Worksport Ltd - Quarter Report: 2017 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For Quarterly Period Ended June 30, 2017

or

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

For the Transition period from _______________ to ______________

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 ¨

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).

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 February 15, 2018, the number of shares outstanding of the registrant’s class of common stock was 119,127,240.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

See accompanying notes to the unaudited condensed consolidated financial statements.

See accompanying notes to the unaudited condensed consolidated financial statements.

See accompanying notes to the unaudited condensed consolidated financial statements.

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”) for the three and six months ended June 30, 2017 and 2016, and the notes thereto. Additional information relating to FNHI is available at www.fnhi.net

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 six months ended June 30, 2017, revenue generated from the entire line of Truxmart products was $169,747, as compared to $119,375, for the six months ended June 30, 2016. The year over year increase of approximately 42% was mainly attributable Canadian distributor sales and an opening private label order that shipped during the six month period ended June 30, 2017. During the six months ended June 30, 2016, the Company incurred a shortage of inventory that resulted in a reduced amount of sales for the period. For the three months ended June 30, 2017, revenue generated from the entire line of Truxmart products was $68,484 as compared to $25,867 for the three months ended June 30, 2016. The year over year increase of approximately 168% was mainly attributable to filling portions of distributor orders and shipping the opening Truxmart private label order.

For the six months ended June 30, 2017, revenue generated in Canada was $115,088 compared to $77,602 for the same period in 2016, an increase of 48%. This increase in sales is attributable to portions of back orders being shipped during the six months ended June 30, 2017 as well as a new private label offering introduced during the six months ended June 30, 2017. For the three months ended June 30, 2017, revenue generated in Canada was $33,006 compared to $10,288 for the same period in 2016, an increase of 221%. In addition to effect of insufficient levels of inventory to satisfy orders during the period ended June 30, 2016, the relative weakening of the Canadian Dollar compared to the United States Dollar during the first six months of fiscal 2016 had a 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 six months ended June 30, 2017 revenue generated in the United States was $54,659 compared to $41,774 for the same period in 2016. For the three months ended June 30, 2017 revenue generated in the United States was $35,477 compared to $13,469 for the same period in 2016. These represent year-over-year increases in US- source revenue of approximately 31% and 163%, respectively, and is primarily attributable the availability of limited inventory to fill only a small portion of the demand for the Company’s products during the periods ended June 30, 2016.

Sales from online retailers of the Truxmart products increased from $41,575 in the six months ended June 30, 2016 to $52,976 in the six months ended June 30, 2017, an increase of 27%. The online retailers accounted for over 46% of total revenue for the six months ended June 30, 2017, compared to 34% for the six months ended June 30, 2016. Distributor sales increased from $51,332 in 2016, to $96,243 in 2017, an increase of over 87%. The remaining revenues consist of sales from key area dealers.

Sales from online retailers of the Truxmart products increased from $12,771 in the three months ended June 30, 2016 to $39,675 in the three months ended June 30, 2017, a decrease of 211%. The online retailers accounted for over 57% of total revenue for the three months ended June 30, 2017, compared to 56% for the three months ended June 30, 2016. Distributor sales decreased from $51,332 in three months ended June 30, 2016, to $29,808 in 2017. The remaining revenues consist of sales from key area dealers.

Currently, Truxmart 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 Truxmart currently supports a total of 16 dealers and distributors, Truxmart 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 six months of 2017 as compared to the first six months of 2016 by 30% from $102,586 to $133,573, representing 79% of revenue. This increase was primarily due to a corresponding increase in sales for the period as well as the reduction of shipping and freight costs included in cost of sales. Our cost of sales, as a percentage of sales, was approximately 86% and 79% for the six months ended June 30, 2016 and 2017, respectively. During the three months ended June 30, 2017, cost of sales increased by 307% to $62,582 from $15,369 in the three months ended June 30, 2016. This increase was due to a corresponding increase in sales for the period. Cost of sales, as a percentage of sales was approximately 59% and 91% for the three months ended June 30, 2016 and 2017. The increase in the percentage of cost of sales during the three month period is a result of a significant portion of the sales for the quarter were generated from a new product with a lower margin as part of the introduction of the new product with increased shipping costs. The increase in the percentage of cost of sales for the six month period ended June 30, 2017 is due to the majority of the sales for the period ended June 30, 2017 being to Canadian customers that generally have lower shipping costs than sales to U.S. customers. Freight costs were $13,980 and $16,142 for the six month periods ended June 30, 2017 and 2016, respectively, and $8,800 and $3,667 for the three month periods ended June 30, 2017 and 2016.

Truxmart 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 six month periods ended June 30, 2017 and 2016 were 21% and 14% respectively. The increase in gross margin reflects a return towards historical norms – the gross margin percentage for the six months ended June 30, 2016 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. During the six months ended June 30, 2016, while sales denominated in Canadian Dollars decreased by 30% and United States Dollars decreased by 72%, the decrease in aggregate sales reported in United States Dollars was 56% as a result of the weakened Canadian Dollar. There was less fluctuation in the foreign exchange rates during the six months ended June 30, 2017, such that there was not a significant disparity between the increases on a percentage basis in revenue denominated in Canadian Dollars when presented in Canadian or United States Dollars. Gross margin percentage for the three month periods ended June 30, 2017 and 2016 were 9% and 41% respectively. The decrease in gross margin is because a significant amount of the sales for the three months ended June 30, 2017 were generated by a new introductory product with low margins as a result of introductory pricing.

Operating Expenses

Operating expenses for the six months ended June 30, 2017 were $1,519,072 compared to $191,906 for the six months ended June 30, 2016. Operating expenses for the three months ended June 30, 2017 were $68,612 compared to $107,693 for the three months ended June 30, 2016. Our general and administrative expense increased by $6,096, from $19,215 to $25,311, during the three months ended June 30, 2017 and $1,371,798, from $49,044 to $1,420,842, during the six months ended June 30, 2017. The increase in the six month period is a result of the fair value of $1,360,000 of 72,000,000 common shares issued to the Company’s CEO during the quarter ended March 31, 2017 as well as an increase in cash salaries paid during the six months ended June 30, 2017. The increase in the three month period is a result of an increase in cash salaries paid during the three months ended June 30, 2017. Sales and marketing decreased by $37,071 to $1,517 from $38,588 during the six months ended June 30, 2017 and by $16,793 from $17,207 to $414 during the three months ended June 30, 2017. These decreases are due to the elimination of amounts paid to a sales consultant during the three and six month periods ended June 30, 2017, that were paid in the comparable periods ended June 30, 2016. Professional fees which include accounting, legal and consulting fees, decreased from $97,889 for the six months ended June 30, 2016 to $70,615 for the six months ended June 30, 2017 and also decreased from $63,518 for the three months ended June 30, 2016 to $44,562 for the three months ended June 30, 2017. The decreases are related to reduced accounting and legal services between the periods. The Company also realized a loss on foreign exchange in the amount of $26,098 during the six months ended June 30, 2017, an increase of $19,713 when compared to a loss on foreign exchange of $6,385 during the six months ended June 30, 2016. 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 small gain on foreign exchange in the amount of $1,675 during the three months ended June 30, 2017, which represents an aggregate expense reduction of $9,428 when compared to a loss on foreign exchange of $7,753 incurred during the three months ended June 30, 2016.

Other Income and Expenses

Late in the 2016 fiscal year and in the first half of fiscal 2017, 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 six month periods ended June 30, 2016, the Company incurred interest of $6,019 and $12,336, respectively, related to these notes. Interest expense related to these notes for the three and six month periods ended June 30, 2017 were $4,837 and $12,673. The remaining balance of interest expense relates to regular bank charges and interest.

During the year ended December 31, 2016, the Company issued two convertible promissory notes in the amount of $132,750 which were determined to be hybrid financial instruments that include embedded derivatives that require separation from the main financial instrument and recognition at fair value. At the time of origination, the fair value of the derivative liabilities were $212,555 and this amount was expensed as a loss on derivative. Between December 31, 2016 and June 30, 2017, the fair value of the derivative liabilities increased such that a loss on derivative of $484,720 was incurred during the six months ended June 30, 2017. As a result of the fair value of the derivative exceeding the face value of the promissory notes at the time of issuance, the Company also recognized a discount on the issuance of the promissory notes which was amortized over the period in which the promissory notes are outstanding. During the six months ended June 30, 2017, the Company incurred expense related to the amortization of the discount of $50,801. In connection with the issuance of the convertible promissory note payable, the Company incurred debt issuance costs which are being amortized to debt issuance expense over the maturity period of the convertible promissory note. As a result, the Company expensed debt issuance costs of $2,971 during the six months ended June 30, 2017. As the two convertible promissory notes were issued subsequent to March 31, 2016, no such expenses were incurred during the three months ended March 31, 2016. During the six months ended June 30, 2017, both notes were converted into common shares of the Company which resulted in the Company issuing 62,144,524 common shares in full satisfaction of the outstanding principal and interest. In connection with the conversion, the Company incurred a loss on settlement in the amount of $11,765 and additional finance charges of $21,000. As the promissory notes were converted during the quarter ended March 31, 2017, there were not any additional expenses incurred during the quarter ended June 30, 2017 related to these promissory notes.

During the three months ended June 30, 2017, the Company entered into a share issuance/ claim extinguishment agreement 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. The fair value of the shares to be issued pursuant to the share issuance/ claim extinguishment agreement was estimated to be $1,218,000 resulting in a loss on the settlement of debt of $1,034,557 recognized during each of the three and six month periods ended June 30, 2017.

Net Loss

Net loss for the three and six month periods ended June 30, 2017 were $1,103,382 and $3,056,800, respectively, compared to net losses of $241,933 and $329,286 for the three and six month periods ended June 30, 2016. The increases in the net losses were mainly due to the fair value of $1,360,000 of 72,000,000 common shares issued to the Company’s CEO during the quarter ended March 31, 2017, as well as the other expenses related to the debt issued by the Company as discussed above.

Liquidity and Capital Resources

Cash Flow Activities

Cash increased from $0 at December 31, 2016 to $24,425 at June 30, 2017. The increase was primarily the result of the timing of inbound payments from customers, and outbound payments to vendors. Accounts receivable decreased by $70,258 from $81,146 at December 31, 2016 to $10,888 at June 30, 2017. Inventory decreased by $35,274 from $78,975 at December 31, 2016 to $43,701 at June 30, 2017 largely as a result of the timing of the receipt of inventory shipments. Accounts payable and accrued liabilities decreased by $218,695 from $340,270 at December 31, 2016 to $121,575 at June 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 discussed above.

Investing Activities

During the first six months of 2017, Truxmart invested $4,873 in warehouse equipment.

Financing Activities

During the first six months of 2017, Truxmart funded working capital requirements principally through the issuance of promissory notes in the amount of $52,081. During the six month period ended June 30, 2017, the Company raised $1,750 through private placements of shares of the Company's common stock. During the six months ended June 30, 2017, the Company repaid $7,894 of the promissory note payable.

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.

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.

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 June 30, 2017 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.

Inherent Limitations over Internal Controls

FNHI’s management does not expect that its disclosure controls or its internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within FNHI have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Our disclosure controls and procedures are designed to provide reasonable assurance of that our reports will be accurate. Our Chief Executive Officer and Principal Accounting Officer concludes that our disclosure controls and procedures were effective at that reasonable assurance level, as of the end of the period covered by this Form 10-Q. Our future reports shall also indicate that our disclosure controls and procedures are designed for this reason and shall indicate the related conclusion by the Chief Executive Officer and Principal Accounting Officer as to their effectiveness.

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 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the six months ended June 30, 2017, the Company did not complete any unregistered sale of equity securities.

Item 3. Defaults Upon Senior Securities

There have been no defaults upon senior securities.

Item 4. Submission of Matters to a Vote of Security Holders

None.

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.

Item 6. Exhibits

(a) Exhibits

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.

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.