Filing Summary
Period and identity mismatch: The supplied text is a Form 10-Q for Franchise Holdings International, Inc. (also referred to as FNHI), for the quarter and nine months ended September 30, 2017—not a Worksport Ltd. filing or a 2017 first-quarter report. The filing describes sales of Truxmart products. Financial amounts below are in U.S. dollars unless stated otherwise.
Business Context and Financial Results
The company sold Truxmart products through distributors and online retailers. Management attributed lower sales primarily to limited inventory. The statements are unaudited and prepared on a going-concern basis.
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2017 / 2016 | $20,315 / $159,588 | $190,062 / $278,963 |
| Gross profit, 2017 / 2016 | $3,019 / $31,563 | $39,193 / $48,352 |
| Gross margin, 2017 / 2016 | 15% / 20% | 21% / 17% |
| Operating expenses, 2017 / 2016 | $112,890 / $80,606 | $1,631,962 / $272,512 |
| Net loss, 2017 / 2016 | $118,022 / $70,278 | $3,174,822 / $399,565 |
| Cash used in operating activities, 2017 / 2016 | Not presented by quarter | $81,886 / $168,640 |
At September 30, 2017, cash was $0; current assets were $565,220 and current liabilities were $389,923. Total assets were $631,396, total liabilities $436,236, and shareholders’ equity $195,160. Secured notes totaled $272,636, including $226,323 classified as current. The balance sheet also showed a $19,262 loan payable and $22,536 due to a shareholder. Substantially all assets were pledged as collateral.
Financing activities provided $88,409 in the first nine months; investing activities used $14,875. The company reported no ending cash. Management stated that losses, accumulated deficit of $8,362,978, and dependence on additional financing raised substantial doubt about the company’s ability to continue as a going concern.
Changes, Commentary, and Risks
- Nine-month revenue fell approximately 32% year over year; third-quarter revenue fell approximately 87%. Management cited insufficient inventory. Online-retailer sales rose to $70,745 for nine months, over 37% of revenue, while distributor sales declined to $118,337.
- Nine-month gross margin improved to 21% from 17%, which management attributed in part to foreign-currency translation; third-quarter margin declined to 15% from 20%.
- Nine-month operating expenses included $1,360,000 of compensation expense for 72 million shares issued to the CEO. The company also recorded a $1,034,557 loss on settling debt with shares and a $484,720 derivative loss. These items materially contributed to the year-to-date net loss.
- Two convertible notes were converted into 62,144,524 common shares. The filing also describes 35 million shares agreed for debt assumption, of which 24.6 million remained reserved at quarter-end, plus other equity commitments and subsequent share transactions—creating substantial dilution risk.
- Customer concentration was significant: three customers represented 81.8% of nine-month sales. Management warned that losing key customers could adversely affect the business.
- A secured note was in default at September 30, 2017; the filing says it was repaid in full afterward. Subsequent events also included additional debt and agreements to issue shares for debt assumption and investment proceeds.
- The filing states that disclosure controls were not effective, citing limited staff and lack of segregation of duties and a financial expert on the audit committee. Elsewhere, it says controls were effective at a reasonable-assurance level, an internal inconsistency that warrants review.
- The filing reports a corporate reorganization that was unwound after quarter-end. It also discloses a prior-period misstatement. Forward-looking statements are subject to risks, and the filing gives no specific financial guidance.
Most Important Facts to Verify
- Confirm the issuer and reporting period: the supplied filing identifies Franchise Holdings International, Inc. and the period ended September 30, 2017, despite the Worksport/2017 Q1 request metadata.
- Reconcile weighted-average share counts: the operations statement reports 205,243,762 for the quarter and 184,081,305 for nine months, while a note gives corrected figures of 67,514,229 and 67,485,906, respectively.
- Review the share issuances, reserved shares, conversion terms, and post-quarter equity agreements to assess dilution and whether reported share figures are consistent.
- Assess near-term liquidity, debt maturities, collateral pledges, default status, and the availability and terms of additional financing given the going-concern warning and zero cash balance.
- Reconcile the conflicting statements about disclosure-control effectiveness and review the prior-period correction and other identified reporting inconsistencies.