Worksport Ltd - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For Quarterly Period Ended June 30, 2019

or

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

For the Transition period from ______________________ to _____________________

Commission File Number: 000-27631

FRANCHISE HOLDINGS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

3120 Rutherford Road

Suite 414

Vaughan, Ontario, Canada L4K 0B2

(Address of principal executive offices) (Zip Code)

(888) 554-8789

Registrant’s telephone number, including area code

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

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

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

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 August 14, 2019, the number of shares outstanding of the registrant’s class of common stock, $0.0001 par value, was 28,177,964.

FRANCHISE HOLDINGS INTERNATIONAL, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Franchise Holdings International, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

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 Six Months Ended June 30, 2019 and 2018

(Unaudited)

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

Franchise Holdings International, Inc.

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2019 and 2018

(Unaudited)

Supplemental Disclosure for non-cash investing and financing Activities

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

Franchise Holdings International, Inc.

Consolidated Statement of Shareholders’ Deficit

For the Three and Six Months Ended June 30, 2019 and 2018

(Unaudited)

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 six-month period ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on May 13, 2019.

b) Functional and Reporting Currency

These interim financial statements are presented in United States Dollars. The functional currency of the Company is the Canadian Dollar. For purposes of preparing these interim financial statements, balances denominated in Canadian Dollars outstanding at June 30, 2019 were converted into United States Dollars at a rate of 1.31 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 June 30, 2019 and December 31, 2018 were converted into United States Dollars at an average rate of 1.34 and 1.30 Canadian Dollars to one United States Dollar, respectfully.

c) Use of Estimates

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

d) Going Concern

These unaudited condensed consolidated financial statements have been prepared on a going concern basis which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. During the six-month period ended June 30, 2019, the Company incurred a net loss of $128,220 and as of that date, the Company’s accumulated deficit was $10,482,521. While the Company has demonstrated the ability to generate revenue, there are no assurances that it will be able to achieve level of revenues adequate to generate sufficient cash flow from operations or obtain additional financing through private placements, public offerings and/or bank financing necessary to support our working capital requirements. To the extent that funds generated from any private placements, public offerings and/or bank financing are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on acceptable terms. These conditions raise substantial doubt about our ability to continue as a going concern. If adequate working capital is not available we may be forced to discontinue operations, which would cause investors to lose their entire investment. The accompanying condensed consolidated financial statements do not include any adjustments that might result relating to the recoverability and classification of the asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this risk and uncertainty.

2. Significant Accounting Policies

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

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

In January 2019, ASC 842 was implemented related to the valuation of leases. Under this guidance, leases should be capitalized that contain terms over one year and values over the capitalization policies. This standard became effective for the Company’s fiscal year beginning January 1, 2019. The 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 six months ended June 30, 2019.

Franchise Holdings International, Inc.

Notes to the Condensed Consolidated Financial Statements

Unaudited

3. Inventory

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

4. Secured Notes Payable

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

5. Shareholders’ Deficit

During the six-month period ended June 30, 2019, the Company issued 1,280,014 common shares pursuant to a subscription payable to Consultant with a value of $195,712. During the same period, the Company entered into a share subscription agreement with a consultant of the Company for 1,500,000 common shares valued at $30,000.

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

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

6. Earnings per Share

For the six months ended June 30, 2019, Earnings per Share (EPS) is 0.01 (basic and diluted) compared to the EPS for the six months ended June 30, 2018 of 0.01 (basic and diluted). Earnings per Share (EPS) is 0.00 (basic and diluted) for the three months ended June 30, 2019 compare to the three months ended June 30, 2018 of 0.00 (basic and diluted). There are 49,833,333 shares authorized, 28,177,964 and 26,514,314 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 six months ended June 30, 2019 and 2018, as well as the balance included in revenue and accounts receivable for each significant customer as at June 30, 2019 and 2018. A customer is considered to be significant if they account for greater than 10% of the Company’s annual sales.

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 August 14, 2019 which is the date the financial statements were available to be issued and the following events after June 30, 2019 occurred:

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 six months ended June 30, 2019 and 2018, and the notes thereto. Additional information relating to FNHI is available at Worksport.ca.

Safe Harbor for Forward-Looking Statements

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

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

Revenue

For the six months ended June 30, 2019, revenue generated from the entire line of Worksport products was $1,088,974 compared to $294,159 for the six months ended June 30, 2018. The year over year increase of approximately 270% was mainly attributable to the availability of inventory to partially satisfy customer orders.

For the six months ended June 30, 2019, revenue generated in Canada was $24,894 compared to $124,947 for the same period in 2018, a decrease of 80%. For the three months ended June 30, 2019, revenue generated in Canada was ($628) compared to $19,574 for the same period in 2018, a decrease of 103%. The decrease was primarily due to a higher demand in the United States, resulting in temporarily limited factory capacity to handle Canadian market sales and rebates offered to Canadian customers for the three months ended. The rate of exchange between the Canadian Dollar and the United States Dollar during the six 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 six months ended June 30, 2019, gross revenue generated in the United States was $1,148,013 compared to $171,041 for the same period in 2018, an increase of 671%. For the three months ended June 30, 2019, gross revenue generated in the United States was $564,591 compared to $141,410 for the same period in 2018, an increase of 399%. This is primarily attributable to re-entering the US market as of mid-2018 and continuing to increase sales which included online retailers and the support of four private labels, after the allowance of use of the Worksport trademark.

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

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

Cost of Sales

Cost of sales increased for the first six months of fiscal 2019, when compared to the first six months of fiscal 2018, by 221% from $251,003 to $804,634. The increase was primarily due to the higher volume of sales for the first and second quarter of 2019 when compared to the same periods in 2018. Our cost of sales, as a percentage of sales, was approximately 74% and 85% for six months ended June 30, 2019 and 2018, respectively.

Within cost of sales, freight costs accounted for 4% of cost of sales during the six months ended June 30, 2019, whereas in 2018, it accounted for 33% 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 June 30, 2019 being larger US orders with economies to scale in shipping. Also, in 2019, retail online orders were drop-shipped sales FOB China to our online vendors reducing intermediary costs.

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 six month period ended June 30, 2019 and 2018 were 26% and 15% respectively. For the three month ended June 30, 2019 and 2018 gross margin percentage were 28% and 15% 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 six and three months ended June 30, 2018 were abnormally low as a result of the fluctuation in foreign exchange rates used to translate Canadian Dollar sales into United States Dollars for purposes of financial reporting.

Operating Expenses

Operating expenses for the six months ended June 30, 2019 were $360,964 compared to $499,361 for the six months ended June 30, 2018. Operating expenses for the three months ended June 30, 2019 were $134,321 compared to $309,045 for the three months ended June 30, 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.

Other Income and Expenses

Other income and expenses for the six month ended June 30, 2019 was $51,596 compared with $523,483 at June 30 2018. The major difference consisted of a loss on debt settlement of $495,943 that occurred in the first quarter of 2018.

During the six month ended June 30, 2019, the Company incurred interest of $51,596 an increase of $24,469 when compared to interest expense of $27,127 incurred during the six months ended June 30, 2018. For three month ended June 30, 2019 interest expense was $12,437 compare to $19,837 a decrease of $7,400 compare to the three month ended June 30, 2018. The difference is due to higher interest accrual for the first quarter compare to the second quarter of 2019. The Company had assumed Canadian and US dollar promissory notes in 2017 in the amount of $123,392 with terms of 12% and 18%. In addition, two lines of credit in both Canadian and US dollar currencies were assumed with an interest rate of 18% in 2016. The interest from these loans were 92% of the interest expense and the remaining 8% consisting of bank charges and interest.

Net Loss

Net loss for the six months ended June 30, 2019 was $128,220 compared to a net loss of $979,688 for the six months ended June 30, 2018, a difference of $851,468 or 87%. For the three month ended June 30, 2019 the Company had net loss of $1,748 compared to the three month period ended June 30, 2018 of a net loss of $288,242, an improvement of $286,494. The Company’s improvement was mainly attributed to an increase in gross margin and a decrease in operating expenses as discussed above. The decrease in the net loss for the 6 month ended June 30, 2019 was mainly due to the loss of debt settlement in the amount of $495,943 and decrease in professional fees of $121,633 as discussed above.

Liquidity and Capital Resources

Cash Flow Activities

Cash increased from $25,323 at December 31, 2018 to $129,698 at June 30, 2019. The increase was primarily the result of the timing of inbound payments from customers, and outbound payments to vendors. Accounts receivable increased by $60,649 from $61,882 at December 31, 2018 to $122,531 at June 30, 2019. Inventory remained consistent from December 31, 2018 at $289,516 to June 30, 2019 at $285,696. Prepaid expenses decreased by $115,710 from $124,114 at December 31, 2018 to $8,404 at June 30, 2019 due to the completion of a large amount of consulting services in the first quarter of 2019. Payroll taxes payable decreased from $82,365 at December 31, 2018 to $17,577 June 30, 2019. This reduction is due to several payments made for payroll remittance. Accounts payable and accrued liabilities increased by $233,074 from $401,766 at December 31, 2018 to $634,840 at June 30, 2019. The increase in payables is related to large purchases related to increased sales during the six months ended June 30, 2019.

Investing Activities

During the six months ended June 30, 2019, Worksport invested $1,198 in warehouse equipment. No investing activities occurred during the six months ended June 30, 2018.

Financing Activities

During the first six 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.

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 March 31, 2019 to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure for the reason described below.

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

Changes in Internal Control Over Financial Reporting

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

PART II OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

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

Item 3. Defaults Upon Senior Securities

There have been no defaults upon senior securities.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

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

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.