ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
TO FINANCIAL STATEMENTS
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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, 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 and 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.
/s/
Haynie & Company
Salt
Lake City, Utah
May
13, 2019
We
have served as the Company’s auditor since 2016.
Franchise
Holdings International, Inc.
Consolidated
Balance Sheets
December
31, 2018 and 2017
|
|
2018
|
|
|
2017
|
|
Assets
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
25,323
|
|
|
$
|
66,961
|
|
Accounts
receivable net (note 3)
|
|
|
61,883
|
|
|
|
189,502
|
|
Inventory
(note 4)
|
|
|
289,516
|
|
|
|
44,635
|
|
Prepaid
inventory
|
|
|
-
|
|
|
|
19,684
|
|
Prepaid
expenses and deposits
|
|
|
124,114
|
|
|
|
392,047
|
|
Total
Current Assets
|
|
|
500,835
|
|
|
|
712,829
|
|
Prepaid
Expenses - long term
|
|
|
-
|
|
|
|
136,466
|
|
Property
and Equipment, net (note 5)
|
|
|
43,860
|
|
|
|
43,079
|
|
Intangible
Assets, net (note 6)
|
|
|
12,673
|
|
|
|
13,096
|
|
Total
Assets
|
|
$
|
557,368
|
|
|
$
|
905,470
|
|
Liabilities
and Shareholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
401,766
|
|
|
$
|
230,770
|
|
Payroll
taxes payable
|
|
|
82,365
|
|
|
|
5,114
|
|
Related
party loan (note 11)
|
|
|
9,372
|
|
|
|
22,211
|
|
Current
portion of notes payable (note 7)
|
|
|
287,425
|
|
|
|
275,844
|
|
Total
Current Liabilities
|
|
|
780,928
|
|
|
|
533,939
|
|
Total
Liabilities
|
|
|
780,928
|
|
|
|
533,939
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
Shareholders’
Equity (Deficit)
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock, $0.0001 par value, 1,000,000 shares authorized, 100,000 shares issued and outstanding
|
|
|
10,000
|
|
|
|
10,000
|
|
Common
stock, $0.0001 par value, 299,000,000 shares authorized, 24,634,051 and 20,387,873 shares issued and outstanding, respectively
(note 10)
|
|
|
2,463
|
|
|
|
2,039
|
|
Additional
paid-in capital
|
|
|
8,103,934
|
|
|
|
7,474,811
|
|
Share subscriptions
receivable
|
|
|
(1,577
|
)
|
|
|
(10,755
|
)
|
Share subscriptions
payable
|
|
|
2,019,532
|
|
|
|
1,531,080
|
|
Accumulated
deficit
|
|
|
(10,354,299
|
)
|
|
|
(8,591,261
|
)
|
Cumulative
translation adjustment
|
|
|
(3,613
|
)
|
|
|
(44,383
|
)
|
Total
Shareholders’ Equity (Deficit)
|
|
|
(223,560
|
)
|
|
|
371,531
|
|
Total
Liabilities and Shareholders’ Equity (Deficit)
|
|
$
|
557,368
|
|
|
$
|
905,470
|
|
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, 2018 and 2017
|
|
2018
|
|
|
2017
|
|
Net
Sales
|
|
|
481,521
|
|
|
|
408,701
|
|
Cost
of Goods Sold
|
|
|
384,908
|
|
|
|
231,771
|
|
Gross
Profit
|
|
|
96,614
|
|
|
|
176,930
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
268,707
|
|
|
|
1,531,467
|
|
Sales
and marketing
|
|
|
90,567
|
|
|
|
3,715
|
|
Professional
fees
|
|
|
864,160
|
|
|
|
417,595
|
|
Loss
(gain) on foreign exchange
|
|
|
84,306
|
|
|
|
4,651
|
|
Total
operating expenses
|
|
|
1,307,741
|
|
|
|
1,957,428
|
|
Loss
from operations
|
|
|
(1,211,127
|
)
|
|
|
(1,780,498
|
)
|
Other
Expense
|
|
|
|
|
|
|
|
|
Interest
expense (note 7)
|
|
|
(55,548
|
)
|
|
|
(13,307
|
)
|
Loss
on derivative (note 9)
|
|
|
-
|
|
|
|
(521,486
|
)
|
Amortization
of debt discount
|
|
|
-
|
|
|
|
(105,600
|
)
|
Debt
issuance costs
|
|
|
-
|
|
|
|
(2,971
|
)
|
Finance
charges
|
|
|
(418
|
)
|
|
|
(48,244
|
)
|
Loss
on settlement of debt
|
|
|
(495,944
|
)
|
|
|
(931,000
|
)
|
Total
other expense
|
|
|
(551,910
|
)
|
|
|
(1,622,608
|
)
|
Net
Loss
|
|
|
(1,763,038
|
)
|
|
|
(3,403,106
|
)
|
Other
Comprehensive Loss
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
40,770
|
|
|
|
(40,605
|
)
|
Comprehensive
Loss
|
|
|
(1,722,268
|
)
|
|
|
(3,443,711
|
)
|
|
|
|
|
|
|
|
|
|
Loss
per Share (basic and diluted)
|
|
|
(0.08
|
)
|
|
|
(0.17
|
)
|
Weighted
Average Number of Shares (basic and diluted)
|
|
|
22,348,119
|
|
|
|
20,387,873
|
|
The
accompanying notes form an integral part of these consolidated financial statements
Franchise
Holdings International, Inc.
Consolidated
Statement of Shareholders’ Equity
December
31, 2018 and 2017
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Share
Subscriptions
|
|
|
Share
Subscription
|
|
|
Accumulated
|
|
|
Cumulative
Translation
|
|
|
Total
Stockholders’
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Receivable
|
|
|
Payable
|
|
|
Deficit
|
|
|
Adjustment
|
|
|
(Deficit)
|
|
Balance
at December 31,2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
11,348,024
|
|
|
$
|
2,039
|
|
|
$
|
4,195,280
|
|
|
$
|
(9,350
|
)
|
|
$
|
-
|
|
|
$
|
(5,188,155
|
)
|
|
$
|
(3,778
|
)
|
|
$
|
(1,004,867
|
)
|
Issuance
for conversion of loans
|
|
|
-
|
|
|
|
-
|
|
|
|
10,890,754
|
|
|
|
1,089
|
|
|
|
1,378,814
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,379,903
|
|
Issuance
for services rendered by a related party
|
|
|
-
|
|
|
|
-
|
|
|
|
12,000,000
|
|
|
|
1,200
|
|
|
|
1,358,801
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,360,001
|
|
Issuance
for services
|
|
|
-
|
|
|
|
-
|
|
|
|
582,429
|
|
|
|
58
|
|
|
|
109,942
|
|
|
|
(3,155
|
)
|
|
|
575,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
681,845
|
|
Issuance
for settlement of payables
|
|
|
-
|
|
|
|
-
|
|
|
|
1,733,333
|
|
|
|
173
|
|
|
|
361,747
|
|
|
|
-
|
|
|
|
856,080
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,218,000
|
|
Exchange
of common stock for preferred stock
|
|
|
1,000,000
|
|
|
|
10,000
|
|
|
|
(16,666,667
|
)
|
|
|
(1,667
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance
for cash and subscription payable
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
50
|
|
|
|
37,960
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
138,010
|
|
Issuance
in settlement of subscription receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
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
|
|
|
|
20,387,873
|
|
|
$
|
2,039
|
|
|
$
|
7,474,811
|
|
|
$
|
(10,755
|
)
|
|
$
|
1,531,080
|
|
|
$
|
(8,591,261
|
)
|
|
$
|
(44,383
|
)
|
|
$
|
371,531
|
|
Issuance
for services
|
|
|
-
|
|
|
|
-
|
|
|
|
3,125,001
|
|
|
|
312
|
|
|
|
533,958
|
|
|
|
-
|
|
|
|
(534,270
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance
for settlement of payables
|
|
|
-
|
|
|
|
-
|
|
|
|
1,121,177
|
|
|
|
112
|
|
|
|
95,166
|
|
|
|
-
|
|
|
|
(95,278
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance
for cash and subscription payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,118,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,118,000
|
|
Uncollectible
receivables
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,177
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,177
|
|
Net
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,763,038
|
)
|
|
|
-
|
|
|
|
(1,763,038
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,770
|
|
|
|
40,770
|
|
Balance
at December 31, 2018
|
|
|
1,000,000
|
|
|
$
|
10,000
|
|
|
|
24,634,051
|
|
|
$
|
2,463
|
|
|
$
|
8,103,934
|
|
|
$
|
(1,577
|
)
|
|
$
|
2,019,532
|
|
|
$
|
(10,354,299
|
)
|
|
$
|
(3,613
|
)
|
|
$
|
(223,560
|
)
|
The
accompanying notes form an integral part of these consolidated financial statements
Franchise
Holdings International, Inc.
Consolidated Statements of Cash Flows
December 31, 2018 and 2017
|
|
2018
|
|
|
2017
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,763,038
|
)
|
|
$
|
(3,403,106
|
)
|
Adjustments
to reconcile net loss to net cash from operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,516
|
|
|
|
1,290
|
|
Accretion
of debt discount and debt issuance costs
|
|
|
-
|
|
|
|
108,571
|
|
Uncollectible
Subscription Receivable
|
|
|
9,178
|
|
|
|
-
|
|
Shares
issued for current and future services
|
|
|
|
|
|
|
1,466,846
|
|
Loss
on settlement of debt
|
|
|
495,944
|
|
|
|
931,000
|
|
Loss
on derivative (note 9)
|
|
|
-
|
|
|
|
521,486
|
|
|
|
|
(1,256,400
|
)
|
|
|
(373,913
|
)
|
Changes
in operating assets and liabilities (note 16)
|
|
|
877,124
|
|
|
|
178,971
|
|
Net
cash used in operating activities
|
|
|
(379,276
|
)
|
|
|
(194,942
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(1,874
|
)
|
|
|
(4,874
|
)
|
Net
cash used in investing activities
|
|
|
(1,874
|
)
|
|
|
(4,874
|
)
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of stock for cash
|
|
|
300,000
|
|
|
|
139760
|
|
Proceeds
from notes payable
|
|
|
22,639
|
|
|
|
176,237
|
|
Shareholder
Assumption of Debt
|
|
|
(11,058
|
)
|
|
|
-
|
|
Proceeds
from shareholder loans
|
|
|
(12,839
|
)
|
|
|
22,211
|
|
Repayment
of promissory notes
|
|
|
-
|
|
|
|
(30,826
|
)
|
Net
cash provided by financing activities
|
|
|
298,742
|
|
|
|
307,382
|
|
Effects
of Foreign Currency Translation
|
|
|
40,770
|
|
|
|
(40,605
|
)
|
Change
in cash
|
|
|
(41,638
|
)
|
|
|
66,961
|
|
Cash
and cash equivalents - beginning of year
|
|
|
66,961
|
|
|
|
-
|
|
Cash
and cash equivalents end of year
|
|
$
|
25,323
|
|
|
$
|
66,961
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
39,572
|
|
|
$
|
5,414
|
|
Supplemental
Disclosure of non-cash investing and financing Activities
|
|
|
|
|
|
|
|
|
Shares
issued for settlement of notes and accounts payable
|
|
$
|
18,000
|
|
|
$
|
1,365,817
|
|
Beneficial
conversion feature
|
|
$
|
|
|
|
$
|
40,600
|
|
Shares
issued to service providers
|
|
$
|
150,000
|
|
|
$
|
575,000
|
|
Preferred
shares issued for common shares
|
|
$
|
-
|
|
|
$
|
10,000
|
|
Shares
issued for share subscriptions payable
|
|
$
|
611,548
|
|
|
$
|
-
|
|
Write
off share subscriptions receivable
|
|
$
|
(9,177
|
)
|
|
$
|
-
|
|
Reverse
stock split
|
|
$
|
12,312
|
|
|
$
|
-
|
|
The
accompanying notes form an integral part of these consolidated financial statements.
Franchise
Holdings International, Inc.
Notes
to the Consolidated Financial Statements
December
31, 2018 and 2017
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,
2018, the Company incurred a net loss of $1,763,038 and as of that date, the Company’s accumulated deficit was $10,354,299.
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.
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, 2018 and 2017, 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, 2018 and 2017,
the Company incurred warranty expenses of $3,538 and $1,595.
Revenue
Recognition –
Beginning after December 15, 2016, for public entities reporting Revenue from Contracts with Customers,
ASC 606, a new accounting standard for revenue recognition was issued. 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. These standards have had no material effect on the reported consolidated
financial statements.
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, 2018, the Company’s product molds were not yet ready for use. As such, they have not been depreciated during
the year ended December 31, 2018.
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.
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, 2018
|
|
0.7330
USD/ CAD
|
|
0.7721
USD/ CAD
|
December 31,
2017
|
|
0.7954
USD/ CAD
|
|
0.7706
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.
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, 2018 and 2017, 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 has evaluated the guidance and it did not at this
time 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 material 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
has adopted this ASU on January 1, 2018 which have had 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
adopted 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.
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, 2018 and 2017 inventory comprised the following:
|
|
2018
|
|
|
2017
|
|
Finished
goods
|
|
$
|
282,239
|
|
|
$
|
44,635
|
|
Promotional
items
|
|
|
700
|
|
|
|
-
|
|
Raw
materials
|
|
|
6,577
|
|
|
|
-
|
|
|
|
$
|
289,516
|
|
|
$
|
44,635
|
|
Prepaid
inventory
|
|
$
|
-
|
|
|
$
|
19,684
|
|
5.
Property and Equipment
Major
classes of property and equipment at December 31, 2018 and 2017 are as follows:
|
|
2018
|
|
|
|
Cost
|
|
|
Accumulated
Depreciation
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
8,850
|
|
|
$
|
2,254
|
|
|
$
|
6,595
|
|
Product
molds
|
|
|
37,243
|
|
|
|
-
|
|
|
|
37,243
|
|
Computers
|
|
|
1,162
|
|
|
|
1,141
|
|
|
|
21
|
|
|
|
$
|
47,255
|
|
|
$
|
3,395
|
|
|
$
|
43,860
|
|
|
|
2017
|
|
|
|
Cost
|
|
|
Accumulated
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
|
|
During
the years ended December 31, 2018 and 2017, the Company recognized depreciation expense of $1,093 and $1,058, 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, 2018 and 2017 are as follows:
|
|
2018
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
Patent
|
|
$
|
10,574
|
|
|
$
|
1,401
|
|
|
$
|
9,173
|
|
Website
|
|
|
3,500
|
|
|
|
-
|
|
|
|
3,500
|
|
|
|
$
|
14,074
|
|
|
$
|
1,401
|
|
|
$
|
12,673
|
|
|
|
2017
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Patent
|
|
$
|
10,574
|
|
|
$
|
978
|
|
|
$
|
9,596
|
|
Website
|
|
|
3,500
|
|
|
|
-
|
|
|
|
3,500
|
|
|
|
$
|
14,074
|
|
|
$
|
978
|
|
|
$
|
13,096
|
|
Amortization
of the patent over the next five years and beyond at December 31, 2018 is as follows:
2019
|
|
$
|
423
|
|
2020
|
|
$
|
423
|
|
2021
|
|
$
|
423
|
|
2022
|
|
$
|
423
|
|
2023
|
|
$
|
423
|
|
2024
and later
|
|
$
|
7,058
|
|
7.
Notes Payable
2018
Notes Payable
During
the year ended December 31, 2018, the Company issued two additions to the original unsecured promissory note of July 2016, totaling
$22,639 ($30,884 Canadian dollars). Interest is accrued at 18% per annum, payable monthly. The payment terms of the original note
including these additions are due “upon completion of going public on the Canadian Securities Exchange, with no change in
interest rate.
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.
As
of December 31, 2018, the note was in default. The company is subsequently working with the note holder on the details of the
extension.
During
the years ended December 31, 2017, the Company issued secured promissory notes in the amount of $53,848 ($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. As of December 31, 2018, the note was in default.
The company is subsequently working with the note holder on the details of the extension.
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. As of December 31, 2018, the note was in default. The company is
subsequently working with the note holder on the details of the extension.
During
the years ended December 31, 2017, the Company issued a secured promissory note in the amount of $52,845 ($64,677 Canadian Dollars),
respectively. The secured promissory note is due in July 2018 and bears interest at a rate of 18% per annum. The secured promissory
note is secured by all present and after-acquired property and assets of the Company. The balance owed on this note payable at
December 31, 2017 is $73,452 ($92,348 Canadian Dollars). At December 31, 2017, the accrued interest on this note payable was $13,134
($16,513 Canadian Dollars). The payment due date remains the same as stated: upon completion of going public on the Canadian Securities
Exchange with no change in interest rate.
Secured
Promissory Note
In
October 2015, the Company signed a secured promissory note with an investor in the principal amount of $79,768 ($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 required a daily payment of $249 (324 Canadian
Dollars) until January 26, 2017 and carried a 40.0% interest rate.
The
promissory note was secured by all assets of the Company. 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, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Balance
owing, December 31,
|
|
$
|
287,425
|
|
|
$
|
275,844
|
|
Less
amounts due within one year
|
|
|
(287,425
|
)
|
|
|
(275,844
|
)
|
Long-term
portion
|
|
$
|
-
|
|
|
$
|
-
|
|
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 was allocated as follows: $12,200 was
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 was amortized over the term of the note and the derivative liability was 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 recording
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.
|
|
|
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, the Company recognized an expense of $105,600 related to the amortization
of the discounts. There were no amounts expensed for 2018.
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, the Company issued convertible promissory notes payable,
as described in note 8, which contain features that entitled 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 required separation from the main
financial instrument and recognition at fair value. The Company measured fair value using the Black-Scholes option valuation mode.
The Company computed the fair value of the derivative liability at each reporting period and the change in the fair value was
recorded as a 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.
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 had 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
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 2018 and 2017 range as follows:
|
|
2018-12-31
|
|
2017-12-31
|
Expected
term
|
|
NA
|
|
0.06
to 1.0 years
|
Share price
|
|
NA
|
|
$0.01
to $0.05
|
Expected
volatility
|
|
NA
|
|
87%
to 515%
|
Expected
dividends
|
|
None
|
|
None
|
Risk-free
interest rate
|
|
NA
|
|
0.47%
to 1.17%
|
Forfeitures
|
|
NA
|
|
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.
Shareholders’ Equity (Deficit)
During
2018, 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.
In
2018, the Company was authorized to issue 49,833,333 shares of its common stock with a par value of $0.0001. All shares were ranked
equally with regards to the Company’s residual assets.
During
the year ended December 31, 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 1,250,000 common shares. From April through September, the investor relations
company had met milestones that corresponded to $63,600 of expense being recorded. None of the shares had been issued through
December 31, 2018.
During
the year ended December 31, 2018, the Company entered into a share issuance/ claim extinguishment agreement with two parties,
pursuant to which the Company agreed to issue 8,333,333 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 $495,944 recognized during the year ended December 31, 2018. During the year
ended December 31, 2018, 990,742 shares were issued under this agreement which reduced the stock subscription payable by $77,278.
The third parties failed to pay the Company’s vendors as agreed so the Company notified them that they are in breach of
contract. The matter has yet to be resolved but the Company does not expect to issue the remaining shares.
During
the year ended December 31, 2018, the Company issued 3,125,001 common shares related to consulting agreements with two individuals
with a subscription payable value of $534,270.
During
the year ended December 31, 2018, the Company received proceeds of $300,000 on subscription agreements ($0.12 per share). The
Company will issue 2,500,000 shares for this capital raise.
During
the year ended December 31, 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 December 31, 2018, the public relations company provided
services valued at $18,000. During September 2018, the Company issued 130,435 shares valued at $0.138 per share to settle the
payable.
Subsequent
to December 31, 2018, the Company completed a share consolidation of the Company’s issued and outstanding common shares
based on six (6) pre-consolidation shares to one (1) post-consolidation share. The Consolidation reduced the number of issued
and outstanding common shares of the Company from 147,804,298 pre-Consolidation common shares to approximately 24,634,051 post-Consolidation
common shares. While the share consolidation occurred subsequent to December 31, 2018, the Company has accounted for the effects
retrospectively as such, the schedules and all references to shares, options and warrants throughout the financial statements
have been updated to reflect the number of post-consolidation securities.
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 16,666,667 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 1,693,122
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 1,693,122 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 10,890,754 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 12,000,000 common shares of the Company to its CEO pursuant to the Company’s
employee stock incentive plan at a deemed cost of $0.006 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 525,762 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 1,733,333 common shares during the period ended December 31,
2017. As at December 31, 2017, 4,100,000 common shares remain reserved for issuance pursuant to the share issuance/ claim extinguishment
agreement.
During
the year ended December 31, 2017, the Company issued 500,000 shares of its common stock for cash proceeds of $38,010. Also, during
the year ended December 31, 2017 the Company issued 56,667 shares of its common stock in exchange for services valued at
$10,000.
11.
Related Party Transactions
During
the year ended December 31, 2018, the Company recorded salaries expense of $63,796 (2017 - $36,668) related to services rendered
to the Company by its major shareholder and CEO.
12.
Income Taxes
a)
The income tax expense for the year ended December 31, 2017 and 2016 is reconciled per the schedule below:
|
|
2018
|
|
|
2017
|
|
Net
loss before income taxes
|
|
$
|
(1,763,038
|
)
|
|
$
|
(3,403,106
|
)
|
Depreciation
|
|
|
566
|
|
|
|
506
|
|
Non-deductible
portion of meals and entertainment
|
|
|
2,953
|
|
|
|
309
|
|
Share
based compensation
|
|
|
-
|
|
|
|
1,360,001
|
|
Derivative
loss
|
|
|
-
|
|
|
|
521,486
|
|
Expenses
paid in shares
|
|
|
322,056
|
|
|
|
(10,417
|
)
|
GL
Settlement of Debt
|
|
|
495,944
|
|
|
|
|
|
Adjusted
net loss for tax purposes
|
|
|
(951,207
|
)
|
|
|
(1,531,221
|
)
|
Statutory
rate
|
|
|
25.35
|
%
|
|
|
24.73
|
%
|
|
|
|
(241,127
|
)
|
|
|
(378,671
|
)
|
Increase
in valuation allowance
|
|
|
241,127
|
|
|
|
378,671
|
|
Provision
for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
b)
Deferred Income Tax Assets
The
tax effects of temporary differences that give rise to the deferred income tax assets at December 31, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Net
operating loss carry forwards
|
|
$
|
997,723
|
|
|
$
|
767,446
|
|
Transaction
costs
|
|
|
34,109
|
|
|
|
36,677
|
|
|
|
|
1,031,832
|
|
|
|
804,123
|
|
Deferred
tax assets not recognized
|
|
|
(1,031,832
|
)
|
|
|
(804,123
|
)
|
Net
deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
c)
Cumulative Net Operating Losses
The
Company has non-capital losses carried forward of approximately $4,377,000 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
|
|
2038
|
|
|
431,000
|
|
|
|
520,000
|
|
|
|
951,000
|
|
|
|
$
|
2,985,000
|
|
|
$
|
1,392,000
|
|
|
$
|
4,377,000
|
|
These
net operating loss carryforwards of approximately $4,377,000 may be offset against future taxable income for the years 2019 through
2038. No tax benefit from continuing or discontinued operations have been reported in the December 31, 2018 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, 2018 and 2017.
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.
13.
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, 2018 and 2017.
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, 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
|
|
|
37.8
|
%
|
|
|
72.4
|
%
|
Customer
B
|
|
|
31.2
|
%
|
|
|
10.4
|
%
|
Customer
C
|
|
|
19.8
|
%
|
|
|
-
|
%
|
Customer
D
|
|
|
10.4
|
%
|
|
|
-
|
%
|
|
|
|
99.2
|
%
|
|
|
82.8
|
%
|
The
loss of any of these key customers could have an adverse effect on the Company’s business. At December 31, 2018, $182,738
was included in revenue from Company A, representing 37.8% of the Company’s accounts receivable as at that date. Customer
B represented 31.2% or $150,707, Customer C represented 19.8% or $95,738, and Customer D represented 10.4% or $50,086. With Customer
A and B representing 69% of the revenue, the loss of either or both customers would have an adverse effect on the Company’s
revenue.
In
2017, Customer A represented 72.4% or $304,813, and Customer B represented 10.2% or $42,738. Loss of either customers would have
a severe effect on the Company’s revenue.
14.
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, 2018, and 2017, the Company had no assets and liabilities measured at fair value on a recurring basis.
15.
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, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Decrease
(increase) in accounts receivable
|
|
$
|
127,620
|
|
|
$
|
(108,356
|
)
|
Decrease
(increase) in inventory
|
|
|
(225,197
|
)
|
|
|
14,656
|
|
Decrease
(increase) in prepaid expenses and deposits
|
|
|
554,405
|
|
|
|
162,754
|
|
Decrease
(increase) in related party receivables
|
|
|
(6
|
)
|
|
|
7,770
|
|
Increase
(decrease) in income taxes payable
|
|
|
77,251
|
|
|
|
318
|
|
Increase
(decrease) in accounts payable and accrued liabilities
|
|
|
343,051
|
|
|
|
104,464
|
|
Increase
(decrease) in bank overdraft
|
|
|
-
|
|
|
|
(2,635
|
)
|
|
|
$
|
877,124
|
|
|
$
|
178,971
|
|
16.
Commitments
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.
17.
Subsequent Events
The Company has evaluated subsequent events
through May 13th, 2019 which is the date the financial statements were available to be issued and the following events after year
end occurred:
|
●
|
On January 7
th
, 2019 the company completed an unregistered sales of equity securities,
pursuant to Rule 506(b) of Regulation D. The company raised $25,000 in exchange for 208,334 post consolidation common shares
of the company.
|
|
|
|
|
●
|
A
1 for 6 reverse stock split of common shares was deemed declared effective, by FINRA, on March 29th, 2019 occurred. On march
8th, 2019; The Board of Directors authorized the submission of a Certificate of Change/Amendment to the Nevada Secretary of
State in which the Company sought to affect a reverse split of its common stock at the rate of 1 for 6 for the purpose of
increasing the per share price for the Company’s stock in an effort to meet the minimum listing requirements of the
Canadian Stock Exchange (“CSE”). The Certificate of Change was submitted to the Nevada Secretary of State on March
20, 2019 and the FINRA corporate action was filed on March 21, 2019. FINRA declared the 1 for 6 reverse stock split effective
on March 29, 2019.
|
|
|
|
|
●
|
On
April 3, 2019, Steven Rossi was issued 13,583,397 shares of Franchise Holdings International, Inc. common stock as approved
by the board of directors, due to a conversion of all 1,000,000 shares of his Series A Preferred stock.
|
|
|
|
|
●
|
On
April 2, 2019 Mr. Craig Loverock was appointed to our Board of Directors and as Chairman of our Audit Committee. Per the language
in the Written Consent of Board of Directors dated April 2, 2019, Mr. Loverock shall be paid $1,000 CDN for each month of
service as Director, and such payment shall be made quarterly. Mr. Loverock shall be eligible to participate in all employee
compensations plans that are available to other Officers and Directors of the Corporation from time to time.
|
|
|
|
|
●
|
On
February 28, 2019 the company issued 1,000,000 common shares of Franchise Holdings International, Inc per the terms of a service
agreement for services rendered by the consultant to the company.
|
|
|
|
|
●
|
On
May 9
th
, 2019 the company issued 1,680,084 common shares of Franchise Holdings International, Inc per the terms
of a service agreement for services rendered by the consultant to the company.
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