ITEM
1. FINANCIAL STATEMENTS
Franchise
Holdings International, Inc.
Condensed
Consolidated Balance Sheets
(Unaudited)
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,900
|
|
|
$
|
25,323
|
|
|
Accounts receivable
|
|
|
355,068
|
|
|
|
61,882
|
|
|
Inventory
|
|
|
164,693
|
|
|
|
289,516
|
|
|
Prepaid expenses and deposits
|
|
|
5,426
|
|
|
|
124,114
|
|
|
Total Current Assets
|
|
|
547,087
|
|
|
|
500,835
|
|
|
Property and Equipment, net
|
|
|
43,493
|
|
|
|
43,860
|
|
|
Intangible Assets, net
|
|
|
12,567
|
|
|
|
12,673
|
|
|
Total Assets
|
|
$
|
603,147
|
|
|
$
|
557,368
|
|
|
Liabilities and Shareholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
555,891
|
|
|
$
|
401,766
|
|
|
Payroll taxes payable
|
|
|
65,376
|
|
|
|
82,365
|
|
|
Related party loan
|
|
|
5,323
|
|
|
|
9,372
|
|
|
Current portion of notes payable
|
|
|
287,425
|
|
|
|
287,425
|
|
|
Total Current Liabilities
|
|
|
914,015
|
|
|
|
780,928
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
Shareholders’ Deficit
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock, $0.0001 par value, 1,000,000 shares authorized, 1,000,000 shares issued and outstanding, respectively,
|
|
|
10,000
|
|
|
|
10,000
|
|
|
Common stock, $0.0001 par value, 49,833,333 shares authorized, 26,634,052 and 24,634,054 shares issued and outstanding, respectively
|
|
|
2,563
|
|
|
|
2,463
|
|
|
Additional paid-in capital
|
|
|
8,256,733
|
|
|
|
8,103,934
|
|
|
Share subscriptions receivable
|
|
|
(1,577
|
)
|
|
|
(1,577
|
)
|
|
Share subscriptions payable
|
|
|
1,896,633
|
|
|
|
2,019,532
|
|
|
Accumulated deficit
|
|
|
(10,480,772
|
)
|
|
|
(10,354,299
|
)
|
|
Cumulative translation adjustment
|
|
|
5,552
|
|
|
|
(3,613
|
)
|
|
Total Shareholders’ Deficit
|
|
|
(310,868
|
)
|
|
|
(223,560
|
)
|
|
Total Liabilities and Shareholders’ Deficit
|
|
$
|
603,147
|
|
|
$
|
557,368
|
|
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 Months Ended March 31, 2019 and 2018
(Unaudited)
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
572,278
|
|
|
$
|
150,878
|
|
|
Cost of Goods Sold
|
|
|
432,948
|
|
|
|
139,937
|
|
|
Gross Profit
|
|
|
139,330
|
|
|
|
10,941
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
40,571
|
|
|
|
66,818
|
|
|
Sales and marketing
|
|
|
27,368
|
|
|
|
1,582
|
|
|
Professional fees
|
|
|
172,502
|
|
|
|
121,526
|
|
|
(Gain) loss on foreign exchange
|
|
|
(13,798
|
)
|
|
|
30
|
|
|
Total operating expenses
|
|
|
226,644
|
|
|
|
189,956
|
|
|
Loss from operations
|
|
|
(87,314
|
)
|
|
|
(179,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(39,160
|
)
|
|
|
(7,290
|
)
|
|
Finance charges
|
|
|
-
|
|
|
|
(9,198
|
)
|
|
Loss on settlement of debt
|
|
|
-
|
|
|
|
(495,943
|
)
|
|
Total other income (expense)
|
|
|
(39,160
|
)
|
|
|
(512,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(126,473
|
)
|
|
$
|
(691,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
9,165
|
|
|
|
(7,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
|
|
$
|
(117,308
|
)
|
|
$
|
(699,089
|
)
|
|
Loss per Share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.005
|
)
|
|
$
|
(0.01
|
)
|
|
Diluted
|
|
$
|
(0.005
|
)
|
|
$
|
(0.01
|
)
|
|
Weighted Average Number of Shares (basic and diluted)
|
|
|
25,000,716
|
|
|
|
20,387,873
|
|
The
accompanying notes form an integral part of these condensed consolidated financial statements.
Franchise
Holdings International, Inc.
Consolidated
Statements of Cash Flows
For
the Three Months Ended March 31, 2019 and 2018
(Unaudited)
Supplemental
Disclosure for non-cash investing and financing Activities
|
|
|
2019
|
|
|
2018
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(126,473
|
)
|
|
$
|
(691,446
|
)
|
|
Adjustments to reconcile net loss to net cash from operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
473
|
|
|
|
1,903
|
|
|
Loss on settlement of debt
|
|
|
-
|
|
|
|
495,943
|
|
|
|
|
|
(126,000
|
)
|
|
|
(193,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
87,462
|
|
|
|
196,200
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(38,539
|
)
|
|
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash
|
|
|
30,000
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
11,058
|
|
|
|
-
|
|
|
Shareholder assumption of debt
|
|
|
(11,058
|
)
|
|
|
-
|
|
|
Repayment of shareholder loans
|
|
|
(4,049
|
)
|
|
|
-
|
|
|
Net cash provided by financing activities
|
|
|
25,951
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes on cash
|
|
|
9,165
|
|
|
|
(7,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Changes in cash
|
|
|
(3,423
|
)
|
|
|
(5,043
|
)
|
|
Cash and cash equivalents – beginning of year
|
|
|
25,323
|
|
|
|
66,961
|
|
|
Cash and cash equivalents – end of year
|
|
$
|
21,900
|
|
|
$
|
61,918
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
39,160
|
|
|
$
|
39,572
|
|
|
Supplemental disclosure of non-cash flow investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Shares issued for share subscription payable
|
|
$
|
152,799
|
|
|
$
|
611,548
|
|
|
Reverse stock split
|
|
$
|
101
|
|
|
$
|
12,312
|
|
The
accompanying notes form an integral part of these condensed consolidated financial statements.
Franchise
Holdings International, Inc.
Consolidated
Statement of Shareholders’ Equity
For
The Three Months Ended March 31, 2019 and 2018
(Unaudited)
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Share
Subscriptions
|
|
|
Share
Subscription
|
|
|
Accumulated
|
|
|
Cumulative
Translation
|
|
|
Total
Stockholders’
Equity
|
|
|
|
|
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
|
)
|
|
$
|
371,530
|
|
|
Issuance
for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Issuance
for settlement of payables
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
650,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
650,000
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(691,446
|
)
|
|
|
|
|
|
|
(691,446
|
)
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,643
|
)
|
|
|
(7,643
|
)
|
|
Balance
at March 31, 2018
|
|
|
1,000,000
|
|
|
$
|
10,000
|
|
|
|
20,387,873
|
|
|
$
|
2,039
|
|
|
$
|
7,474,811
|
|
|
$
|
(10,755
|
)
|
|
$
|
2,331,080
|
|
|
$
|
(9,282,707
|
)
|
|
$
|
(52,026
|
)
|
|
$
|
322,441
|
|
|
Balance
at January 1, 2019
|
|
|
1,000,000
|
|
|
$
|
10,000
|
|
|
|
24,634,051
|
|
|
$
|
2,463
|
|
|
$
|
8,103,934
|
|
|
$
|
(1,577
|
)
|
|
$
|
2,019,532
|
|
|
$
|
(10,354,299
|
)
|
|
$
|
(3,613
|
)
|
|
$
|
(223,560
|
)
|
|
Issuance
for services
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
100
|
|
|
|
152,799
|
|
|
|
-
|
|
|
|
(152,899
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Issuance
for settlement of payables
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,000
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(126,473
|
)
|
|
|
-
|
|
|
|
(126,473
|
)
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,165
|
|
|
|
9,165
|
|
|
Balance
at March 31, 2019
|
|
|
1,000,000
|
|
|
$
|
10,000
|
|
|
|
25,634,052
|
|
|
$
|
2,563
|
|
|
$
|
8,256,733
|
|
|
$
|
(1,577
|
)
|
|
$
|
1,896,633
|
|
|
$
|
(10,480,772
|
)
|
|
$
|
5,552
|
|
|
$
|
(310,868
|
)
|
The
accompanying notes form an integral part of these 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 period ended March 31, 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 March 31,
2019 were converted into United States Dollars at a rate of 1.34 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 March 31, 2019 and December 31,
2018 were converted into United States Dollars at an average rate of 1.33 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 three-month period ended March 31, 2019, the Company incurred a net loss of $126,473 and as of that date, the Company’s
accumulated deficit was $10,480,772. 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, 2018.
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 adoption of ASC 842 on January 1, 2019 did not have any impact on the way leases were
recognized as there are no capital leases during the three months ended March 31, 2019.
Franchise
Holdings International, Inc.
Notes
to the Condensed Consolidated Financial Statements
Unaudited
3.
Inventory
Inventory
consists of the following at March 31, 2019 and December 31, 2018:
|
|
|
2019
|
|
|
2018
|
|
|
Finished goods
|
|
$
|
156,921
|
|
|
$
|
282,239
|
|
|
Promotional items
|
|
|
1,060
|
|
|
|
700
|
|
|
Raw materials
|
|
|
6,712
|
|
|
|
6,577
|
|
|
|
|
$
|
164,693
|
|
|
$
|
289,516
|
|
|
Prepaid inventory
|
|
$
|
-
|
|
|
$
|
-
|
|
4.
Secured Notes Payable
Secured
notes payable consists of the following at March 31, 2019 and December 31, 2018:
|
|
|
2019
|
|
|
2018
|
|
|
Balance owing
|
|
$
|
287,425
|
|
|
$
|
287,425
|
|
|
Less amounts due within one year
|
|
|
(287,425
|
)
|
|
|
(287,425
|
)
|
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
5.
Shareholders’ Deficit
During
the three-month period ended March 31, 2019, the Company issued 1,000,000 common shares pursuant to a subscription payable to
Consultant with a value of $152,899. 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.
During
the three-month period, 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.
6.
Earnings per Share
For
the three months ended March 31, 2019, Earnings per Share (EPS) is 0.005 (basic and diluted) compared to the EPS for the three
months ended March 31, 2018 of 0.01 (basic and diluted). There are 49,833,333 shares authorized, 26,634,052 and 24,634,054 shares
issued and outstanding, respectively.
7.
Reverse Stock Split
A
1 for 6 reverse stock split of common shares was deemed declared effective, by FINRA, on March 29th, 2019 occurred. 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.
Franchise
Holdings International, Inc.
Notes
to the Condensed Consolidated Financial Statements
Unaudited
8.
Concentration of Customer Risk
The
following table includes the percentage of the Company’s sales to significant customers for the three months ended March
31, 2019 and 2018, as well as the balance included in revenue and accounts receivable for each significant customer as at March
31, 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
|
|
|
482,247
|
|
|
|
79.2
|
|
|
|
45,297
|
|
|
|
66.5
|
|
|
Customer B
|
|
|
77,503
|
|
|
|
12.7
|
|
|
|
2,786
|
|
|
|
25.0
|
|
The
loss of any of these key customers could have an adverse effect on the Company’s business.
9.
Evaluation of Subsequent Events
The
Company has evaluated subsequent events through May 31, 2019 which is the date the financial statements were available
to be issued and the following events after March 31, 2019 occurred:
|
|
●
|
On
April 3, 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.
|
|
|
|
|
|
|
●
|
On
April 2, 2019, Mr. Craig Loverock was appointed to our Board of Directors and as Chairman of our Audit Committee. Per the
language in the Written Consent of Board of Directors dated April 2, 2019, Mr. Loverock shall be paid $1,000 CDN for each
month of service as Director, and such payment shall be made quarterly. Mr. Loverock shall be eligible to participate in all
employee compensations plans that are available to other Officers and Directors of the Corporation from time to time.
|
|
|
|
|
|
|
●
|
On
May 9, 2019, Franchise Holdings International, Inc. issued 1,680,084 common stock as approved by the board of directors to
a consultant for services rendered.
|
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 three months ended March 31, 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 months ended March 31, 2019, revenue generated from the entire line of Worksport products was $572,278, compared to
$150,878 for the three months ended March 31, 2018. The year over year increase of approximately 279% was mainly attributable
to the availability of inventory to partially satisfy customer orders.
For
the three months ended March 31, 2019, revenue generated in Canada was $25,602 compared to $102,141 for the same period in 2018,
a decrease of 75%. The decrease was primarily due to a higher demand in the United States, resulting in temporarily limited factory
capacity to handle Canadian market sales. The rate of exchange between the Canadian Dollar and the United States Dollar during
the first three 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 three months ended March 31, 2019, gross revenue generated in the United States was $583,422 compared to $48,736 for the
same period in 2018. This represents a year-over-year increase in US-sourced revenue of approximately 1,097% and 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 first three months of fiscal 2019, when compared to the first three months of fiscal 2018, by 209%
from $139,937 to $432,948. The increase was primarily due to the higher volume of sales for the first quarter of 2019 when compared
to the same period of 2018. Our cost of sales, as a percentage of sales, was approximately 76% and 93% for three months ended
March 31, 2019 and 2018, respectively.
Within
cost of sales, freight costs accounted for 9% of cost of sales during the three months ended March 31, 2019, whereas in 2018,
it accounted for 26% of cost of sales. The large decrease in the percentage of cost of sales is due to the increase in sales for
the quarter ended March 31, 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.
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 three-month periods ended March 31, 2019 and 2018 were 24% and 8% respectively. The increase in gross
margin reflects an increase in one-time shipping costs in landing product in our US warehouse for 2018. In addition, the gross
margin percentage for the three months ended March 31, 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 three months ended March 31, 2019 were $226,644 compared to $189,956 for the three months ended March 31, 2018.
Although there were decreases in general and administrative expenses and foreign exchange, theses expenses were offset by larger
increases in sales and marketing, and professional fees incurred for the period.
|
|
●
|
General
and administrative expense decreased by $26,247, from $66,818 to $40,571 during the three months ended March 31, 2018. The
main reason for the decrease was a major reduction in salaries provided to the CEO for the first quarter.
|
|
|
|
|
|
|
●
|
The
Company also realized a gain on foreign exchange in the amount of $9,165 during the three months ended March 31, 2019, a decrease
of $16,808 when compared to a loss on foreign exchange of ($7,643) during the three months ended March 31, 2018. The current
gains and previous loss 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, increased from $121,526 for the three months ended March 31, 2018
to $172,502 for the three months ended March 31, 2019. The increase is related to increased 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 first quarter at March 31, 2019 was $39,160 compared with $512,431 at March 31, 2018. The major difference
consisted of a loss on debt settlement of $495,943 and financing charges of $9,198 that occurred in the first quarter of 2018.
During
the three-month period ended March 31, 2019, the Company incurred interest of $39,160 an increase of $31,870 when compared to
interest expense of $7,290 incurred during the three months ended March 31, 2018. This was due to the interest accruals not previously
being recorded in 2018 until the end of the year. 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 95% of the interest expense and the other 5%
was for bank interest.
Net
Loss
Net
loss for the three months ended March 31, 2019 was $126,473 compared to a net loss of $691,446 for the three months ended March
31, 2018, a difference of $564,973 or 82%. The decrease in the net loss was mainly due to the loss of debt settlement in the amount
of $495,943; financing costs of $9,198; and an increase in professional fees of $50,976 as discussed above.
Liquidity
and Capital Resources
Cash
Flow Activities
Cash
decreased from $25,323 at December 31, 2018 to $21,900 at March 31, 2019. The decrease was primarily the result of the timing
of inbound payments from customers, and outbound payments to vendors. Accounts receivable increased by $293,186 from $61,882 at
December 31, 2018 to $355,068 at March 31, 2018. Inventory decreased at December 31, 2018 from $289,516 at March 31, 2018 to $164,693
largely as a result of the timing of the receipt of inventory shipments. Prepaid expenses decreased by $118,688 from $124,114
at December 31, 2018 to $5,426 at March 31, 2019 due to the completion of a large amount of consulting services for this quarter.
Payroll taxes payable decreased from $82,365 to $65,376 due to a larger reduction in salaries to related parties. Accounts payable
and accrued liabilities increased by $154,125 from $401,766 at December 31, 2018 to $555,891 at March 31, 2018. The increase in
payables is related to large purchases related to increased sales during the three months ended March 31, 2019.
Financing
Activities
During
the first three months of fiscal 2019, Worksport issued $30,000 in issuance of common stock for cash and repayment of $4,049 of
shareholder loans. During the first quarter of 2018, there were no changes in financing activities for the period.
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.