Worksport Ltd annual report, FY2014

Business context and reporting period

This is Franchise Holdings International, Inc.’s annual report for the fiscal year ended December 31, 2014, filed April 13, 2015. Although the request identifies Worksport Ltd., the filing names Franchise Holdings International, Inc. (FNHI) and describes its acquisition of TruXmart Ltd., a tonneau-cover designer and distributor. The financial statements reflect TruXmart’s historical results and the reverse acquisition; they are not presented as Worksport Ltd. results.

TruXmart sells pickup-truck bed covers in the United States and Canada through distributors, dealers, and online retailers. On December 16, 2014, FNHI agreed to exchange shares for all of TruXmart. The business manufactures through third parties in China and had two full-time employees.

Financial results and liquidity

Revenue grew about 27%; U.S. revenue rose about 45%, while Canadian revenue increased about 5% in U.S.-dollar reporting terms. Online retailer sales increased 44% to $333,095 and exceeded 57% of revenue. Cost of sales was $435,401, or about 73.4% of revenue, versus about 74.7% in 2013.

The larger net loss primarily reflected $299,839 of reverse-acquisition transaction costs, along with higher professional fees, marketing, and shipping expenses. Cash was $155,735 at year-end, versus $17,517 a year earlier. Current assets were $276,997 and current liabilities $292,018, implying a working-capital deficit of about $15,021. Shareholders’ equity was negative $7,432. Accounts payable and accrued liabilities were $286,467; the filing does not provide a clear year-end balance for interest-bearing debt in the balance-sheet presentation. Investing cash use was $213,448 and financing cash provided was $352,041. The company reported no off-balance-sheet arrangements.

Material changes, outlook, and risks

• Management attributed sales growth largely to new online retailers and expects online sales to continue outpacing traditional distribution, but provided no quantified guidance.
• Cash-flow support included $383,000 in share-subscription proceeds received in December 2014 and a further $279,800 in subscriptions after year-end. These proceeds were associated with shares not yet fully issued at the reporting dates.
• Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, limited working capital, and dependence on additional financing. It warned that inadequate funding could force the company to discontinue operations.
• Customer concentration was significant: two customers represented 71.9% of 2014 sales. The filing’s risk discussion describes reliance on two Chinese contract manufacturers, while the financial-statement note says all inventory was purchased from one supplier source in Asia; supplier concentration merits clarification.
• Other risks include competition from better-funded rivals, dependence on third-party distribution, exposure to currency movements and cross-border trade, product-liability and quality risks, and limited patent protection. The company said it had no product-recall insurance.
• Controls were reported ineffective, with material weaknesses in the control environment and financial-statement disclosure processes. The board had no independent directors or committees.
• The auditor issued an unqualified opinion on the financial statements, but did not attest to internal control effectiveness.

Important facts for investors to verify

1. Confirm the issuer and reporting entity: this filing is for Franchise Holdings International, Inc., not Worksport Ltd.
2. Reconcile the share-exchange terms and ownership figures. The filing cites 40 million shares for TruXmart’s owner and gives differing post-transaction ownership percentages; it also says the shares awaited sufficient authorized capital.
3. Verify the status and terms of year-end and subsequent share subscriptions, shares issued, authorized shares, and resulting dilution.
4. Assess whether the reported financing and cash position are sufficient to address the going-concern warning and accrued liabilities.
5. Review customer and supplier concentration, the status of manufacturing arrangements, and the company’s ability to protect its licensed patent rights.
6. Check remediation of the disclosed internal-control material weaknesses and clarify the filing’s inconsistent supplier descriptions.