FRANCHISE INTERNATIONAL : Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

FRANCHISE INTERNATIONAL : Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

The following management’s discussion and analysis (“MD&A”) should be read in
conjunction with financial statements of Worksport, Ltd. (formerly Franchise
Holdings International, Inc
) and its wholly owned subsidiary, Worksport Ltd. for
the three months ended March 31, 2020 and 2019, and the notes thereto.
Additional information relating to Worksport Ltd 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
Worksport 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 Worksport’s MD&A under Risk
Factors . Readers should not place undue reliance on any such forward-looking
statements. Worksport 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.



COVID-19


In December 2019, a novel strain of coronavirus (COVID-19) was reported to have
surfaced in Wuhan, China. The virus has since spread to over 150 countries and
including Canada and United States. On March 11, 2020, the World Health
Organization
declared the outbreak a pandemic. In both Canada and United Sates
most states/provinces and cities have reacted by instituting lockdown orders,
restrictions on travel, “stay at home” rules and restrictions on the types of
businesses that may continue to operate, as well as guidance in response to the
pandemic and the need to contain it.

As a result of the lockdown orders enacted in the United States, Canada and
China the Company expects a disruption to its manufacturing with significant
reduction to sales presented in these condensed interim financial statements. As
of the date of this financial statement, lockdown orders have been relaxed in
parts of the United States, Canada and China, but due to low consumer confidence
and disruption to manufacturing the Company expects sales to remain low.

The extent to which the pandemic may impact our results will depend on future
developments, which are highly uncertain and cannot be predicted as of the date
of this report, including new information that may emerge concerning the
severity of the pandemic and steps taken to contain the pandemic or treat its
impact, among others. Nevertheless, the pandemic and the current financial,
economic and capital markets environment, and future developments in the global
supply chain and other areas present material uncertainty and risk with respect
to our performance, financial condition, results of operations and cash flows.



Revenue


For the three months ended March 31, 2020, revenue generated from the entire
line of Worksport products was $41,027, compared to $572,278 for the three
months ended March 31, 2019. The year over year decrease of approximately 93%
was attributed to the impact of COVID-19.

For the three months ended March 31, 2020, revenue generated in Canada was
$13,018 compared to $25,602 for the same period in 2019, a decrease of 49%. The
rate of exchange between the Canadian Dollar and the United States Dollar during
the first three months of fiscal 2020 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, 2020, gross
revenue generated in the United States was $21,702 compared to $583,422 for the
same period in 2019. This represents a year-over-year decrease in US-sourced
revenue of approximately 96%. The decrease in revenue generated in Canada and
United States can be attributed to the lockdown and stay-at-home orders due to
the COVID-19 pandemic.

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.



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Cost of Sales


Cost of sales decreased for the first three months of fiscal 2020, when compared
to the first three months of fiscal 2019, by 94% from $432,948 to $27,011. The
decrease was primarily due to significantly lower demand as a result of
COVID-19. Our cost of sales, as a percentage of sales, was approximately 66% and
76% for three months ended March 31, 2020 and 2019, respectively.

Within cost of sales, freight costs accounted for 13% of cost of sales during
the three months ended March 31, 2020, whereas in 2019, it accounted for 9% of
cost of sales. The increase in the percentage of cost of sales is due to
increased shipping expenses due increase demand of international delivery due to
COVID-19.

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, 2020 and
2019 were 34% and 24% respectively. The increase in gross margin reflects the
Company’s efforts to negotiate with manufacturers to increase economies of scale
and decreasing the Company’s cost of sales.



Operating Expenses


Operating expenses decreased for the three months ended March 31, 2020 by
$48,172 to $178,471 compared to $226,664 for the three months ended March 31,
2019
. The decrease can be attributed to the impact of COVID-19 in China, United
States
and Canada disrupting the Company’s normal course of operations.

? General and administrative expense decreased by $6,665, from $40,571 to $33,906

during the three months ended March 31, 2020. The decrease in general and

administrative expense was due reduced expenses as a result of COVID-19.

? The Company also realized a gain on foreign exchange in the amount of $7,726

during the three months ended March 31, 2020, a decrease of $6,072 when

compared to a gain on foreign exchange of $13,798 during the three months ended

March 31, 2019. The decrease on foreign exchange was the result of the

Company’s reduced operations due to COVID-19.

? Professional fees which include accounting, legal and consulting fees,

decreased from $172,502 for the three months ended March 31, 2019 to 149,465

for the three months ended March 31, 2020. The decrease in professional fees is

related to decreases in consulting services employed by the Company during the

three months ended March 31, 2020.

Other Income and Expenses

Other income and expenses for the first quarter at March 31, 2020 was $27,811
compared with $39,160 as at March 31, 2019. A difference of $11,349 can be
attributed to lower interest expense being incurred by the Company during the
three months ended March 31, 2020. The decrease in interest expense is
attributed to the Company’s repayment of principal amounts of notes payable
during the year ended December 31, 2019.



Net Loss


Net loss for the three months ended March 31, 2020 was $192,266 compared to a
net loss of $126,473 for the three months ended March 31, 2019, a change of
$65,793 or 52%. The increase in the net loss can be attributed to the decrease
in net sales of $531,251 from $572,278 to $41,027 for the three months ended
March 31, 2019 and 2020 due to COVID-19.



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Liquidity and Capital Resources



Cash Flow Activities


Cash was stable from December 31, 2019 to March 31, 2020 at $11,993 and $11,010
respectively. Accounts receivable increased by $22,888 from December 31, 2019 to
March 31, 2020, due to sales occurring near the end of the quarter. Inventory
decreased by $17,441 from $113,156 to $95,715 at December 31, 2019 and March 31,
2020
respectively. Decrease in inventory was a result of disruptions to supplier
manufacturing from the COVID-19 pandemic. Prepaid expenses decreased by $8,281
from December 31, 2019 to March 31, 2020 due to amortization of prepaid
expenses. Accounts payable and accrued liabilities decreased by $44,567 from
December 31, 2019 to March 31, 2020. The decrease in payables is related to the
slowdown in normal operations as a result of the COVID-19 lockdown.



Financing Activities


During the first three months of fiscal 2020, Worksport received $182,500 in
convertible promissory note and $6,317 from shareholder loans. During the first
quarter of 2019, Worksport issued $30,000 in issuance of common stock for cash
and repayment of $4,049 of shareholder loans.

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 14, 2020. 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.

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