Worksport .(WKSP) - 2019 Q4 - Annual Report

Part I Business Worksport Ltd. designs and manufactures innovative, competitively priced tonneau covers for pickup trucks, targeting North American aftermarket and OEM markets - The company's primary business is conducted through its subsidiary, Worksport Ltd., acquired in December 2014, focusing on designing and manufacturing innovative tonneau covers for pickup trucks[12][13] - The specialty-equipment market was valued at $42.92 billion in 2017 and is projected to grow, supported by a strong economy and high consumer confidence[15][16] - Worksport targets master warehouse distributors, dealers, and OEM vehicle manufacturers such as Toyota, Ford, and General Motors, distributing through Canadian distributors and primarily US dealers and wholesalers[27][28][29] - The main competitor is Truck Hero Group; Worksport competes by offering aggressively priced products, such as its Tri Fold cover at US$239 compared to competitors' prices ranging from $269 to $425[34][36] - Worksport's strategy includes growing private label sales and expanding its intellectual property portfolio, holding 3 granted patents and 3 pending applications in Canada and the USA as of 2019[39][42] Current Patent and Trademark Portfolio | PATENT | DESCRIPTION | STATUS | AREA | STATUS | | :--- | :--- | :--- | :--- | :--- | | 62/823,316 | 3 LATCHES | APPLICATION | WORLD WIDE | PENDING | | US20170355251A1 | QUATTRO | GRANTED | US | EXPIRES IN 2035 | | US10252676B2 | TOOL BAG | GRANTED | US | EXPIRES IN 2035 | | WO2017070786A1 | ALPHA (BRANCH OFF TERRAVIS) | WORLDWIDE PCT APPLICATION | WORLD WIDE | PENDING | | US8814249B2 | SMART LATCH | GRANTED | US | EXPIRES IN 2040 | | 1920142 | WORKSPORT LOGO MARK | TRADEMARK APPLICATION IN CANADA | CANADA | GRANTED | | 1921043 | WORKSPORT WORD MARK | TRADEMARK APPLICATION IN CANADA | CANADA | GRANTED | | 88/120,025 | WORKSPORT WORK MARK | TRADEMARK APPLICATION IN US | US | GRANTED | | 88/120,020 | WORKSPORT LOGO MARK | TRADEMARK APPLICATION IN THE US FOR LOGO. | US | GRANTED | Risk Factors As a "smaller reporting company," the company is not required to provide information for this item Properties The company uses Toronto office space and a US third-party logistics warehouse, relying on contracted partners with minimal owned equipment - The company utilizes a bonded third-party logistics warehouse in the USA for stocking all Worksport products, with an annual rent of about $10,000[65] Legal Proceedings A legal proceeding with a supplier was settled in February 2020, requiring a $24,148 payment in installments - A legal proceeding with a supplier was settled on February 6, 2020; the company agreed to pay $24,148 in four monthly installments of $6,037, starting March 1, 2020[66] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on OTCQB, with 47 million shares outstanding as of May 2020; no dividends are planned, and an equity incentive plan exists - The company's common stock is traded on the OTC Markets (OTCQB) under the symbol "FNHI"[69] - As of May 14, 2020, there were 47,037,772 shares of common stock and 1,000 shares of preferred stock outstanding[5] - The company has never declared or paid dividends on its common stock and does not plan to in the foreseeable future[73] - During the year ended December 31, 2019, the company raised $30,000 in an unregistered equity sale, issuing 250,000 common shares[76] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue increased 300% to $1.93 million in 2019, net loss decreased 76%, but gross margin declined and cash fell Revenue Performance (2018 vs. 2019) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $1,926,405 | $481,521 | +300% | | U.S. Revenue | $1,860,563 | $416,331 | +347% | | Private Label Sales | $1,912,401 | $265,969 | +619% | | Online Retailer Sales | $174,793 | $151,285 | +16% | - Gross margin decreased from 20% in 2018 to 12% in 2019, attributed to foreign exchange rate fluctuations and increased US warehousing costs[86] - Operating expenses decreased by 36% year-over-year, from $1,307,741 in 2018 to $831,973 in 2019, largely due to a 69% decrease in consulting fees[89][97] - Net loss for 2019 was $414,607, a 76% decrease from the $1,763,038 net loss in 2018, driven by higher gross profit, lower operating expenses, and a gain on debt settlement[92][97] - Cash decreased by 53% from $25,323 at the end of 2018 to $11,993 at the end of 2019, partly due to the US-China trade dispute[92] Financial Statements and Supplementary Data The 2019 financial statements include a 'going concern' warning due to losses and accumulated deficit, noting customer concentration and COVID-19 impact - The independent auditor's report highlights a 'going concern' issue, citing the company's net losses and accumulated deficit as factors that raise substantial doubt about its ability to continue operations[102][115] Consolidated Statement of Operations Highlights | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Sales | $1,926,405 | $481,521 | | Gross Profit | $238,547 | $96,614 | | Loss from operations | ($593,424) | ($1,211,127) | | Net Loss | ($414,607) | ($1,763,038) | | Loss per Share (basic and diluted) | ($0.01) | ($0.08) | Consolidated Balance Sheet Highlights | Metric | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $11,993 | $25,323 | | Total Assets | $481,308 | $557,368 | | Total Liabilities | $1,363,869 | $780,928 | | Total Shareholders' Deficit | ($882,561) | ($223,560) | - The company has a significant customer concentration risk, with one customer (Customer A) accounting for 89% of total sales in 2019, up from 37.8% in 2018[178][180] - The company has a supplier concentration risk, purchasing all of its inventory from a single source in Asia[177] - Subsequent to year-end, the company changed its name to Worksport Ltd., took on a new secured promissory note for $544,425, and expects sales to decrease significantly in the first half of 2020 due to the COVID-19 pandemic[200] Controls and Procedures Management found disclosure controls and internal financial reporting ineffective due to material weaknesses like resource limitations and lack of independent board members - Management concluded that disclosure controls and procedures were not effective as of the end of the fiscal year[198] - Internal control over financial reporting was deemed ineffective due to material weaknesses, including a lack of sufficient resources, inability to separate duties, and inconsistent accounting policies[203] - A specific material weakness noted is that the Board of Directors does not have any independent members, and no director qualifies as an audit committee financial expert[204] Part III Directors, Executive Officers, and Corporate Governance The report identifies directors and executive officers, noting the board lacks independent members, while an audit committee has been established Directors and Executive Officers | Name | Position Held | | :--- | :--- | | Steven Rossi | President, Secretary and Director | | Michael Johnston | Chief Financial Officer | | Paul Haber | Director | | Lorenzo Rossi | Director | | Craig Loverock | Director; Chair of Audit Committee | - The Board of Directors does not have any members who are considered independent[230] - An audit committee has been established, chaired by Craig Loverock[217] Executive Compensation Executive compensation for 2019 primarily consisted of a salary paid to Steven Rossi, with no formal employment agreements in place Executive Salaries | Executive | Position | 2019 Salary | 2018 Salary | | :--- | :--- | :--- | :--- | | Steven Rossi | President, CEO | $65,589 | $63,796 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of May 2020, CEO Steven Rossi was the largest beneficial owner with 29% of common shares and significant voting control via preferred stock - As of May 14, 2020, Steven Rossi beneficially owned 13,583,397 common shares, representing 29% of the outstanding shares[226] - Mr. Rossi also owns 1,000 shares of Series B Preferred Stock, with each share having voting rights equal to 10,000 shares of common stock[226] Certain Relationships and Related Transactions, and Director Independence The company has related-party transactions with CEO Steven Rossi, including a patent license and salary payments, and the board lacks independent directors - Worksport licenses U.S. Patent 8,814,249 from CEO Steven Rossi and has paid $7,718 in related patent filing expenses[228] - During fiscal year 2019, CEO Steven Rossi was paid a salary of $65,589[228] - The Board of Directors has determined that no board members are considered independent based on NASDAQ's definition[230] Principal Accounting Fees and Services Haynie & Company billed $84,287 in audit fees for 2019, with an audit committee evaluating the auditor's engagement Audit Fees | Fiscal Year | Auditor | Fees Billed | | :--- | :--- | :--- | | 2019 | Haynie & Company | $84,287 | | 2018 | Haynie & Company | $38,200 | Part IV Exhibits, Financial Statement Schedules This section lists key exhibits filed with the 10-K report, including corporate documents, agreements, and CEO/CFO certifications - Lists key corporate documents filed as exhibits, including Articles of Incorporation, Bylaws, and the Definitive Share Exchange Agreement for the acquisition of Worksport, Ltd.[234] - Includes the patent license agreement with Steven Rossi and various service and shipping agreements[234] - Certifications from the CEO/CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are filed as exhibits 31.1 and 32.1[234]