ITEM
1. FINANCIAL STATEMENTS
Franchise
Holdings International, Inc.
Condensed
Consolidated Balance Sheets
(Unaudited)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Assets
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
158,892
|
|
|
$
|
66,961
|
|
Accounts receivable
|
|
|
19,015
|
|
|
|
189,502
|
|
Inventory
|
|
|
73,958
|
|
|
|
44,635
|
|
Prepaid inventory
|
|
|
84,800
|
|
|
|
19,684
|
|
Prepaid expenses and deposits
|
|
|
319,654
|
|
|
|
392,047
|
|
Total Current Assets
|
|
|
656,319
|
|
|
|
712,829
|
|
Prepaid Expenses - long term
|
|
|
-
|
|
|
|
136,466
|
|
Property and Equipment, net
|
|
|
42,226
|
|
|
|
43,079
|
|
Intangible Assets, net
|
|
|
11,769
|
|
|
|
13,096
|
|
Total Assets
|
|
$
|
710,314
|
|
|
$
|
905,470
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
935,657
|
|
|
$
|
230,770
|
|
Income taxes payable
|
|
|
4,986
|
|
|
|
5,114
|
|
Related party loan
|
|
|
22,211
|
|
|
|
22,211
|
|
Current portion of notes payable
|
|
|
272,418
|
|
|
|
275,844
|
|
Total Current Liabilities
|
|
|
1,235,272
|
|
|
|
533,939
|
|
Total Liabilities
|
|
|
1,235,272
|
|
|
|
533,939
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Shareholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
Series A Preferred Stock, $0.0001 par value, 1,000,000 shares authorized, 100,000 shares issued and outstanding
|
|
|
10,000
|
|
|
|
10,000
|
|
Common stock, $0.0001 par value, 299,000,000 shares authorized, 147,804,278 and 122,327,240 shares issued and outstanding, respectively
|
|
|
14,780
|
|
|
|
12,233
|
|
Additional paid-in capital
|
|
|
7,801,098
|
|
|
|
7,464,617
|
|
Share subscriptions receivable
|
|
|
(10,755
|
)
|
|
|
(10,755
|
)
|
Share subscriptions payable
|
|
|
1,612,330
|
|
|
|
1,531,080
|
|
Accumulated deficit
|
|
|
(9,873,043
|
)
|
|
|
(8,591,261
|
)
|
Cumulative translation adjustment
|
|
|
(79,368
|
)
|
|
|
(44,383
|
)
|
Total Shareholders’ Equity (Deficit)
|
|
|
(524,958
|
)
|
|
|
371,531
|
|
Total Liabilities and Shareholders’ Equity (Deficit)
|
|
$
|
710,314
|
|
|
$
|
905,470
|
|
The
accompanying notes form an integral part of these condensed consolidated financial statements.
Franchise
Holdings International, Inc.
Condensed
Consolidated Statements of Operations and Comprehensive Loss
For
the Three and Nine Months Ended September 30, 2018 and 2017
(Unaudited)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
5,954
|
|
|
$
|
20,315
|
|
|
$
|
300,113
|
|
|
$
|
190,062
|
|
Cost of Goods Sold
|
|
|
54,270
|
|
|
|
17,296
|
|
|
|
305,273
|
|
|
|
150,869
|
|
Gross Profit
|
|
|
(48,316
|
)
|
|
|
3,019
|
|
|
|
(5,160
|
)
|
|
|
39,193
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
39,069
|
|
|
|
20,946
|
|
|
|
133,334
|
|
|
|
1,441,788
|
|
Sales and marketing
|
|
|
2,863
|
|
|
|
948
|
|
|
|
11,178
|
|
|
|
2,465
|
|
Professional fees
|
|
|
207,981
|
|
|
|
91,450
|
|
|
|
603,586
|
|
|
|
162,065
|
|
Loss (gain) on foreign exchange
|
|
|
(3,939
|
)
|
|
|
(454
|
)
|
|
|
(2,763
|
)
|
|
|
25,644
|
|
Total operating expenses
|
|
|
245,974
|
|
|
|
112,890
|
|
|
|
745,335
|
|
|
|
1,631,962
|
|
Loss from operations
|
|
|
(294,290
|
)
|
|
|
(109,871
|
)
|
|
|
(750,495
|
)
|
|
|
(1,592,769
|
)
|
Other Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(7,798
|
)
|
|
|
(1,573
|
)
|
|
|
(34,925
|
)
|
|
|
(12,371
|
)
|
Loss on derivative
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(484,720
|
)
|
Debt issuance costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,971
|
)
|
Finance charges
|
|
|
(7
|
)
|
|
|
(6,578
|
)
|
|
|
(420
|
)
|
|
|
(35,669
|
)
|
Loss on settlement of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(495,943
|
)
|
|
|
(1,046,322
|
)
|
Total other expense
|
|
|
(7,805
|
)
|
|
|
(8,151
|
)
|
|
|
(531,288
|
)
|
|
|
(1,582,053
|
)
|
Net Loss
|
|
|
(302,095
|
)
|
|
|
(118,022
|
)
|
|
|
(1,281,783
|
)
|
|
|
(3,174,822
|
)
|
Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(22,424
|
)
|
|
|
(8,850
|
)
|
|
|
(34,985
|
)
|
|
|
(8,352
|
)
|
Comprehensive Loss
|
|
$
|
(324,519
|
)
|
|
$
|
(126,872
|
)
|
|
|
(1,316,768
|
)
|
|
|
(3,183,174
|
)
|
Loss per Share (basic and diluted)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
Weighted Average Number of Shares (basic and diluted)
|
|
|
140,780,314
|
|
|
|
205,243,762
|
|
|
|
129,373,290
|
|
|
|
184,081,305
|
|
The
accompanying notes form an integral part of these condensed consolidated financial statements.
Franchise
Holdings International, Inc.
Consolidated
Statements of Cash Flows
For
the Nine Months Ended September 30, 2018 and 2017
(Unaudited)
|
|
2018
|
|
|
2017
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,281,783
|
)
|
|
$
|
(3,174,822
|
)
|
Adjustments to reconcile net loss to net cash from operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,180
|
|
|
|
1,290
|
|
Accrued interest
|
|
|
-
|
|
|
|
16,835
|
|
Finance charges and interest paid in shares
|
|
|
-
|
|
|
|
24,824
|
|
Professional fees paid in shares
|
|
|
-
|
|
|
|
29,374
|
|
Stock based compensation
|
|
|
-
|
|
|
|
1,360,000
|
|
Accretion of debt discount
|
|
|
-
|
|
|
|
2,971
|
|
Loss on settlement of debt
|
|
|
495,944
|
|
|
|
1,046,322
|
|
Loss on derivative
|
|
|
-
|
|
|
|
484,720
|
|
|
|
|
(783,659
|
)
|
|
|
(208,486
|
)
|
Changes in operating assets and liabilities
|
|
|
739,000
|
|
|
|
126,600
|
|
Net cash used in operating activities
|
|
|
(44,659
|
)
|
|
|
(81,886
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
-
|
|
|
|
(14,875
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(14,875
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of stock for cash
|
|
|
175,000
|
|
|
|
-
|
|
Repayment of overdraft
|
|
|
-
|
|
|
|
(870
|
)
|
Proceeds from share subscriptions receivable
|
|
|
-
|
|
|
|
1,750
|
|
Proceeds from notes payable
|
|
|
-
|
|
|
|
53,389
|
|
Proceeds from shareholder loans
|
|
|
-
|
|
|
|
22,536
|
|
Proceeds from loan payable
|
|
|
-
|
|
|
|
19,262
|
|
Repayment of promissory notes
|
|
|
-
|
|
|
|
(7,658
|
)
|
Net cash provided by financing activities
|
|
|
175,000
|
|
|
|
88,409
|
|
Effects of Foreign Currency Translation
|
|
|
(38,410
|
)
|
|
|
8,352
|
|
Change in cash
|
|
|
91,931
|
|
|
|
-
|
|
Cash and cash equivalents - beginning of year
|
|
|
66,961
|
|
|
|
-
|
|
Cash and cash equivalents end of year
|
|
$
|
158,892
|
|
|
$
|
-
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
16,604
|
|
|
$
|
-
|
|
Supplemental Disclosure of non-cash investing and financing Activities
|
|
|
|
|
|
|
|
|
Shares issued for settlement of notes and accounts payable
|
|
$
|
172,056
|
|
|
$
|
-
|
|
Shares issued for consulting agreements
|
|
|
393,750
|
|
|
|
-
|
|
Common shares issued to CEO
|
|
|
-
|
|
|
|
1,460,000
|
|
Common shares issued as finance charges
|
|
|
-
|
|
|
|
21,000
|
|
Conversion of promissory notes
|
|
|
-
|
|
|
|
1,314,904
|
|
Increase (decrease) in share subscriptions payable
|
|
|
(589,694
|
)
|
|
|
1,231,079
|
|
Increase in share subscriptions receivable
|
|
|
-
|
|
|
|
39,415
|
|
The
accompanying notes form an integral part of these condensed consolidated financial statements.
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 three-month and nine-month periods ended September 30, 2018 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017 filed with the SEC on June 15, 2018.
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, 2018 were converted into United States Dollars at a rate of 1.29 Canadian Dollars to one United States Dollar. Balances denominated
in Canadian Dollars outstanding at December 31, 2017 were converted into United States Dollars at a rate of 1.26 Canadian Dollars
to one United States Dollar. Transactions denominated in Canadian Dollars for the period ended September 30, 2018 were converted
into United States Dollars at an average rate of 1.29 Canadian Dollars to one United States Dollar. Transactions denominated in
Canadian Dollars for the period ended September 30, 2017 were converted into United States Dollars at an average rate of 1.31
Canadian Dollars to one United States Dollar.
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, 2018, the Company incurred a net loss of $1,281,783 and as of that date, the
Company’s accumulated deficit was $9,873,043. 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 working
capital requirements. To the extent that funds generated from any private placements, public offerings and/or bank financing are
insufficient, the Company 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 the Company 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, 2017.
The
Company also implemented the following accounting standard effective January 1, 2018.
Franchise
Holdings International, Inc.
Notes
to the Condensed Consolidated Financial Statements
Unaudited
In
May 2014, ASC 606 was issued related to revenue from contracts with customers. Under this guidance, revenue is recognized when
promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received
for those goods or services. The standard became effective for the Company’s fiscal year beginning January 1, 2018. The
adoption of ASC 606 on January 1, 2018 did not have an impact on the way we recognized revenue during the nine months ended September
30, 2018.
3.
Inventory
Inventory
consists of the following at September 30, 2018 and December 31, 2017:
|
|
2018
|
|
|
2017
|
|
Finished goods
|
|
|
73,680
|
|
|
$
|
44,635
|
|
Raw materials
|
|
|
278
|
|
|
|
-
|
|
|
|
$
|
73,958
|
|
|
$
|
44,635
|
|
Prepaid inventory
|
|
$
|
84,800
|
|
|
$
|
19,684
|
|
4.
Secured Notes Payable
Secured
notes payable consists of the following at September 30, 2018 and December 31, 2017:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Balance owing, December 31,
|
|
$
|
272,418
|
|
|
$
|
275,844
|
|
Less amounts due within one year
|
|
|
(272,418
|
)
|
|
|
(275,844
|
)
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
5.
Derivative Liability
During
the period ended December 31, 2016, the Company issued two convertible promissory notes payable, which contain features that entitles
the holder to convert any outstanding amounts payable under the convertible promissory note into a share of the common stock of
the Company, the number of which is dependent on several factors. As such, ASC 815 determines the convertible promissory note
to be a hybrid financial instrument that includes an embedded derivative that requires separation from the main financial instrument
and recognition at fair value.
During
the period ended September 30, 2017, certain convertible promissory notes to which the derivative liabilities relate, were converted
to shares of the Company’s common stock. During the period ended September 30, 2017, the Company recognized an aggregate
loss on the value of the derivative liability of $484,720 related to the changes in value from January 1, 2017 to the dates upon
which the convertible promissory notes were converted.
6.
Common Stock
During
the period ended September 30, 2018, the Company issued 5,944,449 common shares under the share payable agreements mentioned in
Note 7.
During
the period ended September 30, 2018, the Company issued 18,750,000 common shares related to consulting agreements with two individuals.
Franchise
Holdings International, Inc.
Notes
to the Condensed Consolidated Financial Statements
Unaudited
During
the period ended September 30, 2018, the Company received proceeds of $175,000 on subscription agreements ($0.02 per share). The
Company has not issued the shares so the $175,000 is classified as share subscription payable. The Company will issue 8,750,000
shares in conjunction with this capital raise.
During
the period ended September 30, 2018, the Company issued 782,609 shares valued at $0.023 per share to settle a payable.
During
the period ended September 30, 2017, the Company issued 62,144,524 common shares pursuant to the conversion of the convertible
promissory notes.
During
the period ended September 30, 2017, the Company issued 72,000,000 common shares of the Company to its CEO pursuant to the Company’s
employee stock incentive plan at a deemed cost of $0.001 per share. The fair value of the common shares of $1,360,000 has been
included as general and administrative expense during the period ended September 30, 2017.
During
the period ended September 30, 2017, the Company issued 3,154,574 common shares in connection with two consulting agreements,
the fair value of which was $100,000. The consultants paid, in aggregate, $3,154 for the shares, and the remaining balance of
$96,846 will be expensed over the 180 day term of the consulting agreements.
During
the period ended September 30, 2017, the Company entered into a share issuance/ claim extinguishment agreement as disclosed in
note 6. Pursuant to the debt assumption agreement, the Company issued 10,400,000 common shares during the period ended September
30, 2017. As at September 30, 2017, 24,600,000 common shares remain reserved for issuance pursuant to the share issuance/ claim
extinguishment agreement.
During
the period ended September 30, 2017, the Company issued 3,000,000 shares of its common stock. The proceeds of $38,010 were receivable
by the Company as of September 30, 2017 and were received subsequent to September 30, 2017.
During
the period ended September 30, 2017, the Company issued 1,000,000 shares of its Series A Preferred Stock to its controlling shareholder
and CEO in exchange for 1,000,000,000 shares of common stock owned by the controlling shareholder and CEO.
7.
Share Payable/ Claim Extinguishment Agreement
During
the nine months ended September 30, 2018, the Company entered into an agreement with an investor relations company to provide
various services to the Company. These services were valued at $150,000 and will be charged to expense as certain milestones are
met. The agreement is to be settled through the issuance of 7,500,000 common shares. From April through September, the investor
relations company had met milestones that corresponded to $63,600 of expense being recorded. None of the shares had been issued
through September 30, 2018.
During
the nine months ended September 30, 2018, the Company entered into a share issuance/ claim extinguishment agreement with two parties,
pursuant to which the Company agreed to issue 50,000,000 shares of its common stock in exchange for the assumption of aggregate
accounts payable of the Company totaling $154,057. The fair value of the shares to be issued was estimated to be $650,000 resulting
in a loss on the settlement of debt in the amount of $495,943 recognized during the nine months ended September 30, 2018. During
the period ended September 30, 2018, 5,944,449 shares were issued under this agreement which reduced the stock subscription payable
by $77,278. The third parties failed to pay the Company’s vendors as agreed so the Company notified them that they are in
breach of contract. The matter has yet to be resolved but the Company does not expect to issue the remaining shares. As of September
30, 2018, the remaining stock subscription payable of $572,722 was reclassified into accounts payable on the balance sheet.
During
the nine months ended September 30, 2018, the Company entered into a share issuance agreement with a public relations company
whereby they would issue shares in satisfaction for service rendered. Through September 30, 2018, the public relations company
provided services valued at $18,000. During September 2018, the Company issued 782,609 shares valued at $0.023 per share to settle
the payable.
During
the year ended December 31, 2017, the Company entered into a share issuance/ claim extinguishment agreement with another party,
pursuant to which the Company agreed to issue 35,000,000 shares of its common stock in exchange for the assumption of aggregate
accounts payable of the Company of $183,443. During the year ended December 31, 2017, the Company issued 10,400,000 of the shares
leaving 24,600,000 shares with a value of $856,080 to be issued as at December 31, 2017. No shares were issued during the nine
months ended September 30, 2018.
Franchise
Holdings International, Inc.
Notes
to the Condensed Consolidated Financial Statements
Unaudited
8.
Consulting Agreement
During
the period ended September 30, 2017, the Company entered into a consulting agreement, pursuant to which the Company will issue
12,500,000 common shares of the Company, upon written demand by the consultant, in exchange for consulting services for a period
of 18 months. The fair value of the 12,500,000 common shares to be issued was estimated to be $375,000 and the Company has recorded
this amount as prepaid expenses and share subscriptions payable as at September 30, 2017 as the shares had yet to be issued as
at that date. The Company recorded professional fees expense of $187,500 and $8,929 during the period ended September 30, 2018
and 2017, respectively, related to this agreement. The 12,500,000 shares were issued to the consultant during the three months
ended September 30, 2018.
9.
Related Party Transactions
During
the nine month period ended September 30, 2018, the Company recorded salaries expense of $53,118 (2017 - $29,540) related to services
rendered to the Company by its major shareholder and CEO. During the nine month period ended September 30, 2018, the Company recognized
revenue of $377 (2017 - $7,719) for goods sold to a company with a director, officer and shareholder in common. During the three
month period ended September 30, 2018, the Company recorded salaries expense of $17,443 (2017 - $7,525) related to services rendered
to the Company by its major shareholder and CEO. During the three month period ended September 30, 2018, the Company recognized
revenue of $0 (2017 - $1,001) for goods sold to a company with a director, officer and shareholder in common
10.
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, 2018 and 2017, as well as the balance included in accounts receivable for each significant customer as at September 30, 2018
and 2017. A customer is considered to be significant if they account for greater than 10% of the Company’s annual sales.
|
|
2018
|
|
|
2017
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Customer A
|
|
|
121,079
|
|
|
|
41.0
|
%
|
|
|
100,236
|
|
|
|
52.7
|
|
Customer B
|
|
|
87,788
|
|
|
|
30.0
|
%
|
|
|
35,158
|
|
|
|
18.5
|
|
Customer C
|
|
|
42,687
|
|
|
|
14.0
|
%
|
|
|
20,076
|
|
|
|
10.6
|
|
The
loss of any of these key customers could have an adverse effect on the Company’s business.
11.
Evaluation of Subsequent Events
The
Company has evaluated subsequent events through November 19, 2018 which is the date the financial statements were available to
be issued and noted no other subsequent events.
During
October 2018, the Company signed a stock subscription agreement. The Company will issue 6,250,000 shares at $0.02 per share. The
$125,000 was received during October 2018. The shares have not been issued as of the date of this filing.
During
October 2018, the Company granted a warrant to an individual to purchase 7,500,000 shares of common stock at an exercise price
of $0.02 per share. The warrant may be exercised until March 20, 2020.
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 Franchise Holdings International, Inc. (“FNHI”), and its wholly-owned subsidiary, Worksport, Ltd. (“Worksport”)
for the three and nine months ended September 30, 2018 and 2017, 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.
Results
of Operations
Revenue
For
the nine months ended September 30, 2018, revenue generated from the entire line of Worksport products was $300,113, as compared
to $190,062 for the nine months ended September 30, 2017. The year over year increase of approximately 58% was mainly attributable
to strong sales during the first six months of 2018. For the three months ended September 30, 2018, revenue generated from the
entire line of Worksport products was $5,954, as compared to $20,315 for the three months ended September 30, 2017. The year over
year decrease of approximately 71% was mainly attributable to a transition from the Company’s former name, Truxmart, to
Worksport. The company required additional time than estimated to secure its trademark rights for its new name, Worksport. This
resulted in the company being unable to produce product or conduct new sales for most of the quarter. Subsequently, the company
was able to secure its trademark for the Worksport name and logo and expects strong sales during Q4, onwards.
For
the nine months ended September 30, 2018, revenue generated by Canadian customers was $123,887 compared to $117,920 for the same
period in 2017, an increase of 5%. For the three months ended September 30, 2018, revenue generated by Canadian customers was
$769 compared to $2,832 for the same period in 2017, a decrease of 73%. The decrease is attributable to a small credit towards
a Canadian account during the third quarter. For the nine months ended September 30, 2018, revenue generated in the United States
was $176,226 compared to $72,142 for the same period in 2017. For the three months ended September 30, 2018, revenue generated
in the United States was $5,185 compared to $17,483 for the same period in 2017. These represent a year-over-year increase of
144% and decrease of 70%, respectively, in US- source revenue.
Sales
from online retailers of the Worksport products increased from $70,745 in the nine months ended September 30, 2017, to $133,337
in the nine months ended September 30, 2018, an increase of 151%. The online retailers accounted for over 48% of total revenue
for the nine months ended September 30, 2018, compared to 37% for the nine months ended September 30, 2017. Distributor sales
decreased from $118,337 in 2018, to $118,337 in the nine months ending 2017.
Sales
from online retailers of the Worksport products decreased from $17,812 in the three months ended September 30, 2017, to $4,986
in the three months ended September 30, 2018, a decrease of 118%. The online retailers accounted for 100% of total revenue for
the three months ended September 30, 2018, compared to 94% for the three months ended September 30, 2017. Distributor sales decreased
from $1,085 in 2017, to $0 in the three months ending September 30, 2018.
Currently,
Worksport has one major distributor in Canada, one in the United States, along with its own contracted distribution and inventory
facility in Pennsylvania. This does not include multiple independent online retailers.
Although
Worksport currently supports a total of 16 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.
The
Company required additional time than estimated to secure its trademark rights for its new name, Worksport. This resulted in the
Company being unable to produce product or conduct new sales for most of the quarter. Subsequently, the Company was able to secure
its trademark for the Worksport name and logo and expects strong sales during Q4, onwards.
Cost
of Sales
Cost
of sales increased for the first nine months of 2018, as compared to the first nine months of 2017, by 113% from $150,869 to $320,982.
This increase was mainly due to the increase in net sales. Our cost of sales, as a percentage of sales, was approximately 107%
and 79% for the nine months ended September 30, 2018 and 2017, respectively. During the three months ended September 30, 2018,
cost of sales increased by 305% to $69,979 from $17,296 in the three months ended September 30, 2017. This increase was due to
increased sales for the period. Cost of sales, as a percentage of sales was approximately 1,175% and 85% for the three months
ended September 30, 2018 and 2017, respectively. The increase in the percentage of cost of sales for the nine month period ended
September 30, 2018 is due to the stabilization of the foreign exchange rates used to translate sales denominated in Canadian Dollars
to Unites States Dollars. Freight costs were $30,963 and $19,856 for the nine month periods ended September 30, 2018 and 2017
and $0 and $5,876 for the three month periods ended September 30, 2018 and 2017, respectively.
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 Sates 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 periods ended September 30, 2018 and 2017 was -2% and 21% respectively. Gross margin percentage
for the three month periods ended September 30, 2018 and 2017 was -811% and 15% respectively. The decrease in gross margin for
the nine months is primarily related to the introduction of fluctuation in foreign exchange rates used to translate Canadian Dollar
sales into United States Dollars for purposes of financial reporting. As substantially all of the sales for the three months ended
September 30, 2018 were denominated in United States Dollars, foreign exchange translation was not a factor in contributing to
fluctuations in gross margin.
Operating
Expenses
Operating
expenses for the nine months ended September 30, 2018 were $745,335 compared to $1,631,962 for the nine months ended September
30, 2017. Operating expenses for the three months ended September 30, 2018 were $245,974 compared to $112,890 for the three months
ended September 30, 2017. Our general and administrative expense decreased by $1,308,454, from $
1,441,788
to $133,334, during the nine months ended September 30, 2018 and increased by $18,123, from $20,946 to $39,069, during
the three months ended September 30, 2018. The decrease for the nine months was mainly due to 72,000,000 common shares (fair value
of $1,360,000) issued to the Company’s CEO during the quarter ended March 31, 2017 without comparable losses in 2018. The
increase between the three month periods is a result of an overall increase in travel and office expenses. Sales and marketing
increased by $8,713 to $11,178 for the nine months ended September 30, 2018 compared to $2,465 during the nine months ended September
30, 2017 and by $1,915 from $948 for the three months ended September 30, 2017 to $2,863 for the three months ended September
30, 2018. These increases are due to an increase in the trade show activity. Professional fees which include accounting, legal
and consulting fees, increased from $162,065 for the nine months ended September 30, 2017 to $603,586 for the nine months ended
September 30, 2018 and also increased from $91,450 for the three months ended September 30, 2017 to $207,981 for the three months
ended September 30, 2018. The increases for the periods is the result of two consulting agreements entered into during the quarter
ended September 30, 2017. The Company also realized a gain on foreign exchange in the amount of $2,763 during the nine months
ended September 30, 2018, an increase of $28,407 when compared to a loss on foreign exchange of $25,644 during the nine months
ended September 30, 2017. This loss was 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. The
company realized a gain on foreign exchange in the amount of $3,939 during the three months ended September 30, 2018, which represents
an increase of $3,485 when compared to a gain on foreign exchange of $454 incurred during the three months ended September 30,
2017.
Other
Income and Expenses
Late
in the 2017 fiscal year and during fiscal 2018, the Company borrowed funds for working capital requirements in exchange for promissory
notes, one of which is convertible into shares of the Company’s common stock. During the three and nine month periods ended
September 30, 2018, the Company incurred interest of $7,798 and $34,925, respectively, related to these notes. During the three
and nine month periods ended September 30, 2017, the Company incurred interest of $6,632 and $19,305, respectively. The remaining
balance of interest expense relates to regular bank charges and interest.
Net
Loss
Net
loss for the three and nine month periods ended September 30, 2018 was $302,095 and $1,281,783, respectively, compared to net
losses of $118,022 and $3,174,822 for the three and nine month periods ended September 30, 2017. The decrease in the net losses
were mainly due to 72,000,000 common shares (fair value of $1,360,000) issued to the Company’s CEO during the quarter ended
March 31, 2017, the loss on derivative during the nine months ended September 30, 2017 and the loss on settlement of debt in the
same period of 2017 without comparable losses in 2018.
Liquidity
and Capital Resources
Cash
Flow Activities
Cash
increased from $66,961 at December 31, 2017 to $158,892 at September 30, 2018. The increase was primarily the result of the timing
of inbound payments from customers, and outbound payments to vendors. Accounts receivable decreased by $170,487 from $189,502
at December 31, 2017 to $19,015 at September 30, 2018. Inventory increased by $29,323 from $44,635 at December 31, 2017 to $73,958
at September 30, 2018 largely as a result of the timing of the receipt of inventory shipments. Accounts payable and accrued liabilities
increased by $704,887 from $230,770 at December 31, 2017 to $935,657 at September 30, 2018. The increase in payables is related
to the timing of outbound payments to vendors based on the lack of cash as well as the non-cash increase in payables of $572,722
related to share subscription payables that will no longer be paid through the issuance of shares. The increase in payables is
partially offset by the assumption of accounts payable in the amount of $172,056 pursuant to the share issuance/ claim extinguishment
agreement.
The
Company’s bank overdraft decreased from $2,365 at December 31, 2016 to $1,765 at September 30, 2017. The decrease was primarily
the result of the timing of inbound payments from customers, and outbound payments to vendors. Accounts receivable decreased by
$72,763 from $81,146 at December 31, 2016 to $8,383 at September 30, 2017. Inventory decreased by $46,697 from $78,975at December
31, 2016 to $32,278 at September 30, 2017 as a result of the timing of the receipt of inventory shipments. Accounts payable and
accrued liabilities decreased by $225,385 from $340,270 at December 31, 2016 to $114,885 at September 30, 2017. The decrease in
payables is related to the payment of various outstanding amounts as well as the assumption of accounts payable in the amount
of $183,443 pursuant to the share issuance/ claim extinguishment agreement.
Investing
Activities
During
the nine months ended September 30, 2017, Worksport invested $14,875 in warehouse equipment. No investing activities occurred
during the nine months ended September 30, 2018.
Financing
Activities
During
the nine months ended September 30, 2018, the Company received proceeds of $175,000 from the issuance of common stock for cash.
During the nine months ended September 30, 2017, Worksport funded working capital requirements principally through the issuance
of promissory notes, shareholder loans and loans payable in the amount of $53,389, $22,536, and $19,262, respectively.
Off-Balance
Sheet Arrangements
We
have 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 consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation
of these 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 this quarterly report. 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.