Worksport Ltd. (WKSP) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining us. I'm Steve Rossi, Founder and CEO of Worksport, and I'm here with Faran Ali , Investor Relations here at Worksport. We last had this conversation in June of this year, and we spoke again during our August earnings call. And since then, shareholders have had several more things to take in. So today, I want to put those pieces together. We'll talk about the business, the latest operating results, capital and the shareholder meeting. We'll also spend time on Terravis Energy and take your questions.

And Steve, I think there's a fairly straightforward question behind a lot of what investors are asking. We see that sales are growing, but how does that get to a point where as a business, we can support ourselves without having to rely on dilution or further capital raises. We'll spend some time there today. But before we start, we want to make sure that we stay with information that's already disclosed publicly. That means that we can explain it, we can provide context, but we can't give unpublished sales figures, discuss undisclosed transactions or get ahead of company announcements. We ask that you stay focused and stay tuned, and we'll be sharing that information as it happens.

Yes. So of course, I must say our discussions today may include forward-looking statements about our operating objectives, products, distribution, financing and certification plans. These statements involve risks and assumptions and actual sales may differ materially. Please review them and all of our disclosures alongside our SEC filings, including our risk factors. We do undertake no obligation to update forward-looking statements, except as required by law. So with that, let's kick things off. In June, we talked quite a bit about the new products, the distribution relationships and what those really could do for Worksport. And we have another quarter of reported results under our belt. And let's assess what those can look like or what those do look like. So Q2 revenue increased nearly 58% from Q1. Gross profit also increased approximately 93%, while operating expenses came in lower at about 17%. That combination really encouraging to us, and it shows that we're improving beyond the sales line.

So let's stop there for a moment. People hear percentages all the time. But Steve, when you look at it, what changed for you?

This really gives us something concrete to work from. As we build the business, we need to understand what parts improve with volume and which expenses require more attention. So we're really always fine-tuning towards that kind of improvement. So a strong sales month is really useful, and it helps us understand how to repeat it and how much of it contributes after the cost of getting the sale. And it really helps us make better decisions to just become better quicker and fast quicker and generally healthier.

And I think that one people -- one thing a lot of people have been talking about is the concept of net loss. We know that net loss has improved from Q1, but it was still slightly larger compared to the second quarter of last year. Where do you see net loss happening? And what's your commentary on that as we proceed forward?

Correct. Yes. So net losses -- I mean, we have really 2 net losses to think about. our operational expenses -- or sorry, expenses to think about, we have as a public company, and then we have Worksport as an operation within that public company. So we did report a quarterly net loss of approximately $3.9 million. And we have work to do, lots of work to do. And I want shareholders to understand the progress without losing sight of really how far we've come and how much we've been able to improve sales, reduce that burn and fundamentally grow the business. So we're really doing quite well in such a short period of time.

And I think that's what July starts to tell us, right? We reported a strong news update with July being the seventh consecutive month of revenue growth. And what's your commentary on that, right? July update, we had a record attention for orders. There were 2 figures that people are talking about, orders and sales. Can you explain the difference between what we saw in July for the $2.2 million in orders -- $2.5 million in orders, but $2.2 million in sales? And how does that work towards the net loss that we're going to be working through?

Yes, good question. So July orders were approximately $2.52 million, which is very healthy. And the net sales were $2.2 million. So we had $300,000 in backlog. So when we first started building tunnel covers at our factory, we were really estimating educated guess that we were putting a new product on the shelves kind of if you build it, they will come. Well, now that metaphor plays true where we are building it and they are coming in. And in fact, we're having more demand than we can fulfill immediately, which is great. To be in a position where we're building to orders is much more risk averse than building to forecasted orders. What we notice is, for example, RA runs a sale on RA trucks and more RAM trucks sell and therefore, the demand for tunnel cover sell into. So we don't have insight on those sales. So it's better to build with a backlog and build towards pending orders and a huge demand that exceeds our capacity and then to make the inventory. And that finished good becomes a liability. It's something that sits on the shelf, and we may not sell it, and we haven't had that problem, but it is definitely a risk. So an order has to meet the revenue recognition requirement before it becomes a reported sale. And that distinction matters when we assess that month in general. And we're able to build products, we're able to invoice those products, and we're able to see good profit from those products, all in a -- on a backlog basis, which is a really healthy position for us.

So it sounds like we're growing so fast that there's orders coming in. And then beyond that, there's orders that haven't been fulfilled yet, but could be revenue attribution coming up. Essentially, what you're saying is the follow-through matters as well for the orders that are coming in.

Absolutely, 100%. So you want to -- in business, you want to fulfill it properly, collect the cash and leave the customer the reason to buy from you again. Obviously, on the B2B side, that's more prevalent. But this applies to an individual truck owner as well as to port distributor. That first sale opens up the relationship, the experience after the sale determines whether it grows. So what we do is we focus, so keenly on putting the best product in a box, getting it out the door as fast as possible and then looking to that 5-star review from the consumer, from the reseller and building works sports culture and DNA is so important to being able to see that demand. We're such a great company. We've built such a fantastic machine that we're seeing a demand that's increasing faster than we could facilitate it, which is a fantastic position...

Yes, that's fantastic. And I guess another clarification in July, we said that the annualized run rate is approaching $30 million. And I think the next segment, Steve, I want to talk about what $30 million and what $35 million really means for the company in terms of cash flow positivity, right? There's been this conversation that at this current market cap, we are not believing that the intrinsic value of the company is captured. We think that as the company heads towards $35 million as it has to reach $40 million, you have a company that's making $40 million a year, might be cash flow positive at that $40 million and market cap is at $10 million. So there seems to be this inherent gap between that point and now. But reality is we're closing in on that $40 million target quickly. And so one thing with annualized run rate, it's a snapshot, right? It does change. But in terms of our trajectory, the run rate and annualized run rate is tending to get bigger. So one thing we want to keep investors in mind is that while annualized run rate is a fantastic measure, it isn't a full year guidance, but we want to guide people towards the idea that at this $35 million, $40 million annualized run rate, the business will be self-sufficient or is expected to be self-sufficient at least, and we're getting there quite fast.

Yes. So I mean, you said it earlier. I mean that's the seventh consecutive quarter of growth. So when we look at a run rate, on the first quarter, we sold $1 million, and we thought, okay, so 1 million times 4, we're going to do just forward math, we're going to do $4 million this year. And then the next quarter, we sold $2 million. And then, of course, you just multiply that again as a run rate. As the business continues to grow, I mean, and healthy growth, we continue to improve our top line. And as a tunnel cover manufacturer, we know that the ceiling is a 9-figure business. Where in 9 figures, we don't know. But we know that we could sell 9 figures in tunnel covers, whether it's $100 million or $99 million. We know that the market is there, and we're thinking about ways to get there. But we're so much more than just the tunnel cover brand. We produce solar accessories. We're augmenting that and improving that market. And we also sell battery technology, which is the global consumer market. So we're building all of that out simultaneously. But in order to figure out run rate, investors should use the latest reported figures, but of course, those are always improving. So July was the third consecutive month above 30% gross margin. and which has progressed from the beginning of the year, but it wasn't 35%. And we can't take one strong month and assume that the margin holds every single month after that. A lot of different things are at play there. So a 35% gross margin, $100 of sale produces $35 in gross profit before operating expenses at a lower margin, the same sale produces less in terms of margin contribution. And that's why growth and margin have to be discussed together. The important thing is that our gross margin remains stable at elevated levels -- so we sell more and we're making almost the same, and we see a path to continuing to increase. We're finding ways of making product more efficiently. And like hell, we're fighting inflation. There's a significant amount of domestic inflation, and I keep saying this in American aluminum, and we produce our product using mostly American sourced components, where we were 80%, 90% of American sourced raw materials and we're fighting inflation there. So it's important to keep that in mind that as inflation simmers and maybe prices god willing, those of raw materials go back down to where they used to be. It's a lot of margin that like.

No, I think that it's a strong story for anyone that does analyze the aluminum prices from 2021 to now. We're seeing in the last 2 years from 2024 to 2026, we saw aluminum go up 50%. Our product is approximately 85% aluminum. So despite having to inherit that 50% cost increase, the margins went up and they stayed up. If aluminum prices have revert back to the 20-year medium, which is, I think, still about 30% less than today's price, we would be in a very healthy cash position and/or in a position to lower our prices and increase sales. So I think ultimately, Steve, that brings us back to cash flow. What I believe is one of the telling signs of the business he is, is it going to be able to sustain its own cash needs? Or will it need to continue to raise capital from the market? I think investors are watching that carefully, especially as we're getting to this critical point. We talked about a revenue threshold at the end of our Q2 call, where we said, hey, $9 million at 35% gross margin would require a 17% OpEx reduction, and we'd be cash flow positive. Alternatively, with no OpEx reduction, we would need about $12 million a quarter. Reflecting back right now, we're at about $6 million to $7 million as of the July ARR. Let's talk about that. Could you give some more detail to investors about that?

Yes. And all the assumptions under these statements kind of matter. A change in gross margin changes the contribution in sales. How important is that dollar of what we sell or what does it do in terms of operational cash flow. So you really said a few different things. Number one is maintaining margin; number two, increasing sales, which we're doing. We're maintaining and increasing margin, although we've discussed how that ebbs and flows. We're increasing sales significantly. And in a period of time that no other tonneau cover brand or brand like us has been able to do. No other brand has grown to an ARR like ours in such a short period of time. It took one of our competitors 2 decades to get a little bit beyond where we are today and what we've been able to do in just a few short years. And then expenses underneath that affects working capital and the cash requirement. So right now, we project that Worksport will be operationally cash flow positive at about $9 million a quarter. or $3 million a month, which we're getting towards with a 35% gross margin. If we reduce our OpEx, if we get leaner and smarter faster, which we will, at about $12.9 million a quarter -- sorry, if we hit $9 million a quarter and we reduced our OpEx by 17%, we'll be cash flow positive. But at a sales rate of about just over $4 million or $12.9 million a quarter with the same gross margin of 35%, we're cash flow positive. So what's important is that we're growing sales on average 10% a month this year. And at this case, we're still on track to hit operational cash flow positivity. And in my eyes, it just matters when we're looking at these types of rates. So I want to underscore that statement that we're going to be cash flow positive within this year in my eyes. And I really feel like that's going to be a big message to the market that we just our humble tunnel cover market not inclusive of revenue contribution for the upcoming solar growth and the battery energy system growth and the other things that we're doing that are incredible that we're working on today, we're going to be a cash flow positive business within the year. That's what we're anticipating.

No, that's fantastic. And let's talk about the inventory and liquidity involved in getting increased sales. You mentioned that sales have went up 7 months in a row. I imagine that inventory still is a point where investors want to know more about. We showed a $12 million inventory balance at the end of Q2. And it's easy to hear a number like that, but -- and think maybe the cash problem is solved, but that inventory needs to convert. So what does that look like?

So inventory needs to become a sale, and that's what I underlined earlier in the conversation. We prefer keeping raw goods in inventory rather than finished goods, which right now, we're building towards demand, a backlog of demand. So -- and the sale needs to become cash. So we buy inventory, which is our bet. We place our bet on inventory, which we know we can convert to any model. And then we convert it to a product and then that product converts to cash. There are costs and execution along that way. And our June end balance included raw materials with work in progress and finished goods, and they were all at different stages of the process. And I think that we maintained a pretty healthy inventory balance in excess, we may know better, I think in excess of $10 million.

Yes. No, it's definitely higher. I think it was at $12 million at the end of the quarter, and that's where it's an important point, like you said, to convert that to sales. As we look towards future reporting results, what should investors look for?

Whether it's important to look at a few key things is whether we're managing purchases and production sensibly against demand, so for building towards the backlog versus building towards inventory, whether goods are moving through the business channels and selling and converting to cash and whether we can support customers while avoiding unnecessary cash tied up in stock and inventory, especially finished good inventory. Selling inventory at any price wouldn't answer the question e. But what we have to consider is the economics of the sales. What does it cost us to put a product in a box and get the box out the door and turn that into cash.

Okay. So Steve, if the operating picture is improving, where there's a plan to convert inventory to sales, where sales are continuing to grow, the margin remains healthy and this $30 million ARR needs to get towards a $40 million ARR and the business might be cash flow positive at that point. Where does the remaining financing look like? What does it look like? What can we talk to investors with information we've already shared publicly about that remaining finance requirement?

Yes. So improvement in sufficient cash is required. We need cash as the cash flow is the lifeblood of our business, and we're generating a significant amount of cash flow. But we have to manage things at different stages. So we still have obligations to meet while we work towards a stronger operational position. And the financing agreement disclosed in August contemplated about $2.3 million in gross proceeds that we really to put to work towards that growth. Obviously, when we land a new account, that account, let's just say it's a national distributor, which there are more that we're working towards, that national distributor is going to come in with a pretty big order, and we need to finance that order. They're going to want truckloads of tunnel covers to get started, and we're not going to see the cash from those truckloads of tunnel covers for what the market right now is 60 or 90-day payment term. But financing the growth is critical. And when investors see small cap companies like ours financing, they think, oh, boy, they're dilutive and they're raising capital to keep the lights on. No, this is growth capital. This is a totally fantastic thing because when we're raising capital today, we're literally -- that's fuel for the fire, that's fuel to grow, not fuel to pay burn. So we -- it also is involved in -- we're also very -- we have a significant amount of effort going into reducing our exercise -- sorry, the financing also reduced the exercise price of the additional warrants, which we understand and shareholders could consider all of this together. Now of course, we didn't want to raise capital. But under the circumstances we did and that growth capital, that's actually a very bullish thing.

No, I think that those are great points said together that the business is growing, margins are elevated. They're projected to increase, and we're projected to hit cash flow positivity. But before we hit that, we do need cash to remain the current obligations. But hitting the shareholder points in the head, dilution is a real cost. And then also, there are some statements in our financial files about going concern. Let's talk about that a little bit.

Yes. So the disclosure remains part of the financial picture. It needs to be read alongside the operating progress. There are things that we're working towards these disclosures remain there, and we're trying to get rid of them. Obviously, going concerns are very important, and we want to get these team stones off of our filings and become a healthy cash flow positive business, which we're working tirelessly towards getting -- achieving for us and for our shareholders.

And in regards to the annual meeting that we just completed about 10 days ago, could we talk a little bit about the 2 core items inside of that meeting, one being the minimum bid price notice and the related filing we did about -- sorry, an option to do a forward or backwards reverse split. And the second being a question that we got a few times about the special dividend advisory item that we did vote on and passed in the...

Yes, absolutely. So on the bid price notice, yes, the company did receive a minimum bid price deficiency notice from NASDAQ. And the initial compliance period to get back above $1 per share for 10 trading days runs till February 9, 2027. So trading continues during the period, and there's no issue. We can get additional -- we believe we can get an additional compliance period of another 6 months after that. So we really have a year to fix that problem. And I think that within a year, if you see how far we've come and how fast we've gotten here within -- from this year to last year or where we are today to a year ago, you can extrapolate how -- just how strong we're going to continue to get operationally between today and almost a year from now, which is a little under -- so the filing describes the requirement from NASDAQ to regain compliance and the options available to the company. And of course, one of them is the dreaded reverse split, reverse stock split to get back above $1, but nobody wants that.

And you know what, Steve, I think it's really important to distinguish a deficiency notice from an actual action that's been implemented, right? We've received a minimum bid price deficiency notice in August, but that doesn't mean that there's any level of action that needs to be or should necessarily be taken at this point. We have till February 9 to regain compliance. And if we don't regain it at that point, we could actually apply for an additional 180 days or 6 months beyond February 9, 2027. So that means that NASDAQ rules allow for numerous methods to cure the deficiency without use of a reverse stock split. And I think that management is looking at cash flow positivity this year, the period of time between then where we might need to take such action and now is significant enough for management to try and raise or try and see the stock price get up organically if it can. And that's sort of what the company is thinking at this point, right? Steve, that's what you've been trying to sell to shareholders? Or do you have additional thoughts on that in regards to when the company would need to do a reverse split?

Sorry, if at all necessary, we have about a year to get there. And I think, again, the business is going to be night and day different, although we're very strong. I mean at today's market cap, our book value, just our liquidation value -- well, maybe not liquidation value, but our net assets are more than double -- well, probably closer to triple we trade at today. So we're already bringing value. The market hasn't recognized it, and we're going to get there. So we can't control daily market pricing. We don't trade our stock. We don't participate in the market. We're not doing anything. So the primary focus for management which is to execute, reduce uncertainty, improve the financial position of the company and preserve the ability to take appropriate compliance action. Obviously, what we did is the AGM was just to kind of give us all the tools we need in the tool belt to renew them. But if you look at what we actually are doing, we're just focused on execution. And having all these consecutive quarters of growth and being a $20 million, $30 million run rate business in just such a short period of time is something where we have to pat ourselves on the back door because it's not easy to do.

And for the second core item in the AGM, could you talk about that proposal for the special dividend? We did touch base about it in the end of the quarter 2 call, but maybe just a reminder.

Yes. So what we did is on an advisory basis, we had the approval from the Board in essence, to consider special dividends in connection with a business unit or material asset sale. So it doesn't announce the sale or declare dividend. It's nothing material, but the Board noted that if we were to sell a business unit or some assets to the business that we could dividend shareholders appropriately for that sale. So you got to look at it works for it as a public company, and that's a public entities, but works for the tunnel covered business is actually a business unit for the public company. And so with Terravis Energy. So someone comes along and says, I want to buy Terravis Energy for $100 million or whatever, $1, $100 million, $1 billion, it doesn't matter. This is just figuratively. We could take that cash and we've now gotten the approval to dividend shareholders a portion of the proceeds.

And so that's the insight on why the Board wants to include that. Is there some sort of sale planned? Or is there something else that people should know?

So I want to be very careful what I say here, but of course, we believe the individual business assets and units like work for, Terravis and what we're working towards are worth significantly more in my eyes of a strategic partner than the value being reflected to them in the market. especially again in case of Terravis Energy. If we ever get the opportunity to deliver a strong return to shareholder via a sale or divestiture of the business unit and a dividend, we may take full advantage of that. And we feel that Worksport as a business unit could be worth significantly more than what it's priced at today. And we also believe that same thing with Terravis. So you got to think that the public markets value the share -- the value of the business, but it doesn't preclude us from having a business come and approach us saying, "Hey, how much to buy Worksport?" And we can't say, oh, $0.43 a share that buys Worksport. No, it's its own value. So within reason, it follows logically that Worksport could be sold for $50 million or $100 million or whatever amount we want for, not what it's trading for. So the trading price is so disconnected from the real asset value of the business that if there's an opportunity to sell either of those businesses, of course, with all the approvals and everyone being for it, we could look at it. And then we've already got approval from the Board to dividend any investor or stockholder of record of that sale, a portion of that. That could be a big upside for long-term shareholders.