Worksport Ltd. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company, formerly Franchise Holdings International, Inc., sells Worksport-branded products. Financial statements are unaudited and presented in U.S. dollars.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $116,491 | $870,053 | $223,620 | $1,959,027 |
| Gross profit / margin | $22,357 / 19% | $201,537 / 23% | $43,592 / 19% | $485,877 / 25% |
| Operating expenses | $392,970 | $173,664 | $671,937 | $534,629 |
| Net income (loss) | $(604,990) | $270,370 | $(949,441) | $142,149 |
| Operating cash flow | Not separately presented | Not separately presented | $(407,704) | $285,135 |
- Management attributed the approximately 89% nine-month revenue decline to COVID-19-related shutdowns, weaker consumer demand, and manufacturing disruption. U.S. revenue fell approximately 89%; Canadian revenue fell approximately 85%.
- Gross margin declined as freight rose to 42% of cost of sales for the nine-month period, compared with 2% in 2019, according to the filing.
- Nine-month professional fees increased to $509,347 from $366,843, which management attributed to consultants engaged to help expand production and sales. General and administrative costs decreased to $97,566 from $149,041.
- Other expense was $321,096 for the nine months, versus other income of $190,901 in 2019. Interest expense was $276,822; the company also recorded a $44,274 loss on debt settlement. The prior period included a $250,778 gain on debt settlement.
Liquidity, debt, and capital
- At September 30, cash was $467,133, versus $11,993 at year-end 2019. Current assets were $907,630 and current liabilities $1,555,453, implying a working-capital deficit of $647,823. Total liabilities were $1,576,272; shareholders’ deficit was $444,263.
- Operating activities used $407,704 of cash over nine months. Financing activities provided $879,571, including $467,500 of convertible-note proceeds, $250,000 from stock issuance, and loan proceeds. Investing activities used $16,727.
- Current liabilities included $384,000 of promissory notes, a $181,062 loan payable, and $28,023 due to a related party. The secured Leonite convertible note carries stated interest of at least 10.2%, matures August 25, 2021, and is convertible at $0.09 per share, subject to adjustments and default provisions. The filing reports $286,382 principal remaining at September 30, net carrying value $16,942 after unamortized debt discount.
- Common shares outstanding increased from 41,906,790 at December 31, 2019 to 61,259,391 at September 30, 2020; 66,451,058 were reported outstanding as of November 16, 2020. The company also reported 2.25 million warrants outstanding and potential shares underlying the convertible note.
Outlook, risks, and notable items
- Management expected sales to remain low amid pandemic-related uncertainty, subdued consumer confidence, manufacturing disruption, and supply-chain risks. The filing provides no quantified revenue or earnings guidance.
- Management stated that substantial doubt exists about the company’s ability to continue as a going concern. It may need additional financing, which is not assured; without sufficient working capital, it could be forced to discontinue operations.
- Customer concentration is a risk: one customer represented 36.7% of nine-month 2020 sales; a different customer represented 89% in the 2019 comparison. Management said loss of key customers could adversely affect the business.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2020, citing limited staffing that prevents segregation of duties and the lack of a formal audit committee with a financial expert. The company also indicated it had not filed all required reports during the preceding 12 months.
- The company disclosed an immaterial prior-period error involving a deemed dividend, share issuances, and professional fees, and revised comparative information. A supplier settlement totaling $24,148 was fully paid. Subsequent to quarter-end, shares were issued under subscriptions, and a third party agreed to cancel a reserve of 4,166,666 shares.
Important facts for investors to verify
- Reconcile the filing’s differing nine-month loss and accumulated-deficit figures: the statements show a $949,441 net loss and $12,627,854 accumulated deficit, while the going-concern note cites $936,841 and $12,615,254.
- Confirm the current status, maturity, conversion mechanics, default terms, and potential dilution from the Leonite note and other share subscriptions and warrants.
- Assess near-term funding needs against the working-capital deficit, operating cash burn, and management’s going-concern warning.
- Verify the timing and extent of any sales recovery, freight costs, manufacturing normalization, and dependence on major customers and distribution channels.
- Monitor remediation of ineffective disclosure controls and the company’s SEC reporting compliance.