Business context and reporting period
This filing reports results for the three months ended March 31, 2017, comparing with the same period in 2016. The filing identifies the issuer as Franchise Holdings International, Inc. (FNHI), with its wholly owned subsidiary Truxmart, Ltd.; it does not identify Worksport Ltd. as the registrant. The financial statements are unaudited and presented in U.S. dollars.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / prior balance |
|---|---|---|
| Revenue | $101,263 | $93,508 |
| Gross profit / margin | $30,272 / approximately 30% | $6,291 / approximately 7% |
| Operating expenses | $1,450,460 | $84,214 |
| Net loss | $1,953,418 | $87,354 |
| Cash from operations | $(37,436) | $(3,100) |
| Cash at period end | $29,282 | $0 at December 31, 2016 |
| Total assets | $287,116 | $336,749 at December 31, 2016 |
| Total liabilities | $543,950 | $1,341,616 at December 31, 2016 |
| Shareholders’ deficit | $(256,834) | $(1,004,867) at December 31, 2016 |
Current assets were $234,824 versus current liabilities of $392,058, a working-capital deficit of $157,234. Secured notes totaled $252,874, including $100,982 classified as current; the balance includes secured notes bearing rates as high as 40%, and one note was disclosed as in default. Most assets were pledged as collateral.
Material changes versus the prior comparable period
- Revenue rose approximately 8%; Canadian sales increased while U.S. sales and online-retailer sales each declined approximately 32%.
- Cost of goods sold fell approximately 19%, and gross margin improved substantially. Management attributed the prior-year margin weakness partly to foreign-exchange translation and higher relative freight costs.
- Operating expenses increased sharply, primarily because $1.36 million of stock-based compensation was recorded for 72 million shares issued to the CEO. The quarter also included a $484,720 derivative loss and other debt-related charges.
- Two convertible notes and accrued interest were converted into 62,144,524 common shares. Common shares issued and outstanding rose to 202,232,666 at quarter-end from 68,088,142 at year-end.
- Operating cash outflow increased to $37,436. Financing activities provided $41,920, principally from $47,755 of secured-note proceeds, partly offset by repayments.
Outlook, risks, contingencies, and unusual items
- Going concern: Management stated that recurring losses and the need for additional financing raise substantial doubt about the company’s ability to continue as a going concern. It cautioned that financing may not be available on acceptable terms and that insufficient working capital could force operations to cease.
- Financing and debt: Subsequent-event disclosures state the company was out of compliance with certain debt covenants. The filing describes additional borrowing, proposed equity financings and debt-for-share arrangements, and a term sheet for up to $500,000 of inventory financing with interest, fees, share issuance and warrants. These disclosures include proposed or conditional arrangements; the filing does not establish that all were completed.
- Further dilution and governance: Subsequent events include a preferred-stock exchange carrying 299 common-share votes per preferred share, share issuances for services and debt assumptions, and agreements for additional common shares. The filing also reports ineffective disclosure controls, citing limited staffing, lack of segregation of duties, and absence of a formal audit committee with a financial expert.
- Customer concentration: The filing warns that losing key customers could adversely affect the business. It reports significant customer concentration, including one customer representing a substantial portion of reported sales under the table’s presentation.
- Outlook: No specific revenue, earnings, or cash-flow guidance is provided. Management expects online-retailer sales to continue growing faster than traditional distribution, but this is a forward-looking expectation, not a quantified forecast.
- Other unusual disclosures: The filing describes a prior-period misstatement involving omitted shares and prepaid expenses. It also reports no material legal proceedings and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Confirm the issuer identity: the supplied metadata says Worksport Ltd., while the filing names Franchise Holdings International, Inc. and Truxmart, Ltd.
- Reconcile share counts and subsequent transactions: the filing reports 202,232,666 shares at March 31, 2017 but 119,127,240 shares outstanding as of February 14, 2018, alongside substantial later share exchanges and issuances.
- Check the status, terms, and fulfillment of subsequent financing, debt-assumption, and share-purchase arrangements, as well as the disclosed covenant noncompliance and defaulted secured note.
- Assess liquidity and going-concern risk, including the company’s ability to fund operations and meet secured debt obligations.
- Review the CEO stock award valuation, derivative accounting and conversion terms, and the company’s remediation of ineffective disclosure controls.