Worksport Ltd. (formerly Franchise Holdings International, Inc.) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; financial statements are unaudited and presented in U.S. dollars. The company changed its name to Worksport Ltd. on April 20, 2020. The filing was signed July 2, 2020.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $41,027 | $572,278; down approximately 93% |
| Cost of goods sold | $27,011 | $432,948 |
| Gross profit / margin | $14,016 / approximately 34% | $139,330 / approximately 24% |
| Operating expenses | $178,471 | $226,644 per financial statements |
| Operating loss | $(164,455) | $(87,314) |
| Interest expense | $(27,811) | $(39,160) |
| Net loss | $(192,266) | $(126,473) |
| Cash from operations | $(181,035) | $(38,539) |
Cash was $11,010 at March 31, down from $11,993 at year-end. Current assets were $452,345 versus current liabilities of $1,364,075, a working-capital deficit of approximately $911,730. Total assets were $682,220 and total liabilities $1,409,547; shareholders’ deficit was $727,327. Accounts payable and accrued liabilities were $903,054.
Financing activities provided $188,817, including $182,500 received under a convertible-note arrangement and $6,317 from shareholder loans. Investing activities used $8,765. Current notes payable were $367,058; the balance sheet also reports $12,715 of long-term notes payable. The filing describes a secured Leonite convertible note with up to $544,425 principal, issued in tranches, an 18-month maturity, and conversion terms that include a $0.09 fixed price and potentially lower pricing following default.
Changes versus the prior comparable period
- Sales fell sharply, and the net loss increased by $65,793 despite lower operating expenses and interest expense.
- Gross margin improved to approximately 34% from 24%, which management attributed to manufacturer negotiations and lower costs; freight rose to 13% of cost of sales from 9%.
- Common shares issued and outstanding increased from 41,906,790 at December 31, 2019 to 46,547,749 at March 31, 2020. Shares were issued for consulting, note consideration, and settlement of payables.
- Cash used in operations increased substantially year over year. Financing inflows offset operating and investing cash use, leaving cash down $983 for the quarter.
Outlook, risks, contingencies, and unusual items
- Management attributed the steep sales decline to COVID-19 lockdowns, manufacturing disruption, and weaker consumer confidence. It expected sales to remain low in Q2 2020; the filing gives no quantified forecast.
- The company reported a $192,266 quarterly loss and a $10,961,172 accumulated deficit. Management stated that the company may need additional financing and that the conditions raise substantial doubt about its ability to continue as a going concern. It warned that insufficient working capital could force a discontinuation of operations.
- Customer concentration was significant: two customers represented 37.5% and 34.5% of Q1 2020 sales, and another represented 14.8%. The filing warns that losing key customers could adversely affect the business.
- A supplier settlement requires four monthly payments of $6,037, totaling $24,148, scheduled to be repaid by June 1, 2020.
- Subsequent events disclosed a June 3, 2020 loan agreement for $32,460, of which the company was to receive $23,000 and a third party paid $9,460 of expenses; and a June 5 online-marketing agreement for which 1,333,333 shares were issued. The company also reported issuing 1,000 preferred shares to its president, secretary, and director on April 20.
- Management concluded disclosure controls and procedures were not effective as of March 31, citing limited staffing that prevents segregation of duties and the absence of a formal audit committee with a financial expert. The cover page marks “No” for having filed all required reports during the preceding 12 months.
- No material legal proceedings or off-balance-sheet arrangements were reported. The filing identifies no defaults upon senior securities.
Important facts for investors to verify
- Near-term funding needs, cash runway, and the availability and terms of additional financing, including the going-concern disclosure.
- The Leonite note’s funded balance, repayment schedule, security priority, conversion mechanics, and potential dilution; reconcile the note disclosures with the balance-sheet notes-payable amounts.
- Post-quarter share and preferred-stock issuances, shares issuable under subscriptions, and the resulting fully diluted share count.
- The extent and duration of COVID-19 effects on manufacturing, sales, and customer demand, as well as the company’s high customer concentration.
- The status of the supplier settlement and June 2020 loan and marketing arrangements, and any subsequent liquidity or operating developments.
- The filing’s “No” response concerning timely prior reporting and management’s disclosed control weaknesses.