Worksport Ltd. / Franchise Holdings International, Inc. — Q1 2019 Form 10-Q
Entity and period: The filing is for Franchise Holdings International, Inc. (FNHI), whose wholly owned subsidiary is Worksport Ltd.; it is not a standalone Worksport filing. It covers the three months ended March 31, 2019, with comparative results for Q1 2018. The filing indicates the company had not filed all required reports during the preceding 12 months.
Financial results and condition
- Revenue: $572,278, up about 279% from $150,878. Management attributed growth mainly to inventory availability and renewed U.S. sales.
- Profitability: Gross profit was $139,330 versus $10,941; gross margin was approximately 24% versus 8%. Operating expenses rose to $226,644 from $189,956. Operating loss narrowed to $87,314 from $179,015. Net loss was $126,473 versus $691,446; the prior-year loss included a $495,943 debt-settlement loss and $9,198 in finance charges. Q1 2019 interest expense was $39,160.
- Cash flow and liquidity: Operating cash used was $38,539, compared with $2,600 provided in Q1 2018. Cash fell to $21,900 from $25,323 at year-end 2018. Current assets were $547,087 against current liabilities of $914,015. Accounts receivable increased to $355,068 from $61,882; accounts payable and accrued liabilities rose to $555,891 from $401,766.
- Debt: Secured notes payable totaled $287,425, all classified as current. The company also reported $5,323 due on a related-party loan. Management described assumed notes bearing 12% and 18% interest and lines of credit bearing 18% interest.
- Equity: Shareholders’ deficit was $310,868, compared with $223,560 at December 31, 2018. The company reported a $10.48 million accumulated deficit.
Material changes and management commentary
- U.S. revenue was reported at $583,422 versus $48,736 in Q1 2018; Canadian revenue was $25,602 versus $102,141. The reported U.S. revenue exceeds consolidated net sales, and the filing does not clearly reconcile the difference.
- Management said larger U.S. orders and drop-shipped online sales reduced freight costs as a share of cost of sales to 9% from 26%. It expects online retail sales to continue outpacing traditional distribution, but gave no quantified guidance.
- Two customers accounted for a reported 79.2% and 12.7% of sales, respectively. Management warned that losing key customers could adversely affect the business.
- The company stated that substantial doubt exists about its ability to continue as a going concern. It cited recurring losses, limited cash, and uncertainty about generating adequate operating cash or obtaining additional financing; it warned that insufficient working capital could force it to discontinue operations.
- Disclosure controls were deemed ineffective, citing limited staffing, lack of segregation of duties, and no formal audit committee with a financial expert. Management reported no material change in internal control over financial reporting during the quarter.
- A 1-for-6 reverse stock split became effective March 29, 2019. Subsequent events included the April conversion of the CEO’s preferred shares into 13,583,397 common shares, a new director appointment, and a May issuance of 1,680,084 shares to a consultant.
Key items for investors to verify
- Confirm the registrant and reporting history: the filing is by FNHI, and its cover indicates required reports had not all been filed in the prior 12 months.
- Reconcile share counts: the balance sheet reports 26,634,052 common shares at March 31, while the equity statement reports 25,634,052; the filing also describes subsequent share issuances and reports 28,177,965 shares outstanding as of May 31.
- Clarify the sales disclosures: reported U.S. and Canadian revenue figures do not reconcile clearly to consolidated net sales, and the customer concentration amounts and percentages should be checked against the underlying records.
- Assess near-term financing needs, note maturities and terms, receivable collection, and the company’s ability to meet current liabilities given its low cash balance and going-concern warning.
- Review remediation of ineffective disclosure controls and the status of any unregistered shares, including the reported 1,500,000-share consultant subscription.