange on which the Company’s securities are then listed. The Board may terminate this Policy at any time.
Other Recoupment Rights
The Administrator intends that this Policy will be applied to the fullest extent of the law. The Administrator may require that any employment agreement, equity award agreement, or similar agreement entered into on or after the Effective Date shall, as a condition to the grant of any benefit thereunder, require a Covered Executive to agree to abide by the terms of this Policy. Any right of recoupment under this Policy is in addition to, and not in lieu of, any other remedies or rights of recoupment that may be available to the Company pursuant to the terms of any similar policy in any employment agreement, equity award agreement, or similar agreement and any other legal remedies available to the Company.
Impracticability
The Administrator shall recover any excess Incentive Compensation in accordance with this Policy unless such recovery would be impracticable, as determined by the Administrator in accordance with Rule 10D-1 of the Exchange Act and the listing standards of the national securities exchange on which the Company’s securities are listed.
Successors
This Policy shall be binding and enforceable against all Covered Executives and their beneficiaries, heirs, executors, administrators or other legal representatives.
Exhibit Filing Requirement
A copy of this Policy and any amendments thereto shall be posted on the Company’s website and filed as an exhibit to the Company’s Annual Report on Form 10-K.