Worksport, Ltd.

Good afternoon, everyone, and thank you for joining Worksport's second quarter 2026 earnings call. I'm Steve Rossi, founder and chief executive officer. With me is Jennifer Kartychak, our chief financial officer. Jennifer was appointed CFO effective May 1st following Michael Johnson's resignation at the end of April. She has served as our vice president of finance since January and started working with the company in 2023. So this is the continuation rather than the transition. This is her second earnings call in the role, and I'm glad to have her here today with me Our quarterly report on Form 10-Q for the period ended June 30, 2026 was filed today and will be available on the SEC's website and on our Investors Relations website along with these remarks and accompanying presentation. Our remarks will follow the slides. We will open the line for questions. Let me start with some safe harbor statements. During this call, we'll make forward-looking statements, including statements regarding our expectations for financial and business trends, our market position, our go-to-market growth initiatives, our and our product programs and their expected benefits. These statements are predictions based on current beliefs, expectations, and assumptions. Because they relate to the future, they are inherently subject to uncertainties, risks, and change in circumstances that are difficult to predict and many of which are outside of our control. Actual results may differ materially and you should not place undue reliance on them. These statements are subject to risks discussed in our SEC filings included in our annual report form 10-K and our quarterly report 10-Qs. They speak only as of today's date. We assume no obligation to update them except as required by law. Any supplemental operating metrics discussed today should be considered together with and not as substitute for the underlying GAAP results. With that, let's kick off the agenda. So today we're going to review our 2026 scorecard in this quarter, Q2, our last quarter, the Worksport platform, liquidity and capital resources, financial review, inventory strategy, commercial execution, and 2026 Outlook and Cashflow Framework. So a lot to go through. Stay buckled in. We're going to go quick and we're going to take questions at the end. We are entering a phase where scale efficiencies are becoming evident. In Q2 2026, quarter-to-date revenue grew sequentially by 58% while total operating expenses declined by 17% and cash used in operations also declined by 58%. Our results reflected improved operating leverage and a more efficient cost structure. We are beginning to generate revenue more efficiently and with a greater proportion of sales converting our operating cash flow. The following Q2 2026 results support our positive scaling dynamics. Point number one. Net sales were approximately $5.2 million for the quarter. This is the strongest quarterly result we've had in Worksport history, up 27% year-over-year and 58% sequentially. Gross profit was approximately $1.6 million, up approximately 52% year-over-year, 93% sequentially, with gross margins expanding to approximately 32% from approximately 26% in the same quarter last year, or sorry, in Q1 of this year. Operating expenses were approximately $5.5 million, down approximately 17% from Q1 2026. Operating expenses as a percentage of net sales declined from 128% to just 68% during the same time period. And net cash used in operating activities was approximately $3.4 million, an improvement of 58% from $8.2 million in Q1 of this year. The quarter also strengthened as it progressed. June was our strongest revenue month on record at approximately $2.1 million in sales, with monthly gross profit rising during the quarter to 35% in June alone. We believe June is a strong indicator of our ability to scale the businesses and continues to expand both in the consumer direct and commercial reseller sales channels. This quarter, we focused on improving our operating cash burn and we made good traction. Jennifer will provide more insights on factors contributing to our improvements. We will also speak to how do we intend to convert our strong operational progress into sustainable operating cash flow breakeven. What Q2 2026 established is that the cost base and the revenue line can move in opposite directions in the same quarter. Moving forward, we intend to continue targeting increased revenue with efficient cost basis. We continue to evolve into a diversified platform with multiple products serving multiple channels and generating multiple revenue streams. As we scale, we are mindful of prioritizing our organizational strengths. Our core economic engine is the hard-holding tunnel covers we proudly make in our ISO 9001-2015 certified facility in West Seneca, New York. We launched our newest tunnel cover, Nexus, in last quarter, Q2 of 2026. Our near-term growth Leavers include distribution onboarding, distribution reorders, expanding e-commerce, and conversion of inventory into working capital. We will continue making new product innovations for our products, and we're going to continue to pursue larger partnerships on our energy products. Our SOLUS, solar tunnel cover core portable energy system, are an emerging commercial option that extends the truck bed from from a covered platform into a mobile power system. And really excitingly, our Atherlux heat pump system through our subsidiary TerraVis Energy is a very exciting strategic opportunity that is expected to be certified within the second half of this year. We prioritize and emphasize operational excellence ahead of additional growth vectors. Our core business strategy must be executed with discipline, and our results in Q2 2026 support our commitment for the success of our platform. I will address liquidity directly, and then I will go through our recent business updates. At June 30, 2026, we held approximately $1.2 million in cash and cash equivalents. Separately, we had about $820,000 of remaining availability on a revolving line of credit, which is borrowing capacity, not cash. We reported an inventory balance of $12 million, which we expect to be a strong source for additional liquidity, and we'll discuss this further below. Our Q2 Form 10Q continues to disclose substantial doubt about our ability to continue as a going concern. While this disclosure reflects uncertainties associated with our current liquidity and capital resources, management has implemented a clear plan forward on revenue growth, margin expansion, disciplined cost management, and active analysis of additional financing opportunities. We remain focused on executing our strategy and strengthening our financial positions. are planning for closing the gap in the same period we are executing operational. Convert inventory into sales and cash, grow gross profit faster than reoccurring costs, cash costs, and improve marketing productivity. Our objective during the first half of this year was to strategically support growth initiatives that we believe will create value over time. Our strategy included funding working capital operations to support scaling. and we are now well positioned to convert inventory into working capital efficiently in the second half of this year. We continue to prioritize a reduction in our reliance on dilutive capital as our gross profit expands and operating cash flow improves. Our greatest source of liquidity inventory is being managed during the balance of this year. We are strategically producing our products to function in a just-in-time environment such that we maximize our use of raw materials while minimizing our concentration risk of inventory buildup. More on the subject to come. To align my incentives further with stock, I elected to receive previously accrued and unpaid bonus compensation of $125,000 in stock at the market's closing prices. I continue to believe in the future of the company that reflects the strong values we continue to actively target cash flow positivity. With that, I will hand the call to Jennifer.

Thank you, Steven. Good afternoon, everyone. Net sales for Q2 2026 was 5.2 million compared to 4.1 million in Q2 2025 and 3.3 million in Q1 2026, growth of approximately 27% year-over-year and 58% sequentially. First half net sales were 8.5 million, or about 11,574 units. The shape, of the most recently completed quarter matters as much as the total. Monthly net sales during Q2 2026 were approximately $1.4 million in April, $1.7 million in May, and $2.1 million in June, each month larger than the one before it. June 2026 was the strongest revenue month in our company's history. That progression reflected stronger production output, broader product availability, and channel execution rather than any single order. We sold 7,010 units, 2,957 through B2B and 4,053 units through B2C, generating approximately 2.3 million and 2.9 million of net sales respectively. Our mix between sales channels was consistent between Q1 and Q2 2026. The mix matters because B2B carries a lower gross margin but a materially lower marketing cost per unit, and the balance between the two is what determines both blended margin and cost efficiency. Having both channels gives us a direct customer insight and wholesale reach at the same time. Gross profit was $1.6 million compared with $1.1 million in Q2 2025 and approximately $850,000 in Q1 2026, an increase of approximately 52% year-over-year and approximately 93% sequentially. Gross margin was approximately 32% compared with 26% in Q2 2025. and approximately 26% in Q1 2026. Gross profit rose from approximately 26% in March 2026 to 35% in June 2026. The improvement was driven by higher sales volume, efficiencies in overhead absorption, and product mix. These gains offset higher input in landed costs, including tariff pressure. That is worth emphasizing. We expanded margin more than five points against a rising cost base. Sustaining gross margin at its current run rate as volume increases and sales mix shifts is a principal objective for the back half of 2026. On to operating expenses and our net loss. Total operating expenses were about $5.5 million, up approximately 16% year-over-year. However, operating expense as a percentage of sales decreased 9 percentage points year-over-year. In addition, operating expense decreased approximately $1.1 million, or 17% from Q1 2026. Research and development expense was $214,000, AL4 and Nexus have moved out of development and into production, which is why this expense caption fell $91,000, or approximately 30%, year over year. Spend converted into product we are now selling. General and administrative expense was about $3.5 million, up approximately 15% year over year. As a percentage of net sales, G&A decreased. by approximately 7 percentage points year-over-year. Further, this expense caption declined by approximately 690,000 or 16% from Q1 2026. Sales and marketing expense was $1.7 million, up approximately 31% year-over-year. However, sales and marketing expense as a percentage of net sales only increased 1% compared with net sales increase of 27%. Further, this expense caption decreased approximately $449,000 or 21% from Q1 of 2026, the first evidence of a marketing discipline we committed to during our Q1 2026 earnings call. Net loss was $3.97 million compared with $3.73 million in Q2 2025 and 5.83 million in Q1 2026. That is a 32% sequential improvement and a 6% reduction in net loss year over year. Loss per share improved from 33 cents from 71 cents for the prior year quarter. This year over year comparison is the one that keeps our attention. Revenue growth alone have not yet outrun our recurring cost base. The sequential comparison is the one that shows the mechanism working. Our objective for the second half is straightforward. Focus on gross margin expanding at a faster rate than operating cash requirements, creating a path to positive operating cash flow. Speaking of cash flow, Net cash used in operating activities in Q2 2026 was $3.4 million, compared with $8.2 million in Q1 of 2026 and approximately $3.1 million in Q2 2025, a 58% sequential reduction. For the first half of 2026, operating cash use was $11.7 million, compared with $6.9 million in the prior year period. An increase of approximately 68%. The Q2 2026 bridge is straightforward. We begin with a net loss of $3.97 million. Approximately $1.1 million is related to non-cash items, principally share-based compensation and depreciation and amortization. Leaving a loss before working capital movements of approximately $2.74 million. Working Capital used approximately $555,000, a substantial normalization from the roughly $3.6 million consumed in Q1 2026, and the clearest sign that the balance sheet build phase is believed to be behind us. Cash and cash equivalents was $1.2 million at June 30, 2026, compared with $567,000 at March 31, 2026, and $5.9 million at December 31, 2025. On to inventory. Inventory consists of raw materials that have already been purchased, work in progress, and finished goods. Converting this inventory into sales represents the largest internal source of working capital available to the company without the need to raise external financing. Net inventory was $12.1 million at June 30, 2026, up $2.5 million from year end. Inventory included approximately $6.6 million of raw materials, $4.6 million of finished goods, and $845,000 of work in progress. We are actively optimizing New production against growing sales channels and expect our materials and finished goods components to meaningfully reduce during Q3 2026. We are optimizing our inventory in the following initiatives. Number one, procurement. We are actively managing procurement requirements for our raw materials against our forecasted projections. First half 2026 procurement of approximately $8.1 million was front-loaded to support production requirements for expanding sales channels, with approximately $1 million of those purchases still in accounts payable at June 30, 2026. That spend, including the amounts outstanding at the end of Q2 2026, are now behind us. Number two, production. The process to manufacture our hard tunnel covers is managed against demonstrated sell-through and distribution reorder cadence rather than launch forecasts. Number three, fulfillment. Finished goods of approximately 4.6 million or 6,800 covers is the balance most directly convertible in the near term. We manage fulfillment by product family and sales channel with the goal to sell more than what is produced in a given month. Working capital conversion is the measure we will report against. For Insight, in July, we sold about 30% more covers than we made and that continues to be the goal for the balance of Q3. We are Prepare to take questions on inventory aging and the split between inventory supporting confirmed orders versus forecasted demand. Back to you, Steven.

Thank you, Jennifer. Lexis entered commercial production on April 13, 2026, with sales shortly thereafter, making Q2 2026 its first quarter in our product portfolios. This proprietary single-sided operation allows a person to secure and release the Nexus tunnel cover without making laps around the pickup truck. Practical solution to a real complaint. The real-world utility of Nexus creates a differentiated premium product for our customers. The product launch followed the shape you want to see. Following its introduction, Nexus achieved $1 million in cumulative sales across all sales channels in just about 10 weeks. Margin contributed is The contribution increased across both sales channels during Q2 of 2026. A product went from its first unit to contributing meaningful margin inside of a single quarter. The focus is now to maximize margin capture to manufacturing efficiencies and channel expansion, including established sales cadence. Into July, Nexus sales continue to grow, with Nexus-related sales orders commanding nearly $1.5 million. Two distribution partners were added in Q2 of this year, one at the end of April and the other one in June. Both distribution partners had orders fulfilled during the quarter. Meyer Distributing joined in June of 2026 as our first multinational distribution partner, bringing a substantially larger North American wholesale network, serving dealers, installers, and aftermarket resellers. That is the widest wholesale access the company has ever had. However, tri-state enterprises began carrying our product, including Nexus, and broaden our reach across four US states. This matters because distributor-driven sales in our commercial channel, including repeat orders, expands our reach while reducing our blended market burden per unit. We plan to focus on creating distributor programs during the second half of this year that emphasize active order frequency. Our filing also describes conversations with three additional major distributors, We remain focused on achieving successful contractual arrangements to maximize our distribution network of nationwide U.S. dealers. I want to characterize those accurately. There are opportunities at present, and we will announce updates as they become available. Let's talk SOLUS. SOLUS integrates solar generation directly into a tunnel cover platform, the first of its kind. Core is a modular, portable energy system that pairs with SOLUS to operate on its own. or operates on its own rather. Together, they extend the truck bed from storage into a power source. Both entered Q2 2026 with launch and certification work substantially complete. Core's UL and CSA certification package removes a real commercialization barrier and expands the set of distributors, retails, fleets, and commercial customers that can evaluate the system. Solus and Core did not represent a material share of Q2 2026 revenues. Our near term objective is product market fit and acquisition economics that do not require customer acquisition costs to rise. and Step with Gross Profit. We continue to develop federal feed and OEM-oriented opportunities, and we assume no material revenue from them in our near-term plan. However, I can confirm that we believe we have made notable progress on that front. Let me repeat. I believe we have, and I can confirm that we believe that we have made notable progress on this front in commercializing both soulless and core. Moving aside into TerraVis Energy, we received U.S. patent number 12624872 during the quarter, covering heat pump systems architecture related to zero frost and designed to reduce or eliminate conventional defrost cycle. Certification work is expected to continue in the second half, subject to testing and customary certification time. Aetherlux remains pre-commercial. No procurement decision has been made, and we do not rely on Aetherlux revenue to achieve our 2026 operating plans. The next gate is third-party validation and certification. We will allocate capital to it against measurable milestones and nothing else. We believe we may hit momentary operational cash flow positivity within Q3 2026. This is huge. At this time, we are not providing guidance of specific calendar targets for sustained operating cash flow positivity, though we remain focused on reaching sustainable operating cash flow breakeven in 2026. Our priority is disciplined cash generation rather than optimizing around a single quarter. Rather than focus on a projected date, we believe investors should focus on the underlying drivers of operating cash flow. Our path to positive earning cash flow is straightforward. Grow revenue, expand gross profit, maintain disciplined control over reoccurring costs, and convert working capital more efficiently, all of which we've shown that we can do in this past quarter. During Q2 of 2026, we made progress across all four areas simultaneously. Gross profit totaled approximately $1.7 million, compared to $4.5 million of cash operating needs before working capital, resulting in an operating cash flow gap of roughly $2.9 million before working capital movements. Working capital usage accounted for an additional $0.6 million during the quarter. Thank you for joining us. the current pre-working capital cost structure. Alternatively, if we expand our margin contribution by just 300 basis points and recognize approximately $9.3 million of quarterly net sales, reoccurring costs would need to decline by approximately $1.2 million per quarter for us to fully cover our reoccurring expenditures, assuming relatively neutral working capital. We offer these figures as a sensitivity We offer these figures as sensitivity guideposts rather than revenue guidance. The key takeaway is that the gap continues to narrow, and we believe the progress achieved during these quarters demonstrates a clear trajectory towards a self-sustaining cash flow, positive operating business. Q2 of this year showed that Worksport can generate stronger revenues, expand margin, reduce operating expenses, and materially improve cash efficiency in the same quarter against a rising input cost basis. The combination results in a business which we believe is on its way to scaling successfully. We are aware that there is still work ahead of us. We must convert our inventory, expand our commercial distribution reach, while maintaining gross profits that meaningfully contribute to our operations. This is a question of execution, and it's the right question to be judged on. So we are committing to three things, convert inventory into cash, turn distributor access into repeat large orders, and grow sales volumes faster than operational cash requirements. On that, thank you very much for your continued interest and work support. This concludes our prepared remarks. Operator, please open the line for analyst questions, and our investor town hall call will follow.