ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Franchise Holdings International, Inc.
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying consolidated balance sheets of Franchise Holdings International, Inc. (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period then ended, in conformity with accounting principles generally accepted in the United States of America.
BASIS FOR OPINION
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
CONSIDERATION OF THE COMPANY’S ABILITY TO CONTINUE AS A GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2 to the financial statements, the Company has incurred net losses has an accumulated deficit. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Haynie & Company
Salt Lake City, Utah
June 15, 2018
We have served as the Company’s auditor since 2016.
Franchise Holdings International, Inc.
Consolidated Balance Sheets
December 31, 2017 and 2016
|
|
2017
|
|
|
2016
|
|
Assets
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
66,961
|
|
|
$
|
-
|
|
Accounts receivable
|
|
|
189,502
|
|
|
|
81,146
|
|
Inventory (note 4)
|
|
|
44,635
|
|
|
|
78,975
|
|
Prepaid inventory (note 4)
|
|
|
19,684
|
|
|
|
-
|
|
Related party receivable
|
|
|
-
|
|
|
|
7,770
|
|
Prepaid expenses and deposits
|
|
|
392,047
|
|
|
|
116,267
|
|
Total Current Assets
|
|
|
712,829
|
|
|
|
284,158
|
|
Prepaid expenses - long term
|
|
|
136,466
|
|
|
|
-
|
|
Property and Equipment, net (note 5)
|
|
|
43,079
|
|
|
|
39,263
|
|
Intangible Assets, net (note 6)
|
|
|
13,096
|
|
|
|
13,328
|
|
Total Assets
|
|
$
|
905,470
|
|
|
$
|
336,749
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Bank indebtedness
|
|
$
|
-
|
|
|
$
|
2,635
|
|
Accounts payable and accrued liabilities
|
|
|
230,770
|
|
|
|
340,270
|
|
Income taxes payable (note 13)
|
|
|
5,114
|
|
|
|
4,796
|
|
Related party loan
|
|
|
22,211
|
|
|
|
-
|
|
Current portion of notes payable (note 7)
|
|
|
275,844
|
|
|
|
105,985
|
|
Convertible promissory note, net of discount (note 8)
|
|
|
-
|
|
|
|
78,978
|
|
Derivative liability (note 9)
|
|
|
-
|
|
|
|
704,868
|
|
Total Current Liabilities
|
|
|
533,939
|
|
|
|
1,237,532
|
|
Notes Payable, Net of Current Portion (note 7)
|
|
|
-
|
|
|
|
104,084
|
|
Total Liabilities
|
|
|
533,939
|
|
|
|
1,341,616
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Shareholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
Series A Preferred Stock, $0.0001 par value, 1,000,000 shares authorized, 1,000,000 and 0 shares issued and outstanding as of December 31, 2017 and 2016, respectively (note 10)
|
|
|
10,000
|
|
|
|
-
|
|
Common stock, $0.0001 par value, 299,000,000 shares authorized, 122,327,240 and 68,088,142 shares issued and outstanding , respectively (note 10)
|
|
|
12,233
|
|
|
|
6,809
|
|
Additional paid-in capital
|
|
|
7,464,617
|
|
|
|
4,189,607
|
|
Share subscriptions receivable
|
|
|
(10,755
|
)
|
|
|
(9,350
|
)
|
Share subscriptions payable
|
|
|
1,531,080
|
|
|
|
-
|
|
Accumulated deficit
|
|
|
(8,591,261
|
)
|
|
|
(5,188,155
|
)
|
Cumulative translation adjustment
|
|
|
(44,383
|
)
|
|
|
(3,778
|
)
|
Total Shareholders' Equity (Deficit)
|
|
|
371,531
|
|
|
|
(1,004,867
|
)
|
Total Liabilities and Shareholders' Equity (Deficit)
|
|
$
|
905,470
|
|
|
$
|
336,749
|
|
The accompanying notes form an integral part of these consolidated financial statements.
Franchise Holdings International, Inc.
Consolidated Statements of Operations and Comprehensive Loss
December 31, 2017 and 2016
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
408,701
|
|
|
$
|
361,123
|
|
Cost of Goods Sold
|
|
|
231,771
|
|
|
|
334,060
|
|
Gross Profit
|
|
|
176,930
|
|
|
|
27,063
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,531,467
|
|
|
|
126,275
|
|
Sales and marketing
|
|
|
3,715
|
|
|
|
62,013
|
|
Professional fees
|
|
|
417,595
|
|
|
|
193,336
|
|
Loss on foreign exchange
|
|
|
4,651
|
|
|
|
7,659
|
|
Total operating expenses
|
|
|
1,957,428
|
|
|
|
389,283
|
|
Loss from operations
|
|
|
(1,780,498
|
)
|
|
|
(362,220
|
)
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(13,307
|
)
|
|
|
(20,773
|
)
|
Loss on derivative (note 9)
|
|
|
(521,486
|
)
|
|
|
(572,118
|
)
|
Amortization of debt discount (note 8)
|
|
|
(105,600
|
)
|
|
|
(103,090
|
)
|
Debt issuance costs
|
|
|
(2,971
|
)
|
|
|
(6,029
|
)
|
Finance charges
|
|
|
(48,244
|
)
|
|
|
(71,990
|
)
|
Loss on settlement of debt
|
|
|
(931,000
|
)
|
|
|
-
|
|
Total other income (expense)
|
|
|
(1,622,608
|
)
|
|
|
(774,000
|
)
|
Net Loss
|
|
|
(3,403,106
|
)
|
|
|
(1,136,220
|
)
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(40,605
|
)
|
|
|
2,434
|
|
Comprehensive Loss
|
|
$
|
(3,443,711
|
)
|
|
$
|
(1,133,786
|
)
|
Loss per Share (basic and diluted)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
Weighted Average Number of Shares (basic and diluted)
|
|
|
168,593,322
|
|
|
|
67,269,092
|
|
The accompanying notes form an integral part of these consolidated financial statements.
Franchise Holdings International, Inc.
Consolidated Statements of Shareholders' Equity
December 31, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Share
|
|
|
Share
|
|
|
|
|
|
Cumulative
|
|
|
Stockholders'
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Subscriptions
|
|
|
Subscriptions
|
|
|
Accumulated
|
|
|
Translation
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Receivable
|
|
|
Payable
|
|
|
Deficit
|
|
|
Adjustment
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
66,885,082
|
|
|
$
|
6,689
|
|
|
|
3,984,662
|
|
|
$
|
(17,500
|
)
|
|
$
|
88,015
|
|
|
$
|
(4,051,935
|
)
|
|
$
|
(6,212
|
)
|
|
$
|
3,719
|
|
Issuance for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
50
|
|
|
|
12,200
|
|
|
|
(1,750
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,500
|
|
Issuance in settlement of subscription payable
|
|
|
-
|
|
|
|
-
|
|
|
|
403,060
|
|
|
|
40
|
|
|
|
87,975
|
|
|
|
-
|
|
|
|
(88,015
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Collection of subscription receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,900
|
|
Issuance for services rendered
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
20
|
|
|
|
101,980
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
102,000
|
|
Issuance for financing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
10
|
|
|
|
14,990
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,000
|
|
Financing fees paid in shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,200
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,200
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,136,220
|
)
|
|
|
-
|
|
|
|
(1,136,220
|
)
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,434
|
|
|
|
2,434
|
|
Balance at December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
68,088,142
|
|
|
|
6,809
|
|
|
|
4,189,607
|
|
|
|
(9,350
|
)
|
|
|
-
|
|
|
|
(5,188,155
|
)
|
|
|
(3,778
|
)
|
|
|
(1,004,867
|
)
|
Issuance for conversion of loans
|
|
|
-
|
|
|
|
-
|
|
|
|
65,344,524
|
|
|
|
6,534
|
|
|
|
1,373,369
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,379,903
|
|
Issuance for services rendered by a related party
|
|
|
-
|
|
|
|
-
|
|
|
|
72,000,000
|
|
|
|
7,200
|
|
|
|
1,352,801
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,360,001
|
|
Issuance for services
|
|
|
-
|
|
|
|
-
|
|
|
|
3,494,574
|
|
|
|
350
|
|
|
|
109,650
|
|
|
|
(3,155
|
)
|
|
|
575,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
681,845
|
|
Issuance for settlement of payables
|
|
|
-
|
|
|
|
-
|
|
|
|
10,400,000
|
|
|
|
1,040
|
|
|
|
360,880
|
|
|
|
-
|
|
|
|
856,080
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,218,000
|
|
Exchange of common stock for preferred stock
|
|
|
1,000,000
|
|
|
|
10,000
|
|
|
|
(100,000,000
|
)
|
|
|
(10,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance for cash and subscription payable
|
|
|
-
|
|
|
|
-
|
|
|
|
3,000,000
|
|
|
|
300
|
|
|
|
37,710
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
138,010
|
|
Issuance in settlement of subscription payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,750
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,750
|
|
Beneficial conversion feature
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,600
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,403,106
|
)
|
|
|
|
|
|
|
(3,403,106
|
)
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(40,605
|
)
|
|
|
(40,605
|
)
|
Balance at December 31, 2017
|
|
|
1,000,000
|
|
|
$
|
10,000
|
|
|
|
122,327,240
|
|
|
$
|
12,233
|
|
|
|
7,464,617
|
|
|
$
|
(10,755
|
)
|
|
$
|
1,531,080
|
|
|
$
|
(8,591,261
|
)
|
|
$
|
(44,383
|
)
|
|
$
|
371,531
|
|
The accompanying notes form an integral part of these consolidated financial statements.
Franchise Holdings International, Inc.
Consolidated Statements of Cash Flows
December 31, 2017 and 2016
|
|
2017
|
|
|
2016
|
|
Operating Activities
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(3,403,106
|
)
|
|
$
|
(1,136,220
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,290
|
|
|
|
998
|
|
Accretion of debt discount and debt issuance costs
|
|
|
108,571
|
|
|
|
103,090
|
|
Shares issued for current and future services
|
|
|
1,466,846
|
|
|
|
-
|
|
Financing fees paid in shares
|
|
|
-
|
|
|
|
15,000
|
|
Financing fees paid through promissory note
|
|
|
-
|
|
|
|
52,800
|
|
Loss on settlement of debt
|
|
|
931,000
|
|
|
|
-
|
|
Loss on derivative
|
|
|
521,486
|
|
|
|
572,118
|
|
|
|
|
(373,913
|
)
|
|
|
(392,214
|
)
|
Changes in operating assets and liabilities (note 16)
|
|
|
178,971
|
|
|
|
155,191
|
|
Net cash used in operating activities
|
|
|
(194,942
|
)
|
|
|
(237,023
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(4,874
|
)
|
|
|
(551
|
)
|
Intangible assets
|
|
|
-
|
|
|
|
(2,857
|
)
|
Net cash used in investing activities
|
|
|
(4,874
|
)
|
|
|
(3,408
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash
|
|
|
139,760
|
|
|
|
10,500
|
|
Proceeds from share subscriptions receivable
|
|
|
-
|
|
|
|
9,900
|
|
Proceeds from notes payable
|
|
|
176,237
|
|
|
|
224,858
|
|
Proceeds from related party notes
|
|
|
22,211
|
|
|
|
-
|
|
Repayment of promissory notes
|
|
|
(30,826
|
)
|
|
|
(21,727
|
)
|
Net cash provided by financing activities
|
|
|
307,382
|
|
|
|
223,531
|
|
Effects of Foreign Currency Translation
|
|
|
(40,605
|
)
|
|
|
2,434
|
|
Change in cash
|
|
|
66,961
|
|
|
|
(14,466
|
)
|
Cash and cash equivalents - beginning of year
|
|
|
-
|
|
|
|
14,466
|
|
Cash and cash equivalents end of year
|
|
$
|
66,961
|
|
|
$
|
-
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
46,104
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
Supplemental Disclosure of non-cash investing and financing Activities
|
|
|
|
|
|
|
|
|
Stock issued for settlement of notes payable and accounts payable
|
|
$
|
1,365,817
|
|
|
$
|
-
|
|
Beneficial conversion feature
|
|
$
|
40,600
|
|
|
$
|
-
|
|
Stock issued to service providers
|
|
$
|
575,000
|
|
|
$
|
102,000
|
|
Preferred shares issued for common shares
|
|
$
|
10,000
|
|
|
$
|
-
|
|
Common stock issued for finance charges
|
|
$
|
-
|
|
|
$
|
15,000
|
|
The accompanying notes form an integral part of these consolidated financial statements.
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
1. Nature of Operations and Reverse Acquisition Transaction
Franchise Holdings International, Inc. (the “Company”) was incorporated in the State of Nevada on April 2, 2003. During the year ended December 31, 2014, the Company completed a reverse acquisition transaction (the “Reverse Acquisition”) with TruXmart Ltd. (“TruXmart”). On May 2, 2018, Truxmart legally changed its name to Worksport Ltd. (“Worksport”). Worksport designs and distributes truck tonneau covers in Canada and the United States.
2.
Basis of Presentation and Going Concern
a) Statement of Compliance
The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) as issued by the Financial Accounting Standards Board (“FASB”).
b) Basis of Measurement
The Company’s financial statements have been prepared on the accrual basis.
c) Functional and Presentation Currency
Franchise Holdings International, Inc.’s functional currency is the United States Dollar (USD). The Canadian Dollar (“CAD”) is the functional currency of Worksport.
The translation of CAD denominated assets and liabilities into USD for the purpose of these consolidated financial statements does not necessarily mean the Company could realize or settle, in USD, the reported values of these assets and liabilities in USD. Likewise, it does not mean the Company could return or distribute the reported USD value of Worksport’s capital to its shareholders.
d) Use of Estimates
The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
e) Going Concern
These 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 year ended December 31, 2017, the Company incurred a net loss of $3,403,106, and as of that date, the Company’s accumulated deficit was $8,591,261. 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 the Company may be forced to discontinue operations, which would cause investors to lose their entire investment.
f)
Reclassification
Certain comparative figures have been re-classified to conform to the current period’s presentation.
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
3. Significant Accounting Policies
Consolidation -
The Company is incorporated in the state of Nevada. The Company has one wholly-owned subsidiary, Worksport Ltd., a company incorporated in the province of Ontario. All intercompany transactions and balances have been eliminated upon consolidation.
Cash and Cash Equivalents -
Cash and cash equivalents includes cash on account and demand deposits with maturities of three months or less.
Receivables -
Trade accounts receivable are stated at the amount the Company expects to collect. Receivables are reviewed individually for collectability. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, allowances may be required.
The Company offers credit terms on the sale of the Company’s products to a significant majority of the Company’s customers and requires no collateral from these customers. The Company performs ongoing credit evaluations of customers’ financial condition and maintains an allowance for doubtful accounts receivable based upon the Company’s historical experience and a specific review or accounts receivable at the end of each period. As at December 31, 2017 and 2016, the Company had no allowance for doubtful accounts.
Inventory -
Inventory is stated at the lower of cost or market, with cost being determined by a weighted average basis. Cost includes the cost of materials plus direct labor applied to the product.
Warranties -
The Company offers limited warranties against product defects. Customers who are not completely satisfied with their purchase may attempt to be reimbursed for their purchases outside the warranty period. For the years ending December 31, 2017 and 2016, the Company incurred warranty expenses of $1,595 and $3,080.
Revenue Recognition -
Sales are recognized when products are shipped, with no right of return, and the title and risk of loss has passed to unaffiliated customers or when they are delivered based on the terms of the sale, there is persuasive evidence of an agreement, the price is fixed or determinable and collectability is reasonably assured. Revenue related to shipping and handling costs billed to customers is included in net sales and the related shipping and handling costs are included in cost of products sold.
Property and Equipment -
Capital assets are recorded at cost and are amortized using the straight-line method over the following estimated useful lives:
Furniture and equipment
|
|
5 years
|
Computers
|
|
3 years
|
As at December 31, 2017, the Company’s product molds were not yet ready for use. As such, they have not been depreciated during the year ended December 31, 2017.
Income Taxes -
Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income, and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB ASC 740. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Tax positions initially need to be recognized in the financial statements when it is more-likely-than-not the positions will be sustained upon examination by the tax authorities.
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
Foreign Currency Translation -
Transactions denominated in foreign currencies are initially recorded in the functional currency using exchange rates in effect at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using exchange rates prevailing at the end of the reporting period. All exchange gains and losses are included in the statement of operations and deficit.
For the purpose of presenting financial statements in United States Dollars, the assets and liabilities are expressed in United States Dollars using exchange rates prevailing at the end of the reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognized in other comprehensive loss and reported as cumulative translation adjustment in shareholder’s equity.
For the purpose of these financial statements, the following exchange rates were used:
|
|
Balance Sheet
|
|
Income Statement
|
December 31, 2017
|
|
0.7954 USD/ CAD
|
|
0.7706 USD/ CAD
|
December 31, 2016
|
|
0.7448 USD/ CAD
|
|
0.7545 USD/ CAD
|
Financial Instruments -
Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 825, Disclosures about Fair Value of Financial Instruments, requires disclosures of the fair value of financial instruments. The carrying value of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and shareholder loan, approximates their fair values because of the short-term maturities of these instruments.
Measurement -
The Company initially measures its financial instrument at fair value, except for certain non-arm’s length transactions. The Company subsequently measures all its financial assets and financial liabilities at amortized cost, except for investments in equity instruments that are quoted in an active market, which are measured at fair value. Changes in fair value are recognized in earnings for the period in which they occur.
Financial assets measured at amortized cost include cash and cash equivalents, accounts receivable, related party receivable, other receivables and share subscriptions receivable. Financial liabilities measured at amortized cost include accounts payable and accrued liabilities, and promissory note payable.
Derivative Financial Instruments -
The Company has issued and could issue instruments with such terms that require the Company to account for the transactions as derivative financial instruments. The Company is accounting for these transactions in accordance with FASB Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, which requires that every derivative instrument is recorded on the balance sheet as an asset or liability measured at its fair value as of the reporting date. ASC 815 also requires changes in the derivatives’ fair value to be recognized in earnings for the period.
Related Party Transactions -
All transactions with related parties are in the normal course of operations and are measured at the exchange amount.
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
Intangible Assets and Impairment -
Patents and other intangibles are amortized using the straight-line method over their estimated useful lives and are evaluated for impairment at least annually or when events or circumstances arise that indicate the existence of impairment. The Company evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. When indicators of impairment exist, the Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. During the years ended December 31, 2017 and 2016, the Company had no impairment losses related to intangible assets.
Recent Accounting Pronouncements -
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which was amended with ASU No. 2015-14, ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-11, ASU No. 2016-12 and ASU No. 2016-20. These new standards supersede all existing revenue recognition requirements, including most industry specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The Company is evaluating the guidance but does not at this time expect it to have a material impact on the Company’s revenue recognition. However, the Company does expect to have significant changes to the footnote disclosures related to revenue recognition as a result of implementing these new standards. This standard was implemented effective January 1, 2018 with no effect to the Company or the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02:
Leases
ASU 2016-02 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 will be effective for the Company’s fiscal year beginning January 1, 2020 on a modified retrospective basis and earlier adoption is permitted. Management is currently evaluating the impact of the pending adoption of ASU 2016-02 on the Company’s consolidated financial statements and based on the Company’s one lease agreement, does not anticipate a material impact.
In November 2016, the FASB issued an ASU amending the presentation of restricted cash within the statement of cash flows. The new guidance requires that restricted cash be included within cash and cash equivalents on the statement of cash flows. The ASU is effective retrospectively for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company will adopt this ASU on January 1, 2018 which will have no impact on the Company’s financial statements.
In May 2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.
This Standard was issued to provide clarity and reduce both diversity in practice and cost complexity when applying the guidance regarding a change to the terms and conditions of a stock-based payment award. ASU 2017-09 also provides guidance about the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company will adopt this ASU on January 1, 2018. Since this standard is to be applied prospectively, there will be no effect on prior financial statements and the Company does not currently have any option agreements where this standard would be applicable.
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
In July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II). Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
. Part I applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that contain down round features. Part II simply replaces the indefinite deferral for certain mandatorily redeemable noncontrolling interests and mandatorily redeemable financial instruments of nonpublic entities contained within current account guidance with a scope exception and does not impact the accounting for these mandatorily redeemable instruments. This ASU is effective for the Company for annual reporting periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted. The Company has not had any instruments that meet the criteria for Part I, but could issue such instruments in the future; therefore, the Company is currently evaluating the impact that the adoption of the standard could have on its future consolidated financial statements.
ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities was issued in August 2017. The amendments under ASU 2017-12, refine and expand hedge accounting requirements for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. The standard is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company will adopt this ASU on January 1, 2020. The Company does not currently have any derivative or hedging instruments but may in the future. The Company is assessing the impact the adoption of this ASU could have on the consolidated financial statements.
ASU 2018-02,
Income Statement Reporting - Comprehensive Income (Topic 220)
allows the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Management is currently evaluating the effect that the provisions of ASU 2018-02 will have on the Company’s financial statements.
4. Inventory
At December 31, 2017 and 2016 inventory comprised the following:
|
|
2017
|
|
|
2016
|
|
Finished goods
|
|
$
|
44,635
|
|
|
$
|
64,377
|
|
Promotional items
|
|
|
-
|
|
|
|
11,720
|
|
Raw materials
|
|
|
-
|
|
|
|
2,878
|
|
|
|
$
|
44,635
|
|
|
$
|
78,975
|
|
Prepaid inventory
|
|
$
|
19,684
|
|
|
$
|
-
|
|
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
5. Property and Equipment
Major classes of property and equipment at December 31, 2017 and 2016 are as follows:
|
|
2017
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
6,976
|
|
|
$
|
1,181
|
|
|
$
|
5,795
|
|
Product molds
|
|
|
37,243
|
|
|
|
-
|
|
|
|
37,243
|
|
Computers
|
|
|
1,162
|
|
|
|
1,121
|
|
|
|
41
|
|
|
|
$
|
45,381
|
|
|
$
|
2,302
|
|
|
$
|
43,079
|
|
|
|
2016
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
Equipment
|
|
$
|
2,102
|
|
|
$
|
779
|
|
|
$
|
1,323
|
|
Product molds
|
|
|
37,243
|
|
|
|
-
|
|
|
|
37,243
|
|
Computers
|
|
|
1,162
|
|
|
|
465
|
|
|
|
697
|
|
|
|
$
|
40,507
|
|
|
$
|
1,244
|
|
|
$
|
39,263
|
|
During the years ended December 31, 2017 and 2016, the Company recognized depreciation expense of $1,058 and $690, respectively. All current property and equipment, as well as any future purchases of property and equipment have been pledged as security for the notes payable disclosed in Note 7.
6. Intangible Assets
Intangible assets consist of costs incurred to establish the Worksport Tri-Fold and Smart Fold patent technology, as well as the Company’s website. The patent was issued August 26, 2014. The patent will be amortized on a straight-line basis over its useful life of 25 years. The Company’s website has an indefinite useful life and has not been amortized. The change in intangible assets for the years ending December 31, 2017 and 2016 are as follows:
|
|
2017
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
Patent
|
|
$
|
10,574
|
|
|
$
|
978
|
|
|
$
|
9,596
|
|
Website
|
|
|
3,500
|
|
|
|
-
|
|
|
|
3,500
|
|
|
|
$
|
14,074
|
|
|
$
|
978
|
|
|
$
|
13,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
Patent
|
|
$
|
10,574
|
|
|
$
|
746
|
|
|
$
|
9,828
|
|
Website
|
|
|
3,500
|
|
|
|
-
|
|
|
|
3,500
|
|
|
|
$
|
14,074
|
|
|
$
|
746
|
|
|
$
|
13,328
|
|
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
Amortization of the patent over the next five years and beyond at December 31, 2017 is as follows:
2018
|
|
$
|
423
|
|
2019
|
|
$
|
423
|
|
2020
|
|
$
|
423
|
|
2021
|
|
$
|
423
|
|
2022
|
|
$
|
423
|
|
2023 and later
|
|
$
|
7,481
|
|
7. Notes Payable
2017 Notes Payable
During the year ended December 31, 2017, the Company issued an unsecured promissory note in the amount of $9,545 ($12,000 Canadian Dollars). The unsecured promissory note is due in August 2018 and bears interest at a rate of 18% per annum, payable monthly.
During the years ended December 31, 2017, the Company issued secured promissory notes in the amount of $53,847 ($67,700 Canadian Dollars). The secured promissory notes are due in October and November 2018 and bears interest at a rate of 12% per annum. The secured promissory notes are secured by Company inventory and personal assets held by the CEO.
During the years ended December 31, 2017, the Company issued secured promissory notes in the amount of $60,000. The secured promissory notes are due in August and November 2018 and bear interest at a rate of 12% per annum. The secured promissory notes are secured by Company inventory and personal assets held by the CEO.
During the years ended December 31, 2017 and 2016, the Company issued secured promissory notes in the amount of $52,845 and $20,608 ($64,677 and $27,670 Canadian Dollars), respectively. The secured promissory notes are due in July 2018 and bears interest at a rate of 18% per annum. The secured promissory notes are secured by all present and after-acquired property and assets of the Company. The balance owed on these notes payable at December 31, 2017 and 2016 is $73,452 and $20,608 ($92,348 and $27,670 Canadian Dollars), respectively. At December 31, 2017 and 2016 the accrued interest on these notes payable was $13,134 and $948 ($16,513 and $2,024 Canadian Dollars), respectively.
2016 Notes Payable
During the year ended December 31, 2016, the Company issued secured promissory notes in the amount of $79,000. The secured promissory notes are due from July through October 2018 and bears interest at a rate of 18% per annum, payable monthly. The secured promissory notes are secured by all present and after-acquired property and assets of the Company. In connection with the issuance of the secured promissory notes, the Company issued 100,000 shares of its common stock with an aggregate fair value of $15,000 as a commitment fee. The commitment fee was expensed during the year ended December 31, 2016. At December 31, 2017 and 2016 the accrued interest on these notes was $9,327 and $3,528, respectively.
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
Secured Promissory Note
In October, 2015, the Company entered into a secured promissory note with an investor in the principal amount of 102,000 Canadian Dollars. The Company received proceeds of $58,653 (75,000 Canadian Dollars) and $21,115 (27,000 Canadian Dollars) was recorded as a discount which was accreted over the life of the note. The promissory note requires a daily payment of $249 (324 Canadian Dollars) until January 26, 2017 and carries a 40.0% interest rate.
The promissory note is secured by all assets of the Company. The outstanding principal balance on the note at December 31, 2016 was $44,382 (56,592 Canadian Dollars) and the carrying amount of the discount was $1,163 (1,561 Canadian Dollars). During 2017, the lender agreed to settle the loan for $30,826 ($39,000 Canadian Dollars) resulting in the Company recording a $13,556 gain on the forgiveness of the remaining portion of the secured promissory note.
The amounts repayable under notes payable and secured promissory note at December 31, 2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Balance owing, December 31,
|
|
$
|
275,844
|
|
|
$
|
210,069
|
|
Less amounts due within one year
|
|
|
(275,844
|
)
|
|
|
(105,985
|
)
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
104,084
|
|
8. Convertible Promissory Notes Payable
a)
|
During the year ended December 31, 2016, the Company issued a promissory note in the amount of $65,000 to a consultant for the purposes of generating subscriptions of the Company’s common stock. The principal balance has been allocated as follows: $12,200 has been allocated against additional paid-in capital, with the remaining $52,800 expensed as financing charges. The promissory note was due February 18, 2017 and was non-interest bearing. During 2017, the promissory note was assigned to another lender. At the time of assignment, the terms of this note were renegotiated with the new holder whereby the note became due in February 2018 and convertible into common stock at 50% of the lowest trading price in the thirty days prior to the conversion. This modification resulted in the promissory note becoming a derivative instrument whereby the Company recorded a $65,000 discount on the promissory note and a derivative liability of $938,001 and a loss resulting from the formation of the derivative totaling $873,001. The discount will be amortized over the term of the note and the derivative liability will be revalued at each reporting period.
|
|
|
|
On September 15, 2017, the terms of the promissory note were modified whereby the note became convertible at a fixed rate of $0.02 per share or 3,200,000 shares of common stock. As part of the modification, the discount and derivative liability were adjusted to their fair value as of September 15, 2017 which was $29,740 for the discount and $101,766 for the derivative liability and the Company recorded interest expense from the discount of $35,260 and decreased the derivative loss by $836,235. The Company then recorded the $65,000 convertible promissory note under its current terms whereby the derivative liability of $101,766 was removed along with the original $29,740 discount and recorded a beneficial conversion discount of $40,600 based on the Company’s common stock having a value of stock $0.033 per share on September 15, 2017. This resulted in the Company recoding a $101,766 gain on the modification of the loan. On September 22, 2017 the note holder converted the promissory note for 3,200,000 common shares and recorded the $40,600 beneficial discount as interest expense.
|
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
b)
|
During the year ended December 31, 2016, the Company entered into a $77,750 convertible promissory note with a maturity date of March 22, 2017. The convertible promissory note bore interest at a rate of 10.0% per annum. The Holder had the right to convert any unpaid principal amount into shares of the Company’s common stock at the lesser of (i) 45% of the previous day trading price or (ii) 45% of the lowest trading price for the previous 25-day trading period. In connection with the issuance of the convertible promissory note, the Company incurred debt issuance costs of $7,500 which were amortized over the maturity period of the convertible promissory note. During the year ended December 31, 2017, the promissory note and accrued interest was converted into 37,640,800 shares of the Company’s common stock.
|
|
|
c)
|
During the year ended December 31, 2016, the Company entered into a $55,500 convertible promissory note in the principal amount of $55,000 with a maturity date of June 28, 2017. The convertible promissory note bears interest at a rate of 10.0% per annum. The Holder had the right to convert any unpaid principal amount into shares of the Company’s common stock at the lesser of (i) the closing sale price of the Company’s common stock from the previous date or ii) 55% of the lowest sale price for the Company’s common stock for the previous 20-day period. In connection with the issuance of the convertible promissory note, the Company incurred debt issuance costs of $1,500 which were being amortized over the maturity period of the convertible promissory note. Included in interest expense for the year ended December 31, 2017 and 2016, is $751 and $746, respectively related to the amortization of the debt issuance costs. During 2017, and prior to the maturity date, the promissory note and accrued interest was converted in full into 24,503,724 shares of the Company’s common stock.
|
As a result of the derivative liabilities associated with the conversion feature of the convertible promissory notes, exceeding the principal amounts of the convertible promissory notes, the Company has recognized aggregate discounts on the convertible promissory notes of $238,350. During the year ended December 31, 2017 and 2016, the Company recognized expense of $105,600 and $81,949 related to the amortization of the discounts.
The amounts repayable under the convertible promissory notes at December 31, 2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Balance owing, December 31,
|
|
$
|
-
|
|
|
$
|
132,750
|
|
Less unamortized discount on debt issuance
|
|
|
-
|
|
|
|
(50,801
|
)
|
Less unamortized debt issuance costs
|
|
|
-
|
|
|
|
(2,971
|
)
|
|
|
|
-
|
|
|
|
78,978
|
|
Less amounts due within one year
|
|
|
-
|
|
|
|
(78,978
|
)
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
9.
Derivative Liability
The Company adopted ASC 815 which defines the determination of whether an instrument (or embedded feature) is solely indexed to an entity’s own stock. During the period ended December 31, 2017 and 2016, the Company issued convertible promissory notes payable, as described in note 8, which contain features that entitles the holder to convert any outstanding amounts payable under the convertible promissory note into common stock, 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. The Company measures fair value using the Black-Scholes option valuation mode. The Company computes the fair value of the derivative liability at each reporting period and the change in the fair value is recorded as non-cash expense or non-cash income.
At origination, the Company valued the conversion feature of the convertible promissory note described in note 8(a) and determined that at origination, the fair value of the derivative liability related to the conversion feature was $938,001. Of this amount $65,000 was allocated to a discount on the convertible loan with the remaining $873,001 expensed.
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
On September 15, 2017, in conjunction with the modification of the convertible promissory note, the Company revalued the conversion feature and determined the value of the derivative liability decreased to $101,766. The corresponding gain of $836,235 has been recognized during the year ended December 31, 2017 and has the effect of decreasing the original loss recorded at the time of origination. As part of the loan modification the $101,766 derivative liability was written off and included as part the gain on loan modification.
During 2016, at origination, the Company valued the conversion feature of the convertible promissory note described in note 8(b) and 8(c) and determined that at origination, the fair value of the derivative liability related to the conversion feature was $212,555 which was expensed at the time of origination.
At December 31, 2016, the Company revalued the conversion feature of the convertible promissory note and determined that, from the time of inception to December 31, 2016, the value of the derivative liability increased to $704,867. The corresponding loss of $492,312 has been recognized during the year ended December 31, 2016 and has the effect of increasing the original loss recorded at the time of origination.
During 2017, in conjunction with the settlement of the convertible promissory notes, the Company revalued the derivative liability and determined the value increased to $1,190,068. The corresponding increase of $485,201 has the effect of increasing the loss on derivative. As part of the conversion of the convertible promissory notes the $1,190,068 derivative liability was removed and included as part of additional paid-in capital.
The assumptions used by the Company during 2017 and 2016 range as follows:
|
|
|
12/31/2017
|
|
|
12/31/2016
|
Expected term
|
|
|
0.06 to 1.0 years
|
|
|
0.22 to 0.97 years
|
Share price
|
|
|
$0.01 to $0.05
|
|
|
$0.035 to $0.15
|
Expected volatility
|
|
|
87% to 515%
|
|
|
166% to 226%
|
Expected dividends
|
|
|
None
|
|
|
None
|
Risk-free interest rate
|
|
|
0.47% to 1.17%
|
|
|
0.48% to 0.62%
|
Forfeitures
|
|
|
None
|
|
|
None
|
The assumptions used in determining fair value represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change the Company’s fair value estimates could be materially different in the future.
10. Share Issuance/ Claim Extinguishment Agreement
During the year ended December 31, 2017, the Company entered into a share issuance/ claim extinguishment agreement (the “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. The fair value of the shares to be issued pursuant to the Agreement was estimated to be $1,218,000 resulting in a loss on the settlement of debt in the amount of $1,034,557 recognized during the year ended December 31, 2017. 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.
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
11.
Shareholders’ Equity (Deficit)
The Company is 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.
The Company is authorized to issue 299,000,000 shares of its common stock with a par value of $0.0001. All shares are ranked equally with regards to the Company’s residual assets.
2017 Transactions
During the period ended December 31, 2017, the Company issued 1,000,000 shares of its Series A Preferred Stock to its controlling shareholder and CEO in exchange for 100,000,000 shares of common stock owned by the controlling shareholder and CEO.
On November 1, 2017 the Company entered into an agreement with an investor where by the investor contributed $300,000 for 10,158,729 shares of common stock. The $300,000 contributed comprised $100,000 in cash and $200,000 of services to be rendered over two years. The agreement also provides that if the market value of the 10,158,729 shares is below $175,000 six months from the date of agreement (May 1, 2018) the Company will issue additional shares to make the total market value $175,000. The Company analyzed this fair value guarantee and concluded additional shares would need to be issued and have accrued $53,096 at December 31, 2017 related to this fair value guarantee. The agreement also provided the investor would receive six million warrants at an exercise price of $0.07 and a contractual life of two years. Lastly, if the Company effects a stock split within two years of the date of the agreement the investor will be entitled to $50,000 of additional value. The Company is not considering a stock split currently and will accrue the $50,000 should they consider pursuing a stock split. The shares have yet to be issued and the $300,000 investment is classified as share subscription payable at December 31, 2017.
During the period ended December 31, 2017, the Company issued 65,344,524 common shares pursuant to the conversion of the convertible promissory notes discussed in note 8.
During the period ended December 31, 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 year ended December 31, 2017.
During the year ended December 31, 2017, the Company issued 3,154,574 common shares in connection with two consulting agreements, the fair value of which was $100,000. The consultants paid, in aggregate, $3,154 for the shares, and the remaining balance of $96,846 will be expensed over the 180-day term of the consulting agreements.
During the year ended December 31, 2017, the Company entered into a share issuance/ claim extinguishment agreement as disclosed in note 6. Pursuant to the debt assumption agreement, the Company issued 10,400,000 common shares during the period ended December 31, 2017. As at December 31, 2017, 24,600,000 common shares remain reserved for issuance pursuant to the share issuance/ claim extinguishment agreement.
During the year ended December 31, 2017, the Company issued 3,000,000 shares of its common stock for cash proceeds of $38,010. Also, during the year ended December 31, 2017 the Company issued 340,000 shares of its common stock in exchange for services valued at $10,000.
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
2016 Transactions
During the year ended December 31, 2016, the Company issued 403,060 common shares, the proceeds of which were received during the year ended December 31, 2015.
During the year ended December 31, 2016, the Company issued 100,000 common shares pursuant to a secured promissory note described in Note 7.
During the year ended December 31, 2016, the Company issued 200,000 common shares pursuant to a consulting agreement at a deemed price of $0.51 per common share. The consideration of $102,000 was recorded as a prepaid expense at December 31, 2016 as the services were yet to be rendered but were considered rendered during 2017 and expensed.
During the year ended December 31, 2016, the Company entered into an Equity Purchase Agreement (the “Agreement”) pursuant to which the Company will issue up to $1,000,000 of the Company’s common stock. All sales of the Company’s stock pursuant to the Agreement are subject to the Company fulfilling certain conditions contained therein, including the filing and effectiveness of a registration document with the SEC to register the shares of the common stock to be sold. During the year ended December 31, 2016, the Company issued 250,000 common shares of the Company for gross proceeds equal to $10,500 pursuant to this Agreement. During the year ended December 31, 2016, the Company issued an additional 250,000 common shares of the Company for gross proceeds equal to $1,750 which were not received as at December 31, 2016 but was received in 2017.The Company also issued a promissory note in connection with this Agreement in the amount of $65,000 as disclosed in note 7.
12.
Related Party Transactions
During the year ended December 31, 2017 and 2016, the Company recorded salaries expense of $36,668 and $30,838, respectively related to services rendered to the Company by its major shareholder and CEO.
13. Income Taxes
a)
The income tax expense for the year ended December 31, 2017 and 2016 is reconciled per the schedule below:
|
|
2017
|
|
|
2016
|
|
Net loss before income taxes
|
|
$
|
(3,403,106
|
)
|
|
$
|
(1,136,220
|
)
|
Depreciation
|
|
|
506
|
|
|
|
225
|
|
Non-deductible portion of meals and entertainment
|
|
|
309
|
|
|
|
309
|
|
Share based compensation
|
|
|
1,360,001
|
|
|
|
17,000
|
|
Derivative loss
|
|
|
521,486
|
|
|
|
-
|
|
Transaction costs
|
|
|
(10,417
|
)
|
|
|
(11,201
|
)
|
Adjusted net loss for tax purposes
|
|
|
(1,531,221
|
)
|
|
|
(1,129,887
|
)
|
Statutory rate
|
|
|
24.73
|
%
|
|
|
24.91
|
%
|
|
|
|
(378,671
|
)
|
|
|
(281,399
|
)
|
Increase in valuation allowance
|
|
|
378,671
|
|
|
|
281,399
|
|
Provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
b) Deferred Income Tax Assets
The tax effects of temporary differences that give rise to the deferred income tax assets at December 31, 2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
Net operating loss carry forwards
|
|
$
|
767,446
|
|
|
$
|
479,652
|
|
Transaction costs
|
|
|
36,677
|
|
|
|
39,437
|
|
|
|
|
804,123
|
|
|
|
519,089
|
|
Deferred tax assets not recognized
|
|
|
(804,123
|
)
|
|
|
(519,089
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
c) Cumulative Net Operating Losses
The Company has non-capital losses carried forward of approximately $5,290,000 available to reduce future years’ taxable income. These losses will expire as follows:
|
|
United States
|
|
|
Canada
|
|
|
Total
|
|
2034
|
|
$
|
53,000
|
|
|
$
|
183,000
|
|
|
$
|
236,000
|
|
2035
|
|
|
161,000
|
|
|
|
368,000
|
|
|
|
529,000
|
|
2036
|
|
|
868,000
|
|
|
|
262,000
|
|
|
|
1,130,000
|
|
2037
|
|
|
1,472,000
|
|
|
|
59,000
|
|
|
|
1,531,000
|
|
|
|
$
|
2,554,000
|
|
|
$
|
872,000
|
|
|
$
|
3,426,000
|
|
These net operating loss carryforwards of approximately $3,426,000 may be offset against future taxable income for the years 2018 through 2037. No tax benefit from continuing or discontinued operations have been reported in the December 31, 2017 consolidated financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
Due to change in ownership provisions of the Tax Reform Act of 1986, net operation loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
The Company complies with the provisions of FASB ASC 740 in accounting for its uncertain tax positions. ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely that not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company has determined that the Company has no significant uncertain tax positions requiring recognition under ASC 740.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company had no accruals for interest and tax penalties at December 31, 2017 and 2016.
The Company does not expect the amount of unrecognized tax benefits to materially change within the next twelve months.
The Company is required to file income tax returns in the U.S. and Canadian Federal jurisdictions, as well as the states of New York, New Jersey, and Utah and in the province of Ontario. The Company is no longer subject to income tax examinations by tax authorities for tax years ending before December 31, 2014.
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
14. Financial Instruments
Credit Risk
The Company is exposed to credit risk on the accounts receivable from its customers. In order to reduce its credit risk, the Company has adopted credit policies which include the analysis of the financial position of its customers and the regular review of their credit balances. The Company incurred no bad debt expense during the year ended December 31, 2017 and 2016.
Currency Risk
The Company is exposed to currency risk on its sales and purchases denominated in Canadian Dollars. The Company actively manages these risks by adjusting its pricing to reflect currency fluctuations and purchasing foreign currency at advantageous rates.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its obligations associated with financial liabilities. The Company relies on cash flows generated from operations, as well as injections of capital through the issuance of the Company’s capital stock to settle its liabilities when they become due.
Interest Rate Risk
The Company is not exposed to significant interest rate risk due to the short-term maturity of its monetary current assets and current liabilities.
Concentration of Supplier Risk
The Company purchases all of its inventory from one supplier source in Asia. The Company carries significant strategic inventories of these materials to reduce the risk associated with this concentration of suppliers. Strategic inventories are managed based on demand. To date, the Company has been able to obtain adequate supplies of the materials used in the production of its products in a timely manner from existing sources. The loss of this key supplier or a delay in shipments could have an adverse effect on its business.
Concentration of Customer Risk
The following table includes the percentage of the Company’s sales to significant customers for the fiscal years ended December 31, 2017 and 2016. A customer is considered to be significant if they account for greater than 10% of the Company’s annual sales:
|
|
2017
|
|
|
2016
|
|
Customer A
|
|
|
72.4
|
%
|
|
|
65.8
|
%
|
Customer B
|
|
|
10.4
|
%
|
|
|
7.5
|
%
|
|
|
|
82.8
|
%
|
|
|
73.3
|
%
|
The loss of any of these key customers could have an adverse effect on the Company’s business. At December 31, 2017, $201,323 was included in accounts receivable from Company A, representing 89% of the Company’s accounts receivable as at that date.
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
15. Fair Value of Financial Instruments
The Company complies with the accounting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements, as well as certain related FASB staff positions. This guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact business and considers assumptions that marketplace participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
The guidance also establishes a fair value hierarchy for measurements of fair value as follows:
Level 1 – quoted market prices in active markets for identical assets or liabilities.
Level 2 – inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
As of December 31, 2017, and 2016, the Company had the following assets and liabilities measured at fair value on a recurring basis:
|
|
2017
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability
|
|
$
|
740,868
|
|
|
$
|
-
|
|
|
$
|
|
|
$
|
740,868
|
|
Franchise Holdings International, Inc.
Consolidated Notes to the Financial Statements
December 31, 2017 and 2016
16.
Changes in Cash Flows from Operating Assets and Liabilities
The changes to the Company’s operating assets and liabilities for the years ended December 31, 2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
Decrease (increase) in accounts receivable
|
|
$
|
(108,356
|
)
|
|
$
|
14,417
|
|
Decrease (increase) in inventory
|
|
|
14,656
|
|
|
|
50,031
|
|
Decrease (increase) in prepaid expenses and deposits
|
|
|
162,754
|
|
|
|
(9,661
|
)
|
Decrease (increase) in related party receivables
|
|
|
7,770
|
|
|
|
1,180
|
|
Increase (decrease) in income taxes payable
|
|
|
318
|
|
|
|
143
|
|
Increase (decrease) in accounts payable and accrued liabilities
|
|
|
104,464
|
|
|
|
96,446
|
|
Increase (decrease) in bank overdraft
|
|
|
(2,635
|
)
|
|
|
2,635
|
|
|
|
$
|
178,971
|
|
|
$
|
155,191
|
|
17. Commitments
a)
|
During the year ended December 31, 2015, the Company entered into a License Agreement whereby the Company was granted an exclusive license under Patent Rights to make, use, offer for sale, import or sell a proprietary latching system developed and patented by the Company’s shareholder (the “Licensor”). The License Agreement allows the Company to manufacture or sub-license the patented latching system and provide services utilizing the patented latching system within the United States and its territories and possessions and any foreign countries where Patent Rights exist. The License Agreement does not require the payment of license issue fees or royalties, however, the Company will be required to maintain any fees or costs associated to keep the patent active. The License Agreement will be in effect for the life of the last-to-expire patent or last-to-be-abandoned patent application licensed under this Agreement, whichever is later. The Company will have the right to terminate the Agreement in whole or as to any portion of Patent Rights at any time by giving such notice to the Licensor. Should the Company violate or fail to perform any term of this Agreement, the Licensor may give written notice of such default (“Notice of Default”) to the Company. Should the Company fail to repair such default within sixty days, of the effective date of such notice, the Licensor will have the right to terminate the License Agreement and the licenses therein by a second written notice (“Notice of Termination”) to the Company. If a Notice of Termination is sent to the Company, the License Agreement will automatically terminate on the effective date of such notice.
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18. Subsequent Events
Subsequent to December 31, 2017, the Company:
a)
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On May 2, 2018, the Company’s wholly owned subsidiary TruxMart Ltd. changed its name to Worksport Ltd. This change is reflected throughout these financial statements.
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b)
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The Company has evaluated subsequent events through June 15, 2018 which is the date the financial statements were available to be issued.
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