Business context and reporting period
This summary reflects the unaudited Form 10-Q for the quarter ended September 30, 2016. The filing identifies the registrant as Franchise Holdings International, Inc. (FNHI), reporting sales of Truxmart products; this differs from the Worksport Ltd. name in the request metadata. Financial amounts are in U.S. dollars.
Financial performance and position
| Metric | Three months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2016 |
|---|---|---|
| Revenue | $159,588 | $278,963 |
| Gross profit / margin | $31,563 / 19.8% | $48,352 / 17.3% |
| Operating expenses | $80,606 | $272,512 |
| Net loss | $70,278 | $399,565 |
| Cash used in operations | Not separately reported | $168,640 |
At September 30, cash was $1,341; current assets were $243,545 versus current liabilities of $625,239. Total liabilities were $664,239, including a $215,359 derivative liability and $35,619 carrying value of convertible notes. Shareholders’ equity was a deficit of $370,702. Cash declined from $14,466 at year-end 2015.
Material changes versus prior comparable periods
- Third-quarter revenue increased about 5% from $151,428 in 2015; nine-month revenue fell about 34% from $421,700.
- Third-quarter gross margin improved to about 20% from 14%; nine-month gross margin was approximately 17% in both years.
- Net losses narrowed from $1,228,518 to $70,278 for the quarter and from $2,076,378 to $399,565 for the nine-month period, largely reflecting much lower professional fees and other expenses, including share-based consulting costs recorded in 2015.
- Management attributed lower year-to-date sales mainly to limited inventory while preparing new product lines. Distributor sales rose, while online retailer sales fell sharply year over year.
Outlook, risks, and unusual items
No quantified revenue or earnings guidance is provided. Management said it expects online-retailer sales growth to outpace traditional distribution, but this is not a quantified forecast. The filing states that substantial doubt exists about the company’s ability to continue as a going concern, citing recurring losses, limited cash, working-capital needs, and uncertainty about obtaining additional financing.
- The company issued $132,750 of convertible notes with variable, deeply discounted conversion terms; the embedded derivatives and debt discounts produced significant noncash expenses and liabilities. A separate secured note carries 18% interest; another note bears 40% interest and requires daily payments.
- One customer accounted for 52.4% of nine-month sales and 81% of accounts receivable at quarter-end. The company also reported relying on a single supplier source in Asia.
- Management concluded disclosure controls and procedures were not effective at period-end. The filing reports no material legal proceedings and no off-balance-sheet arrangements.
- After quarter-end, the company reported a $25,000 secured note and $10,500 of gross proceeds from issuing 250,000 shares under an equity purchase agreement. The agreement permits up to $1 million of stock sales, subject to conditions.
Important facts for investors to verify
- Confirm the registrant’s identity and relationship, if any, to Worksport Ltd.; the filing itself names Franchise Holdings International, Inc.
- Review the convertible-note conversion formulas, derivative valuation, dilution exposure, and any subsequent financing or share issuance.
- Assess near-term liquidity, debt repayment obligations, and the availability and terms of additional capital in light of the going-concern warning.
- Verify customer concentration, receivable collection, inventory availability, and dependence on the single supplier.
- Reconcile the MD&A discussion of derivative gains and losses with the financial-statement presentation, and check comparative sales percentages for consistency.