Franchise Holdings International, Inc. — Q1 2016 Form 10-Q
Identity note: The request identifies Worksport Ltd, but the filing names Franchise Holdings International, Inc. (FNHI) as the registrant and discusses its TruXmart subsidiary. The filing does not clearly establish the relationship to Worksport Ltd. The summary below reflects the filing provided. Reporting period: three months ended March 31, 2016; comparative period: Q1 2015. Amounts are U.S. dollars unless stated otherwise.
Business and financial results
TruXmart sells truck-bed cover products. Revenue increased about 20%, primarily because more inventory was available to fulfill orders than in Q1 2015. Canadian sales rose substantially, while U.S. sales and online-retailer sales declined.
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Revenue | $93,508 | $78,176 | Up about 20% |
| Cost of goods sold | $87,217 | $62,286 | Up about 40% |
| Gross profit / margin | $6,291 / 7% | $15,890 / 20% | Margin declined 13 percentage points |
| Operating expenses | $84,214 | $40,866 | Higher G&A, sales and marketing, and professional fees |
| Operating loss | $(77,923) | $(24,976) | Loss increased |
| Interest expense | $(9,431) | $(710) | Included $6,317 related to the secured note |
| Net loss | $(87,354) | $(25,686) | Loss increased by $61,668 |
| Operating cash flow | $(3,100) | $(14,914) | Cash used decreased |
| Cash at period end | $0 | $349,809 | Compared with $14,466 at Dec. 31, 2015 |
| Total assets | $230,678 | $302,772 at Dec. 31, 2015 | Declined |
| Total liabilities | $322,919 | $299,053 at Dec. 31, 2015 | Increased |
| Shareholders’ equity (deficit) | $(92,241) | $3,719 at Dec. 31, 2015 | Shifted to a deficit |
The filing reports no meaningful per-share loss value, showing “$-” for both periods. No operating margin is expressly provided; the reported operating loss and revenue imply a negative operating margin of approximately 83% in Q1 2016, versus approximately 32% in Q1 2015.
Changes, liquidity and debt
- Canadian revenue increased to $65,204 from $28,655; U.S. revenue decreased to $28,304 from $49,511. Management said a weaker Canadian dollar reduced the U.S.-dollar translation of Canadian sales.
- Online-retailer sales fell 32% to $28,697 from $42,108. Distributor sales rose to $61,448 from $8,413.
- Cost of sales rose faster than revenue, and gross margin fell to 7% from 20%. Management attributed the margin pressure in part to currency translation and product/customer mix.
- Cash was depleted during the quarter. Current assets were $180,730 versus current liabilities of $322,919, a working-capital deficit of $142,189. Accounts payable and accrued liabilities were $270,540.
- The company reported a secured promissory note bearing 40% interest and requiring daily payments. Its March 31 carrying amount was $46,105, all classified as due within one year; the note is secured by all company assets. The company repaid $4,076 during the quarter.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing recurring losses and the need for adequate operating cash flow or additional financing; no assurance was given that financing would be available on acceptable terms.
Outlook, risks and other notable items
- No quantified revenue, earnings, or cash-flow guidance is provided. Management said it expected online-retailer sales growth to continue to outpace traditional distribution, but this is not a quantified forecast.
- After quarter-end, the company entered an equity purchase agreement for up to $1 million of common stock, subject to conditions including SEC registration and effectiveness of a registration document. The filing does not state that the full amount was raised.
- Customer concentration was significant: five customers represented a reported 82.3% of Q1 2016 sales; one customer alone accounted for 47.4%. The company also relied on one inventory supplier in Asia.
- Foreign-currency exposure, inventory availability, customer and supplier concentration, and access to financing are identified risks. Management said Q1 2015 sales had been constrained by inventory shortages.
- The company stated there were no material legal proceedings, no defaults upon senior securities, and no off-balance-sheet arrangements.
- Management initially concluded disclosure controls were not effective as of March 31, 2016, but a later paragraph in the same section says controls were effective at a “reasonable assurance” level. This internal inconsistency should be clarified.
Important facts for investors to verify
- Whether this filing is the intended issuer filing, given the Worksport Ltd. request metadata and FNHI registrant name in the document.
- The status, conditions, and actual proceeds, if any, from the post-quarter-end equity purchase agreement.
- Near-term liquidity needs, payment status and terms of the 40% secured note, and the company’s ability to meet obligations with zero cash at quarter-end.
- Whether gross margins can recover and whether increased Canadian/distributor sales can offset declines in U.S. and online-retailer sales.
- The customer and single-supplier concentrations, and the remediation status of the disclosed control weaknesses and conflicting control conclusions.