Business context and reporting period
This is Franchise Holdings International, Inc.’s Form 10-K for the fiscal year ended December 31, 2017—not a standalone fourth-quarter report. The company’s operating business was Truxmart Ltd., which changed its name to Worksport Ltd. on May 2, 2018. Worksport designs and distributes pickup-truck tonneau covers, primarily in North America, with products manufactured in China.
Financial results and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $408,701 | $361,123 |
| Gross profit / margin | $176,930 / 43.3% | $27,063 / 7.5% |
| Operating expenses | $1,957,428 | $389,283 |
| Loss from operations | ($1,780,498) | ($362,220) |
| Net loss | ($3,403,106) | ($1,136,220) |
| Net cash used in operations | ($194,942) | ($237,023) |
| Cash at year-end | $66,961 | $0 |
Cost of goods sold fell to $231,771 from $334,060; cost of sales declined to approximately 57% of revenue from 93%. Revenue increased 13.2% (MD&A describes the increase as approximately 13.5%). Canada revenue rose to $329,000 from $226,000, while U.S. revenue fell to $80,000 from $135,000.
At December 31, 2017, current assets were $712,829 and current liabilities were $533,939, yielding working capital of $178,890. Total liabilities were $533,939; notes payable of $275,844 were classified as current. The company also reported a $22,211 related-party loan. Total assets were $905,470 and stockholders’ equity was $371,531. The accumulated deficit was $8,591,261.
Material changes versus 2016
- Revenue grew modestly, with higher Canadian and online-retailer sales offset by lower U.S. revenue.
- Gross margin improved substantially, attributed to manufacturing cost reductions and higher-margin private-label sales.
- Net loss nearly tripled. General and administrative expense increased to $1.53 million, chiefly reflecting $1.36 million of stock compensation for 72 million shares issued to the CEO. Professional fees rose to $417,595 from $193,336.
- Other expenses included a $521,486 derivative loss and a $931,000 net loss on debt settlement. The company reported no derivative liability or convertible promissory note balance at year-end; substantial debt was converted to equity.
- Common shares outstanding were 122,327,240 at year-end, versus 68,088,142 a year earlier. The company also issued 1 million Series A preferred shares to its controlling shareholder in exchange for 100 million common shares; each preferred share carries voting rights equal to 299 common shares.
Outlook, risks and unusual items
The filing provides no quantified revenue or earnings guidance. Management said it planned to resume emphasis on direct dealer sales as U.S. inventory became available in 2018, and expected online sales growth to outpace traditional distribution. Alpha-series products were targeted for late 2018 or early 2019, subject to a successful capital raise; the Smart Roll was temporarily discontinued for redesign.
The auditor issued an unmodified opinion on the financial statements but highlighted substantial doubt about the company’s ability to continue as a going concern. Management said continued operations may require additional financing, for which availability and terms were uncertain; without adequate working capital, operations could be discontinued. Operating cash flow remained negative, and the company depended on operations and capital issuance to meet obligations.
Risks include dependence on one Asian inventory supplier and customer concentration: one customer accounted for 72.4% of 2017 sales and 89% of year-end receivables. The company had only one full-time employee. Management concluded disclosure controls and internal control over financial reporting were ineffective, citing limited staffing, inadequate accounting procedures, and disclosure-control weaknesses; there were no independent directors or audit committee. The filing did not provide the risk-factor disclosures, as the company relied on the smaller-reporting-company exemption. No material legal proceedings or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Confirm the filing’s identity: the registrant is Franchise Holdings International, Inc.; Worksport Ltd. was its subsidiary, renamed in May 2018.
- Reconcile debt-settlement disclosures: the notes describe a $1,034,557 settlement loss and a separate $104,000 gain, while the income statement reports a net $931,000 loss.
- Assess near-term funding needs, note maturities, and the availability and terms of additional capital; the auditor cited substantial doubt about going concern.
- Review the extent of potential dilution, including shares reserved under agreements, the equity plan’s 100 million-share authorization, and preferred-stock voting rights.
- Evaluate customer and supplier concentration, collection of the major customer receivable, and progress in reducing control weaknesses.