Worksport Ltd. / Franchise Holdings International, Inc. — FY2018 Form 10-K
Reporting period: Year ended December 31, 2018; filed May 13, 2019. This is an annual report, not a standalone fourth-quarter report. Although the request identifies Worksport Ltd., the registrant named on the filing is Franchise Holdings International, Inc. (OTCQB: FNHID); Worksport Ltd. is its wholly owned operating subsidiary.
Business context and operating update
Worksport designs and sells pickup-truck tonneau covers, primarily through online retailers, distributors, dealers and private-label/OEM arrangements. Products are manufactured in China. The company reported one full-time employee and relies on contract manufacturers and logistics providers. Management described a strategic emphasis on online and private-label sales, and cited plans to develop its Alpha cover line.
Financial results and liquidity
| Metric (USD) | FY2018 | FY2017 |
|---|---|---|
| Revenue | $481,521 | $408,701 |
| Gross profit / gross margin | $96,614 / 20.1% | $176,930 / 43.3% |
| Operating expenses | $1,307,741 | $1,957,428 |
| Loss from operations | $(1,211,127) | $(1,780,498) |
| Net loss | $(1,763,038) | $(3,403,106) |
| Net loss per share, basic and diluted | $(0.08) | $(0.17) |
| Net cash used in operating activities | $(379,276) | $(194,942) |
| Cash at year-end | $25,323 | $66,961 |
Revenue increased about 18%, but gross margin fell sharply as cost of sales rose 66%, including higher freight, customs and duty costs and U.S. warehousing costs. The net loss narrowed 48%, reflecting lower general and administrative expense and the absence of 2017 derivative and debt-discount charges; 2018 included a $495,944 debt-settlement loss and $864,160 in professional fees.
At year-end, current assets were $500,835 and current liabilities were $780,928, for a current ratio of approximately 0.64. Total assets were $557,368, total liabilities $780,928, and shareholders’ deficit $223,560. Notes payable were $287,425, all classified as current; the filing says several notes were in default and the company was discussing extensions. Cash from financing activities was $298,742, including $300,000 raised from stock subscriptions. The filing reports no off-balance-sheet arrangements.
Material changes, outlook and risks
- Revenue mix shifted substantially: U.S. revenue rose to $416,331 from $80,000, while Canadian revenue fell to $65,190 from $329,000. Management attributed the U.S. recovery partly to being able to resume use of the Worksport trademark from mid-2018 and the Canadian decline partly to factory-capacity constraints.
- Online-retailer revenue rose to $151,285 from $71,000. Private-label revenue was $265,969, or 56% of total sales. Four customers represented 99.2% of 2018 sales; the two largest accounted for 69%.
- Management said Alpha and Alpha Helios were expected for release in late 2019, contingent on a successful capital raise for research and development. The filing provides no quantified revenue or earnings guidance.
- The auditor and management cited substantial doubt about the company’s ability to continue as a going concern. Management said further financing may be required and that no assurance could be given it would be available on acceptable terms.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end, citing insufficient accounting resources, lack of segregation of duties, disclosure-process gaps, delayed information flows and reconciliation errors. The company said it later engaged an outside accounting firm to support bookkeeping and filings.
- Key operating exposures include dependence on one Asian inventory supplier, customer concentration, foreign-currency fluctuations, financing availability, and competition. The company relies on a patent licensed from CEO and major shareholder Steven Rossi; the license requires the company to maintain the patent but provides for no royalties.
- FY2018 financing and settlements involved share issuances and subscriptions. A debt-assumption agreement was disputed after counterparties allegedly failed to pay vendors; the company said it did not expect to issue the remaining shares. Subsequent events included a 1-for-6 reverse split effective March 29, 2019, and conversion of the CEO’s preferred shares into common stock.
Important facts for investors to verify
- Confirm the registrant and security being analyzed: the filing is by Franchise Holdings International, Inc., with Worksport Ltd. as the operating subsidiary.
- Reconcile the reported 2017 cash balance: the balance sheet and cash-flow statement show $66,961, while MD&A states $66,691.
- Review the status, maturity, security and extension terms of the $287,425 current notes payable, particularly notes disclosed as in default.
- Assess near-term funding needs, the going-concern warning, cash burn, and whether financing for the planned Alpha products was obtained.
- Examine customer and supplier concentration, gross-margin deterioration, and the disputed share-for-debt arrangement and other potential dilution.
- Note that the cover page indicates the company had not filed all required Exchange Act reports during the preceding 12 months; verify its filing-compliance status and the remediation of control weaknesses.