Business context and reporting period
This is Franchise Holdings International, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2015, with results also presented for the nine months ended September 30, 2015. The company’s operating business, TruXmart, designs and distributes truck tonneau covers in Canada and the United States. The request identifies Worksport Ltd., but the filing names Franchise Holdings International, Inc.; verify the intended issuer.
Financial performance and position
| Metric | Three months ended Sept. 30, 2015 | Nine months ended Sept. 30, 2015 | Comparable 2014 period |
|---|---|---|---|
| Revenue | $151,428 | $421,700 | $154,054 quarterly; $484,218 nine months |
| Gross profit | $21,247 | $73,512 | $36,944 quarterly; $140,262 nine months |
| Gross margin | 14.0% | 17.4% | 24.0% quarterly; 29.0% nine months |
| Net loss | $1,228,518 | $2,076,378 | $7,873 quarterly; $29,879 nine months |
| Operating cash flow | $(405,548) for nine months | $39,190 for nine months |
At September 30, 2015, cash was $18,480, current assets were $1,571,632, and current liabilities were $306,103. Current assets included $1,280,482 in prepaid expenses and deposits, largely related to shares issued for services to be provided. The balance sheet reports no shareholder loan and no other debt balance; accounts payable and accrued liabilities were $301,295. Cash fell from $155,735 at December 31, 2014. The filing reports no off-balance-sheet arrangements.
Material changes versus prior periods
- Nine-month revenue declined 13%, while third-quarter revenue was down about 2%. Management attributed the nine-month decline to inventory constraints, preparation for new product lines, and the weaker Canadian dollar. For the quarter, U.S. revenue rose 41% while Canadian revenue fell 50%, with Canadian orders affected by stock shortages.
- Nine-month cost of goods sold rose slightly despite lower revenue; gross margin fell to 17.4% from 29.0%. Management cited foreign-exchange translation effects. In the quarter, gross margin was 14.0%, down from 24.0%.
- Nine-month operating expenses rose sharply, with professional fees of $1,755,984 versus $42,989 in 2014. Management said these included public-company compliance costs and $1,336,029 of share-based consultant expenses. The company also recorded higher sales and marketing costs, product development costs, and transaction costs.
- Financing included $439,800 of share-subscription proceeds. Shares outstanding were 66,785,082 at September 30 and 66,885,082 as of November 19, 2015.
Outlook, risks and notable items
The filing provides no quantified revenue or earnings guidance. Management described plans to develop new products and said it expected online-retailer sales growth to outpace traditional distribution. Results are subject to risks including limited inventory, dependence on one Asian supplier, customer concentration (two customers represented 51.2% of nine-month sales), Canadian-dollar fluctuations, and reliance on additional financing.
Management stated that substantial doubt exists about the company’s ability to continue as a going concern: it reported a nine-month net loss of $2,076,378 and an accumulated deficit of $2,640,556, and said future operations may require additional financing that is not assured. Disclosure controls and internal control over financial reporting were reported ineffective, citing limited staffing, inadequate segregation of duties, and weaknesses in accounting procedures and financial-statement disclosures. The filing reports no material legal proceedings.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for Franchise Holdings International, Inc., not Worksport Ltd.
- Reconcile the filing’s inconsistent net-loss figures: the financial statements show $2,076,378 for nine months, while MD&A states $2,076,375; a note also contains an apparent typographical error.
- Assess liquidity and the availability and terms of additional financing given the $18,480 cash balance and going-concern warning.
- Review the valuation, service periods, and future expense recognition for consultant shares, including amounts recorded as prepaid expenses.
- Evaluate inventory availability, supplier and customer concentration, foreign-exchange exposure, and management’s plans to remediate control weaknesses.