Freshii Inc. Condensed Consolidated Interim Financial Statements For the 13 and 39 weeks ended and 24, 2017 (Expressed in thousands of US Dollars) (Unaudited)
Condensed Consolidated Interim Balance Sheets (Expressed in thousands of US Dollars, unaudited) and December 31, 2017 December 31, 2017 December 26, 2016 Assets Current Cash $ 29,586 $ 28,584 $ 6,581 Restricted Cash - - 122 Amounts receivable (Note 4) 1,924 2,284 1,564 Prepaid expenses and other assets (Note 5) 1,054 607 1,699 Current portion of deferred charges (Note 11) 41 44 38 32,605 31,519 10,004 Non-current Property and equipment (Note 7) 2,351 530 561 Intangible and other assets (Note 20) 5,695 5,832 388 Deferred charges (Note 11) 370 417 471 Deferred tax asset (Note 6) 4,069 4,307 3,014 Total assets $ 45,090 $ 42,605 $ 14,438 Liabilities Current Accounts payable and accrued liabilities (Note 8) $ 3,350 $ 1,828 $ 5,167 Current portion of long-term debt - - 15,000 Current portion of deferred revenue (Note 11) 2,323 2,766 2,849 Current portion of settlement payable - - 640 Income taxes payable (Note 6) 614 254 367 6,287 4,848 24,023 Non-current Deferred revenue (Note 11) 5,605 6,122 4,722 Total liabilities 11,892 10,970 28,745 Equity (Deficit) Capital stock (Note 9) 48,408 46,155 1,709 Contributed surplus (Note 10) 3,888 3,543 248 Accumulated other comprehensive income 20 1,317 464 Deficit (19,155) (19,421) (16,759) 33,161 31,594 (14,338) Non controlling interest 37 41 31 $ 45,090 $ 42,605 $ 14,438 Commitments, contingencies and guarantees - Note 19 Related parties Note 21 Approved by the Directors November 7, 2018 (Signed) Jeffrey Burchell Jeffrey Burchell, Director (Signed) Adam Corrin Adam Corrin, Director
Condensed Consolidated Interim Statements of Earnings (Loss) and Comprehensive Income (Loss) (Expressed in thousands of US Dollars, except per share amounts, unaudited) For the 13 and 39 weeks ended and 24, 2017 For the 13 weeks ended 24, 2017 For the 39 weeks ended 24, 2017 Revenue Franchise revenue (Note 11) $ 4,752 $ 3,711 $ 13,794 $ 10,498 Company-owned store revenue 850 687 2,205 1,947 Total revenue 5,602 4,398 15,999 12,445 Costs and expenses Cost of sales 719 583 1,909 1,632 Selling, general and administrative (Note 12) 3,463 2,148 9,774 7,709 Depreciation and amortization (Note 20) 566 171 988 296 Share based compensation expense (Note 10) 889 1,777 2,598 5,646 Total costs and expenses 5,637 4,679 15,269 15,283 Income (loss) before interest costs, foreign exchange & income taxes (35) (281) 730 (2,838) Interest income, net (Note 15) (125) (135) (341) (105) Foreign exchange (gain) loss 33 197 (73) (257) Income (loss) before income tax expense 57 (343) 1,144 (2,476) Income tax expense (recovery) (Note 6) 503 151 861 (480) Net income (loss) (446) (494) 283 (1,996) Other comprehensive (loss) income Currency translation adjustment that may be reclassified to: net income (loss), net of tax 476 2,294 (1,297) 1,462 Comprehensive income (loss) $ 30 $ 1,800 $ (1,014) $ (534) Net income (loss) attributable to: Freshii Inc. $ (459) $ (514) $ 266 $ (2,016) Non controlling interest $ 13 $ 20 $ 17 $ 20 Comprehensive income (loss) attributable to: Freshii Inc. $ 17 $ 1,780 $ (1,031) $ (554) Non controlling interest $ 13 $ 20 $ 17 $ 20 Net income (loss) per share attributable to the Common Shareholders of the Company: (in dollars) Basic earnings (loss) per share (Note 13) $ (0.01) $ (0.02) $ 0.01 $ (0.06) Diluted earnings (loss) per share (Note 13) $ (0.01) $ (0.02) $ 0.01 $ (0.06)
Condensed Consolidated Interim Statements of Changes in Equity (Deficit) (Expressed in thousands of US Dollars, unaudited) For the 39 weeks ended and 24, 2017 Capital stock Contributed surplus Cumulative translation reserve Total equity (deficit) of Freshii Noncontrolling interests Deficit Total Balance as at December 31, 2017 $ 46,155 $ 3,543 $ 1,317 $ (19,421 ) $ 31,594 $ 41 $ 31,635 Stock compensation expense (Note 10) - $ 2,598 - - 2,598-2,598 Currency translation adjustments - - (1,297) - (1,297) - (1,297) Net income for the period - - - 266 266 17 283 Distributions to non-controlling interest - - - - - (21) (21) Treasury share issuance on RSU vesting (Note 10) 2,253 (2,253) - - - - - $ 48,408 $ 3,888 $ 20 $ (19,155 ) $ 33,161 $ 37 $ 33,198 Capital stock Contributed surplus Cumulative translation reserve Total equity (deficit) of Freshii Noncontrolling interests Deficit Total Balance as at December 25, 2016 $ 1,709 $ 248 $ 464 $ (16,759 ) $ (14,338) $ 31 $ (14,307) Stock compensation expense (Note 10) - 5,646 - - 5,646-5,646 Currency translation adjustments - - 1,320-1,320-1,320 Net income (loss) for the period - - - (2,016) (2,016) 20 (1,996) Distributions to non-controlling interest 3,399 (3,399) - - - (16) (16) Share issuance 41,047 41,047 41,047 24, 2017 $ 46,155 $ 2,495 $ 1,784 $ (18,775 ) $ 31,659 $ 35 $ 31,694
Condensed Consolidated Statements of Cash Flows (Expressed in thousands of US Dollars, unaudited) For the 39 weeks ended and 24, 2017 24, 2017 Cash provided by (used in) Operations Net income (loss) $ 283 $ (1,996) Items not affecting cash Depreciation and amortization 988 296 Unrealized foreign exchange (gain) loss (58) 203 Bad debt expense 19 120 Stock based compensation expense 2,598 5,646 Amounts receivable 200 (423) Prepaid expenses and other assets (616) (1,511) Deferred charges 44 88 Deferred revenue (875) 602 Accounts payable and accrued liabilities 1,537 (3,499) Income taxes payable 358 (350) Deferred income tax asset 13 (556) 4,491 (1,380) Investing Restricted cash - 126 Purchase of property and equipment (1,969) (12) Proceeds from sale of property and equipment - 4 Purchase of intangibles and other assets (778) (123) Business acquisitions - (4,150) (2,747) (4,155) Financing Repayment of demand term loan - (15,000) Distributions to non controlling interest (21) (16) Settlement payable - (517) Issuance of Class A subordinate voting shares, net of transaction costs - 41,545 (21) 26,012 Net change in cash 1,723 20,477 Foreign exchange effect on cash (721) 1,638 Cash, beginning of period 28,584 6,581 Cash, end of period $ 29,586 $ 28,696 Supplemental disclosure Cash interest received, net $ (341) $ (105) Cash taxes paid $ 373 $ 418
1. NATURE OF OPERATIONS Freshii Inc. is a Canadian company incorporated under the Business Corporations Act (Ontario). The Company's head office is located at 1055 Yonge Street, Unit 101, Toronto, Ontario, Canada. References herein to "Freshii Inc.," or the "Company" refer to Freshii Inc. and its subsidiaries, unless specifically noted otherwise. The Company's principal business is the development, franchising and operation of quick-serve restaurants throughout the world with the majority of its locations in Canada and the United States of America ("USA"). On January 31, 2017, the Company completed an initial public offering of Class A subordinate voting shares (the Offering ). The Offering of 10,900,000 Class A subordinate voting shares consisted of a treasury issuance ( Treasury Offering ) by the Company of 4,360,000, and a secondary offering of 6,540,000 by the selling shareholders. The offering price of C$11.50 resulted in net proceeds to the Company of C$47,132 and C$70,697 to selling shareholders after underwriting commissions of C$3,008 and C$4,513, respectively. In addition, the Company and selling shareholders other than Jaxii Holdings, on a pro rata basis granted the Underwriters an over-allotment option to purchase up to an additional 1,635,000 Class A subordinate voting shares at an exercise price of C$11.50 per Class A subordinate voting share. The over-allotment option was fully exercised after the Offering and raised additional net proceeds of C$7,069 to the Company and C$10,605 to the selling shareholders after underwriting commissions of C$451 and C$677 respectively. See note 9 for further details on the impact to the Company s share capital. Total proceeds to the Company after underwriting commissions were C$54,201. The Company s Class A subordinate voting shares are listed on the Toronto Stock Exchange under the stock symbol FRII. 2. BASIS OF PRESENTATION Statement of compliance The condensed consolidated interim financial statements ( interim financial statements ) of the Company have been prepared in accordance with and comply with International Financial Reporting Standards ( IFRS ) and International Accounting Standard ( IAS ) 34, Interim Financial Reporting as issued by the International Accounting Standards Board ( IASB ), on a basis consistent with those accounting policies followed by the Company in the most recent annual consolidated financial statements, except where noted below. These condensed consolidated interim financial statements do not include all the information and disclosures required in the Company s annual consolidated financial statements and should be read in conjunction with the Company s annual consolidated financial statements for the 53-week period ended December 31, 2017. The interim financial statements were approved and authorized for issue by the Board of Directors ( Board ) on November 7, 2018. Seasonality of interim operations Results of operations for the interim period are not necessarily indicative of the results of operations for the full year. Sales are subject to seasonal fluctuations due to consumer spending patterns. The Company may also experience quarterly variations in its operating results as its revenues may be subject to fluctuations resulting from a number of factors such as economic conditions, the effect of severe weather and the number of new locations opened or closures of existing franchise or Company-owned restaurants. IFRS 16, Leases ( IFRS 16 ) IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, the customer ( lessee ) and the supplier ( lessor ). This will replace IAS 17, Leases ( IAS 17 ) and related interpretations. IFRS 16 provides revised guidance on identifying a lease and for separating lease and non-lease components of a contract. IFRS 16
introduces a single accounting model for all lessees and requires a lessee to recognize right-of-use assets and lease liabilities for leases with terms of more than 12 months, unless the underlying asset is of low value, and depreciation of lease assets separately from interest on lease liabilities in the income statement. Under IFRS 16, lessor accounting for operating and finance leases will remain substantially unchanged. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with earlier application permitted for entities that apply IFRS 15, Revenue from Contracts with Customers. While the Company is currently evaluating the impact this new guidance will have on its consolidated financial statements, adoption of IFRS 16 is expected to increase the assets and liabilities on the consolidated balance sheet as the Company has contractual obligations in the form of operating leases. In addition, the Company is in the process of identifying and implementing appropriate changes to business processes, systems and internal controls to support recognition and disclosure under the new standard. In the coming months, the Company will be finalizing a detailed accounting policy to support ongoing compliance with IFRS 16. Further updates will be provided as the Company advances its assessment 3. NEW ACCOUNTING STANDARDS IFRS 15, Revenue from Contracts with Customers IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 supersedes the previous revenue recognition guidance including the related interpretations. The new guidance provides a single framework in which revenue is required to be recognized to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The Company implemented the following revenue recognition policies as a result of the adoption of IFRS 15. Franchise Revenue Franchise revenue relates to: 1) the initial franchise fee received for pre-opening support services, 2) the Company s licensing of its franchise rights over the term of the respective franchise agreement, and 3) royalty fees based on a percentage of franchisee sales Pre-opening support services include selecting a location, assistance with leasing space, and providing design and build out support. The performance obligation is satisfied at the point in time when the store is ready to open for operations. Licensing of franchise rights related to the access to the Freshii brand is recognized over time. This revenue is deferred and recognized over the franchise agreement term which is generally 10 years, beginning when the store is ready to open for operations. This revenue is recognized over time, as this benefit is expected to be transferred to the customer evenly over the term of the franchise agreement. Initial fees are allocated to the respective performance obligations based on the estimated relative stand-alone selling price of the respective service. Royalty revenues are earned weekly based on a percentage of franchisees sales over the term of
the franchise agreement. The new guidance did not materially impact the recognition of royalty income. The Company does not have any contracts where the period between the transfer of promised goods or services to the customer and payment by the customer exceeds one year. Consequently, the Company does not adjust any of the transaction prices for the time value of money. Other Revenue The Company receives food and beverage, and product and service coordination fees relating to agreements with vendors. Fees are generally earned based on the value of purchases during the period. Agreements that contain an initial upfront fee, in addition to ongoing fees are generally recorded to income over the term of the respective agreement. Contract Assets The Company incurs incremental costs to support franchise sales around the world that are payable to service providers upon the Company's collection of the franchise fee under the franchise agreement. Incremental commission costs are recognized as a contract asset as deferred charges and recorded to sales, general, and administrative expense over the term of the related franchise agreement. Deferred charges are regularly reviewed for impairment to determine whether the remaining amount of consideration expected to be earned from the contract exceeds the remaining amortized cost, taking into consideration the customer s credit risk. Impact of Adoption The Company applied the requirements of IFRS 15 using the full retrospective method with the cumulative effect of initially applying the standard recognized at the date of initial application (i.e. December 26, 2016). A cumulative effect adjustment was recorded to the opening balance of accumulated deficit as of the first day of fiscal year 2017, the earliest period presented, of $5,642. The table below reconciles the impact of the IFRS 15 adjustments to the Company s previously reported Consolidated Balance Sheets as at December 26, 2016. Balance Sheet items Balance at December 25, 2016 Adjustment due to adoption of IFRS 15 Balance at December 26, 2016 Deferred revenue $ 1,531 $ 6,040 $ 7,571 Deferred charges (111) (398) (509) Deferred tax assets 1,218 $ 1,796 3,014 Deficit $ (12,913) $ (3,846) (16,759) The impact on the Company s retained earnings as at January 1, 2018 and December 26, 2016 is as follows: 2018 2017 Deficit $ (14,441) $ (12,913) Increase in deferred charges 437 398 Decrease in amounts receivable (72) - Increase in deferred revenue (7,062) (6,040) Increase in deferred tax asset 1,602 1,796 Increase in cumulative translation adjustment 115 - Adjustment to deficit from adoption of IFRS 15 $ (4,980) $ (3,846) Restated opening deficit, January 1, 2018 and December 26, 2016 $ (19,421) $ (16,759) The following tables summarize the impact the IFRS 15 adoption has had on each line item reported as at December 26, 2016, and for the 13 and 39 weeks ended 24, 2017.
Statement of Earnings (Loss) and Comprehensive Income (Loss) Previously reported for the 13 weeks ended 24, 2017 Adjustment due to adoption of IFRS 15 For the 13 weeks ended 24, 2017 Revenues: Franchise revenue $ 509 $ (145) $ 364 Other income 904 6 910 Income tax expense 781 (630) 151 Expenses: SG&A 2,151 (3) 2,148 Net loss $ (988) $ 494 $ (494) EPS (0.03) 0.01 (0.02) Statement of Earnings (Loss) and Comprehensive Income (Loss) Previously reported for the 39 weeks ended 24, 2017 Adjustment due to adoption of IFRS 15 For the 39 weeks ended 24, 2017 Revenues: Franchise revenue $ 2,093 $ (672) $ 1,421 Other income 2,567 (96) 2,471 Income tax expense 334 (814) (480) Expenses: SG&A 7,720 (11) 7,709 Net loss $ (2,053) $ 57 $ (1,996) EPS (0.07) 0.01 (0.06) Franchise Revenue The adoption of the new guidance changed the timing of recognition of initial franchise fees, for single unit, area development and master franchise agreements. Under the previous revenue standards, initial franchise fees were recorded as revenue when the Company performed all material services and conditions, which was generally when a franchised store begins operations on a proportional basis which generally aligns with the total costs completed to date compared to the total costs to fulfil the terms of the franchise agreement. Under the new guidance, the Company records a portion of the initial franchise fee that relate to pre-opening services when the franchised stores begin operations. The remainder of the initial franchise fee is recognized over the term of the related franchise agreement, commencing when the stores begin operations. Other Revenue Transactions The adoption of the new guidance resulted in certain fees generated by licensing of our brand names and other intellectual property to be recognized over the term of the related agreement. Contract Costs IFRS 15 provides enhanced guidance on the accounting for incremental costs associated with obtaining a contract. The Company had arrangements with service providers to support franchise sales around the world in exchange for a commission. Commission costs that relate to any fee revenue that is deferred were also deferred and expensed as the associated revenues were recognized into income. Under the new guidance, we identified and deferred commission charges and recognize the charge to income over the term of the related franchise agreements. IFRS 9, Financial Instruments IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments,
impairment of financial assets and hedge accounting. The adoption of IFRS 9 Financial Instruments from January 1, 2018 resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. The new accounting policies are set out below. In accordance with the transitional provisions in IFRS 9, comparative figures have not been restated. The adoption of IFRS 9 had no impact on the Company s classification of financial assets and financial liabilities that continue to be measured on the same basis as was previously applied under IAS 39. IFRS 9 replaces the incurred loss model of IAS 39 with a model based on expected credit losses. Under the new standard, the loss allowance for a financial instrument will be calculated at an amount equal to 12-month expected credit losses, or lifetime expected credit losses if there has been a significant increase in the credit risk on the instrument. To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. On that basis, the loss allowance as at January 1, 2018 was determined as follows for both trade receivables and contract assets: Amount overdue by January 1, 2018 Current 1-30 days 30-60 days > 60 days Total Expected loss rate 1 % 10 % 25 % 45 % Trade accounts receivable 689 21 185 895 Loss allowance 7 5 83 95 Expected loss rate 0.5 % 15 % 25 % 35 % Royalties and franchise fee receivable 916 114 75 456 1,561 Loss allowance 5 17 19 159 200 Total loss allowance $ 12 $ 17 $ 24 $ 242 $ 295 Trade receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, the failure of a franchisee to engage in a repayment plan with the group, and a failure to make contractual payments for a period of greater than 120 days past due. This resulted in an increase to our allowance for doubtful accounts that was recorded as an adjustment to retained earnings on January 1, 2018 of $72. 4. AMOUNTS RECEIVABLE December 31, 2017 Trade accounts receivable $ 1,073 $ 895 Royalties and franchise fee receivable 1,087 1,561 Sales tax receivable 78 123 Allowance for doubtful accounts (314) (295) $ 1,924 $ 2,284 Roll forward of allowance for doubtful accounts Balance at the beginning of the year $ (295) $ (375) Adjustment for new accounting pronouncements - (72) Allowance made during the year (19) (253) Amounts written off during the year - 405 Balance at the end of the period $ (314) $ (295)
Trade Accounts Receivable Amount overdue by Current 1-30 days 30-60 days >60 days Total Expected loss rate 1 % 10 % 25 % 42 % Trade accounts receivable 835 31 31 176 1,073 Loss allowance 8 3 8 74 93 Royalty and Franchise Fee Receivable Amount overdue by Current 1-30 days 30-60 days >60 days Total Expected loss rate 0.5 % 15 % 25 % 41 % Royalties and franchise fee receivable 340 290 77 380 1,087 Loss allowance 2 44 19 156 221 Total loss allowance $ 10 $ 47 $ 27 $ 230 $ 314 5. PREPAID EXPENSES AND OTHER ASSETS December 31, 2017 Prepaid expenses $ 817 $ 514 Inventory 50 33 Current portion of other assets 187 60 $ 1,054 $ 607 6. INCOME TAXES For the 39 weeks ended, the Company's effective income tax rate of 75.3% ( 24, 2017 19.4%) differs from the combined federal and provincial statutory income tax rate of 26.5% ( 24, 2017-26.5%) primarily as a result of the difference between the expected tax deductible amounts of the Company s restricted stock unit plan when compared to the underlying accounting expense. The effective rate was also impacted by other non-deductible permanent differences and changes in temporary differences for which no deferred tax asset was recorded. 7. PROPERTY AND EQUIPMENT Restaurant Equipment Office furniture and computer s Leasehold Improvement s Cost Total January 1, 2018 1,85 $ 639 $ 233 $ 982 $ 4 Additions 1,96 224 380 1,365 9 Disposals - - - - Impact of foreign exchange (17) 11 (8) (14) 3,80 $ 846 $ 624 $ 2,339 $ 9
Accumulated depreciation January 1, 2018 Restaurant Equipment Office furniture and computer s Leasehold Improvement s Total 1,32 3 $ 552 $ 85 $ 686 $ Depreciation 54 42 75 171 Disposals - - Impact of foreign exchange (17) 1 (20) (36) Net book value $ 589 $ 128 $ 741 $ 1,45 8 2,35 $ 257 $ 496 $ 1,598 $ 1 December 31, 2017 $ 87 $ 148 $ 295 $ 530 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Included within accounts payable and accrued liabilities are the following obligations: December 31, 2017 Trade accounts payable $ 1,715 $ 903 Accrued liabilities 1,215 425 Gift card and mobile app liabilities 192 233 Payroll liabilities 228 267 $ 3,350 $ 1,828 9. CAPITAL STOCK December 31, 2017, there were 5,248,017 class B multiple voting shares and 25,608,034 subordinate class A voting shares issued and outstanding. Class B shares have 10 votes, whereas class A shares have 1 vote per share. During the 13 and 39 weeks ended, the Company granted an aggregate of 18,431 and 501,250 restricted stock units ( RSUs ) to Freshii s executive officers, management and employees and 74,185 RSUs to Freshii s non-management directors. These RSUs granted to our employees and executive officers will vest on each of the first three annual anniversary dates following the Grant Date, which is defined as the date the RSUs were granted. Half of the RSUs granted to our non-management directors will vest on the date that is six months following the Grant Date, and the remaining RSUs granted to our non-management directors will vest on the date that is 12 months following the Grant Date. Upon settlement of any RSU for cash, the fair market value of the Class A subordinate voting share that such RSU would have otherwise been
settled in exchange for, is an amount equal to, on a particular date, the closing price for the Class A subordinate voting shares on the TSX for the trading day on which the Class A subordinate voting shares traded immediately preceding such settlement date. During the 39 weeks ended, 283,092 of the RSUs granted to Freshii s executive officers, management and employees, and non-management directors vested. This resulted in a share issuance from treasury in the amount of $2,253. Compensation expense for the 13 and 39 weeks ended of $889 and, $2,598 (13 and 39 weeks ended 24, 2017 $1,777 and $5,646) was recorded in the income statement as described in note 10. 10. LONG-TERM INCENTIVE PLANS a) Stock option plan Options to purchase an aggregate of 1,021,245 Common shares were granted to employees in January 2015. The options allowed the holders to purchase an aggregate of 1,021,245 Common shares in the Company on a 1:1 basis., all 1,021,245 were vested, with an aggregate of nil options exercised. b) Restricted share units plan i) Employee plan The Company has an employee plan ( EP ), whereby RSUs are issued to executive officers, management, and employees of the Company. The value of the initial grant of the RSUs was equal to the Offering price. Subsequent grants will be valued at the fair market value of the RSUs at the time of grant, which is equal to the weighted average trading price of the Company s voting shares for the trading day immediately preceding the date of grant. Each RSU entitles the employee to receive payment upon vesting in the form of voting shares of the Company. The Company intends to settle all RSUs with shares either through the purchase of voting shares on the open market or the issuance of new shares from treasury; however, wholly at its own discretion, the Company may settle the units in cash. The RSU s time vest in tranches over of a three-year period, with compensation expense being recognized in net earnings over the service period. At, 928,632, (December 31, 2017 687,886) voting shares of the Company were reserved for issuance under the EP plan. For the 13 and 39 weeks ended, the Company settled nil and nil RSUs through the open market and 6,772 and 221,249 RSUs with shares issued from treasury (13 and 39 weeks ended 24, 2017 nil and nil; 350,132 and 350,132). Changes in the number of units, with their weighted average fair value, are summarized below: December 31, 2017 Weighted fair Weighted fair Number of Units value (Canadian $) Number of Units value (Canadian $) Units outstanding, beginning of year 687,886 $ 11.31 - $ - Granted 501,250 6.95 1,065,452 11.32 Settled (221,249) 11.49 (350,132) 11.33 Forfeited (39,255) 9.23 (27,434) 11.50 Units outstanding, end of period 928,632 $ 9.00 687,886 $ 11.31
ii) Board plan The Company also has a Board plan ( BP ), whereby RSUs are issued to non-management directors of the Company. The value of the initial grant of the Board RSUs was equal to the offering price. Subsequent grants will be valued at the fair market value of the RSUs at the time of grant, which is equal to the weighted average trading price of the Company s voting shares for the trading day immediately preceding the date of grant. Each RSU entitles the employee to receive payment upon vesting in the form of voting shares of the Company. The Company intends to settle all RSUs with shares either through the purchase of voting shares on the open market or the issuance of new shares from treasury; however, wholly at its own discretion, the Company may settle the units in cash. The RSU s time vest in tranches over of a one-year period, with compensation expense being recognized in net earnings over the service period. At, 37,092 (December 31, 2017 24,750) voting shares of the Company were reserved for issuance under the BP plan. For the 13 and 39 weeks ended, the Company settled nil and nil RSUs through the open market and 37,093 and 61,843 RSUs with shares issued from treasury (13 and 39 weeks ended 24, 2017 nil and nil; 24,750 and 24,750). Changes in the number of units, with their weighted average fair value, are summarized below: December 31, 2017 Weighted fair Weighted Number of Units value (Canadian $) Number of Units fair value (Canadian $) Units outstanding, beginning of year 24,750 $ 11.50 - $ - Granted 74,185 7.01 49,500 11.50 Settled (61,843) 8.81 (24,750) 11.50 Forfeited - - - - Units outstanding, end of period 37,092 $ 7.01 24,750 $ 11.50 The following table summarizes share-based payment expense for the Company s equity-based plans: For the 13 weeks ended For the 39 weeks ended 24, 2017 24, 2017 Employee plan $ 782 $ 1,678 $ 2,265 $ 5,290 Board plan 107 99 333 356 Share based compensation expense $ 889 $ 1,777 $ 2,598 $ 5,646 11. FRANCHISE REVENUE The Company has recognized the following amounts relating to revenue in the Statement of Earnings (Loss) and Comprehensive Income (Loss): For the 13 weeks ended For the 39 weeks ended 24, 2017 24, 2017 Royalty revenue $ 3,060 $ 2,437 $ 8,782 $ 6,606 Franchise fee revenue 559 364 1,789 1,421 Other income 1,133 910 3,223 2,471 $ 4,752 $ 3,711 $ 13,794 $ 10,498
(a) Disaggregation of revenue from contracts with customers The Company derives revenue from the transfer of goods and services over time and at a point in time in the following major revenue streams, geographical regions and timing of revenue recognition: For the 13 weeks ended Canada US & Other Total Royalty revenue $ 1,925 $ 1,135 $ 3,060 Franchise fee - pre-opening support 121 235 356 Franchise fee - access to IP 57 146 203 Other income - - 1,133 Franchise revenue $ 2,103 $ 1,516 $ 4,752 Franchise fee revenue At a point in time 121 235 356 Over time 57 146 203 $ 178 $ 381 $ 559 For the 13 weeks ended 24, 2017 Canada US & Other Total Royalty revenue $ 1,354 $ 1,083 $ 2,437 Franchise fee - pre-opening support 130 105 235 Franchise fee - access to IP 41 88 129 Other income - - 910 Franchise revenue $ 1,525 $ 1,276 $ 3,711 Franchise fee revenue At a point in time 130 105 235 Over time 41 88 129 $ 171 $ 193 $ 364 For the 39 weeks ended Canada US & Other Total Royalty revenue $ 5,345 $ 3,437 $ 8,782 Franchise fee - pre-opening support 617 651 1,268 Franchise fee - access to IP 156 365 521 Other income - - 3,223 Franchise revenue $ 6,118 $ 4,453 $ 13,794 Franchise fee revenue At a point in time 617 651 1,268 Over time 156 365 521 $ 773 $ 1,016 $ 1,789 For the 39 weeks ended 24, 2017 Canada US & Other Total Royalty revenue $ 3,396 $ 3,210 $ 6,606 Franchise fee - pre-opening support 490 374 864 Franchise fee - access to IP 111 446 557 Other income - - 2,471 Franchise revenue $ 3,997 $ 4,030 $ 10,498 Franchise fee revenue At a point in time 490 374 864 Over time 111 446 557 $ 601 $ 820 $ 1,421
(b) Contract assets and liabilities December 31, 2017 Notes Royalty receivable (i) $ 924 $ 1,047 Franchise fee receivable (i) $ 163 $ 514 Contract Asset - Deferred costs (ii) $ 411 $ 461 Contract Liability - Deferred revenue (iii) $ 7,928 $ 8,888 (i) Royalty revenue is calculated and collected on a weekly basis. The initial franchise fee is nonrecurring and generally non-refundable to be paid and due upon signing of each agreement. All amounts owed to the Company not paid within 7 days after the due date will bear interest beginning after the original due date. (ii) The Company incurs various costs to obtain contracts, in the form of success fees and sales commissions payable upon securing new franchisees. (iii) The amounts deferred include the pre-opening support service fees paid for units that have not yet opened as of the consolidated balance sheet date and the unrecognized portion of franchise fees related to access to IP. The following table shows how much of the revenue recognized in the current reporting period relates to carried-forward contract liabilities where performance obligations were satisfied in the current year. For the 13 weeks ended Septembe r Septembe r 24, 2017 For the 39 weeks ended Septembe r Septembe r 24, 2017 Revenue recognized that was included in the contract liability balance at the beginning of the period Franchise fees $ 559 $ 364 $ 1,635 $ 1,343 The following table shows unsatisfied performance obligations resulting from pre-opening support services and access to IP. December 31, 2017 Aggregate transaction price allocated to pre-opening support services $ 2,589 $ 3,286 Aggregate transaction price allocated to access to IP $ 5,204 $ 5,506 Management expects approximately 65% of the transaction price allocated to pre-opening support services will be recognized as revenue over the next 52 weeks. Management expects the transaction price allocated to access to IP to be recognized as revenue over the remaining terms of each related franchise agreement. The average remaining term is 7.9 years.
(c) Deferred revenue The Company has deferred $7,928 for the 39 weeks ended (December 31, 2017 - $8,888) of development and franchise fees as a contract liability. The amounts deferred are the portion of deposits from franchisees for units that have not yet opened as at the condensed consolidated interim balance sheet dates or have not been recorded as revenue as discussed above. (d) Deferred charges Included in deferred charges is $411 (December 31, 2017 $461) of commission costs capitalized relating to commissions paid to third parties for franchise locations not yet opened. Of this amount $41 (December 31, 2017 - $44) is expected to be recorded as expense in Sales, General and Administrative expense, in the next 52 weeks and has been presented as current. 12. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses are made up of the following amounts. For the 13 weeks ended For the 39 weeks ended 24, 2017 24, 2017 Franchise support $ 3,103 $ 1,880 $ 8,745 $ 5,265 Costs related to the Offering - $ - - 835 Franchise selling expense 34 9 110 404 Company-owned store selling, general and administrative 38 38 112 113 Other 288 221 807 1,092 $ 3,463 $ 2,148 $ 9,774 $ 7,709 13. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share amounts are calculated by dividing the net earnings (loss) attributable to class A subordinate voting, and class B multiple voting shareholders of the Company by the weighted average number of shares issued during the periods ended on the dates provided below. Diluted earnings (loss) per share amounts are calculated by dividing the net earnings (loss) attributable to common shareholders of the Company by the weighted average number of shares issued during the year adjusted for the effects of potentially dilutive stock options and restricted
share units. The following table sets forth the calculation of basic and diluted earnings (loss) per share ( EPS ): For the 13 weeks ended Net income (loss) attributable t o shareholders Weighted average number of shares EPS 31,139,14 (0.0 3 $ For the 13 weeks ended 24, 2017 Net income (loss) attributable t o shareholders Weighted average number of shares 30,856,05 1 $ EPS Basic $ (446) 1 ) $ (494) Share options - - - - Restricted share units - 965,724 - - Diluted 32,104,86 (0.0 30,856,05 $ (446) 7 $ 1 ) $ (494) 1 $ For the 39 weeks ended Net income (loss) attributable t o shareholders Weighted average number of shares 31,139,14 For the 39 weeks ended 24, 2017 Net income (loss) attributable t o shareholders Weighted average number of shares 30,856,05 1 $ EPS EPS Basic $ 283 3 $ 0.01 $ (1,996) Share options - - - - Restricted share units - 965,724 - - Diluted 32,104,86 30,856,05 $ 283 7 $ 0.01 $ (1,996) 1 $ (0.0 2 ) (0.0 2 ) (0.0 6 ) (0.0 6 ) The Company has 1,021,245 stock options outstanding that are fully vested as at 30, 2018 that have not been included in the Company s calculation of diluted earnings (loss) per share for the 13 and 39 weeks ending. The stock options and RSUs are not included in the calculation of diluted EPS for the period ended because the effects are antidilutive. The Company has 1,021,245 stock options outstanding that are fully vested as at 24, 2017, and 1,029,550 restricted share units vesting that have not been included in the Company s calculation of diluted earnings (loss) per share for the 13 and 39 weeks ending 24, 2017. The stock options and RSUs are not included in the calculation of diluted EPS for the period ended 24, 2017 because the effects are antidilutive.
14. SEGMENTED INFORMATION Freshii separates its reporting segments based on the various operational components of the organization: franchise operations and corporate restaurant operations. Franchise segment The Franchise segment consists of the Company s domestic and international franchise stores, which represent the majority of the Company s system-wide stores., the franchise operations segment consisted of 426 (December 31, 2017 342) restaurants operated by franchise partners in Canada the United States and fifteen additional countries. Revenues in this segment consist primarily of franchise royalty revenue, sales of franchises and area development fees and other income. Company-owned segment The Company-owned segment consists of the Company s Company-owned restaurants, located only in Canada and the United States., the Company-owned segment consisted of five (December 31, 2017 three) Company-owned restaurants. Company-owned store revenues are for food and beverage sales at Company-owned restaurants. Company-owned store expenses are operating expenses at Company-owned restaurants and include food, beverage, labour, benefits, utilities, rent and other operating costs.
For the 13 weeks ended Company Franchise Total Company-owned store revenue $ 850 $ - $ 850 Franchise revenue - 4,752 4,752 Total revenue 850 4,752 5,602 Cost of sales 719-719 SG&A 38 3,137 3,175 Segment income 93 1,615 1,708 Depreciation and amortization 566 Share based compensation (Note 10) 889 Other (Note 12) 288 Interest income, net and foreign exchange (92) Income before income tax expense $ 57 For the 13 weeks ended 24, 2017 Company Franchise Total Company-owned store revenue $ 687 $ - $ 687 Franchise revenue - 3,711 3,711 Total revenue 687 3,711 4,398 Cost of sales 583-583 SG&A 38 1,889 1,927 Segment income 66 1,822 1,888 Depreciation and amortization 171 Share based compensation (Note 10) 1,777 Costs related to the offering and Other (Note 12) 221 Interest expense, net and foreign exchange 62 Loss before income tax expense $ (343) For the 39 weeks ended Company Franchise Total Company-owned store revenue $ 2,205 $ - $ 2,205 Franchise revenue - 13,794 13,794 Total revenue 2,205 13,794 15,999 Cost of sales 1,909-1,909 SG&A 112 8,855 8,967 Segment income 184 4,939 5,123 Depreciation and amortization 988 Share based compensation (Note 10) 2,598 Other costs 807 Interest income, net and foreign exchange (414) Income before income tax expense $ 1,144 For the 39 weeks ended 24, 2017 Company Franchise Total Company-owned store revenue $ 1,947 $ - $ 1,947 Franchise revenue - 10,498 10,498 Total revenue 1,947 10,498 12,445 Cost of sales 1,632-1,632 SG&A 113 5,669 5,782 Segment income 202 4,829 5,031 Depreciation and amortization 296 Share based compensation (Note 10) 5,646 Costs related to the Offering and Other 1,927 Interest income, net and foreign exchange (362) Loss before income tax expense $ (2,476)
15. INTEREST For the 13 weeks ended For the 39 weeks ended 24, 2017 24, 2017 Interest expense $ - $ - $ - $ 106 Interest income (125) (135) (341) (211) $ (125) $ (135) $ (341) $ (105) 16. SIGNIFICANT SUPPLIER Approximately 99% (December 31, 2017-99%) of the Company's total inventory purchases are made from an independent food supplier. Amounts due to the supplier comprised approximately 12% (December 31, 2017-4%) of the total period-end trade accounts payable balance. 17. FINANCIAL RISKS The main risks the Company s financial instruments are exposed to are credit risk, market risk, foreign currency risk, interest rate risk, liquidity risk, and commodity price risk, each of which is discussed below. Credit risk The Company s credit risk is primarily attributable to its trade receivables. Trade and other receivables primarily comprise amounts due from franchisees. Credit risk associated with these receivables is mitigated for a number of reasons including the following: - Other than receivables from international locations, the Company s broad franchise base is spread mostly across Canada and USA, which limits the concentration of credit risk. - Prior to accepting a franchisee, the Company undertakes a detailed screening process which includes the requirement that a franchisee has sufficient financing - Franchisee balances beyond a particular age are reviewed and evaluated and in cases where management considers that the expected recovery is less than the actual account receivable, the Company accounts for this with a specific bad debt provision. The amounts disclosed in the consolidated balance sheet are net of allowances for bad debts, estimated by the Company s management based on past experience and specific circumstances of the counterparty. Other financial instruments that potentially subject the Company to credit risk consist principally of cash. The Company had no significant credit risk exposure arising in relation to its financial instruments as at. The Company limits its counterparty risk associated with cash by utilizing a number of different financial institutions. The majority of the cash as at was held at large U.S. and Canadian financial institutions.
Market risk Market risk is the risk that changes in market prices and interest rates will affect the Company's net earnings or the value of financial instruments. These risks are generally outside the control of the Company. The objective of the Company is to mitigate market risk exposures within acceptable limits, while maximizing returns. The Company s market risk consists of risks from changes in foreign exchange rates, interest rates and market prices that affect its financial liabilities, financial assets and future transactions. Foreign currency risk The Company is exposed to foreign currency risk as a portion of the sales and purchases are made in foreign currencies. Foreign exchange risk arises due to fluctuations in foreign exchange rates, which could affect the Company's results. The total Canadian dollar ("CAD") balances as at 30, 2018 in the amount of $2,096 CAD were translated into United States dollars (USD) at the thirteenweek end rate of 0.7725 for CAD. Based on the above, net exposures as at, and assuming all other variables remain constant, a +/- 5% change in the value of the CAD against the USD would result in an increase/decrease of $81 in the condensed consolidated interim statements of comprehensive income (loss). Liquidity risk Liquidity risk relates to the risk the Company will encounter difficulty in meeting its obligations associated with financial liabilities. The financial liabilities on its condensed consolidated interim balance sheets consist of accounts payable and accrued liabilities, and settlements payable. Management closely monitors cash flow requirements and future cash flow forecasts to ensure it has access to funds through its committed borrowing facility and from operations to meet operational and financial obligations. The Company believes it has sufficient liquidity to meet its cash requirements for the next twelve months. Commodity price risk The Company is exposed to increases in the prices of commodities in operating its Company-owned restaurants. To manage this exposure, the Company uses purchase arrangements for a portion of its needs for certain consumer products that may be commodities based. 18. CAPITAL MANAGEMENT The Company defines capital to include its working capital position, debt, and capital stock and options components of its shareholders equity. The Company s working capital structure is described in note 9. The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support its operations. The primary objective of the Company's capital management is to ensure it maintains healthy capital ratios to support its business and maximize shareholder value. The Company does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management to sustain future development of the business.
19. COMMITMENTS, CONTINGENCIES AND GUARANTEES The Company is subject to various claims by third parties arising out of the normal course and conduct of its business, including, but not limited to, labour and employment, regulatory, franchisee related and environmental claims. In addition, the Company is potentially subject to regular audits from federal, state and provincial tax authorities relating to income, commodity and capital taxes and as a result of these audits may receive assessments and reassessments. Although such matters cannot be predicted with certainty, management currently considers the Company s exposure to such claims and litigation, to the extent not covered by the Company s insurance policies or otherwise provided for, not to be material to these consolidated financial statements. During the 13 and 39 weeks ended, the Company settled on the claim brought by International Franchise Inc., Yogurty s Yogurt Inc. and Yogen Früz Canada Inc. The action was dismissed on consent of the parties. 20. IMPAIRMENT For the 13 and 39 weeks ended, the Company recorded $315 and $315 (13 and 39 weeks ended 24, 2017 nil and nil) of impairment losses on the Company s reacquired franchise rights. An impairment loss is recorded when the carrying amount of the intangible asset exceeds its recoverable amount. The recoverable amount is based on the greater of the asset s fair value less costs to sell ( FVLCS ) and its value in use ( VIU ). When determining the VIU of the reacquired franchise rights, the Company employs a discounted cash flow model. The duration of the cash flow projections corresponds with the remaining contractual life of the reacquired franchise rights which is 108 months. Sales forecasts for cash flows are based on actual operating results, operating budgets and long-term growth rates that were consistent with strategic plans presented to the Company s Board and ranged between 1.5% and 2.5%. The estimate of the VIU of the asset was determined using an after-tax discount rate of 8.5% at ( 24, 2017 7.6%) which is based on the Company s weighted average cost of capital with appropriate adjustments for the risks associated with the asset. An impairment loss and any subsequent reversals, if any, are recognized in the consolidated statements of earnings as depreciation and amortization.
21. RELATED PARTIES The Company`s policy is to conduct all transactions with related parties at arm s length to align with market terms and conditions. Transactions with key management Key management personnel are those persons who have the authority and the responsibility for planning, directing, and controlling the activities of the Company and/or its subsidiary, directly or indirectly, including any external director of the Company and/or its subsidiary. Key management includes the Company s Chief Executive Officer and director, Chief Operating Officer, Chief People Officer, and Chief Financial Officer. Key management personnel may also participate in the Company s share-based compensation plans. Remuneration of key management personnel of the Company is comprised of the following expenses: For the 13 weeks ended For the 39 weeks ended 24, 2017 24, 2017 Short-term employee benefits $ 229 $ 226 $ 731 $ 1,088 Share-based compensation expense 1,014 1,111 2,052 3,603 $ 1,243 $ 1,337 $ 2,783 $ 4,691