Worksport Ltd. (formerly Franchise Holdings International, Inc.) — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed May 14, 2020. This is an annual report, not a standalone fourth-quarter report. The filing covers the Nevada parent and its Worksport subsidiary. The company announced a name change to Worksport Ltd. on April 20, 2020, with ticker change approval pending.
Business context
Worksport designs and sells pickup-truck tonneau covers, including branded and private-label products, primarily in the U.S. and Canada. Products are manufactured by contract suppliers in China and sold through distributors, dealers and online retailers. The company reported one full-time employee and reliance on outside manufacturing and logistics partners.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $1,926,405 | $481,521 |
| Gross profit / margin | $238,547 / approximately 12% | $96,614 / approximately 20% |
| Operating expenses | $831,971 | $1,307,741 |
| Operating loss | $(593,424) | $(1,211,127) |
| Net loss | $(414,607) | $(1,763,038) |
| Net cash used in operating activities | $(13,253) | $(379,276) |
| Cash at year-end | $11,993 | $25,323 |
U.S. revenue rose to $1,860,563 from $416,331; Canadian revenue was nearly flat at $65,842 versus $65,190. Management attributed the sales increase to stronger sales to existing customers and re-entry into the U.S. market. Private-label sales were reported at $1,912,401 for 2019.
Gross margin declined from approximately 20% to 12%. The filing attributes the decline to foreign-exchange translation and higher product and U.S. warehousing costs. A $250,778 gain from unwinding a prior debt settlement also contributed to the lower net loss; the company still recorded an operating loss.
At year-end, current assets were $253,685 versus current liabilities of $1,324,684, a working-capital deficit of approximately $1.07 million. Total liabilities were $1,363,869, total assets $481,308, and shareholders’ deficit $882,561. The balance sheet lists $267,881 as the current portion of notes payable; the notes separately report a $278,938 balance owing, all classified as due within one year. Interest expense was $71,961.
Financing activities provided $117,842 in 2019, including $30,000 from a stock issuance and $88,120 in loan proceeds. Investing activities used $114,011, including $98,353 for property and equipment. The company reported an accumulated deficit of $10,768,906.
Changes, outlook and risks
- Revenue increased approximately 300% year over year, while net loss narrowed by approximately 76%. Gross margin nevertheless weakened.
- Customer concentration increased: one customer represented 89% of 2019 sales according to the filing. The filing also identifies that customer’s sales as $1,912,401, an amount that does not reconcile to the reported revenue total.
- The company purchases all inventory from one supplier source in Asia. Management cited the U.S.–China trade dispute as a factor affecting cash, and warned that loss of the supplier or shipping delays could harm operations.
- The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, accumulated deficit and dependence on additional financing. The company said financing may not be available on acceptable terms.
- Management expected COVID-19 lockdowns to reduce sales significantly in the first and second quarters of 2020. No quantified longer-term guidance was provided. Management planned to refocus on online sales and said new inventory was expected in the U.S. in 2020; the Alpha product line was expected for late 2020 subject to a successful capital raise.
- A supplier lawsuit was settled after year-end: payments of $6,037 per month for four months, totaling $24,148, beginning March 2020. In March 2020, the company also entered into a secured promissory note for $544,425, with 900,000 warrants exercisable at $0.10 and 450,000 shares to be issued to the lender.
- Management concluded disclosure controls and internal control over financial reporting were ineffective, citing limited staffing, inadequate segregation of duties and disclosure-control weaknesses. The auditor did not attest to internal controls.
- Other notable items include a $54,292 inventory impairment, an agreement to invest in a private mobile-phone company, and a reverse stock split of one share for six in March 2019. The company disclosed potential dilution from stock issuances and notes.
Important facts for investors to verify
- Reconcile the customer-concentration disclosure: 89% is stated, but the reported $1,912,401 customer amount is approximately 99% of total 2019 revenue.
- Reconcile the notes-payable balance of $267,881 on the balance sheet with the $278,938 amount in Note 7, and confirm repayment and maturity terms.
- Review liquidity and going-concern disclosures, including subsequent financing, debt service, and the status of the March 2020 secured note.
- Assess the sustainability and margins of the 2019 revenue increase given the concentration in private-label sales and one customer.
- Track the stated COVID-19 sales impact, inventory availability, and progress toward planned online sales and new product launches.
- Monitor remediation of material weaknesses in financial reporting controls and the company’s dependence on its single Asian supplier.