Worksport Ltd. — filing summary
Issuer and period: The supplied filing is a Form 10-K for Franchise Holdings International, Inc. (FNHI), not a filing under the name Worksport Ltd. It reports the fiscal year ended December 31, 2016, with 2015 comparatives; it is not a standalone Q4 report. FNHI’s principal operating business was Truxmart Ltd., which designs and distributes truck-bed tonneau covers. The filing was signed September 18, 2017. In August 2017, a reorganization created a successor public issuer that retained the FNHI name.
Financial results and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $361,123 | $651,667 |
| Gross profit | $27,063 | $119,086 |
| Gross margin | 7.5% | 18.3% |
| Operating loss | $(362,220) | $(3,425,804) |
| Net loss | $(1,136,220) | $(3,487,757) |
| Operating cash flow | $(237,023) | $(542,042) |
- Revenue mix: U.S. revenue fell to $135,000 from $431,000; Canadian revenue was $226,000 versus $220,000. Online-retailer sales declined to $53,659 from $434,533, while distributor sales increased to $263,567 from $127,654.
- Expenses and unusual items: Operating expenses fell sharply, particularly professional fees, which included $2.9 million of share-based consultant costs in 2015. The 2016 net loss included a $572,118 derivative loss related to convertible notes, as well as interest and financing costs.
- Liquidity: Cash was zero at year-end and the balance sheet showed bank indebtedness of $2,635. Current assets were $284,158 against current liabilities of $1,237,532; reported working-capital deficiency was $953,374, versus $41,818 in 2015. The company reported substantial doubt about its ability to continue as a going concern, citing recurring losses and dependence on additional financing.
- Debt: Notes payable totaled about $210,000 before discounts, and convertible notes had $132,750 principal outstanding; the balance-sheet carrying amount for the convertible notes was $78,978 after discounts and costs. A $44,382 secured note was in default at year-end. Certain secured notes bore 18% interest, and the defaulted note carried a 40% rate.
- Equity and dilution: Stockholders’ deficit was $1,004,867 at year-end. The company had 68,088,142 shares outstanding at December 31, 2016; the filing reports 222,787,240 shares outstanding as of September 8, 2017.
Changes, outlook, and risks
- Revenue declined approximately 45% year over year. Management attributed the drop mainly to inventory timing, insufficient working capital to restock U.S. inventory, and foreign-exchange translation. It said inventory had been shifted to Canada in response to patent complaints filed in Michigan in early 2016; the complaints were settled in May 2016, and the filing says products could be sold globally.
- Management expected to re-enter the U.S. and other markets in late 2017 and planned to release the Alpha product line subject to a successful capital raise. These are expectations, not assured results; the filing gives no quantified financial guidance.
- Subsequent to year-end, both convertible notes were converted into approximately 62.1 million shares in total. Other disclosed subsequent events included issuance of 72 million shares to the CEO under an incentive plan, agreements to issue shares for consulting services and assumed payables, and a debt-covenant compliance issue. The filing also describes a later settlement of a $65,000 note for 3.2 million shares.
- Risks highlighted in the filing include severe liquidity constraints and financing dependence; highly dilutive convertible-note terms; customer concentration (one customer represented 65.8% of 2016 sales); reliance on a single Asian inventory supplier; currency exposure; and competition. Management reported ineffective disclosure controls and internal control over financial reporting, citing limited staffing, inadequate segregation of duties, and other material weaknesses. The board had no independent directors or audit committee.
- The filing states that there were no material legal proceedings. Management did not provide a clear quantified outlook for future revenue, profitability, or cash flow.
Key facts for investors to verify
- Confirm the issuer and security being evaluated: this filing is for FNHI and describes a 2017 successor-issuer reorganization, while the request identifies Worksport Ltd.
- Review subsequent filings for the reorganization, share issuances, convertible-note conversions, debt-covenant status, and resulting fully diluted share count.
- Assess whether the company obtained sufficient financing and rebuilt inventory to support its stated market re-entry and product-launch plans.
- Examine the convertible-note derivative valuation and dilution terms, the defaulted and secured debt, and the company’s ability to meet near-term obligations.
- Check whether the disclosed material weaknesses in financial reporting controls were remediated and whether customer and supplier concentration changed.