Worksport / Franchise Holdings International, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The filing’s registrant is Franchise Holdings International, Inc. (FNHI), whose wholly owned subsidiary is Worksport, Ltd.; this differs from the “Worksport Ltd” company label in the request. Financial amounts are in U.S. dollars. The filing states the statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended Sep. 30, 2018 | Nine months ended Sep. 30, 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | $5,954 | $300,113 | $20,315 quarter; $190,062 nine months |
| Gross profit (loss) | $(48,316) | $(5,160) | $3,019 quarter; $39,193 nine months |
| Operating expenses | $245,974 | $745,335 | $112,890 quarter; $1,631,962 nine months |
| Net loss | $(302,095) | $(1,281,783) | $(118,022) quarter; $(3,174,822) nine months |
| Basic and diluted loss per share | $(0.00) | $(0.01) | $(0.00) quarter; $(0.02) nine months |
- Nine-month revenue rose about 58%, while third-quarter revenue fell about 71%. Nine-month gross margin was negative 2%, versus positive 21% in 2017; third-quarter gross margin was negative 811%, versus positive 15%.
- At September 30, cash was $158,892; current assets were $656,319 and current liabilities $1,235,272, a working-capital deficit of approximately $579,000. Accounts payable and accrued liabilities were $935,657, up from $230,770 at year-end 2017.
- Current notes payable were $272,418, with no long-term portion; a related-party loan of $22,211 was also reported. Nine-month operating cash use was $44,659; financing provided $175,000, principally from stock subscriptions. Cash increased from $66,961 at year-end 2017.
- Total assets were $710,314 and shareholders’ equity was a deficit of $524,958. Accumulated deficit was $9,873,043. Common shares outstanding rose from 122,327,240 at December 31, 2017 to 147,804,278 at September 30, 2018.
Changes, outlook, and risks
- Management attributed the third-quarter sales decline to delays securing trademark rights for the Worksport name, which it said prevented production or new sales for most of the quarter. The filing says the trademark was subsequently secured and management expected strong sales from Q4 onward; no quantified forecast was provided.
- Online-retailer sales for the first nine months increased to $133,337 from $70,745 and represented over 48% of revenue. Management said it expected online sales growth to outpace traditional distribution. Three customers accounted for approximately 85% of nine-month sales, creating customer-concentration risk.
- Nine-month operating expenses decreased substantially year over year, mainly because 2017 included $1.36 million of stock compensation for shares issued to the CEO. Professional fees rose to $603,586 from $162,065. The 2018 net loss also included a $495,943 loss on settlement of debt.
- The company disclosed substantial doubt about its ability to continue as a going concern, citing its loss, accumulated deficit, and dependence on adequate revenue or additional financing. It warned that unavailable working capital could force it to discontinue operations.
- A debt-assumption/share agreement was in dispute: counterparties allegedly failed to pay vendors as agreed, and the company said it did not expect to issue the remaining shares. The related $572,722 balance was reclassified to accounts payable. Separately, the filing describes 50 million shares contemplated under the agreement.
- After quarter-end, the company received $125,000 for a subscription of 6.25 million shares, which had not yet been issued as of the filing date; it also granted a warrant for 7.5 million shares at $0.02, exercisable through March 20, 2020.
- The company said disclosure controls were not effective at September 30, citing limited staffing and lack of segregation of duties and a formal audit committee with a financial expert. A later paragraph in the filing says controls were effective at a reasonable-assurance level, an apparent internal inconsistency. The cover page also marks “No” for having filed all required reports during the preceding 12 months.
Important facts for investors to verify
- Confirm the registrant and operating-company identity, and whether the filing’s delinquent-report indication has been resolved.
- Reconcile cost of goods sold: the financial statements report $54,270 for Q3 and $305,273 for nine months, while MD&A reports $69,979 and $320,982, respectively. The filing text does not explain these differences.
- Clarify the company’s actual control-effectiveness conclusion, given the conflicting statements in the filing.
- Track liquidity, vendor payables, financing availability, and progress toward the Q4 sales recovery management anticipated.
- Verify the status and consequences of the disputed share/debt-assumption arrangement and potential dilution from share subscriptions, commitments, and warrants.