Worksport Ltd. / Franchise Holdings International, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The filing identifies the registrant as Franchise Holdings International, Inc. and describes Worksport Ltd. as its wholly owned subsidiary, despite the request metadata naming Worksport Ltd. Figures are in U.S. dollars unless noted otherwise.
Financial performance and position
- Revenue: $150,878, up 49% from $101,263 in Q1 2017. Canada revenue was $102,141 (up 25%); U.S. revenue was $48,736 (up approximately 154%).
- Gross profit and margin: Gross profit was $10,941 versus $30,272. Gross margin fell to about 7% (management reports 8%) from about 30%. Cost of sales rose 97% to $139,937, with freight representing 26% of cost of sales versus 7% a year earlier.
- Operating costs and loss: Operating expenses were $189,956, down from $1,450,460. Net loss was $691,446 versus $1,953,418; basic and diluted loss per share was $0.01 in both periods. Q1 2018 included a $495,943 loss on settling debt with shares. Q1 2017 included $1.36 million of CEO share-based compensation and a $484,720 derivative loss, among other debt-related costs.
- Cash flow: Operating activities provided $2,600, compared with $37,436 used in Q1 2017. Cash declined by $5,043 during the quarter to $61,918, including a $7,643 adverse currency translation effect. No financing cash flow was reported for Q1 2018.
- Liquidity and debt: Current assets were $807,400 and current liabilities $539,231, implying working capital of $268,169 and a current ratio of approximately 1.5. Current notes payable were $275,844; a related-party loan was $22,211. Total liabilities were $539,231.
- Other balance-sheet items: Accounts receivable fell to $83,628 from $189,502; inventory rose to $131,747 from $44,635. Total assets were $861,672 and shareholders’ equity $322,441 at March 31, 2018.
Changes, outlook, and risks
- Management attributed revenue growth mainly to available inventory and partial fulfillment of distributor orders. It said 2018 margins were depressed by higher U.S. shipping costs, one-time freight to stock the U.S. warehouse, and foreign-currency translation effects.
- During the quarter, the company agreed to issue 50 million common shares to two parties for assumption of $154,057 in payables. The shares were valued at $650,000, producing the $495,943 settlement loss; no shares had been issued by March 31, 2018. The filing also notes 24.6 million shares from a prior-year settlement remained to be issued at December 31, 2017, with no issuance during Q1 2018.
- The company reported substantial doubt about its ability to continue as a going concern, citing the quarterly loss, accumulated deficit of $9,282,707, and need for sufficient operating cash or additional financing. It warned that unavailable working capital could force it to discontinue operations.
- Customer concentration is a risk: the filing states that one customer represented 66.5% of sales in Q1 2018 and another 25.0%; management warns losing key customers could adversely affect the business. The filing’s customer table does not clearly reconcile its sales percentages and dollar amounts.
- Disclosure controls were deemed ineffective as of March 31, 2018, citing limited staffing, inadequate segregation of duties, and no formal audit committee with a financial expert. The company reported no material change in internal control during the quarter.
- No specific financial guidance or quantified outlook was provided. The filing states there were no material legal proceedings and no defaults upon senior securities. Management said adoption of ASC 606 did not affect revenue recognition for the quarter.
Important facts for investors to verify
- Confirm the correct reporting entity and filing history: the cover page marks “No” for having filed all required reports during the preceding 12 months.
- Track liquidity, financing availability, and progress addressing the stated going-concern uncertainty.
- Verify the status and final share count/value of the 50 million-share settlement and other shares remaining to be issued.
- Assess whether gross margins recover as freight and inventory constraints change, and whether customer concentration declines.
- Review remediation of ineffective disclosure controls and the accuracy of the customer-concentration disclosures.