Notes
to the Consolidated Financial Statements
December
31, 2019 and 2018
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)
Consolidation
The
Company's consolidated financial statements consolidate the accounts of the Company and its wholly owned subsidiary. All intercompany
transactions, balances and unrealized gains or losses from intercompany transactions have been eliminated upon consolidation.
d) Functional and Presentation Currency
These consolidated financial statements
are presented in United States Dollars. The functional currency of the Company is the Canadian Dollar. For purposes of preparing
these consolidated financial statements, balances denominated in Canadian Dollars outstanding at December 31, 2019 were converted
into United States Dollars at a rate of 1.30 Canadian Dollars to one United States Dollar. Balances denominated in Canadian Dollars
outstanding at December 31, 2018 were converted into United States Dollars at a rate of 1.36 Canadian Dollars to one United States
Dollar. Transactions denominated in Canadian Dollars for the period ended December 31, 2019 and December 31, 2018 were converted
into United States Dollars at an average rate of 1.33 and 1.30 Canadian Dollars to one United States Dollar, respectfully.
e)
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.
f)
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,
2019, the Company incurred a net loss of $414,607 and as of that date, the Company’s accumulated deficit was $10,768,906.
While the Company has demonstrated the ability to generate revenue, there are no assurances that it will be able to achieve level
of revenues adequate to generate sufficient cash flow from operations or obtain additional financing through private placements,
public offerings and/or bank financing necessary to support our working capital requirements. To the extent that funds generated
from any private placements, public offerings and/or bank financing are insufficient, we will have to raise additional working
capital. No assurance can be given that additional financing will be available, or if available, will be on acceptable terms.
These conditions raise substantial doubt about our ability to continue as a going concern. If adequate working capital is not
available we may be forced to discontinue operations, which would cause investors to lose their entire investment. The accompanying
consolidated financial statements do not include any adjustments that might result relating to the recoverability and classification
of the asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this risk
and uncertainty.
g)
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, 2019 and 2018, the Company had no allowance
for doubtful accounts.
Inventory
- Inventory is stated at the lower of cost or net realizable value, 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, 2019 and 2018,
the Company incurred warranty expenses of $2,106 and $3,538.
Revenue Recognition – Beginning
after December 15, 2017, for public entities reporting Revenue from Contracts with Customers, ASC 606, a new accounting standard
for revenue recognition was issued. An entity must satisfy the following steps under ASC 606 for revenue recognition; identifiable
contract, identifiable performance obligation, determinable transaction price, allocating the transaction price and satisfying
performance obligations. Sales are recognized when products are shipped, with no right of return, the title and risk of loss has
passed to the customers or when they are delivered based on the terms of the sale. 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 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
|
Patents
|
|
25
years
|
Leasehold
improvements
|
|
15
years
|
As
at December 31, 2019, the Company does not take depreciation for the following items: product moulds, trademarks and the website
as the following items are not in service.
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, 2019
|
|
0.7699
USD/ CAD
|
|
0.7537
USD/ CAD
|
December
31, 2018
|
|
0.7330
USD/ CAD
|
|
0.7721
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, 2019 and 2018, the Company had no impairment losses related to intangible assets.
Lease
Accounting - On January 1, 2019, the Company adopted the new accounting standards ASC 842 that requires lessees to recognize
all leases on the balance sheet as right-of-use assets and lease liabilities based on the value of the discounted future lease
payments. Expanded disclosures about the nature and terms of lease agreements are required prospectively and are included in Note
19. Upon adoption, the Company also recognized right-of-use assets and lease liabilities of $68,516.
Private Equity Investment - Private
equity investments may consist of common stock and preferred stock of privately owned companies. The Company records all private
equity investments at the transaction price, excluding transaction costs. The Company assesses annually if there is any objective
evidence that its interest in its investments are impaired. If impaired, the carrying value of the Company's share of the underlying
assets of the investment is written down to its estimated recoverable amount and charged to the consolidated statement of operations
and comprehensive loss.
4.
Inventory
Inventory
consists of the following at December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Finished
goods
|
|
$
|
104,868
|
|
|
$
|
282,239
|
|
Promotional
items
|
|
|
552
|
|
|
|
700
|
|
Raw
materials
|
|
|
7,737
|
|
|
|
6,577
|
|
|
|
$
|
113,156
|
|
|
$
|
289,516
|
|
Prepaid
inventory
|
|
$
|
50,000
|
|
|
$
|
-
|
|
During
the year ended December 31, 2019 the Company recognized a loss on impairment of inventory $54,292.
5.
Property and Equipment
Major
classes of property and equipment at December 31, 2019 and 2018 are as follows:
|
|
2019
|
|
|
|
Equipment
|
|
|
Product
molds
|
|
|
Computers
|
|
|
Leasehold
Improvements
|
|
|
Total
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
– January 1, 2019
|
|
$
|
8,850
|
|
|
$
|
37,243
|
|
|
$
|
1,162
|
|
|
$
|
-
|
|
|
$
|
47,255
|
|
Additions
|
|
|
1,197
|
|
|
|
28,465
|
|
|
|
-
|
|
|
|
23,371
|
|
|
|
53,033
|
|
Balance
– December 31, 2019
|
|
$
|
10,047
|
|
|
$
|
65,708
|
|
|
$
|
1,162
|
|
|
$
|
23,371
|
|
|
|
100,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
– January 1, 2019
|
|
$
|
(2,254
|
)
|
|
$
|
-
|
|
|
$
|
(1,141
|
)
|
|
$
|
-
|
|
|
$
|
(3,395
|
)
|
Additions
|
|
|
(1,531
|
)
|
|
|
-
|
|
|
|
(21
|
)
|
|
|
(646
|
)
|
|
|
(2,198
|
)
|
Balance
– December 31, 2019
|
|
$
|
(3,785
|
)
|
|
$
|
-
|
|
|
$
|
(1,162
|
)
|
|
$
|
(646
|
)
|
|
$
|
(5,593
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
amount as at December 31, 2019
|
|
$
|
6,262
|
|
|
$
|
65,708
|
|
|
$
|
-
|
|
|
$
|
22,725
|
|
|
$
|
94,695
|
|
|
|
2018
|
|
|
|
Equipment
|
|
|
Product
molds
|
|
|
Computers
|
|
|
Leasehold
Improvements
|
|
|
Total
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
– January 1, 2018
|
|
$
|
6,976
|
|
|
$
|
37,243
|
|
|
$
|
1,162
|
|
|
$
|
-
|
|
|
$
|
45,381
|
|
Additions
|
|
|
1,874
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,874
|
|
Balance
– December 31, 2018
|
|
$
|
8,850
|
|
|
$
|
37,243
|
|
|
$
|
1,162
|
|
|
$
|
-
|
|
|
$
|
47,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
– January 1, 2018
|
|
$
|
(1,181
|
)
|
|
$
|
-
|
|
|
$
|
(1,121
|
)
|
|
$
|
-
|
|
|
$
|
(2,302
|
)
|
Additions
|
|
|
(1,073
|
)
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
(1,093
|
)
|
Balance
– December 31, 2018
|
|
$
|
(2,254
|
)
|
|
$
|
-
|
|
|
$
|
(1,141
|
)
|
|
$
|
-
|
|
|
$
|
(3,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
amount as at December 31, 2018
|
|
$
|
6,596
|
|
|
$
|
37,243
|
|
|
$
|
21
|
|
|
$
|
-
|
|
|
$
|
43,860
|
|
During
the years ended December 31, 2019 and 2018, the Company recognized depreciation expense of $2,198 and $1,093, 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, Worksport trademarks, as
well as the Company’s website. The patent was issued in 2014 and 2019. The patent will be amortized on a straight-line basis
over its useful life of 25 years. The Company’s trademark and website are reassessed annually for impairment; the Company
has determined that impairment is not necessary for the current year ended December 31, 2019. The change in intangible assets
for the years ending December 31, 2019 and 2018 are as follows:
|
|
2019
|
|
|
|
Patent
|
|
|
Website
|
|
|
Trademarks
|
|
|
Total
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
– January 1, 2019
|
|
$
|
10,574
|
|
|
$
|
3,500
|
|
|
$
|
-
|
|
|
$
|
14,074
|
|
Additions
|
|
|
40,676
|
|
|
|
-
|
|
|
|
4,644
|
|
|
|
45,320
|
|
Balance
– December 31, 2019
|
|
$
|
51,250
|
|
|
$
|
3,500
|
|
|
$
|
4,644
|
|
|
$
|
59,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
– January 1, 2019
|
|
$
|
(1,401
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,401
|
)
|
Additions
|
|
|
(848
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(848
|
)
|
Balance
– December 31, 2019
|
|
$
|
(2,249
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
amount as at December 31, 2019
|
|
$
|
49,001
|
|
|
$
|
3,500
|
|
|
$
|
4,643
|
|
|
$
|
57,145
|
|
|
|
2018
|
|
|
|
Patent
|
|
|
Website
|
|
|
Trademarks
|
|
|
Total
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
– January 1, 2018
|
|
$
|
10,574
|
|
|
$
|
3,500
|
|
|
$
|
-
|
|
|
$
|
14,074
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
– December 31, 2018
|
|
$
|
10,574
|
|
|
$
|
3,500
|
|
|
$
|
-
|
|
|
$
|
14,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
– January 1, 2018
|
|
$
|
(978
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(978
|
)
|
Additions
|
|
|
(423
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(423
|
)
|
Balance
– December 31, 2018
|
|
$
|
(1,401
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
amount as at December 31, 2018
|
|
$
|
9,173
|
|
|
$
|
3,500
|
|
|
$
|
-
|
|
|
$
|
12,673
|
|
Amortization
of the patent over the next five years and beyond December 31, 2019 is as follows:
2020
|
|
$
|
2,050
|
|
2021
|
|
$
|
2,050
|
|
2022
|
|
$
|
2,050
|
|
2023
|
|
$
|
2,050
|
|
2024
|
|
$
|
2,050
|
|
2025
and later
|
|
$
|
46,895
|
|
7.
Notes Payable
The
following tables shows the balance of the notes payable as of December 31, 2019 and 2018:
Balance
as at December 31, 2017
|
|
$
|
275,844
|
|
Additions
|
|
|
22,639
|
|
Payment
|
|
|
(11,058
|
)
|
Balance
as at December 31, 2018
|
|
$
|
287,425
|
|
Additions
|
|
|
-
|
|
Payments
|
|
|
(19,544
|
)
|
Balance
as at December 31, 2019
|
|
$
|
267,881
|
|
2019
Notes Payable
During
the year ended December 31, 2019 the Company extended the maturity dates of all secured promissory notes in the amount of $79,000
and $96,091 ($123,231 Canadian Dollars) to be due on April 1, 2021.
During
the year ended December 31, 2019 the Company extended the maturity dates of all unsecured promissory notes in the amount of $50,000
and $53,848 ($67,700 Canadian Dollars) to be due on October 8, 2020 and November 3, 2020 respectively.
During
the year ended December 31, 2019 the Company repaid $9,545 ($12,000 Canadian dollars) and $10,000 of its unsecured promissory
notes. In addition, the Company paid $8,113 in interest for outstanding unsecured promissory notes.
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 was due in August 2018 and bears interest at a rate of 18% per annum, payable monthly. As the note
is in good standing, the payment terms have been extended indefinitely with no change in interest rate.
During
the year ended December 31, 2017, the Company issued secured promissory notes in the amount of $53,848 ($67,700 Canadian
Dollars). The secured promissory notes were 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 the note is in good standing,
the payment terms have been extended with no change in interest rate. Refer to 2019 notes payable above for note extension.
During
the year 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 the note is in good standing, the payment terms have been extended
with no change in interest rate. Refer to 2019 notes payable above for note extension.
During
the year 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 was 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 accrued 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, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Balance
owing
|
|
$
|
278,938
|
|
|
$
|
287,425
|
|
Less
amounts due within one year
|
|
|
(278,938
|
)
|
|
|
(287,425
|
)
|
Long-term
portion
|
|
$
|
-
|
|
|
$
|
-
|
|
8.
Shareholders’ Equity (Deficit)
During
the year ended December 31, 2019, 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 during the year ended December 31, 2019, 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.
In
2018 and 2019, the Company was authorized to issue 49,833,333 shares of its common stock with a par value of $0.0001. All shares
were ranked equally with regards to the Company’s residual assets. During 2018 and 2019, the Company was authorized to issue
1,000,000 shares of its Series A Preferred Stock with a par value of $0.0001. These shares have voting rights equal to 299 shares
of common stock, per share of preferred.
During
the year ended December 31, 2019, the Company issued 1,901,455 common shares, previously recorded as subscription payable to a
consultant with a value of $290,730. In addition the Company also issued to the same consultant 2,778,629 common shares at $0.02
per share for $55,573 for additional consulting serviced performed. During the same period, the Company entered into a share subscription
agreement with a consultant of the Company for 1,500,000 common shares valued at $30,000. As the shares have not yet been issued,
the $30,000 has been recorded as share subscriptions payable.
During
year ended December 31, 2019, the Company reached a legal settlement agreement (the “unwinding”) with an individual
investor to dissolve the Debt Settlement and Mutual Release Agreement entered into on January 12, 2018. In accordance to the settlement
agreement, 19,055,551 pre-stock split (990,742 post stock split), reserved shares with a value of $325,000 recorded in share subscription
payable were released and returned to the Company.
During
the year ended December 31, 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.
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. As of December 31, 2019, all shares have been
issued and $150,000 has been expensed.
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.
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. As of December 31, 2019, the shares have not been issued.
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.
9.
Related Party Transactions
During
the year ended December 31, 2019, the Company incurred $112,665 payable to a US based corporation controlled by the Company’s
CEO and director for the purchase of inventory.
During
the year ended December 31, 2019, the Company recorded salaries expense of $65,589 (2018 - $63,796) related to services rendered
to the Company by its CEO.
10.
Income Taxes
a)
The income tax expense for the year ended December 31, 2019 and 2018 is reconciled per the schedule below:
|
|
2019
|
|
|
2018
|
|
Net
loss before income taxes
|
|
$
|
(414,607
|
)
|
|
$
|
(1,763,038
|
)
|
Depreciation
|
|
|
(10,956
|
)
|
|
|
566
|
|
Non-deductible
portion of meals and entertainment
|
|
|
1,115
|
|
|
|
2,953
|
|
Expenses
paid in shares
|
|
|
55,573
|
|
|
|
322,056
|
|
Loss
on impairment
|
|
|
54,292
|
|
|
|
-
|
|
GL
Settlement of Debt
|
|
|
(250,778
|
)
|
|
|
495,944
|
|
Adjusted
net loss for tax purposes
|
|
|
(565,361
|
)
|
|
|
(951,207
|
)
|
Statutory
rate
|
|
|
24.63
|
%
|
|
|
25.35
|
%
|
|
|
|
(139,236
|
)
|
|
|
(241,127
|
)
|
Increase
in valuation allowance
|
|
|
139,236
|
|
|
|
241,127
|
|
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, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Net
operating loss carry forwards
|
|
$
|
1,125,158
|
|
|
$
|
997,723
|
|
Transaction
costs
|
|
|
-
|
|
|
|
34,109
|
|
|
|
|
1,125,158
|
|
|
|
1,031,832
|
|
Deferred
tax assets not recognized
|
|
|
(1,125,158
|
)
|
|
|
(1,031,832
|
)
|
Net
deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
c)
Cumulative Net Operating Losses
The
Company has non-capital losses carried forward of approximately $4,942,000 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
|
|
2039
|
|
|
372,000
|
|
|
|
193,000
|
|
|
|
565,000
|
|
|
|
$
|
3,357,000
|
|
|
$
|
1,585,000
|
|
|
$
|
4,942,000
|
|
These
net operating loss carryforwards of approximately $4,942,000 may be offset against future taxable income for the years 2020 through
2039. No tax benefit from continuing or discontinued operations have been reported in the December 31, 2019 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, 2019 and 2018.
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, 2016.
11.
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, 2019 and 2018.
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, 2019 and 2018. A customer is considered to be significant if they account for greater than 10% of the Company’s annual
sales:
|
|
2019
|
|
|
2018
|
|
Customer
A
|
|
|
89
|
%
|
|
|
37.8
|
%
|
Customer
B
|
|
|
-
|
%
|
|
|
31.2
|
%
|
Customer
C
|
|
|
-
|
%
|
|
|
19.8
|
%
|
Customer
D
|
|
|
-
|
%
|
|
|
10.4
|
%
|
|
|
|
89
|
%
|
|
|
99.2
|
%
|
The
loss of any of these key customers could have an adverse effect on the Company’s business. At December 31, 2019, $1,912,401
was included in revenue from Company A, representing 89% of the Company’s total sales for the year ended. With Customer
A representing 89% of the revenue, the loss of the customer would have an adverse effect on the Company’s revenue.
In
2018, Customer A represented 37.8% or $182,738 of total sales.
12.
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, 2019, and 2018, the Company had no assets and liabilities measured at fair value on a recurring basis.
13.
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, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Decrease
(increase) in accounts receivable
|
|
$
|
(5,913
|
)
|
|
$
|
127,620
|
|
Decrease
(increase) in inventory
|
|
|
122,067
|
|
|
|
(225,197
|
)
|
Decrease
(increase) in prepaid expenses and deposits
|
|
|
63,373
|
|
|
|
554,405
|
|
Decrease
(increase) in related party receivables
|
|
|
-
|
|
|
|
(6
|
)
|
Increase
(decrease) in lease liability
|
|
|
(8,392
|
)
|
|
|
-
|
|
Increase
(decrease) in income taxes payable
|
|
|
(45,521
|
)
|
|
|
77,251
|
|
Increase
(decrease) in accounts payable and accrued liabilities
|
|
|
405,214
|
|
|
|
343,051
|
|
|
|
$
|
530,828
|
|
|
$
|
877,124
|
|
14.
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.
15.
Gain (Loss) on Settlement of Debt
During
year ended December 31, 2019, the Company reached a legal settlement agreement (the “unwinding”) with an individual
investor to dissolve the Debt Settlement and Mutual Release Agreement entered into on January 12, 2018. In accordance to the settlement
agreement, 19,055,551 pre-stock split, reserved shares were released and returned to the Company. In addition, 5,944,449 pre-stock
split (990,742 post stock split) shares already issued were returned to the Company’s treasury, and cancelled, reducing
the companies issued and outstanding shares accordingly. The company closed the unwinding in August 2019.
16.
Contingent Liability
During
the year ended December 31, 2019 the Company entered into an agreement with a debtor for the settlement of outstanding notes payable
of $56,723 ($75,000 CAD). The Company will issue to the debtor 1,500,000 million common shares for the settlement of the outstanding
notes payable upon listing on the Canadian Securities Exchange. The agreement was subsequently cancelled after year end.
As
of December 31, 2019 the Company (defendant) is currently in an ongoing legal proceedings with a supplier (plaintiff). Refer to
Note 20 for subsequent event and resolution.
17.
Reverse Stock Split
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.
These financial statements including, prior period comparative share amounts, have been retrospectively restated to reflect this
reverse split.
18.
Investment
During
the year ended December 31, 2019, the Company entered into an agreement to purchase 10,000,000 shares for $50,000 which has been
issued to FNHI. The Company’s investment accounts for a 10% equity stake in a US based mobile phone development company.
As of December 31, 2019 the Company had advanced a total of $15,658 and is advancing trenches of capital as required by the Company.
19.
Lease Liabilities
During
the year ended December 31, 2019, the Company signed a lease agreement for warehouse space to commence on August 1, 2019 and end
on July 31, 2022 with monthly lease payments of $2,221. The Company has accounted for its leases upon adoption of ASC 842 whereby
it recognizes a lease liability and a right-of-use asset at the date of initial application, beginning January 1, 2019. The lease
liability is measured at the present value of the remaining lease payments, discounted using the Company’s incremental borrowing
rate of 10%. The Company has measured the right-of-use asset at an amount equal to the lease liability.
The
Company’s right-of-use asset for the year ended December 31, 2019 is as follows:
|
|
2019
|
|
Right-of-use
asset
|
|
$
|
60,125
|
|
|
|
|
|
|
Current
lease liability
|
|
$
|
22,000
|
|
Long-term
lease liability
|
|
$
|
39,185
|
|
The
components of lease expense are as follows:
|
|
2020
|
|
Amortization
of right-of-use
|
|
$
|
21,619
|
|
Interest
on lease liability
|
|
$
|
5,039
|
|
Total
lease cost
|
|
$
|
26,658
|
|
Maturities
of lease liability are as follows:
Future
minimum lease payments as of December 31, 2019,
2020
|
|
$
|
26,658
|
|
2021
|
|
|
26,658
|
|
2022
|
|
|
15,551
|
|
Total
future minimum lease payments
|
|
|
68,867
|
|
Less:
amount representing interest
|
|
|
(7,682
|
)
|
Present
value of future payments
|
|
|
61,185
|
|
Current
portion
|
|
|
22,000
|
|
Long
term portion
|
|
$
|
39,185
|
|
20.
Subsequent Events
The
Company has evaluated subsequent events through May 14, 2020 which is the date the financial statements were available
to be issued and the following events after year end occurred:
|
●
|
On
January 2, 2020, a consulting agreement was signed with Craft Capital Management LLC to introduce placement opportunities
to the Company in exchange for 4%-8% of the Placement received by the Company. The agreement is effective from the date of
signing for 18 months.
|
|
|
|
|
●
|
On
January 4, 2020, a consulting agreement was signed with an individual to assist the Company in developing and procuring all
company media assets including videos, photos, photo shoots, video shoots, logos, print and digital media. The term of the
consulting agreement will be for a minimum period of 18 months with a consideration of 4,000,000 common shares at $0.03 per
share for a total value of $125,000.
|
|
|
|
|
●
|
On
January 23, 2020, a subscription agreement for 5,000,000 shares for $186,874 was cancelled. The Company and investor are currently
in negotiation on the return the funds.
|
|
|
|
|
●
|
On
January 28, 2020, a consulting agreement was signed with YK GROUP INC in assisting the Company with going public on the Canadian
Securities Exchange.
|
|
|
|
|
●
|
On
February 3, 2020, the Company terminated a consulting agreement signed on July 23, 2016.
|
|
|
|
|
●
|
On
February 6, 2020, the Company reached a legal settlement with a supplier in which the Company is obligated to pay $6,037 per
month beginning on March 1, 2020 for four months until the full amount of $24,148 has been repaid in full on June 1, 2020.
|
|
|
|
|
●
|
On
February 28, 2020, the Company issued 2,680,982 for shares to settle the remaining debt purchase agreement entered in 2017
of $84,310.
|
|
|
|
|
●
|
In
March 2020, the Company entered into a secured promissory note of $544,425. $44,425 are to be used to pay legal and accounting
fees. As part of the secured promissory note the agreement the loan holder is also granted warrants allowing the loan holder
to purchase 900,000 shares at an exercise price of $0.10. The agreement also requires the Company to issue 450,000 shares
to the loan holder.
|
|
|
|
|
●
|
On
March 26, 2020 the Company issued 2,000,000 shares to a consultant for $40,000 of consulting expense performed.
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On
April 20, 2020, the Company changed its name from Franchise Holding International Inc. to Worksport Ltd pending approval of
the change from “FNHI” to WKSP”.
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On
April 20, 2020, the Company issued 1,000 preferred stock to the Company’s President, Secretary and Director.
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Due
to the impact of COVID-19 around the world the Company expects its sales to decrease significantly for the first and second
quarter of 2020 as governments around the world enter a lockdown to prevent the spread of COVID-19.
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