Worksport Ltd quarterly report, Q2 FY2016

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Filing summary

Entity and period: The supplied filing is a Form 10-Q for the quarter ended June 30, 2016, filed by Franchise Holdings International, Inc. (FNHI), not Worksport Ltd. It reports on TruXmart products. Investors should verify that this is the intended filing. Financial statements are unaudited and presented in U.S. dollars.

Financial performance and position

  • Revenue: Second-quarter revenue was $25,867, down 87% from $192,096 in Q2 2015. First-half revenue was $119,375, down 56% from $270,272.
  • Gross profit and margin: Q2 gross profit was $10,498, or about 41% of sales, versus $36,375, or about 19%, in Q2 2015. First-half gross profit was $16,789, or about 14% of sales, versus $52,265, or about 19%. Management attributes the revenue decline mainly to insufficient inventory; it also cites currency translation effects. The filing's MD&A gives a different Q2 2016 cost-of-sales percentage than the figures in its financial statements, so the margin presentation merits verification.
  • Operating expenses and loss: First-half operating expenses were $191,906, down from $857,230, largely reflecting lower professional, marketing, and shipping costs. Net loss was $241,933 for Q2 and $329,286 for the first half, compared with $822,174 and $847,860, respectively, in 2015. First-half loss includes a $137,353 derivative-related charge associated with a convertible note.
  • Cash flow: First-half operating cash use was $48,883, compared with $377,862 in 2015. Financing provided $71,185, principally from a $77,750 convertible note, partly offset by note repayments and issuance costs. Cash increased from $14,466 at year-end to $32,252 at June 30.
  • Liquidity and debt: Current assets were $182,029, against current liabilities of $551,927. Total liabilities were $551,927, and shareholders' deficit was $320,183. Current obligations included $45,449 on a secured promissory note, $70,496 net carrying value on the convertible note, and a $137,353 derivative liability. The secured note bears 40% interest and is secured by company assets; the convertible note bears 10% interest, rising to 24% on overdue amounts, and has a conversion price linked to a substantial discount to trading prices.
  • Shares: 67,288,142 common shares were outstanding at June 30 and August 1, 2016. The company disclosed an equity purchase agreement for up to $1 million of common stock, subject to conditions including SEC registration effectiveness.

Changes, outlook, and risks

  • Management says sales fell because inventory shortages limited fulfillment of customer orders. Inventory declined to $89,117 from $129,006 during the first half.
  • The company reported substantial reductions in expenses versus 2015, including professional fees; the prior-year period included significant share-based consulting charges.
  • No quantified financial guidance is provided. Management states that adequate revenue or additional financing cannot be assured and that financing may not be available on acceptable terms. The filing says these conditions raise substantial doubt about the company's ability to continue as a going concern; failure to obtain working capital could force it to discontinue operations.
  • Risks include reliance on one Asian inventory supplier, sales concentration among key customers, foreign-exchange exposure, and dependence on operating cash flow and additional capital. Management reported no material legal proceedings and no off-balance-sheet arrangements.
  • Disclosure controls were described as ineffective at June 30 because of limited staffing and lack of a formal audit committee with a financial expert. A later statement in the same section says controls were effective at a reasonable-assurance level, creating an internal inconsistency that investors should clarify.

Important facts to verify

  1. Whether the filing is the intended document, given the mismatch between Worksport Ltd in the request and FNHI in the filing.
  2. The reported Q2 gross-margin and cost-of-sales figures, which do not reconcile between the MD&A and financial statements.
  3. The convertible note's conversion terms, derivative valuation, and potential dilution, as well as the terms and conditions of the proposed equity purchase agreement.
  4. The company's near-term working-capital needs and ability to obtain financing in light of the going-concern warning and low cash balance relative to current liabilities.
  5. The contradictory conclusions about disclosure-control effectiveness.