Worksport Ltd. (Franchise Holdings International, Inc.) — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2019; filed November 14, 2019. The filing names Franchise Holdings International, Inc. (FNHI) as the registrant and describes FNHI and its wholly owned subsidiary, Worksport Ltd. The filing does not identify Worksport Ltd. as the registrant.
Financial results and position
- Revenue: Q3 2019 net sales were $870,053, versus $5,954 in Q3 2018. Nine-month sales were $1,959,027, versus $300,113. Management attributes the increase mainly to inventory availability and renewed U.S. market sales.
- Profit and margins: Q3 net income was $270,370, compared with a $302,095 loss. Nine-month net income was $142,149, compared with a $1,281,783 loss. Gross margin was 23% for Q3 and 25% for the nine months, versus negative 811% and negative 2%, respectively, in 2018. Q3 earnings per share were $0.01 basic and $0.00 diluted; nine-month EPS was $0.00 basic and diluted.
- Important earnings item: Nine-month results included a $250,778 gain on settlement of debt. The statement of operations reports a gain, while portions of MD&A describe the settlement item inconsistently as a loss; see investor verification items below.
- Cash flow: Nine-month operating cash flow was positive $285,135, versus negative $44,659 in 2018. Investing used $99,807 and financing provided $10,605; foreign-exchange effects reduced cash by $42,504. Cash rose from $25,323 at year-end 2018 to $178,752.
- Liquidity and debt: Current assets were $653,219 against current liabilities of $1,224,686; working capital was negative $571,467. Accounts payable and accrued liabilities were $913,335. Notes payable were $277,425, all classified as current; the company reported repaying an additional $10,909 after quarter-end. Total liabilities were $1,266,864, exceeding total assets of $847,949.
- Other balance-sheet items: Accounts receivable increased to $249,588 from $61,882; inventory decreased to $198,478 from $289,516. Shareholders’ deficit was $418,914. Common shares outstanding were 38,506,721 at September 30 and 40,506,721 as of November 14, 2019.
Material changes and business developments
- U.S. nine-month gross revenue was $2,072,963, versus $259,621 in 2018; Canadian revenue was $74,058, versus $32,483. The filing attributes U.S. growth to re-entry into that market, online retailers, and private-label support.
- One customer represented 89% of reported nine-month sales in 2019, creating material customer concentration. Management says Worksport supports 10 dealers and distributors and expects online-retailer sales to continue outpacing traditional distribution.
- Operating expenses declined to $534,629 from $745,335, primarily reflecting lower professional fees, partly offset by higher general and administrative and sales and marketing costs. Nine-month interest expense increased to $59,877 from $34,925.
- The company adopted lease accounting (ASC 842) and recorded a $63,399 right-of-use asset and corresponding lease liability. It entered a warehouse lease running August 2019 through July 2022, with monthly payments of $2,496.
- A 1-for-6 reverse stock split became effective March 29, 2019. During the period, all 1,000,000 Series A preferred shares converted into 13,583,397 common shares; the filing also describes returned and cancelled shares under a debt-settlement unwinding.
- The company reported a 10% investment in a U.S. mobile-phone development company, with $15,658 advanced by quarter-end under an agreement involving a stated $50,000 purchase price.
Outlook, risks, and controls
- Going concern: Despite nine-month net income, management says substantial doubt exists about the company’s ability to continue as a going concern. It cites the accumulated deficit of $10,212,150, uncertain ability to generate adequate operating cash, and dependence on additional financing; no assurance is given that financing will be available on acceptable terms.
- Outlook: No quantitative guidance is provided. Management expects online-retailer growth to continue, but forward-looking statements are subject to risks and actual results may differ.
- Contingency: The company agreed to settle $56,723 of notes payable by issuing 1,500,000 common shares upon listing on the Canadian Securities Exchange. It also said those 1,500,000 shares had not been registered as of the quarter.
- Other risks: Management warns that losing key customers could adversely affect the business. A related-party corporation controlled by the CEO/director was owed $58,465 for inventory purchases during the nine months. The filing reports no material legal proceedings and no defaults upon senior securities.
- Controls and filing status: Management concluded disclosure controls were ineffective, citing limited staffing that prevents segregation of duties and the lack of a formal audit committee with a financial expert. The conclusion refers to effectiveness “as of March 31, 2019,” despite this being a September-quarter report. The cover page marks “No” for having filed all required reports during the preceding 12 months.
Important facts for investors to verify
- Confirm the correct reporting entity and relationship between FNHI and Worksport Ltd.; the filing is FNHI’s 10-Q, notwithstanding the Worksport metadata.
- Reconcile the $250,778 debt-settlement gain reported in the financial statements with MD&A passages that characterize the settlement item as a loss, and assess its effect on reported profitability.
- Assess near-term liquidity, the substantial going-concern doubt, payable balances, debt repayment terms, and the availability and terms of additional financing.
- Verify customer concentration and the reported customer-sales figures: the filing lists $1,910,430 and 89% for one customer, while total reported nine-month net sales are $1,959,027.
- Review potential dilution, including the post-quarter issuance of 2,000,000 shares for services, the 1,500,000-share debt settlement contingent on CSE listing, and the common shares outstanding reported as of November 14.