UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For Quarterly Period Ended September 30, 2019

 

or

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition period from ______________________ to _____________________

 

Commission File Number: 000-27631

 

FRANCHISE HOLDINGS INTERNATIONAL, INC.

 (Exact name of registrant as specified in its charter)

 

NEVADA   65-0782227

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3120 Rutherford Road

Suite 414

Vaughan, Ontario, Canada L4K 0B2

(Address of principal executive offices) (Zip Code)

 

(888) 554-8789

Registrant’s telephone number, including area code

 

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One).

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]
(Do not check if a smaller reporting company)   Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [  ]

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

As of November 14, 2019, the number of shares outstanding of the registrant’s class of common stock, $0.0001 par value, was 40,506,721.

 

 

 

     

 

 

FRANCHISE HOLDINGS INTERNATIONAL, INC.

 

TABLE OF CONTENTS

 

  Pages
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements 3
  Condensed Consolidated Balance Sheets at September 30, 2019 and December 31, 2018 (Unaudited) 3
  Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (Unaudited) 4
  Condensed Consolidated Statements of Cash Flows for the nine months Ended September 30, 2019 and 2018 (Unaudited) 5
  Consolidated Statement of Shareholders’ Deficit for the three and nine months ended September 30, 2019 and 2018 (Unaudited) 6
  Notes to the Condensed Consolidated Financial Statements (Unaudited) 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 15
PART II OTHER INFORMATION  
Item 1. Legal Proceedings 16
Item 1A Risk Factors 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Mine Safety Disclosures 16
Item 5. Other Information 16
Item 6. Exhibits 17
SIGNATURES 18

 

  2  

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Franchise Holdings International, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

   

September 30, 2019

   

December 31, 2018

 
Assets                
Current Assets                
Cash and cash equivalents   $ 178,752     $ 25,323  
Accounts receivable     249,588       61,882  
Inventory     198,478       289,516  
Prepaid expenses and deposits     26,401       124,114  
Total Current Assets     653,219       500,835  
Investment     15,658       -  
Property and Equipment, net     72,377       43,860  
Right-of-use Asset, net     63,399       -  
Intangible Assets, net     43,297       12,673  
Total Assets   $ 847,949     $ 557,368  
                 
Liabilities and Shareholders’ Deficit                
Current Liabilities                
Accounts payable and accrued liabilities   $ 913,335     $ 401,766  
Payroll taxes payable     12,705       82,365  
Related party loan     -       9,372  
Current portion of notes payable     277,425       287,425  
Current lease liability     21,221       -  
Total Current Liabilities     1,224,686       780,928  
Long Term - Lease Liability     42,178       -  
Total Liabilities     1,266,864       780,928  
Shareholders’ Deficit                
Series A Preferred Stock, $0.0001 par value, 1,000,000 shares authorized, 0 shares issued and outstanding, respectively,     -       10,000  
Common stock, $0.0001 par value, 49,833,333 shares authorized, 38,506,721 and 24,634,052 shares issued and outstanding, respectively     3,850       2,463  
Additional paid-in capital     8,230,982       8,103,934  
Share subscriptions receivable     (1,577 )     (1,577 )
Share subscriptions payable     1,606,097       2,019,532  
Accumulated deficit     (10,212,150 )     (10,354,299 )
Cumulative translation adjustment     (46,116 )     (3,613 )
Total Shareholders’ Deficit     (418,914 )     (223,560 )
Total Liabilities and Shareholders’ Deficit   $ 847,949     $ 557,368  

 

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

  3  

 

Franchise Holdings International, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

For the Three and Nine Months Ended September 30, 2019 and 2018

(Unaudited)

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
    2019     2018     2019     2018  
                         
Net Sales   $ 870,053     $ 5,954     $ 1,959,027     $ 300,113  
Cost of Goods Sold     668,516       54,270       1,473,150       305,273  
Gross Profit     201,537       (48,316 )     485,877       (5,160 )
                                 
Operating Expenses                                
General and administrative     91,254       39,069       149,041       133,334  
Sales and marketing     12,253       2,863       62,172       11,178  
Professional fees     92,858       207,981       366,843       603,586  
(Gain) loss on foreign exchange     (22,701 )     (3,939 )     (43,427 )     (2,763 )
Total operating expenses     173,664       245,974       534,629       745,335  
Gain (Loss) from operations     27,873       (294,290 )     (48,752 )     (750,495 )
                                 
Other Income (Expense)                                
Interest expense     (8,281 )     (7,798 )     (59,877 )     (34,925 )
Finance charges     -       (7 )     -       (420 )
Gain (loss) on settlement of debt     250,778       -       250,778       (495,943 )
Total other income (expense)     242,497       (7,805 )     190,901       (531,288 )
                                 
Net Income (Loss)   $ 270,370     $ (302,095 )   $ 142,149     $ (1,281,783 )
                                 
Other Comprehensive Income (Loss)                                
Foreign currency translation adjustment     (22,492 )     (22,424 )     (42,504 )     (34,985 )
                                 
Comprehensive Income (Loss)   $ 247,878     $ (324,519 )   $ 99,645     $ (1,316,768 )
Earnings (Loss) per Share                                
Basic   $ 0.01     $ (0.01 )   $ 0.00     $ (0.06 )
Diluted   $ 0.00     $ (0.01 )   $ 0.00     $ (0.06 )
Weighted Average Number of Shares (basic)     39,239,007       23,463,386       34,492,728       21,562,215  
Weighted Average Number of Shares (diluted)     54,310,448       23,463,386       49,515,451       21,562,215  

 

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

  4  

 

Franchise Holdings International, Inc.

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2019 and 2018

(Unaudited)

 

    Nine Months Ended  
    September 30,  
    2019     2018  
Operating Activities                
Net Income (loss)   $ 142,149     $ (1,281,783 )
Adjustments to reconcile net loss to net cash from operating activities:                
Depreciation and amortization     25,009       2,180  
Loss (gain) on settlement of debt     (250,778 )     495,944  
      (83,620 )     (783,659 )
Changes in operating assets and liabilities     368,755       739,000  
Net cash provided by (used in) operating activities     285,135       (44,659 )
                 
Cash Flows from Investing Activities                
Purchase of investment     (15,658 )     -  
Purchase of property and equipment     (84,149 )     -  
Net cash used in investing activities     (99,807 )     -  
                 
Financing Activities                
Issuance of common stock for cash     30,000       175,000  
Repayment of notes payable     (10,000 )     -  
Repayment of shareholder loans     (9,395 )     -  
Net cash provided by financing activities     10,605       175,000  
                 
Effects of exchange rate changes on cash     (42,504 )     (38,410 )
                 
Changes in cash     153,429       91,931  
Cash and cash equivalents – beginning of year     25,323       66,961  
Cash and cash equivalents – end of year   $ 178,752     $ 158,892  
Supplemental disclosure of cash flow information:                
Interest paid   $       $ 16,604  
Supplemental disclosure of non-cash flow investing and financing activities:                
Shares issued for settlement of notes and accounts payable   $ -     $ 172,056  
Shares issued for consulting agreements     -     $ 393,750  
Conversion of Preferred Stock to Common Stock   $ (8,642 )     -  
Reverse stock split   $ 768       -  
Increase (decrease) in share subscription payable   $ (768 )   $ (589,694 )
Return and share cancellation   $ 8,642       -  

 

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

  5  

 

Franchise Holdings International, Inc.

Consolidated Statement of Shareholders’ Deficit

For the Nine Months Ended September 30, 2019 and 2018

(Unaudited)

 

   

Preferred Stock

    Common Stock     Additional Paid-in     Share Subscriptions     Share Subscriptions     Accumulated     Cumulative Translation    

Total

Stockholders’

 
    Shares     Amount     Shares     Amount     Capital     Receivable     Payable     Deficit     Adjustment     Deficit  
Balance at January 1, 2018     1,000,000     $ 10,000       20,387,873     $ 2,039     $ 7,474,811     $ (10,755 )   $ 1,531,080     $ (8,591,261 )   $ (44,383 )   $ 371,531  
Issuance for services     -       -       -       -       -       -       150,000       -       -       150,000  
Issuance for settlement of payables     -       -       4,246,173       12,741       326,287       -       (68,750 )     -       -       270,278  
Net loss     -       -       -       -       -       -       -       (1,281,782 )     -        (1,281,782 )
Foreign currency translation adjustment     -       -       -       -       -       -       -       -       (34,985 )     (34,985 )
Balance at September 30, 2018     1,000,000     $ 10,000       24,634,046     $ 14,780     $ 7,801,098     $ (10,755 )   $ 1,612,330     $ (9,873,043 )   $ (79,368 )   $ (524,958 )
                                                                                 
Balance at January 1, 2019     1,000,000     $ 10,000       24,634,052     $ 2,463     $ 8,103,934     $ (1,577 )   $ 2,019,532     $ (10,354,299 )   $ (3,613 )   $ (223,560 )
Insurance for Services     -       -       1,280,014       128       195,585       -       (195,713 )     -       -       -  
Return and cancellation of shares     -       -       (990,742 )     (99 )     (77,179 )     -       (247,722 )     -       -       (325,000 )
Issuance for settlement of payables     -       -       -       -       -       -       30,000       -       -       30,000  
Conversion of Preferred Stock     (1,000,000 )     (10,000 )     13,583,397       1,358       8,642       -       -        -       -       -  
Net Income     -       -       -       -       -       -       -       142,149       -       142,149  
Foreign currency translation adjustment     -       -       -       -       -       -       -       -       (42,503 )     (42,503 )
Balance at September 30, 2019     -       -       38,506,721     $ 3,850     $ 8,230,982     $ (1,577 )   $ 1,606,097     $ (10,212,150 )   $ (46,116 )   $ (418,914 )

 

The accompanying notes form an integral part of these consolidated financial statements.

 

  6  

 

Franchise Holdings International, Inc.

Consolidated Statement of Shareholders’ Deficit

For the Three Months Ended September 30, 2019 and 2018

(Unaudited)

 

   

 

Preferred Stock

   

 

Common Stock

   

 

Additional Paid-in

   

 

Share Subscriptions

   

 

Share Subscriptions

   

 

Accumulated

   

 

Cumulative Translation

   

Total

Stockholders’

 
    Shares     Amount     Shares     Amount     Capital     Receivable     Payable     Deficit     Adjustment     Deficit  
Balance at June 30, 2018     1,000,000     $ 10,000       21,378,615     $ 2,138     $ 7,551,990     $ (10,755 )   $ 2,271,802     $ (9,570,949 )   $ (56,944 )   $ 197,282  
Issuance for settlement of payables     -       -       3,255,431       12,642       249,108       -       (659,472 )     -       -       (397,722 )
Net loss     -       -       -       -       -       -       -       (302,094 )     -        (302,094 )
Foreign currency translation adjustment     -       -       -       -       -       -       -       -       (22,424 )     (22,424 )
Balance at September 30, 2018     1,000,000     $ 10,000       24,634,046     $ 14,780     $ 7,801,098     $ (10,755 )   $ 1,612,330     $ (9,873,043 )   $ (79,368 )   $ (524,958 )
                                                                                 
Balance at June 30, 2019     -     -       39,497,463     $ 3,949     $ 8,338,161     $ (1,577 )   $ 1,853,819     $ (10,482,520 )   $ (23,624 )   $ (341,792 )
Return and cancellation of shares     -       -       (990,742 )     (99 )     (77,179 )     -       (247,722 )     -       -       (325,000 )
Net Income     -       -       -       -       -       -       -       270,370       -       270,370  
Foreign currency translation adjustment     -       -       -       -       -       -       -       -       (22,492 )     (22,492 )
Balance at September 30, 2019     -       -       38,506,721     $ 3,850     $ 8,230,982     $ (1,577 )   $ 1,606,097     $ (10,212,150 )   $ (46,116 )   $ (418,914 )

 

The accompanying notes form an integral part of these consolidated financial statements.

 

  7  

 

Franchise Holdings International, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

1. Basis of Presentation and Going Concern

 

a) Interim Financial Information

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments and reclassifications considered necessary in order to make the financial statements not misleading and for a fair and comparable presentation have been included and are of a normal recurring nature. Operating results for the nine-month period ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on May 13, 2019.

 

b) Functional and Reporting Currency

 

These interim financial statements are presented in United States Dollars. The functional currency of the Company is the Canadian Dollar. For purposes of preparing these interim financial statements, balances denominated in Canadian Dollars outstanding at September 30, 2019 were converted into United States Dollars at a rate of 1.3 Canadian Dollars to one United States Dollar. Balances denominated in Canadian Dollars outstanding at December 31, 2018 were converted into United States Dollars at a rate of 1.36 Canadian Dollars to one United States Dollar. Transactions denominated in Canadian Dollars for the period ended September 30, 2019 and December 31, 2018 were converted into United States Dollars at an average rate of 1.34 and 1.30 Canadian Dollars to one United States Dollar, respectfully.

 

c) Use of Estimates

 

The preparation of condensed unaudited financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

d) Going Concern

 

These unaudited condensed consolidated financial statements have been prepared on a going concern basis which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. During the nine-month period ended September 30, 2019, the Company incurred a net income of $142,149 and as of that date, the Company’s accumulated deficit was $10,212,150. While the Company has demonstrated the ability to generate revenue, there are no assurances that it will be able to achieve level of revenues adequate to generate sufficient cash flow from operations or obtain additional financing through private placements, public offerings and/or bank financing necessary to support our working capital requirements. To the extent that funds generated from any private placements, public offerings and/or bank financing are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on acceptable terms. These conditions raise substantial doubt about our ability to continue as a going concern. If adequate working capital is not available we may be forced to discontinue operations, which would cause investors to lose their entire investment. The accompanying condensed consolidated financial statements do not include any adjustments that might result relating to the recoverability and classification of the asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this risk and uncertainty.

 

2. Significant Accounting Policies

 

The accounting polices used in the preparation of these interim financial statements are consistent with those of the Company’s audited financial statements for the year ended December 31, 2018.

 

The Company also implemented the following accounting standard effective January 1, 2019.

 

In January 2019, ASC 842 was implemented related to the valuation of leases. Under this guidance, leases should be capitalized that contain terms over one year and values over the capitalization policies. This standard became effective for the Company’s fiscal year beginning January 1, 2019. The Company has accounted for its leases upon adoption of ASC 842 whereby it recognizes a lease liability and a right-of-use asset at the date of initial application, being January 1, 2019. The lease liability is measured at the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate. The Company has measured the right-of-use asset at an amount equal to the lease liability.

 

Assets are depreciated over the useful life of the assets. The useful life of the following assets are as follows: warehouse equipment over 5 years, computers over 3 years, patents over 25 years, and leasehold improvements of 15 years. The Company does not take depreciation for the following items: product moulds, trademarks and website.

 

  8  

 

Franchise Holdings International, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

3. Inventory

 

Inventory consists of the following at September 30, 2019 and December 31, 2018:

 

    2019     2018  
Finished goods   $ 190,750     $ 282,239  
Promotional items     1,070       700  
Raw materials     6,658       6,577  
    $ 198,478     $ 289,516  

 

4. Secured Notes Payable

 

Secured notes payable consists of the following at September 30, 2019 and December 31, 2018:

 

    2019     2018  
Balance owing   $ 277,425     $ 287,425  
Less amounts due within one year     (277,425 )     (287,425 )
Long-term portion   $ -     $ -  

 

Subsequent to the nine month period ended September 30, 2019, the Company repaid in full an additional $10,909 of notes payable consisting of $9,545 principal and $1,364 in interest.

 

5. Changes in Cash Flows from Operating Assets and Liabilities

 

The changes to the Company’s operating assets and liabilities for the nine months period ended September 30, 2019 and 2018 are as follows:

 

    2019     2018  
Decrease (increase) in accounts receivable   $ (187,706 )   $ 170,487  
Decrease (increase) in inventory     91,038       (29,323 )
Decrease (increase) in prepaid expenses and deposits     97,737       7,277  
Increase (decrease) in income taxes payable     (69,660 )     (128 )
Increase (decrease) in accounts payable and accrued liabilities     437,346       590,687  
    $ 368,755     $ 739,000  

 

6. Investment

 

During the nine month ended September 30, 2019, the Company entered into an agreement to purchase 10,000,000 shares for $50,000 which has been issued to FNHI. The Company’s investment accounts for a 10% equity stake in a US based mobile phone development company. As of September 30, 2019 the Company had advanced a total of $15,658 and is advancing trenches of capital as required by the Company.

 

  9  

 

Franchise Holdings International, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

7. Lease Liabilities

 

During the nine month period ended September 30, 2019, the Company signed a lease agreement for warehouse space to commence on August 1, 2019 and end on July 31, 2022 with monthly lease payments of $2,496. The Company has accounted for its leases upon adoption of ASC 842 whereby it recognizes a lease liability and a right-of-use asset at the date of initial application, being January 1, 2019. The lease liability is measured at the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate of 10%. The Company has measured the right-of-use asset at an amount equal to the lease liability.

 

The Company’s right-of-use asset for the nine months ended September 30, 2019 is as follows:

 

   

September 30,

2019 		 
Right-of-use asset   $ 63,399  
         
Current lease liability   $ 21,221  
Long-term lease liability   $ 42,178  

 

The components of lease expense are as follows:

 

     

September 30,

2019

 

Amortization of right-of-use

  $ 3,296  

Interest on lease liability

  $ 1,212  

Total lease cost

  $ 4,508  

 

Maturities of lease liability are as follows:

 

Future minimum lease payments as of September 30, 2019,

 

2019   $ 6,651  
2020     26,606  
2021     26,606  
2022     13,303  
Total future minimum lease payments     73,166  
Less: amount representing interest     (9,717 )
Present value of future payments     63,399  
Current portion     21,221  
Long term portion   $ 42,178  

 

8. Shareholders’ Deficit

 

During the nine-month period ended September 30, 2019, the Company issued 1,280,014 common shares, previously recorded as subscription payable to Consultant with a value of $195,712. During the same period, the Company entered into a share subscription agreement with a consultant of the Company for 1,500,000 common shares valued at $30,000. As the shares have not yet been issued, the $30,000 has been recorded as share subscriptions payable.

 

During the nine-month period ended September 30, 2019, Steven Rossi was issued 13,583,397 shares of Franchise Holdings International, Inc common stock as approved by the board of directors, due to a conversion of all 1,000,000 shares of his Series A Preferred stock.

 

In 2018 and 2019, the Company was authorized to issue 49,833,333 shares of its common stock with a par value of $0.0001. All shares were ranked equally with regards to the Company’s residual assets. During 2018 and 2019, the Company was authorized to issue 1,000,000 shares of its Series A Preferred Stock with a par value of $0.0001. These shares have voting rights equal to 299 shares of common stock, per share of preferred.

 

  10  

 

Franchise Holdings International, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

9. Gain (Loss) on Settlement of Debt

 

During the nine-month period ended September 30, 2019, the Company reached a legal settlement agreement (the “unwinding”) with an individual investor to dissolve the Debt Settlement and Mutual Release Agreement entered into on January 12, 2018. In accordance to the settlement agreement, 19,055,551 pre-stock split, reserved shares were released and returned to the Company. In addition, 5,944,449 pre-stock split (990,742 post stock split) shares already issued were returned to the Company’s treasury, and cancelled, reducing the companies issued and outstanding shares accordingly. The company closed the unwinding in August 2019.

 

10. Contingent Liability

 

During the nine-month period ended the Company entered into an agreement with a debtor for the settlement of outstanding notes payable of $56,723 ($75,000 CAD). The Company will issue to the debtor 1,500,000 million common shares for the settlement of the outstanding notes payable upon listing on the Canadian Securities Exchange.

 

11. Earnings per Share

 

For the nine months ended September 30, 2019, Earnings per Share “EPS” is 0.00 (basic and diluted) compared to the loss per share for the nine months ended September 30, 2018 of 0.01 (basic and diluted). EPS is 0.01 and 0.00 (basic and diluted respectively) for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 of 0.00 (basic and diluted). At September 30, 2019 the Company had 13,721,441 share subscription and 1,350,000 warrants for a total of 14,971,441 common stock for the underlying instruments. Compared to a total of 16,885,738 of common stock to be issued from share subscription at September 30, 2018.

 

12. Reverse Stock Split

 

On March 8th, 2019, the Board of Directors authorized the submission of a Certificate of Change/Amendment to the Nevada Secretary of State in which the Company sought to affect a reverse split of its common stock at the rate of 1 for 6 for the purpose of increasing the per share price for the Company’s stock in an effort to meet the minimum listing requirements of the Canadian Stock Exchange (“CSE”). The Certificate of Change was submitted to the Nevada Secretary of State on March 20, 2019 and the FINRA corporate action was filed on March 21, 2019. FINRA declared the 1 for 6 reverse stock split effective on March 29, 2019. These financial statements, including prior period comparative share amounts, have been retrospectively restated to reflect this reverse split.

 

13. Concentration of Customer Risk

 

The following table includes the percentage of the Company’s sales to significant customers for the nine months ended September 30, 2019 and 2018, as well as the balance included in revenue and accounts receivable for each significant customer as at September 30, 2019 and 2018. A customer is considered to be significant if they account for greater than 10% of the Company’s annual sales.

 

    2019     2018  
    $     %     $     %  
Customer A     1,910,430       89.0       42,687       14.0  
Customer B     n/a       n/a       121,079       41.0  
Customer C     n/a       n/a       87,788       30.0  

 

The loss of any of these key customers could have an adverse effect on the Company’s business.

 

14. Related Party Transactions

 

During the nine months ended September 30, 2019, the Company incurred $58,465 payable to a US based corporation controlled by the Company’s CEO and director for the purchase of inventory.

 

15. Evaluation of Subsequent Events

 

The Company has evaluated subsequent events through November 14, 2019 which is the date the financial statements were available to be issued and the following events after September 30, 2019 occurred:

 

  ● On October 17, 2019, the Company issued 2,000,000 shares for services rendered per prior contract for consulting performed.
  ● Refer to Note 4 for additional subsequent event.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following management’s discussion and analysis (“MD&A”) should be read in conjunction with financial statements of FNHI, and its wholly owned subsidiary, Worksport, Ltd. for the nine months ended September 30, 2019 and 2018, and the notes thereto. Additional information relating to FNHI is available at Worksport.ca.

 

Safe Harbor for Forward-Looking Statements

 

Certain statements included in this MD&A constitute forward-looking statements, including those identified by the expressions anticipate, believe, plan, estimate, expect, intend, and similar expressions to the extent they relate to FNHI or its management. These forward-looking statements are not facts, promises, or guarantees; rather, they reflect current expectations regarding future results or events. These forward-looking statements are subject to risks and uncertainties that could cause actual results, activities, performance, or events to differ materially from current expectations. These include risks related to revenue growth, operating results, industry, products, and litigation, as well as the matters discussed in FNHI’s MD&A under Risk Factors. Readers should not place undue reliance on any such forward-looking statements. FNHI disclaims any obligation to publicly update or to revise any such statements to reflect any change in the Company’s expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

 

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included in this report.

 

Revenue

 

For the three and nine months ended September 30, 2019, revenue generated from the entire line of Worksport products was $870,053 and $1,959,027, compared to $5,954 and $300,113 for the three and nine months ended September 30, 2018. The year over year increase of approximately 553% was mainly attributable to the availability of inventory to satisfy customer orders.

 

For the nine months ended September 30, 2019, revenue generated in Canada was $74,058 compared to $32,483 for the same period in 2018, an increase of 56%. For the three months ended September 30, 2019, revenue generated in Canada was $49,410 compared to refunds of $6,059 for the same period in 2018, an increase of 6425%. The increase was primarily due to an increased higher demand in Canada, resulting in Canadian market sales to increase for the three months ended. The rate of exchange between the Canadian Dollar and the United States Dollar during the nine months of fiscal 2019 was consistent, which limited the historically negative effect on reported revenues as a result of translating the sales denominated in Canadian Dollars to United States Dollars for financial statement reporting purposes. For the nine months ended September 30, 2019, gross revenue generated in the United States was $2,072,963 compared to $259,621 for the same period in 2018, an increase of 1176%. For the three months ended September 30, 2019, gross revenue generated in the United States was $924,949 compared to $4,986 for the same period in 2018, an increase of 17839%. This is primarily attributable to re-entering the US market as of mid-2018 and continuing to increase sales which included online retailers and the support of four private labels, after the allowance of use of the Worksport trademark.

 

Currently, Worksport works closely with one major distributor in Canada, along with its own contracted distribution and inventory facility in Breinigsville, PA and Depew, NY. This does not include multiple independent online retailers.

 

Although Worksport currently supports a total of 10 dealers and distributors, Worksport believes the trend of increasing sales through online retailers will continue to outpace the traditional distribution business model. Moreover, reputable online retailer’s customers tend to provide larger sales volumes, greater margin of profit as well as greater protection against price erosion.

 

Cost of Sales

 

Cost of sales increased for the three and nine months of fiscal 2019, when compared to the three and nine months of fiscal 2018, by 1,132% and 383% from $54,270 and $305,273 to $668,516 and $1,473,150. The increase was primarily due to the higher volume of sales for the first, second and third quarters of 2019 when compared to the same periods in 2018. Our cost of sales, as a percentage of sales, was approximately 77% and 75% compare to 911% and 102% for three and nine months ended September 30, 2019 and 2018, respectively.

 

Within cost of sales, freight costs accounted for 2% of cost of sales during the nine months ended September 30, 2019, whereas in 2018, it accounted for 10% of cost of sales. The decrease in the percentage of cost of sales is due to the increase in sales for the quarter ended September 30, 2019 being larger US orders with economies to scale in shipping. Also, in 2019, retail online orders were drop-shipped sales FOB China to our online vendors reducing intermediary costs.

 

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Worksport provides its distributors and online retailers an “all-in” wholesale price. This includes any import duty charges, taxes and shipping charges. Discounts are applied if the distributor or retailer chooses to use their own shipping process. Certain exceptions apply on rare occasions where product is shipped outside the contiguous United States or from the United States to Canada. Volume discounts are also offered to certain higher volume customers.

 

Gross Margin

 

Gross margin percentage for the nine month period ended September 30, 2019 and 2018 were 25% and -2% respectively. For the three month ended September 30, 2019 and 2018 gross margin percentage were 23% and -811% respectively. The increase in gross margin reflects a decrease in cost of goods due to the decreases of the prices of the goods. In addition, the gross margin percentage for the nine and three months ended September 30, 2018 were abnormally low as a result of the fluctuation in foreign exchange rates used to translate Canadian Dollar sales into United States Dollars for purposes of financial reporting.

 

Operating Expenses

 

Operating expenses for the nine months ended September 30, 2019 were $534,629 compared to $745,335 for the nine months ended September 30, 2018. Operating expenses for the three months ended September 30, 2019 were $173,664 compared to $245,974 for the three months ended September 30, 2018. Although there were decreases in professional fees, this expense was offset by larger increases in sales and marketing and general and administrative incurred for the period.

 

  ● General and administrative expense increased by $15,707, from $133,334 to $149,041 during the nine months ended September 30, 2019. For the three month ended September 30, 2019, general and administrative expense increased by $52,185 from $39,069 to $91,254 compared to the three month ended September 30, 2018. During the three month period September 30, 2019, research and development increased by $24,410, from $3,596 to $28,006. Rental payments and wages and salaries increased due to the new lease agreement the Company entered during the three month period ended September 30, 2019.
  ● The Company also realized a gain on foreign exchange in the amount of $43,427 during the nine months ended September 30, 2019, an increase of $40,664 when compared to a gain on foreign exchange of $2,763 during the nine months ended September 30, 2018. For the three month ended September 30, 2019 the Company realized a gain on foreign exchange of $22,701, compare to a gain of $3,939 on foreign exchange for the three month ended September 30, 2018, an increase of $18,762. The current gains were the result of the Company converting Canadian cash generated by sales to Canadian customers into United States Dollars in order to purchase inventory and pay operating expenses denominated in United States Dollars.
  ● Professional fees which include accounting, legal and consulting fees, decreased from $603,586 for the nine months ended September 30, 2018 to $366,843 for the nine months ended September 30, 2019 a difference of $236,743. For the three months ended September 30, 2019 professional fees decreased by $115,123 from $207,981 to $92,858, compared to the three months ended of September 30, 2018. The decrease is related to a decrease in accounting and audit fees, consulting, legal services and SEC filing fees between the two periods.

 

Other Income and Expenses

 

Other income and expenses for the nine month ended September 30, 2019 was an income of $190,901 compared with an expense of $531,288 at September 30, 2018. The reason for the income is due to a loss on debt settlement of $495,943 for the period ended September 30, 2019.

 

During the nine month ended September 30, 2019, the Company incurred interest of $59,877 an increase of $24,952 when compared to interest expense of $34,925 incurred during the nine months ended September 30, 2018. For three month ended September 30, 2019 interest expense was $8,281 compared to $7,798 an increase of $483 compare to the three month ended September 30, 2018. During the three months period September 30, 2019, the Company renewed its Canadian and US dollar promissory notes. During the three months period September 30, 2019, the Company repaid $10,000 of its US dollar promissory note. The lower increase for the three months period ended September 30, 2019 was a result of renewal of the Canadian and US dollar promissory notes, resulting in a lower interest rate.

 

The Company had assumed Canadian and US dollar promissory notes in 2017 in the amount of $123,392 with terms of 12% and 18%. In addition, two lines of credit in both Canadian and US dollar currencies were assumed with an interest rate of 18% in 2016. The interest from these loans were 92% of the interest expense and the remaining 8% consisting of bank charges and interest.

 

Net Income/Loss

 

Net income for the nine months ended September 30, 2019 was $142,149 compared to a net loss of $1,281,783 for the nine months ended September 30, 2018, a difference of $1,423,932 or 111%. For the three month ended September 30, 2019 the Company had a net income of $270,370 compared to the three month period ended September 30, 2018 of a net loss of $302,095, an improvement of $572,465. The Company’s improvement was mainly attributed to an increase in gross margin and a decrease in professional fees as discussed above. The increase in the net income for the nine month ended September 30, 2019 was mainly due to the gain of debt settlement in the amount of $250,778.

 

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Liquidity and Capital Resources

 

Cash Flow Activities

 

Cash increased from $25,323 at December 31, 2018 to $178,752 at September 30, 2019. The increase was primarily the result of the timing of inbound payments from customers, and outbound payments to vendors. Accounts receivable increased by $187,706 from $61,882 at December 31, 2018 to $249,588 at September 30, 2019. Inventory remained decreased from December 31, 2018 at $289,516 to September 30, 2019 at $198,478. Prepaid expenses decreased by $97,737 from $124,114 at December 31, 2018 to $26,401 at September 30, 2019 due to the completion of a large amount of consulting services in the first quarter of 2019. Payroll taxes payable decreased from $82,365 at December 31, 2018 to $12,705 September 30, 2019. This reduction is due to several payments made for payroll remittance. Accounts payable and accrued liabilities increased by $545,911 from $401,766 at December 31, 2018 to $913,335 at September 30, 2019. The increase in payables is related to large purchases related to increased sales during the nine months period ended September 30, 2019.

 

Investing Activities

 

During the nine months period ended September 30, 2019, the Company invested $84,149 in warehouse equipment, product moulds, patents, trademarks, and leasehold improvements.

 

During the nine month ended September 30, 2019, the Company entered into an agreement to purchase 10,000,000 shares for $50,000 which has been issued to FNHI. The Company’s investment accounts for a 10% equity stake in a US based Mobile Phone Development Company. As of September 30, 2019 the Company had advanced a total of $15,658 and is advancing trenches of capital as required by the Company.

 

No investing activities occurred during the nine months ended September 30, 2018.

 

Financing Activities

 

During the first nine months of fiscal 2019, Worksport issued $30,000 in issuance of common stock for cash.

 

During the nine month period ended September 30, 2019, the Company reached a legal settlement agreement (the “unwinding”) with an individual investor to dissolve the Debt Settlement and Mutual Release Agreement entered into on January 12, 2018 (refer to note 6. Shareholders’ Deficit).


During the nine months period ended September 30, 2018, the Company received proceeds of $175,000 from the issuance of common stock for cash.

 

Off-Balance Sheet Arrangements

 

There are no off-balance sheet arrangements with any party.

 

Critical Accounting Policies

 

Our discussion and analysis of results of operations and financial condition are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to provisions for uncollectible accounts receivable, inventories, valuation of intangible assets and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

The accounting policies that we follow are set forth in Note 2 to our financial statements as included in the Form 10K filed on May 13, 2019. These accounting policies conform to accounting principles generally accepted in the United States and have been consistently applied in the preparation of the financial statements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

As a “smaller reporting company,” as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information in this Item.

 

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Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are not effective as of March 31, 2019 to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure for the reason described below.

 

Because of our limited operations, we have limited number of employees which prohibits a segregation of duties. In addition, we lack a formal audit committee with a financial expert. As we grow and expand our operations we will engage additional employees and experts as needed. However, there can be no assurance that our operations will expand.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not a party to any material or legal proceeding and, to our knowledge, none is contemplated or threatened.

 

Item 1A. Risk Factors

 

We are a smaller reporting company and, as a result, are not required to provide the information under this item. Please review the risk factors identified in Item 1.A of our 2018 Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the three months ended September 30, 2019, the Company did not complete registration of 1,500,000 common shares as they were unregistered equity securities.

 

Item 3. Defaults Upon Senior Securities

 

There have been no defaults upon senior securities.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

As a “smaller reporting company,” as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information in this Item.

 

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Item 6. Exhibits

 

(a) Exhibits    
     
EXHIBIT    
NO.   DESCRIPTION
3.1*   Articles of Incorporation
3.2*   By-Laws
31.1   Section 302 Certification of Chief Executive Officer
31.2   Section 302 Certification of Chief Financial Officer
32.1   Section 906 Certification of Chief Executive Officer
32.2   Section 906 Certification of Chief Financial Officer
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.

 

 

* Filed as an exhibit to the registrant’s Form 10-QSB, filed October 13, 1999 and incorporated by reference herein.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  FRANCHISE HOLDINGS INTERNATIONAL, INC.
   
Dated: Nov 14, 2019 By: /s/ Steven Rossi
    Steven Rossi
    Chairman of the Board,
    Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Dated: Nov 14, 2019 By: /s/ Michael Johnston
    Michael Johnston
    Interim Chief Financial Officer

 

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