ITEM
1. FINANCIAL STATEMENTS
Franchise
Holdings International, Inc.
Condensed
Consolidated Balance Sheets
(Unaudited)
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
77,130
|
|
|
$
|
66,961
|
|
Accounts receivable
|
|
|
107,078
|
|
|
|
189,502
|
|
Inventory
|
|
|
76,583
|
|
|
|
44,635
|
|
Prepaid inventory
|
|
|
84,800
|
|
|
|
19,684
|
|
Prepaid
expenses and deposits
|
|
|
437,500
|
|
|
|
392,047
|
|
Total
Current Assets
|
|
|
783,091
|
|
|
|
712,829
|
|
Prepaid Expenses
- long term
|
|
|
-
|
|
|
|
136,466
|
|
Property and Equipment,
net
|
|
|
42,282
|
|
|
|
43,079
|
|
Intangible
Assets, net
|
|
|
11,366
|
|
|
|
13,096
|
|
Total
Assets
|
|
$
|
836,739
|
|
|
$
|
905,470
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’
Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
and accrued liabilities
|
|
$
|
336,473
|
|
|
$
|
230,770
|
|
Income taxes payable
|
|
|
4,898
|
|
|
|
5,114
|
|
Related party loan
|
|
|
22,211
|
|
|
|
22,211
|
|
Current
portion of notes payable
|
|
|
275,844
|
|
|
|
275,844
|
|
Total
Current Liabilities
|
|
|
639,426
|
|
|
|
533,939
|
|
Notes
Payable, Net of Current Portion
|
|
|
-
|
|
|
|
-
|
|
Total
Liabilities
|
|
|
639,426
|
|
|
|
533,939
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
Series A Preferred Stock, $0.0001 par
value, 1,000,000 shares authorized, 100,000 and 0 shares issued and outstanding
|
|
|
10,000
|
|
|
|
10,000
|
|
Common stock, $0.0001 par value, 299,000,000
shares authorized, 128,271,689 and 122,327,240 shares issued and outstanding, respectively
|
|
|
12,827
|
|
|
|
12,233
|
|
Additional paid-in capital
|
|
|
7,541,301
|
|
|
|
7,464,617
|
|
Share subscriptions receivable
|
|
|
(10,755
|
)
|
|
|
(10,755
|
)
|
Share subscriptions payable
|
|
|
2,271,801
|
|
|
|
1,531,080
|
|
Accumulated deficit
|
|
|
(9,570,917
|
)
|
|
|
(8,591,261
|
)
|
Cumulative translation
adjustment
|
|
|
(56,944
|
)
|
|
|
(44,383
|
)
|
Total
Shareholders’ Equity
|
|
|
197,313
|
|
|
|
371,531
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
836,739
|
|
|
$
|
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 Six Months Ended June 30, 2018 and 2017
(Unaudited)
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
143,281
|
|
|
$
|
68,484
|
|
|
$
|
294,159
|
|
|
$
|
169,747
|
|
Cost
of Goods Sold
|
|
|
111,066
|
|
|
|
62,582
|
|
|
|
251,003
|
|
|
|
133,573
|
|
Gross
Profit
|
|
|
32,215
|
|
|
|
5,902
|
|
|
|
43,156
|
|
|
|
36,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
27,447
|
|
|
|
25,311
|
|
|
|
94,265
|
|
|
|
1,420,842
|
|
Sales and marketing
|
|
|
6,733
|
|
|
|
414
|
|
|
|
8,315
|
|
|
|
1,517
|
|
Professional fees
|
|
|
274,079
|
|
|
|
44,562
|
|
|
|
395,605
|
|
|
|
70,615
|
|
Loss
on foreign exchange
|
|
|
1,146
|
|
|
|
(1,675
|
)
|
|
|
1,176
|
|
|
|
26,098
|
|
Total
operating expenses
|
|
|
309,405
|
|
|
|
68,612
|
|
|
|
499,361
|
|
|
|
1,519,072
|
|
Loss
from operations
|
|
|
(277,190
|
)
|
|
|
(62,710
|
)
|
|
|
(456,205
|
)
|
|
|
(1,482,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(19,837
|
)
|
|
|
(2,488
|
)
|
|
|
(27,127
|
)
|
|
|
(10,798
|
)
|
Loss on derivative
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(484,720
|
)
|
Debt issuance costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,971
|
)
|
Finance charges
|
|
|
8,785
|
|
|
|
(3,627
|
)
|
|
|
(413
|
)
|
|
|
(29,091
|
)
|
Loss
on settlement of debt
|
|
|
-
|
|
|
|
(1,034,557
|
)
|
|
|
(495,943
|
)
|
|
|
(1,046,322
|
)
|
Total
other income (expense)
|
|
|
(11,052
|
)
|
|
|
(1,040,672
|
)
|
|
|
(523,483
|
)
|
|
|
(1,573,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
(288,242
|
)
|
|
|
(1,103,382
|
)
|
|
|
(979,688
|
)
|
|
|
(3,056,800
|
)
|
Other Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(4,918
|
)
|
|
|
(7,596
|
)
|
|
|
(12,561
|
)
|
|
|
(17,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss
|
|
$
|
(293,160
|
)
|
|
$
|
(1,110,978
|
)
|
|
|
(992,249
|
)
|
|
|
(3,074,002
|
)
|
Loss per Share
(basic and diluted)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
Weighted Average Number of Shares
(basic and diluted)
|
|
|
124,809,537
|
|
|
|
209,399,110
|
|
|
|
123,575,246
|
|
|
|
173,324,698
|
|
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, 2018 and 2017
(Unaudited)
|
|
2018
|
|
|
2017
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(979,688
|
)
|
|
$
|
(3,056,800
|
)
|
Adjustments to reconcile net loss to
net cash from operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
2,527
|
|
|
|
784
|
|
Accretion of debt
discount
|
|
|
-
|
|
|
|
2,971
|
|
Shares issued for
current and future services
|
|
|
18,000
|
|
|
|
1,380,445
|
|
Financing fees paid
in shares
|
|
|
-
|
|
|
|
21,000
|
|
Interest paid in
shares
|
|
|
-
|
|
|
|
3,823
|
|
Loss on settlement
of debt
|
|
|
495,943
|
|
|
|
1,046,322
|
|
Loss
on derivative
|
|
|
-
|
|
|
|
484,720
|
|
|
|
|
(463,218
|
)
|
|
|
(116,735
|
)
|
Changes in operating
assets and liabilities
|
|
|
485,948
|
|
|
|
85,529
|
|
Net cash provided
by (used in) operating activities
|
|
|
22,730
|
|
|
|
(31,206
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities
|
|
|
|
|
|
|
|
|
Purchase of property
and equipment
|
|
|
-
|
|
|
|
(4,873
|
)
|
Net cash used in
investing activities
|
|
|
-
|
|
|
|
(4,873
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Repayment of overdraft
|
|
|
-
|
|
|
|
(2,635
|
)
|
Proceeds from share subscriptions receivable
|
|
|
-
|
|
|
|
1,750
|
|
Proceeds from notes payable
|
|
|
-
|
|
|
|
52,081
|
|
Repayment of
promissory notes
|
|
|
-
|
|
|
|
(7,894
|
)
|
Net
cash provided by financing activities
|
|
|
-
|
|
|
|
43,302
|
|
Effects
of Foreign Currency Translation
|
|
|
(12,561
|
)
|
|
|
17,202
|
|
Change in cash
|
|
|
10,169
|
|
|
|
24,425
|
|
Cash
and cash equivalents - beginning of year
|
|
|
66,961
|
|
|
|
-
|
|
Cash
and cash equivalents end of year
|
|
$
|
77,130
|
|
|
$
|
24,425
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure
of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
16,724
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure
of non-cash investing and financing Activities
|
|
|
|
|
|
|
|
|
Shares issued for
settlement of notes and accounts payable
|
|
$
|
650,000
|
|
|
$
|
1,314,904
|
|
Shares issued for
consulting agreement
|
|
$
|
150,000
|
|
|
$
|
-
|
|
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 six-month period ended June 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 June 30,
2018 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, 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 June 30, 2018 were converted into
United States Dollars at an average rate of 1.28 Canadian Dollars to one United States Dollar. Transactions denominated in Canadian
Dollars for the period ended June 30, 2017 were converted into United States Dollars at an average rate of 1.33 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 six-month period ended June 30, 2018, the Company incurred a net loss of $979,688 and as of that date, the Company’s
accumulated deficit was $9,570,917. 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.
Franchise
Holdings International, Inc.
Notes
to the Condensed Consolidated Financial Statements
Unaudited
The
Company also implemented the following accounting standard effective January 1, 2018.
Effective January 1, 2018, the Company
adopted Accounting Standards Codification Topic 606,
Revenue from Contracts with Customers,
(“ASC 606”) using
the full retrospective transition method. To determine revenue recognition for arrangements that the Company determines are within
the scope of ASC 606, the Company performs the following five steps: (i) identifies the contract(s) with a customer; (ii) identifies
the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the
performance obligations in the contract; and (v) recognizes revenue when (or as) the entity satisfies a performance obligation.
The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration
it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract
is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract
and determines those that are distinct performance obligations.
The Company’s products consist of
truck bed covers for light duty trucks with its primary markets being in the United States and Canada. The Company plans to expand
globally as they find suitable markets with a demand for the products they manufacture. The Company’s sales their product
through the aftermarket and other markets. Revenue generated in Canada for the three and six months ended June 30, 2018, was $19,574
and $124,947, respectively. Revenue generated in the United States for the three and six months ended June 30, 2018 was $141,410
and $171,041, respectively.
The implementation of ASC 606 had no effect on this period or prior periods. Had
the implementation of ASC 606 been applicable, the Company’s prior periods would have needed to be revised to present revenue
as if ASC 606 had been applicable for all periods presented.
Inventory
consists of the following at June 30, 2018 and December 31, 2017:
|
|
2018
|
|
|
2017
|
|
Finished goods
|
|
|
76,305
|
|
|
$
|
44,635
|
|
Raw materials
|
|
|
278
|
|
|
|
-
|
|
|
|
$
|
76,583
|
|
|
$
|
44,635
|
|
Prepaid inventory
|
|
$
|
84,800
|
|
|
$
|
19,684
|
|
Secured
notes payable consists of the following at June 30, 2018 and December 31, 2017:
|
|
2018
|
|
|
2017
|
|
Balance owing, December 31,
|
|
$
|
275,844
|
|
|
$
|
275,844
|
|
Less
amounts due within one year
|
|
|
(275,844
|
)
|
|
|
(275,844
|
)
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
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 June 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 June 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.
During
the period ended June 30, 2017, the Company issued 62,144,524 common shares pursuant to the conversion of the convertible promissory
notes.
During
the period ended June 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 June 30, 2017.
Franchise
Holdings International, Inc.
Notes
to the Condensed Consolidated Financial Statements
Unaudited
7.
|
Share
Payable/ Claim Extinguishment Agreement
|
During
the six months ended June 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 June, the investor relations
company had met milestones that corresponded to $63,600 of expense being recorded. None of the shares had been issued through
June 30, 2018.
During
the six months ended June 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 six months ended June 30, 2018. During the
period ended June 30, 2018 5,944,449 shares have been issued under this agreement.
During
the six months ended June 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 June 30, 2018, the public relations company has provided
services valued at $18,000. The Company has yet to issue the shares for these services.
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 six
months ended June 30, 2018.
8.
|
Related
Party Transactions
|
During
the three and six month period ended June 30, 2018, respectively, the Company recorded salaries expense of $10,814 (2017 - $7,150)
and $28,783(2017 - $22,015) related to services rendered to the Company by its major shareholder and CEO. As mentioned in Note
6, during the six months ended June 30, 2017, the Company issued the CEO 72,000,000 shares valued at $1,360,000.
9.
|
Concentration
of Customer Risk
|
The
following table includes the percentage of the Company’s sales to significant customers for the three months ended June
30, 2018 and 2017, as well as the balance included in accounts receivable for each significant customer as at June 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
|
%
|
|
|
4,415
|
|
|
|
66.0
|
|
Customer B
|
|
|
87,788
|
|
|
|
30.0
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
Customer C
|
|
|
42,687
|
|
|
|
14.0
|
%
|
|
|
298
|
|
|
|
10.6
|
|
The
loss of any of these key customers could have an adverse effect on the Company’s business.
10.
|
Evaluation
of Subsequent Events
|
In
July 2018, 12,500,000 shares were issued under the share payable agreements mentioned in Note 6 above.
The
Company has evaluated subsequent events through August 20, 2018 which is the date the financial statements were available to be
issued and noted no other subsequent events.
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 and six months ended June 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 six months ended June 30, 2018, revenue generated from the entire line of Worksport products was $295,988, as compared to
$169,747, for the six months ended June 30, 2017. The year over year increase of approximately 75% was mainly attributable to
Canadian distributor sales and an additional private label order that shipped during the six month period ended June 30, 2018.
During the six months ended June 30, 2018, the Company incurred a shortage of inventory that resulted in a reduced amount of sales
to dealers that depend on Worksport “just in time’ inventory. For the three months ended June 30, 2018, revenue generated
from the entire line of Worksport products was $160,983 as compared to $68,484 for the three months ended June 30, 2017. The year
over year increase of approximately 135% was mainly attributable to filling portions of distributor orders and shipping the additional
Worksport private label orders.
For
the six months ended June 30, 2018, revenue generated in Canada was $124,947 compared to $115,088 for the same period in 2017,
an increase of 9%. This increase in sales is attributable to portions of back orders being shipped during the six months ended
June 30, 2018 as well as a new continued gradual success of the Worksport Private Label sales initiative. For the three months
ended June 30, 2018, revenue generated in Canada was $19,574 compared to $33,006 for the same period in 2017, an decrease of 40%.
In addition to effect of insufficient levels of inventory to satisfy orders during the period ended June 30, 2018, the weak Canadian
Dollar compared to the United States Dollar during the first six months of fiscal 2018 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, 2018 revenue generated in the United States was $171,041 compared to $54,659 for the
same period in 2017. For the three months ended June 30, 2018 revenue generated in the United States was $141,410 compared to
$35,477 for the same period in 2017. These represent year-over-year increases in US- source revenue of approximately 212% and
298%, respectively, and is primarily attributable to new private label sales during the periods ended June 30, 2018.
Sales
from online retailers of the Worksport products increased from $141,410 during the six months ended June 30, 2018 to $52,976 during
the six months ended June 30, 2017, an increase of 167%. The online retailers accounted for over 57% of total revenue for the
six months ended June 30, 2018, compared to 46% for the six months ended June 30, 2017. Distributor sales increased from $96,243
in 2017, to $121,080 in 2018, an increase of over 26%. The remaining revenues consist of sales from key area dealers.
Sales
from online retailers of the Worksport products increased from $98,528 in the three months ended June 30, 2018 to $39,675 in the
three months ended June 30, 2017, an increase of 148%. Distributor sales decreased from $29,808 in three months ended June 30,
2017, to $19,575, due to inventory shortages. The remaining revenues consist of sales from key area dealers.
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 14 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 2018 as compared to the first six months of 2017 by 88% from $133,573 to $251,003,
representing 85% 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
79% and 85% for the six months ended June 30, 2017 and 2018, respectively. During the three months ended June 30, 2018, cost of
sales increased by 77% to $111,066 from $62,582 in the three months ended June 30, 2017. This increase was due to
a corresponding increase in sales for the period as well as delayed invoicing from suppliers related to US shipped sales recognized
in the quarter ended March 30, 2018. Cost of sales, as a percentage of sales was approximately 91% and 78% for the three months
ended June 30, 2017 and 2018. 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, paired with delayed billing noted earlier. The increase in the percentage of cost of
sales for the six month period ended June 30, 2018 is due to the majority of the sales for the period ended June 30, 2018 being
to US customers that generally have higher shipping costs than sales to Canadian customers. Freight costs were $83,919 and $13,980
for the six month periods ended June 30, 2018 and 2017, respectively, and $69,270 and $8,800 for the three month periods ended
June 30, 2018 and 2017.
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 six month periods ended June 30, 2018 and 2017 were 9% and 21% respectively. The decrease in gross margin
reflects an isolated occurrence due to sales promotions during 2018. Gross margin percentage for the three month periods
ended June 30, 2018 and 2017 were 0% and 9% respectively. The decrease in gross margin during the three month period is due
to the sales promotions mentioned above.
Operating
Expenses
Operating
expenses for the six months ended June 30, 2018 were $499,361 compared to $1,519,072 for the six months ended June 30, 2017. Operating
expenses for the three months ended June 30, 2018 were $309,045 compared to $68,612 for the three months ended June 30, 2017.
Our general and administrative expense was consistent between the three months ended June 30, 2018 and 2017 and
decreased by $1,326,577, from $1,420,842 to $94,265, between the six months ended June 30, 2018 and 2017.
The decrease 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 six months ended June 30, 2018. Professional fees which include accounting, legal and consulting fees, increased
from $70,615 for the six months ended June 30, 2017 to $395,605 for the six months ended June 30, 2018 and also increased from
$44,562 for the three months ended June 30, 2017 to $274,079 for the three months ended June 30, 2018. The increase is primarily
related to amortization of consulting expense which had been paid through the issuance of common stock.
Other
Income and Expenses
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. Interest expense related to these notes for the three and six month periods ended June 30,
2018 was $19,837 and $27,127.
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. 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. 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.
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, 2018 were $270,242 and $961,688, respectively, compared to net losses
of $1,103,382 and $3,056,800 for the three and six month periods ended June 30, 2017. The decrease 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 offset by an increase in professional fees resulting from the amortization of consulting expense which had been paid
through the issuance of common stock.
Liquidity
and Capital Resources
Cash
Flow Activities
Cash increased from $66,961 at December 31, 2017 to $77,130 at June 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 $82,424
from $189,502 at December 31, 2017 to $107,078 at June 30, 2018. Inventory increased by $31,948 from $44,635 at December 31, 2017
to $76,583 at June 30, 2018 largely as a result of the timing of the receipt of inventory shipments. Accounts payable and accrued
liabilities increased by $105,703 from $230,770 at December 31, 2017 to $336,473 at June 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 decrease in payables through
the assumption of accounts payable in the amount of $183,443 pursuant to the share issuance claim extinguishment agreement.
Investing
Activities
During the
six months ended June 30, 2017, Worksport invested $4,873 in warehouse equipment. No investing activities occurred during the
six months ended June 30, 2018.
Financing
Activities
During
the six months ended June 30, 2018, the Company did not have any financing activities. During the six months ended June 30, 2017,
Worksport funded working capital requirements principally through the issuance of promissory notes in the amount of $52,081.
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.