Filing identity and reporting period
Important identity mismatch: The supplied filing is a Form 10-Q for Franchise Holdings International, Inc. (FNHI), not Worksport Ltd. It covers the quarter ended June 30, 2015, with results presented for the three and six months ended June 30, 2015. FNHI reports that its 2014 reverse acquisition brought in TruXmart, a Canadian and U.S. designer and distributor of truck tonneau covers. The interim financial statements are unaudited and presented in U.S. dollars.
Key financial results
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 | Comparable 2014 period |
|---|---|---|---|
| Revenue | $192,096 | $270,272 | $164,908 quarter; $330,164 six months |
| Gross profit | $36,375 | $52,265 | $45,930 quarter; $103,318 six months |
| Gross margin | 18.9% | 19.3% | 27.9% quarter; 31.3% six months |
| Net loss | $822,174 | $847,860 | $37,526 quarter; $22,006 six months |
| Operating cash flow | Not presented quarterly | $(377,862) | $36,199 six months |
Cash was $91,704 at June 30, 2015, down from $155,735 at year-end 2014. Investing used $102,630 and financing provided $439,800 during the first half. Current assets were $2.476 million, including $2.011 million of prepaid expenses and deposits; current liabilities were $309,069. The balance sheet shows no shareholder loan or other debt balance, but cash was limited relative to ongoing operating needs. The six-month deficit was $1.412 million.
Material changes and unusual items
- First-half revenue fell 18% year over year, which management attributed mainly to limited inventory while preparing new product lines. Second-quarter revenue rose 16%, attributed to a new product release and sufficient inventory.
- First-half gross margin declined to 19.3% from 31.3%. Management cited foreign-exchange translation effects; cost of goods sold was 81% of revenue versus 69% a year earlier.
- Operating expenses rose sharply: six-month professional fees were $646,820 versus $10,373, including $517,664 of share-based fees for consultants. Total six-month expenses were $900,125 versus $125,324, contributing to the larger net loss.
- Consulting and service agreements led to $2.011 million in prepaid expenses, to be expensed over agreement terms. The company also reported $38,280 in transaction costs related to a vendor settlement.
- Shares outstanding were 64,405,082 at June 30 and 66,785,082 as of July 30. The filing reports substantial share issuance for the reverse acquisition, cash subscriptions, and services; verify the resulting dilution and share valuations.
Outlook, risks, and controls
No numerical guidance or specific forecast is provided. Management said it expected online retailer sales growth to continue to outpace traditional distribution, while describing inventory availability and product launches as relevant to sales. FNHI disclosed substantial doubt about its ability to continue as a going concern, citing losses and uncertainty about generating adequate operating cash or obtaining additional financing. It relies on one supplier source in Asia; two customers represented 65% of first-half sales. It also faces Canadian-dollar currency exposure.
Management concluded that disclosure controls and internal control over financial reporting were ineffective as of June 30, 2015, citing insufficient staffing, weaknesses in the control environment, and inadequate disclosure controls. The filing states that the company planned to address weaknesses as resources allowed. No material legal proceedings or off-balance-sheet arrangements were reported.
Facts investors should verify
- Whether this FNHI filing is relevant to the requested Worksport Ltd. issuer; the filing identifies FNHI and TruXmart, not Worksport.
- The company’s actual cash runway, financing needs, and ability to continue as a going concern.
- The composition, recoverability, and expense-recognition schedule of the $2.011 million prepaid balance and related share-based service agreements.
- Share issuance records, post-quarter share count, pricing, and potential dilution.
- Inventory availability, supplier concentration, customer concentration, and the reported effect of foreign exchange on margins and revenue.