Worksport Ltd Q1 FY2025 Earnings Call

We are discussing key operational milestones and sharing our updated outlook for 2025. The first quarter of this year was transformative for Worksport, marked by the release of our flagship higher-margin product, the AL4 tonneau cover. We rapidly expanded our dealer network and strengthened our gross margins. We will be reviewing the financial results for the quarterly period ending March 31, 2025, which were filed today at 4:00 p.m. Eastern Time in our Form 10-Q, available for download via the link provided in the chat. At the end of this call, our prepared remarks and presentation deck will also be available for download. These remarks will be accompanied by a slide presentation, after which we will open the line for questions. During this call, we will make forward-looking statements, including our financial outlook for the full year 2025 and our expectations regarding financial trends, impacts from the macroeconomic environment, market position, opportunities, growth strategy, business aspirations, and product initiatives. These statements are predictions based on our current beliefs, expectations, and assumptions, subject to uncertainties, risks, and changes that may be outside our control. Actual results may differ materially, and therefore, reliance on these forward-looking statements should be limited. They are subject to risks discussed in our filings with the SEC, including our annual report and quarterly reports. The forward-looking statements made today are only accurate as of this date, and Worksport has no obligation to update them. We will begin by highlighting Worksport's achievements from Q1 2025, celebrating the milestones that propelled our impressive growth trajectory. We will then dive into our financial performance, emphasizing our margin growth and developments in our dealer network. Our operational successes will also be explored, showcasing our hard folding truck bed cover line made in the U.S.A. Additionally, we will discuss our shift towards higher-margin, Worksport-branded product sales and detail anticipated product launches like the SOLIS solar cover, the COR portable energy storage system, and innovations from Terravis Energy, our subsidiary, which has attracted significant industry interest. Finally, we will share our vision and strategic plans for fiscal year 2025, presenting fresh guidance and outlining key financial goals for the remainder of the year. The first quarter of 2025 continued our strong growth, with revenue reaching $2.24 million, a 337% increase from $512,000 in Q1 last year. While this figure is slightly lower than our Q4 2024 results, this is consistent with seasonal trends where Q4 is typically our strongest sales period due to Black Friday and the holidays, while Q1 tends to be slower. Nevertheless, we are confident in achieving substantial year-over-year growth by the end of 2025. Our strategic shift towards branded high-margin products, particularly with the late Q1 launch of our AL4 product line, has significantly improved gross margins and set a positive tone for the year ahead. Early signs indicate that AL4 sales are already contributing to a significant portion of our Q2 revenues, reinforcing our expectations for continued upward momentum. Exciting times are ahead as consumers adopt the newly released AL4, and we are all committed to achieving significant and exponential growth in the coming months. Mike Johnston, our CFO, will now walk you through the financial details of Q1 2025.

Thanks, Steve. Please bear with me, I'm on a bit of a cold here, so my voice might be all over the place. We've reached significant financial milestones this quarter. Gross profit rose notably to $396,000, achieving a gross margin of nearly 18%, which is up from 7% in the same quarter last year and 11% in Q4 of 2024. These improvements highlight the ongoing success of our strategic shift towards higher-margin Worksport-branded products and better operational efficiency. We expect margin to continue improving with an objective of reaching 25% to 30% later this year. We believe this will be achievable with increased production that will optimize overhead absorption along with continued sales growth of our AL4 product. Furthermore, with COR and SOLIS releasing later this year, we expect additional notable improvements to the company's gross profit and top-line revenue profile. Total operating expenses for Q1 were $4.65 million, up from about $3.68 million in Q1 of 2024. A 26% increase in operating expenses reflects targeted investments that directly supported a 337% surge in revenues over the same period from last year, demonstrating the scalability of our model and return on our strategic spending. This increase in operating costs reflects some one-time expenses, ongoing strategic investments in marketing, product development, and significant investment in the expansion of our sales team. More specifically, sales and marketing expenses were $870,000, reflecting expanded digital marketing efforts. General and administrative expenses rose to approximately $2.99 million from $2.29 million, driven primarily by increased staffing and facility-related costs. Professional fees decreased to $426,000 from $944,000, highlighting effective cost control measures. For Q1 of 2025, our operating loss was approximately $4.46 million compared to $3.71 million in the prior-year period. Our net loss of $4.46 million reflects the costs associated with scaling operations and continued strategic investments, specifically in sales and marketing expenses and nonrecurring corporate expenses. Despite the net loss and improved gross margin, operational efficiency lays a foundation for achieving profitability. We believe there is adequate room to continue controlling expenses while continuing to accelerate expansion. The gap between expenses and gross profit is expected to decrease in future quarters. Importantly, the company is still targeting to achieve operational cash flow breakeven in Q4 of 2025 or early Q1 of 2026. More on this to come later. Turning to the balance sheet. Cash and cash equivalents stood at $5.08 million, slightly up from $4.88 million at year-end 2024. The increase follows capital raising efforts and subsequent to a reduction of long-term debt of approximately $2 million this quarter. Working capital improved to $7.94 million, providing financial flexibility and operational readiness for continued growth. Our current liabilities decreased slightly, enhancing our liquidity position and preparing us to effectively manage our upcoming product launches. During Q1 of 2025, cash used in operating activities totaled $3.84 million, primarily reflecting our net loss and increased inventories to support projected demand. Investment activities consumed $269,000 primarily for property and equipment upgrades. Financing activities generated a positive inflow of approximately $4.5 million, driven by proceeds from warrant exercises offsetting operational and capital investments. We had inventories of $5.7 million as of March 31, 2025, a slight increase from December 31, 2024, representing roughly 50% of our current assets. Notably, $3.4 million of our inventory balance is raw materials. This inventory includes components for our AL series covers and legacy products, and we deem it appropriately balanced. We have processes in place to monitor for any slow-moving or obsolete stock and will adjust production and purchasing accordingly. We view our quarter-end inventory level as a healthy support for 2025 sales targets without needing substantial further investment in working capital. We also view this inventory level as sufficient to combat short-term tariff related impacts on our business. While long-term impacts are expected to be relatively minimal for our Made-in-America hard covers. Now, back to Steve for key insights on business operations.

Thank you, Michael. Looking beyond the financial figures, the first quarter lays the groundwork for what we can look forward to in the coming year. I want to emphasize some of the important milestones we have reached, which are shaping our future. We initiated shipments of the AL4 tonneau covers and made them available for purchase on our e-commerce site in late February 2025, just a few months back. The launch of the AL4 is crucial for Worksport as it broadens our premium product range, with initial customer feedback indicating high satisfaction regarding the quality, appearance, and functionality of this model. This product will play a significant role in our narrative for the remainder of the year. The early interest has been tremendous, and we expect it to be a major revenue contributor in the near future. The Worksport factory aims to quadruple its monthly production by the end of Q3 2025 compared to Q4 of last year. This means we intend to manufacture over 200 units daily by the end of the summer, and we've already made progress toward that target in Q1, with even more advancements expected in the early months of Q2. Achieving a production rate of 200 units per day could lead to more than $45 million in annual revenue from our e-commerce channel, while also enhancing our gross margins as we reach our previously projected levels. Our reseller sales network has also seen significant expansion in Q1 2025. Worksport’s U.S. network now includes 151 active dealers, reflecting a 64% increase from 92 at the end of last year. We've onboarded 35 new dealer accounts in March, following 24 additions in January and February combined. Sales to businesses in March 2025 grew nearly 70% compared to February, highlighting strong market momentum and increased interest in the AL4 tonneau cover. Our dealer partners are independent retailers and installers of truck accessories, essential components of the American economy. Worksport is dedicated to helping these local businesses succeed by providing excellent service, quality products, and favorable profit margins. This commitment will drive significant ongoing growth and adoption of our products in the B2B market, given there are over 17,000 potential dealers nationwide. We expect our dealer network to significantly contribute to revenue growth this year. Worksport aims to further expand by collaborating with distributors and purchasing groups that appreciate American-made quality and prioritize the success of dealers. These partnerships will likely bring many new dealers into our network. The company plans to share more updates soon. Our products are designed to ensure good margins for dealers while delivering outstanding performance and value to end users, making Worksport beneficial for both sides of the market. This year, Worksport intends to launch three new products: the HD3 hard folding tonneau cover, the SOLIS solar-integrated tonneau cover, and the COR portable energy storage system. The HD3 is a heavy-duty tonneau cover designed for business-to-business use and is under development for a summer release. It builds upon the AL3 design with enhanced materials, seals, and latch mechanisms for improved durability, primarily targeting commercial and fleet customers. The HD3 will be offered on our website and to wholesale clients, but it aims to primarily boost growth within our wholesale B2B segment. Production and sales of the HD3 are expected to begin in the coming months, adding another revenue stream for 2025 and completing our robust line of high-quality, durable tonneau covers made in the U.S.A. Moving on to the SOLIS. In Q1, our solar-integrated tonneau cover, SOLIS, has advanced toward beta testing, with select customers trialing early units before a commercial launch planned for later this year. The SOLIS will be manufactured in the U.S. using American aluminum and solar panels sourced from India, which we consider favorable in terms of tariffs. We have seen strong initial interest, especially among pickup truck owners, including those with F-150s in both electric and traditional segments. The pricing will align with existing premium tonneau covers, making our patented solar cover a compelling value proposition. Now for the COR mobile power system. Alongside SOLIS, the portable COR power system is approaching mass production and is on track for a release later this year. COR is a modular energy solution that can integrate with SOLIS or work as a standalone unit, providing reliable power for various sites and emergency situations. Designed for the broader consumer market, COR marks our entry beyond the pickup truck segment, targeting a larger audience. Together, COR and SOLIS position Worksport in the rapidly emerging multi-billion-dollar portable energy market, which we believe will be crucial for long-term profitability. On the topic of innovation and clean energy, Terravis Energy announced a significant breakthrough with a cold climate heat pump system named AetherLux on February 11, 2025. This system features two major innovations: the removal of the defrost cycle and ultra-low-temperature functionality that is unprecedented. The AetherLux can operate without traditional defrost cycles, which commonly interrupt heating for ice melting. This allows for efficient heating maintenance even in freezing temperatures. Furthermore, the system can work in ambient temperatures as low as negative 57 degrees Fahrenheit, making it viable for extreme conditions where conventional heat pumps fail. This presents a major global opportunity, and the AetherLux heat pump, featuring our ZeroFrost technology, has generated substantial interest from several major corporations. We are committed to capitalizing on this transformative technology and are open to strategic licensing and manufacturing discussions within this $123 billion market. Regarding intellectual property, Worksport possesses a strong and expanding portfolio of over 170 patents and trademarks, both approved and pending. In January 2025, we joined the LOT Network, a global group focused on safeguarding innovations from patent trolls, which helps protect our intellectual property while connecting us with other tech companies committed to cross-licensing for defensive measures. Worksport believes it has robust protections in place against competitors for its upcoming innovations, including the SOLIS tonneau covers, COR battery system, and AetherLux heat pump. I will now hand it back to Mike for our updated outlook and guidance for fiscal year 2024.

Thank you, Steve. Worksport's hard tonneau covers, specifically the AL3 and AL4 models, are proudly produced in the United States. By sourcing mainly domestically, we gain strong resilience against tariffs and geopolitical issues. Our soft covers, which are currently sourced from China, contribute a relatively small percentage to our revenue, but we are actively reviewing options for domestic production. The forthcoming SOLIS solar cover will be assembled in the U.S., with solar panels likely procured from India, a country that maintains stable trade relations with the U.S. For the COR portable power system, Worksport is collaborating with an international battery supplier and U.S. partners to reduce tariff exposure and explore onshore manufacturing. By sourcing locally and manufacturing in the U.S., Worksport believes it reduces tariff risks on its tonneau cover products, supports American jobs, and ensures consistent product quality. The success of the AL4 demonstrates that manufacturing in the U.S. with American-sourced materials and a strong workforce is an effective strategy for growth in the world's largest economy. Looking ahead, we remain optimistic about Worksport's trajectory in 2025. We aim to continue the momentum in margins from Q1 2025 towards consistent and rapid growth and enhanced financial performance. Let me share our outlook and guidance for the year. We are predicting another year of significant revenue growth in 2025, driven by both our core tonneau cover business and new product launches. Based on our current visibility, we anticipate full-year revenues of $20 million to $25 million in 2025. We are excited to provide insights into our optimistic forecast. Although Q1 2025 revenue was $2.24 million, which was impacted by expected seasonality, we are confident that Q2 revenue will show further margin improvements and growth. This is particularly stimulated by the launch of the higher-margin AL4, which began sales late in Q1. This revenue projection marks an approximate two-and-a-half to threefold increase compared to the year-end revenue of 2024. The tonneau cover business is expected to sustain this growth. We anticipate sales of tonneau covers to improve in Q2 and notably increase in Q3 and Q4, positioning us towards this target. Initially, we are targeting $2 million to $3 million in revenue from the COR and SOLIS product lines by year-end. However, as geopolitical conditions and global supply chain volatility, particularly in power electronics, improve, we feel optimistic about potentially raising this guidance later in Q3. We believe that reaching the upper end of this range, around $25 million, will help us achieve cash flow breakeven and lay a strong foundation for targeting profitability. While it’s early to provide a detailed revenue projection for 2026, we are targeting overall company profitability and strong revenue growth in 2025, primarily driven by expanding market share in the multi-billion-dollar U.S. tonneau cover market and rapid growth of COR and SOLIS. Our next major goal is cash flow positivity. We are pleased with the margin improvements we've seen in Q1 2025 and expect gross margin to continue increasing as our product mix shifts towards higher-margin items and as we benefit from economies of scale. By phasing out lower-margin private label products, we anticipate a steady increase in gross margin each quarter. We currently expect gross margin to reach the 25% to 30% range or higher by late 2025. While we continue to invest in R&D and sales to support growth, we expect a more moderate rise in operating expenses relative to revenue growth in 2025, which should enhance EBITDA. Our primary financial goal for 2025 is to get significantly closer to cash flow breakeven and ultimately achieve cash flow positivity by late 2025 or early 2026. Given the revenue growth and margin improvements I just outlined, we believe Worksport can reach cash flow breakeven. This objective is becoming increasingly attainable, and our team is committed to achieving it. We will carefully manage operating expenses, balancing growth investments with efficiency. If we exceed expectations in sales or margins, we could expedite our timeline for reaching breakeven. Importantly, while we strive for profitability, we maintain adequate cash reserves and access to capital to support our growth initiatives without sacrificing liquidity. Regarding capital expenditures, we foresee moderate needs in late 2025. Most of our required production equipment for tonneau covers is already established, yet management is contemplating additional equipment for scaling. We will also invest in further tooling for production ramp-up and potentially in automation enhancements to increase throughput. The launches of SOLIS and COR may involve some production setup investments, but we expect to manage these within our operating cash flow as the year unfolds. In summary, our 2025 outlook closely mirrors what we projected in Q4 2024, showcasing significant growth alongside improved financial performance. We have established clear targets for aggressive growth, expanding margins, and achieving a sustainable financial model by year-end. We will report on our progress each quarter and remain confident in our direction.

All said, and thank you, Mike. To conclude, our strategic priorities for 2025 remain well defined. Scale sales of our current products, including the AL4 and AL3 and upcoming HD3 tonneau covers. Successfully launch our SOLIS cover and COR product lines, drive continued innovation, and strengthen intellectual property protections. Maintain operational excellence across manufacturing and supply chain, improve margins, and continue ramping up revenue with a clear path towards achieving cash flow positivity. We remain focused on disciplined execution across these priorities to support sustained growth and long-term value creation. To our investors and analysts listening, thank you for your time today and for your interest in Worksport. We are committed to transparent communications and delivering on our promises. We look forward to updating you on our progress in the quarters ahead as we work to create sustainable long-term value.

Thanks, everyone. This concludes our prepared remarks. Operator, please open the line for questions.

We're now open, go ahead, Fran.

Thank you, Mike. We have two questions from an analyst at Maxim, Tate Sullivan. First question is, have you made sales of the AL4 product this quarter?

Yes, Tate, thank you for the question. The AL4 is selling very well. We were actually low on stock last week. It's not just selling; it's selling extremely well. We have a lot of upcoming news regarding the product and its adoption, particularly concerning the reseller network.

Thanks, Steve. And the second question is, what are the raw materials that are within the inventory budget?

Raw materials within the inventory budget are everything that's required from packaging our product to plastic components, brackets, seals, weather stripping, everything required to manufacture the product. The product's majority of its inventory comprises aluminum products, probably, it's all domestically sourced aluminum. So it's aluminum ingot from American soil, extruded by American extruders or rolled into coils here in America, painted with American paint. So I would say about 60%, maybe 70% of our bill of material consists of aluminum products, which most of our products are all aluminum. That's for the AL3, AL4 and the upcoming HD3. The SOLIS will be all the same, but with the addition of relatively expensive solar technology that we're importing. So the cost breakdown will be a little bit different, and it will be about 20% aluminum and about 60% solar is the cost for these high-performance panels, if that makes sense.

Thanks, Steve. That's all the questions we have from Tate. We do have two more analysts on the call, but I don't see any questions for now.

We'll open the floor if anyone has any questions, just by all means.

Steven, it's Scott Buck. Can you hear me?

Yes, I can. Hey, Scott.

I appreciate the time guys. I'm curious, what do you have in place currently for distribution with COR and SOLIS? Will they be using the same dealer network that you use for the covers? Or how will that work?

The COR and the SOLIS will be a moving target regarding product distribution. Both products are high technology, and we may initially limit launches to direct consumer sales, at least for the third or fourth quarter of this year. This approach will allow us to gather feedback and recover some costs with higher margins. We likely will distribute through our existing network late this year or early next year. There has been significant interest from large companies with fleets of thousands of pickup trucks, as well as from government agencies, where we've already made some key sales. To summarize, we will start with direct-to-consumer sales to stabilize the product and recoup our R&D expenditures before releasing it through our existing distribution network. Additionally, we have strong interest from large fleets and government entities.

Great. That's helpful. And then my second one, the gross margin expectations through the remainder of the year, are the new products being launched, do they have higher gross margin? Or is this simply a benefit of scaling?

It's both. The same production line that is set to produce 200 units per day with almost the same staff, maybe slightly more, was previously making 40 or 50 units a day. We are achieving significant efficiencies in production. We plan to automate key parts of our production process and elevate the roles of our employees to automation operators. This is leading us to a strong economy of scale. Additionally, the potential for cost reductions or margin increases is substantial, contributing significantly to the margin growth. However, we are positioning Worksport to not just offer cheaper products for the white box or imported product market but to develop it into a premium brand. This will require a higher price point, but with financing options available for consumers through our website, we believe we can sell more expensive products with higher margins that deliver real value to customers, encouraging them to spend. We achieve that value through innovation. Thus, we will enhance our profitability metrics and also improve our margins through economies of scale. So it's truly a combination of both top and bottom line improvements.

I appreciate your time guys. Thank you very much.

Thank you, Scott. Great questions.

Hey, Steven.

Hey, Poe.

Yes, Poe Fratt from AGP. Can you just clarify on the guidance? You're using still $20 million to $25 million from tonneau covers. And then the SOLIS potential $2 million to $3 million of sales, hopefully, end of the year, maybe bleed into next year. But I just wanted to be clear whether that's included in that $20 million to $25 million guidance for 2025?

We have decided to eliminate that projection. We are not saying we won't sell any of those products; rather, we will refrain from providing specific forecasts. As mentioned earlier, we will adjust our guidance when geopolitical situations stabilize. The battery and semiconductor supply chains are predominantly based in Asia, while our solar panels for SOLIS come from India, which offers a more favorable trade situation. In this quarter, we are removing the guidance for SOLIS and COR sales entirely, although we do plan to sell them and expect to have positive developments beyond the guidance we've provided. Our guidance will focus solely on traditional Made-in-America tonneau covers. While we are not denying future sales, we will wait another quarter to assess how things evolve.

And am I correct in looking at the Q and seeing pretty much that everything shifted to the hard tonneau covers and the soft tonneau covers are pretty much going to zero by the end of the year?

Yes. Our commitment to domestic production is strong. The soft covers currently come from China, but we are no longer supporting any imported business and are actively exploring the possibility of manufacturing soft covers in North America. In fact, we have all the necessary equipment to cut and sell our own soft folding goods in our factory; we just need to finalize the product design. We plan to restart that product line in alignment with our Made-in-America initiative.

Great, thank you.

Thank you, Poe. Any other questions?

Thank you, Mike. I think that's all the questions we have for today. We'd like to thank everyone for attending. And if there are any more questions from the retail side, please send us an email or give us a call, and we'll be very happy to answer. Thank you so much. Have a great day.

Take care, everyone. Thank you.