Worksport Ltd 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This section and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. All forward-looking statements in this Form 10-Q are made based on current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, various factors, uncertainties, and risks should be specifically considered that could affect future results or operations. These factors, uncertainties and risks may cause actual results to differ materially from any forward-looking statement set forth in this Form 10-Q. These risks and uncertainties described and other information contained in the reports filed with or furnished to the SEC should be carefully considered before making any investment decision with respect to the Company’s securities. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. Unless otherwise stated, all information presented herein is based on the Company’s fiscal calendar, and references to particular years, quarters, months or periods refer to the Company’s fiscal years ended December 31st and the associated quarters, months and periods of those fiscal years. Each of the terms “Company” and “Worksport” as used herein refers collectively to Worksport Ltd. and its subsidiaries, unless otherwise stated. The following discussion should be read in conjunction with the Company’s Annual Report Form 10-K for the fiscal year ended December 31, 2025 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 26,2026 and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q. 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. 20 Rising Popularity of Electric Vehicles Electric Vehicles (EVs) have been 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 portable power system. Regulatory Environment Favoring Electric Vehicles The Build Back Better Bill was a strong indication of upcoming and favorable U.S. regulations. Many regulations that improve North America’s EV charging infrastructure or provide grants to businesses operating in the EV space would 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. However, President Donald Trump has signed an executive order titled Unleashing American Energy in which he has indicated his administration will be reversing the electric vehicle mandates of Joe Biden’s former administration, and he has further paused billions of dollars in funding allocated towards electric vehicle charging stations. The future of the U.S.’s regulatory environment surrounding electric vehicles is uncertain. 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. Economic Conditions and Market Trends 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. Tariffs and Supply Chain Impact Our hybrid manufacturing model, which includes sourcing certain products and components from overseas—particularly from China—exposes us to risks associated with tariffs and evolving global trade policies. Tariffs on imported raw materials, components, and finished goods have increased our input costs and may continue to do so in the future. During fiscal 2025, increases in certain material and component costs attributable, in part, to tariffs contributed to higher cost of goods sold; however, these increases were offset by higher production volumes, improved overhead absorption, and operational efficiencies, resulting in an overall improvement in gross margins compared to the prior fiscal year. These impacts are both direct, through duties applied to imported products and components, and indirect, as suppliers and logistics providers may pass through increased costs associated with tariff regimes and related trade restrictions. While we have taken steps to mitigate these risks through supplier diversification, a portion of our supply chain remains dependent on foreign sources. As a result, tariffs and other trade measures may continue to increase our cost of goods sold and may impact product pricing and margins to the extent not offset by operational efficiencies or pricing actions. In addition, changes in U.S. trade policy or further escalation of tariffs could disrupt supply availability or increase lead times, which may adversely affect our operations and results of operations. 21 Geopolitical and Macroeconomic Conditions Recent geopolitical developments, including conflicts in the Middle East involving Iran, have contributed to volatility in global financial markets, higher energy prices and inflationary pressures. While we do not have direct exposure to the affected regions through our suppliers, customers, or operations, these conditions may adversely affect our business. In particular, increases in global energy and transportation costs may increase our cost of goods sold, and inflationary pressures may increase the cost of materials sourced from our suppliers, including suppliers in Asia. In addition, such conditions may adversely affect consumer discretionary spending, which could reduce demand for our products. Volatility in the capital markets may also affect our ability to raise capital on favorable terms. The extent and duration of these conditions remain uncertain and could adversely affect our business, financial condition and results of operations. 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 U.S. 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. Additionally, as central banks and the U.S. Federal Reserve adjust interest rates in response to evolving inflationary conditions, the cost of debt financing may fluctuate. While the Federal Reserve began reducing the federal funds rate in the latter half of 2024 and has continued measured reductions into 2025 and early 2026, interest rates remain elevated relative to pre-2022 levels, and the pace and extent of future reductions remain uncertain. Our $6,000,000 revolving line of credit and our $1,487,000 in equipment financing both carry floating interest rates, meaning we remain susceptible to variable debt interest costs as a result of changes in interest rates. High 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 recent 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 during certain periods due to geopolitical tensions and disruptions affecting global shipping routes, the shipping routes used by Worksport have not faced dramatic price hikes. Regardless, Worksport is closely monitoring international shipping costs. 22 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. 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. Business Developments The following highlights recent material developments in our business in the three months ended March 31, 2026: ● On January 13, 2026, the Company announced the commercial launch of the SOLIS™ Solar Tonneau Cover and COR™ Portable Energy System. The production launch allowed pre-orders to be fulfilled via Worksport’s US facilities, and a digital marketing campaign was initiated to drive sales for the standalone COR battery system and the solar-integrated SOLIS cover. ● On February 12, 2026, the Company announced that a large government entity is actively monitoring upcoming laboratory performance results of Aetherlux™ Heat Pump as part of an internal evaluation process. ● On March 19, 2026, the Company announced its presentation of its new, premium tonneau cover model to industry buyers at the Keystone BIG Show. CRITICAL ACCOUNTING POLICIES On a regular basis, we evaluate the critical accounting policies used to prepare our consolidated financial statements, including revenue recognition, inventory valuation, reviews for impairment of long-lived assets, and income taxes. RECENT ACCOUNTING PRONOUNCEMENTS See Note 1, Description of Business and Significant Accounting Policies included in Item 1, Financial Statements of this report for further information regarding Financial Accounting Standards Board issued Accounting Standards Updates (“ASU”). 23 CONSOLIDATED RESULTS OF OPERATIONS The following is a discussion of our results of operations from the three months ended March 31, 2026 compared to the three months ended March 31, 2025 Three months ended March 31, Favorable (Unfavorable) 2026 vs. 2025 2026 2025 Amount % Net sales $ 3,312,800 $ 2,240,005 $ 1,072,795 47.9 % Cost of sales 2,458,854 1,843,784 (615,070 ) (33.4 )% Gross profit 853,946 396,221 457,725 115.5 % Research and development 205,333 369,601 164,268 44.4 % General and administrative 4,239,154 3,414,822 (824,332 ) (24.1 )% Sales and marketing 2,155,867 869,749 (1,286,118 ) (147.9 )% (Gain) loss on foreign exchange (2,231 ) (1,645 ) 586 35.6 % Loss from operations (5,744,177 ) (4,256,306 ) (1,487,871 ) (35.0 )% Interest expense (92,383 ) (195,438 ) 103,055 52.7 % Other income (expense) 8,038 (8,720 ) 16,758 192.2 % Net loss $ (5,828,522 ) $ (4,460,464 ) $ (1,368,058 ) (30.7 )% Per share data Basic and diluted earnings per share $ (0.54 ) $ (1.05 ) $ 0.51 48.3 % Three months ended March 31, Favorable (Unfavorable) Percent of net sales 2026 2025 Percentage points Cost of sales 74 % 82 % 8 % Gross profit 26 % 18 % 8 % Research and development expense 6 % 17 % 10 % General and administrative expense 128 % 152 % 24 % Sales and marketing expense 65 % 39 % (26 )% Net sales For the three months ended March 31, 2026, net sales generated in the U.S. was $3,306,645, compared to $2,227,549 for the same period in 2025, an increase of approximately 48%. Net sales increased during the three months ended March 31, 2026 compared to the same period the prior year due to increased sales of tonneau covers to end users via the Company’s online marketplace and various dealers and distributors. The Company increased its product offerings in 2025 to also include AL4 and HD3 covers to end customers. The Company continues to focus on establishing as well as strengthening its presence in both the direct-to-consumer and business-to-business sales channels while also strengthening customer support to increase customer satisfaction and increase product turnover. We distribute our products in the U.S. and Canada through an expanding network of wholesalers, distributors, and dealers, and through online channels, including major online marketplaces and our direct-to-consumer e-commerce platform. We intend to continue expanding both business-to-business and direct-to-consumer channels with product offerings unique to each of these channels. We also continue to pursue relationships with original equipment manufacturers and fleet customers where appropriate. 24 We currently work closely with a large Canadian and a large U.S. distributor as well as online retailers to grow our customer base. We are progressing well in conversations with three other major distributors with strong market presences, which will allow us to promote to dealers and sell to jobbers in strategic regions. Lastly, we are in closing discussions with a network of nationwide U.S. dealers capable of bringing our product to all U.S. continental states. Net sales from online retailers of our products decreased by $60,045, from $1,871,085 for the three months ended March 31, 2025 to $1,811,040 for same period ended March 31, 2026. The 3% decrease is a result of the Company’s focus to lower our customer acquisition cost with additional focus on brand awareness and less focus on conversion marketing. The reduction in conversion marketing efforts decreased order volume, but this was offset by an increase in the average order value of our product offerings. Cost of Sales The decrease in the cost of sales as a percentage of sales was primarily driven by two factors: (1) increase production volume to support sales growth, including introduction of new product lines during 2025, and (2) overhead allocation efficiencies associated with higher production volume. These improvements offset increases in certain material, components, and landed costs, including the impact of tariffs on imported products and components sourced from overseas. While tariffs contributed to higher input costs during the three months ended March 31, 2026, the overall effect of increased scale and production efficiencies resulted in an improvement in our gross margin. We continue to employ a discounting strategy as part of a broader initiative to enhance market presence and build brand awareness. We anticipate this will well position us for sustained customer engagement in future periods, during which discounting may not be necessary to the same extent. As production volume grows and our manufacturing process becomes more efficient, we expect to allocate fixed costs included in overhead absorption against a larger production volume base. This scaling will be facilitated by reallocating more of our existing human capital and machinery resources toward production. We provide our distributors and online retailers with 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 U.S. to Canada. Volume discounts are offered to certain high-volume customers, and we also offer a “dock price” or “pickup program” whereby clients are able to pick up product directly from our stocking warehouse. Operating Expenses Operating expenses increased for the three months ended March 31, 2026 by $1,945,596, from $4,652,527 for the three months ended March 31, 2025 to $6,598,123, mainly due to the following factors: ● Research and development expense decreased by $164,268, from $369,601 for the three months ended March 31, 2025 to $205,333 for the three months ended March 31, 2026. The decrease was related to developmental progress of our AL3 and AL4 product lines, which required less R&D efforts as resources were shifted to normal-course production. ● General and administrative expense increased by $824,332, from $3,414,822 in 2025 to $4,239,154 in 2026. The increase was related to a shift in overhead absorption driven by production volume requirements as well as an increase in labor costs to support production efforts. ● Sales and marketing expense increased by $1,286,118, from $869,749 in 2025 to $2,155,867 in 2026. The increase in sales and marketing was primarily attributable to marketing campaigns to promote brand awareness. Other Income and Expenses We reported net other expenses for the three months ended March 31, 2026 of $84,345, compared to $204,158 for three months ended March 31, 2025. The decrease in net other expenses was attributed to decreased interest expense on our line of credit as a result of reduced usage following cash inflows as a result of the December warrant inducement transaction. Net Loss Net loss for the three months ended March 31, 2026 was $5,828,522, compared to a net loss of $4,460,464 for the three months ended March 31, 2025 – an increase of approximately 31%. The increase in net loss can be attributed to the increase in various operating expenses as we focus on expanding our operations and promoting our brand awareness. 25 Liquidity and Capital Resources As of March 31, 2026 and December 31, 2025, we had $566,583 and $5,945,894, respectively in cash and cash equivalents. As of March 31, 2026, we had $2,479,490 of remaining available capacity on our revolving line of credit compared with $3,448,016 of remaining available capacity as of December 31, 2025. The decrease in cash and cash equivalents and decrease in the remaining available capacity on our revolving line of credit was primarily a result of our use of proceeds from our warrant inducement transaction in December 2025 to fund working capital requirements to support the production of our new product offerings. We have historically generated only limited gross profit and have relied primarily upon capital generated from public and private offerings of our securities to fund continuing operations. Since the Company’s acquisition of Worksport in 2014, it has never generated a profit. During the three months ended March 31, 2026, we had net losses of $5,828,522 (three months ended March 31, 2025 - $4,460,464). As of March 31, 2026, the Company had working capital of $6,579,541 (As of December 31, 2025 - $10,061,578) and had an accumulated deficit of $89,729,030 (As of December 31, 2025 - $83,873,790). In their fiscal 2025 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 three months ended March 31, 2026, the Company received net proceeds of $2,208,337 from the offerings described below. Management is focused on transitioning towards gross profit as our principal source of liquidity by growing our existing product offerings and customer base and realizing manufacturing efficiency improvements. 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 raised funds during the three months ended March 31, 2026 from the following public and private securities offerings: ATM Shares On November 14, 2025, the Company entered into an amendment to its At The Market Offering Agreement, dated September 30, 2022, with H.C. Wainwright & Co., LLC (“Wainwright”) in connection with a new shelf registration statement on Form S-3 (File No. 333-291582), which was declared effective by the SEC on December 12, 2025. Pursuant to the amended ATM Agreement and the related prospectus supplement dated December 12, 2025, the Company may offer and sell shares of its common stock having an aggregate offering price of up to $4.0 million through Wainwright as sales agent. During the three months ended March 31, 2026, the Company sold 1,468,606 shares of common stock under the ATM Agreement for aggregate gross proceeds of approximately $2,232,530, resulting in net proceeds of approximately $2, 154,230 after deducting commissions and offering expenses. Because the Company’s public float is below $75.0 million, sales under the ATM Agreement are subject to the limitations of General Instruction I.B.6 of Form S-3, which limits the amount of securities the Company may sell in primary offerings during any rolling 12-month period. As a result, the amount currently available for sale under the ATM Agreement may be significantly less than the aggregate amount registered under the Company’s shelf registration statement. Regulation A Offering During the three months ended March 31, 2026, we received $54,107 of proceeds net of issuance cost that were previously held in escrow. The funds in escrow pertain to the Regulation A offering from 2025. Consolidated Statement of Cash Flows Cash decreased from $5,945,894 at December 31, 2025, to $566,583 at March 31, 2026 – a decrease of $5,379,311 or 90%. The decrease was primarily due to the use of cash to acquire working capital based on supporting the production of existing product offerings as well as the expected growth of additional product offerings launched in 2026. The Company procured approximately $5.1 million of raw materials to support production of our expanded product lineup, including the SOLIS, COR and NEXUS product lines. Some of our new product offerings utilize raw materials common to existing product offerings. Approximately $1.0 million of these raw materials purchases remained in accounts payable as of March 31, 2026. Operating Activities Net cash used in operating activities for the three months ended March 31, 2026 was $8,234,754, compared to $3,839,918 in 2025, primarily driven by the launch of additional product offerings during the three months ended March 31, 2026. Net cash used in operating activities exceeded the Company’s net loss by approximately $2.4 million. The principal component of the change is attributable to the $2.1 million increase in inventory, reflecting the procurement of raw materials and production of finished goods to support the launch of new product offerings during the three months ended March 31, 2026: SOLIS, COR, and NEXUS. 26 Accounts receivable decreased at March 31, 2026 by $23,759 and increased by $25,362 in the prior period. The decrease in accounts receivable is based on the timing of shipment with various business-to-business customers and well as the concentration of customers in certain sales channels. Inventory increased at March 31, 2026 by $2,092,218, and increased at March 31, 2025 by $583,116, as a result of the procurement and production of raw materials and finished goods to support the successful launches of our COR, SOLIS and NEXUS product lines. Prepaid expenses and other decreased by $62,902 at March 31, 2026, and increased by $192,071 at March 31, 2025 due to timing of advanced payments for professional services to support operations. Accounts payable and accrued liabilities decreased at March 31, 2026 by $1,562,383 compared to an increase of $390,691 at March 31, 2025 due to the payment for raw materials and finished goods procured and produced in preparation to support the successful launches of our COR, SOLIS and NEXUS product lines. Investing Activities Net cash used in investing activities for the three months ended March 31, 2026 was $103,643 compared to $458,342 for the three months ended March 31, 2025. The decrease in investing activities was primarily attributable to our purchase of cryptocurrency and website enhancements in the prior period, both of which are classified as intangible assets. Financing Activities Net cash provided by financing activities for the three months ended March 31, 2026 was $2,959,086 compared to net cash provided by financing activities of $4,495,533 for the three months ended March 31, 2025. Net cash provided by financing activities were principally due to our use of the ATM, whereby we received net proceeds of $2,154,230. We also received proceeds from our line of credit through net borrowings of $829,591 for the three months ended March 31, 2026. Material Contractual Obligations As of March 31, 2026, the Company had an outstanding contractual obligation of approximately $2.1 million related to the acquisition of manufacturing equipment from Prima Power, representing approximately 70% of the total equipment cost of approximately $3.0 million. Equipment deposits totaling approximately $859,000 are reflected in construction in progress on the Company’s balance sheet, and approximately $879,000 of capital expenditures related to the equipment were included in accounts payable as of March 31, 2026. The remaining amounts are expected to become due when the equipment is delivered, and installation milestones are achieved. Off-Balance Sheet Arrangements We did not have any material off-balance sheet arrangements that have or are reasonably likely to have a material future effect on our financial condition, results of operations or cash flows. Item 3. 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.