Condensed Consolidated Interim Financial Statements

Transcription

1 Condensed Consolidated Interim Financial Statements As at December 31, 2011 and for the three months ended December 31, 2011 and 2010 NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS Under National Instrument , Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor. The accompanying unaudited interim financial statements of the Company have been prepared by, and are the responsibility of, the Company s management. The Company s independent auditor has not performed a review of these financial statements. 1

2 Contents Condensed Consolidated Interim Financial Statements Condensed Consolidated Interim Statements of Financial Position 3-4 Condensed Consolidated Interim Statements of Loss 5 Condensed Consolidated Interim Statements of Comprehensive Loss 6 Condensed Consolidated Interim Statements of Changes in Equity 7 Condensed Consolidated Interim Statements of Cash Flows

3 Condensed Consolidated Interim Statements of Financial Position Unaudited Unaudited Unaudited December 31, 2011 September 30, 2011 October 1, 2010 Assets Cash $ 1,997,968 $ 2,586,399 $ 2,165,389 Restricted cash (Note 5) 1,935,774 1,845,911 2,791,630 Accounts receivable, net of allowance for doubtful accounts ($408,240 at 12/31/11; $386,282 at 9/30/11 and $298,938 at 10/1/10) 924,635 1,034, ,421 Related party accounts receivable (Note 13) 254, , ,890 Related party notes receivable (Note 6) 160, , ,500 Other notes receivable, net of allowance for doubtful notes ($26,250 at 12/31/11, $9,001 at 9/30/11 and $16,798 at 10/1/10) (Note 7) 17,904 43,562 - Prepaid expenses 180, , ,654 Total current assets 5,471,772 6,149,260 6,380,484 Property, Plant and Equipment, net (Note 8) 173, , ,560 Other: Related party notes receivable, net of allowance for doubtful notes ($1,273,447 at 12/31/11 and 9/30/11, respectively and $1,299,566 at 10/1/10) (Note 6) 1,576,355 1,576,355 1,736,356 Other assets (Note 10) 182, , ,658 Goodwill 3,959,473 3,959,473 3,959,473 Other intangible assets, net (Note 9) 2,823,891 2,855,860 2,983,735 8,715,176 8,689,404 8,998,782 Total assets $ 14,186,948 $ 14,838,664 $ 15,379,266 See accompanying notes to consolidated financial statements. 3

4 Condensed Consolidated Interim Statements of Financial Position Unaudited Unaudited Unaudited December 31, 2011 September 30, 2011 October 1, 2010 Liabilities and Shareholders' Equity Liabilities Accounts payable and accrued liabilities $ 2,830,401 $ 2,883,550 $ 2,239,408 Deposits received from franchisees 245, , ,517 Insurance loss reserves (Note 5) 1,361,331 1,649,044 2,560,675 Current portion of note payable (Note 11) 2,500, Total current liabilities 6,937,399 4,767,971 5,044,600 Note payable (Note 11) - 2,500,000 2,500,000 Total liabilities 6,937,399 7,267,971 7,544,600 Commitments and contingencies (Notes 5, 14) Shareholders' Equity Share capital (Note 12a) 15,117,041 15,117,041 15,117,041 Contributed surplus (Note 12b) 1,609,674 1,595,669 1,548,798 16,726,715 16,712,710 16,665,839 Accumulated deficit (9,651,914) (9,311,609) (9,005,246) Accumulated other comprehensive income (Note 12c) 174, , ,073 (9,477,166) (9,142,017) (8,831,173) Total shareholders' equity 7,249,549 7,570,693 7,834,666 Total liabilities and shareholders' equity $ 14,186,948 $ 14,838,664 $ 15,379,266 See accompanying notes to consolidated financial statements. Approved by the Board of Directors (Signed) "Sanford Miller" Director (Signed) "Michael Linn" Director 4

5 Condensed Consolidated Interim Statements of Loss Unaudited Unaudited Three Months Three Months Ended Ended December 31, 2011 December 31, 2010 Revenues Continuing franchisee and related fees (Note 6) $ 937,217 $ 964,720 Initial franchise fees 50, ,489 Insurance premiums and related fees 2,782,935 2,900,676 Total revenues 3,771,093 3,968,885 Costs and expenses Direct operating Franchise operating (Note 17 a) 1,314,890 1,112,773 Insurance operating (Note 17 b) 1,361,083 1,466,162 Claims expense 429, ,866 Insurance underwriting expenses 108, ,596 General and administration (Note 17 c) 838, ,501 Recovery of losses on related party notes receivable - (16,275) Provision for losses on other notes receivable 17,250 - Stock-based compensation expense (Note 12a) 14,005 19,273 Amortization and depreciation 55,068 54,842 Total costs and expenses 4,139,101 4,127,738 Operating loss before income taxes (368,008) (158,853) Income tax benefit (27,703) (7,993) Net loss $ (340,305) $ (150,860) Accumulated Deficit beginning of the period (9,311,609) (9,005,246) Accumulated Deficit end of period $ (9,651,914) $ (9,156,106) Loss per share (Note 12d) Basic and Diluted $ (0.01) $ - See accompanying notes to consolidated financial statements. 5

6 Condensed Consolidated Interim Statements of Comprehensive Loss Unaudited Unaudited Three Months Three Months Ended Ended December 31, 2011 December 31, 2010 Net loss $ (340,305) $ (150,860) Other Comprehensive Loss Translation of Canadian dollar functional currency to US dollar reporting currency (Note 12c) 5,156 6,419 Comprehensive loss $ (335,149) $ (144,441) See accompanying notes to consolidated financial statements. 6

7 Condensed Consolidated Interim Statements of Changes in Equity Accumulated Other Total Share Contributed Accumulated Comprehensive Shareholders' Capital Surplus Deficit Income Equity Balance, October 1, 2010 $ 15,117,041 $ 1,548,798 $ (9,005,246) $ 174,073 $ 7,834,666 Stock-based compensation expense - 46, ,871 Translation adjustment (4,481) (4,481) Net Loss - - (306,363) - (306,363) Balance, September 30, ,117,041 1,595,669 (9,311,609) 169,592 7,570,693 Stock-based compensation expense - 14, ,005 Translation adjustment ,156 5,156 Net Loss - - (340,305) - (340,305) Balance, December 31, 2011 $ 15,117,041 $ 1,609,674 $ (9,651,914) $ 174,748 $ 7,249,549 See accompanying notes to consolidated financial statements. 7

8 Condensed Consolidated Interim Statements of Cash Flows Unaudited Unaudited Three Months Three Months Ended Ended December 31, 2011 December 31, 2010 Operating activities Net loss $ (340,305) $ (150,860) Items not affecting cash: Amortization and depreciation (Notes 8 and 9) 55,068 54,842 Recovery of losses on related party notes receivable (Note 6) - (16,275) Provision for losses on other notes receivable (Note 7) 17,249 - Provision for doubtful accounts receivable (Note 16) 31,500 31,500 Note received in payment of franchise fee - (7,022) Repayments on notes and other receivables 8,408 16,275 Stock-based compensation (Note 12a) 14,005 19,273 (214,075) (52,267) Changes in non-cash working capital: Accounts receivable 72,017 35,672 Prepaid expenses and other assets 2,847 (28,091) Accounts payable and accrued liabilities (58,304) (118,381) Insurance loss reserves (295,804) (105,501) Deposits received from franchisees 10,290 3,250 Net change in non-cash working capital (268,954) (213,051) Net cash used in operating activities (483,029) (265,318) Investing activities Change in restricted cash (79,358) 254,417 Property, plant and equipment expenditures (26,364) (8,803) Net cash provided by (used in) investing activities $ (105,722) $ 245,614 See accompanying notes to consolidated financial statements. 8

9 Condensed Consolidated Interim Statements of Cash Flows Unaudited Unaudited Three Months Three Months Ended Ended December 31, 2011 December 31, 2010 Financing activities Repayments of notes payable $ - $ - Net cash used in financing activities - - Net decrease in cash (588,751) (19,704) Effect of exchange rate changes on cash 320 3,145 Cash, beginning of period 2,586,399 2,165,389 2,586,719 2,168,534 Cash, end of period $ 1,997,968 $ 2,148,830 Supplemental disclosures of cash flow information: Cash paid during the period for: Income taxes paid $ 27,732 $ 8,697 Interest 63,254 63,399 See accompanying notes to consolidated financial statements. 9

10 1. Nature of Business Organization and Nature of the Business Franchise Services of North America Inc. ( FSNA or the Company ), formerly Rent-A-Wreck Capital Inc. is a public company incorporated under the Canada Business Corporations Act on August 27, 1998 and whose common shares are listed on the TSX Venture Exchange under the symbol FSN. The Company s registered office is 2500, st Street S.E, Calgary, AB, T2P 5H1 and its principal place of business is 1052 Highland Colony Parkway, Suite 204, Ridgeland, MS, The Company owns two operating subsidiaries, U-Save Auto Rental of America, Inc. ( U-Save ) and Practicar Systems Inc. ( Practicar ). U-Save licenses franchises to operate U-Save Auto Rental businesses in the United States and abroad. In addition, U-Save offers to franchisees and independent car rental operators ( associates ) insurance products including liability and physical damage coverage on their rental fleet. U-Save also operates an association, Auto Rental Resource Center ( ARRC ). ARRC provides insurance discounts and products and services to its members who operate independent vehicle rental businesses. As a result of the acquisition of DRSN Holdings, LLC ( DRSN ), the Company owns a full-service insurance agency, providing insurance products to its franchisees, associates, and third-party customers predominately in the auto rental business. Practicar licenses franchises to operate Rent-A-Wreck vehicle rental and sales businesses in Canada. Thus, overall, the Company operates in one reportable business segment, the auto rental segment. 2. Basis of Presentation The interim consolidated financial statements have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting ( IAS 34 ) using accounting policies consistent with International Financial Reporting Standards ( IFRS ), issued by the International Accounting Standards Board ( IASB ). This is the first time the Company has prepared its consolidated financial statements in accordance with IFRS, having previously prepared its consolidated financial statements in accordance with Canadian Generally Accepted Accounting Policies ( GAAP ). These condensed consolidated interim financial statements have been prepared in accordance with IFRS applicable to the preparation of interim financial statements, including IAS 34 and IFRS 1 First Time Adoption of International Financial Reporting Standards ( IFRS 1 ). In accordance with IFRS 1, the Company has consistently applied the same accounting policies in its opening IFRS Statement of Financial Position at October 1, 2010 (the Transition Date ) and through all periods presented, as if these policies had always been in effect. These condensed consolidated interim financial statements do not include all of the information and footnotes required by IFRS for complete financial statements for year-end reporting purposes and should be read in conjunction with the Company s Canadian GAAP audited annual consolidated financial statements for the year ended September 30, The effects of the transition from GAAP to IFRS on the Company s reported financial position, financial performance and cash flows, are set out in Note 4. 10

11 2. Basis of Presentation, continued Basis of measurement The consolidated financial statements have been prepared on the historical basis. Functional and presentation currency The Company and its operating subsidiary in Canada (Practicar) have a functional currency which is the Canadian dollar. All other subsidiaries have the US dollars as their functional currency. The Company has adopted the U.S. dollar as its presentation currency because the majority of its operations are located in the United States. Significant accounting judgments, estimates and assumptions The preparation of the Company s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainties about these assumptions and estimates could result in outcomes that would require a material adjustment to the carrying amount of the asset or liability affected in the future. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amount recognized in the consolidated financial statements are described in the following notes: Impairment of non-financial assets At each reporting date, the Company assesses whether there are any indicators of impairment for all non-financial assets. Non-financial assets that have an indefinite useful life or are not subject to amortization, such as goodwill, are tested annually for impairment. Other non-financial assets are tested for impairment if there are indicators that their carrying amounts may not be recoverable. Share-based payments The amount disclosed relating to fair values of stock options issued are based on management s estimates of expected stock price volatility, expected lives of the options, expected dividends to be paid by the Company, risk-free interest rates and certain other assumptions. By their nature, these estimates are subject to measurement uncertainty, and the effect on the consolidated financial statements from changes in such estimates in future years could be material. 11

12 2. Basis of Presentation, continued Significant accounting judgments, estimates and assumptions, continued Deferred income taxes The calculation of deferred income tax is based on assumptions, which are subject to uncertainty as to timing and which tax rates are expected to apply when temporary differences reverse. Deferred income tax recorded is also subject to uncertainty regarding the magnitude on non-capital losses available for carry forward and of the balances in various tax pools. By their nature, these estimates are subject to measurement uncertainty, and the effect on the consolidated financial statements from changes in such estimates in future years could be material. Provisions The Company is periodically involved in legal actions and automobile accident claims that arise as a result of events occurring in the normal course of operations. In the regular course of business, the Company evaluates estimated losses or costs related to litigation and a provision is made for anticipated losses whenever the Company believes that such losses are probable and can be reasonably estimated. Allowances for receivables At each reporting date, the Company assesses the allowance for doubtful accounts on its accounts receivable by regularly evaluating individual customer receivables and considering a customer s financial condition, credit history, and current economic conditions and on its notes receivable by evaluating any breach in contracts. Insurance reserves The Company makes certain assumptions, which includes discount rates and the future development of claims. See Note Summary of Significant Accounting Policies Basis of Consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Any balances, unrealized gains and losses or income and expenses arising from intra-company transactions, are eliminated upon consolidation. 12

13 3. Summary of Significant Accounting Policies, continued Foreign Currency Translation Transactions denominated in foreign currencies are translated into the functional currency of the Company at exchange rates prevailing at the transaction dates (spot exchange rates). Monetary assets and liabilities are retranslated at the exchange rates at the period end date. Exchange gains and losses on translation or settlement are recognized in profit or loss whereas the Company s net investment in its foreign subsidiaries is recognized in other comprehensive income. Non-monetary items that are measured at historical cost are translated using the exchange rates at the date of the transaction and non-monetary items that are measured at fair value are translated using the exchange rates at the date when the items fair value was determined. The Company and its Canadian subsidiary (Practicar), which have the Canadian dollar as their functional currency, have been translated into US dollars for presentation purposes as follows: assets and liabilities have been translated at the closing rate at the reporting date; revenues and expenses have been translated at the average rate over the reporting period. Exchange differences are recognized in other comprehensive income (loss) and recognized in the currency translation reserve in equity. Revenue Recognition Initial franchise fee revenue from an individual franchise is recognized when all material services or conditions relating to the transaction have been substantially performed or satisfied by the Company. Generally, substantial performance occurs prior to the commencement of operations by the franchisee. Continuing license fees are recognized as revenue as the fees are earned and are based on the number of cars operated by the individual franchisee or as a percentage of the individual franchisee s time and mileage revenue. Income from insurance operations is recorded as revenue when earned and recognized ratably over the term of the coverage. Cash and Cash Equivalents The Company considers unrestricted highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Restricted Cash and Cash Equivalents Restricted cash is held in a savings bank account. Restricted cash and cash equivalents are restricted for the payment of estimated insurance claims and premiums for some, but not all, of the Company s insurance programs, with some balances held in the Company s name at financial institutions and other balances held on the Company s behalf by insurance carriers (see Note 5). At December 31, 2011, the Company has annual renewable letters of credit totaling $1.435 million outstanding to the Company s insurance carriers as security for payment of claims, insurance premiums and any other obligations to the carrier. These letters of credit are secured by cash of the same amounts and are reflected in the Company s restricted cash balance at December 31,

14 3. Summary of Significant Accounting Policies, continued Accounts Receivable Accounts receivable are carried at original invoice amount less an estimate for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer s financial condition, credit history, and current economic conditions. Receivables are written off when deemed uncollectible. See Note 16 for further discussion of financial instrument risks. Notes Receivable Notes receivable are classified as impaired when there is no longer reasonable assurance of the timely collection of outstanding advances. In determining the provision for possible note receivable losses, the Company considers the length of time the notes have been outstanding, whether they are in arrears, the overall financial strength of the borrower and the residual value of security pledged. If necessary, an allowance for losses on impaired notes receivable is made to reduce the carrying amount to the estimated realizable amounts. During the three months ended December 31, 2011, the Company recorded a net recovery of allowance for losses on impaired notes receivable of $Nil ($4,618 for the year ended September 30, 2011). See Note 6 and Note 7. Property, Plant and Equipment Property, plant and equipment are recorded at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items. Property, plant and equipment are stated at cost and depreciated generally on the straight-line method for financial reporting purposes using estimated useful lives as follows: Furniture and equipment 5 Years Vehicles 5 Years Computer equipment 3-5 Years Intangible Assets Intangible assets acquired in a business combination are identified and recognized separately from goodwill where they meet the definition of an intangible asset and their fair values can be measured reliably. The cost of such intangible assets is their fair value at the acquisition date. Subsequent to initial recognition, intangible assets with a finite life are reported at cost less accumulated amortization and accumulated impairment losses. Intangibles assets with an indefinite life are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset my be impaired Intangible assets that have a finite life are amortized using the straight-line basis over the estimated useful lives as follows: Customer list 7-8 years Advertising jingle 5 years Non-compete agreement 3 years 14

15 3. Summary of Significant Accounting Policies, continued Goodwill Goodwill arising in a business combination is recognized as an asset at the date of control (acquisition date). Goodwill is measured as the excess of the cost of the acquisition over the Company s interests in the net fair value of the identifiable net assets, liabilities and contingent liabilities of the acquiree recognized at the date of acquisition. For acquisitions prior to October 1, 2010, the Company has elected to not restate business combinations that occurred before the date of transition to IFRS. The amount of goodwill recognized upon transition to IFRS is therefore the carrying amount under Canadian GAAP at October 1, For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows (cash-generating units). Cash-generating units to which goodwill has been allocated are tested for impairment at least annually. An impairment loss is recognized for the amount by which the cash-generating unit s carrying amount exceeds its recoverable amount, and reduces first the carrying amount of any goodwill allocated to that cash-generating unit. Any remaining impairment loss is charged pro rata to the other assets in the cash-generating unit. An impairment loss recognized for goodwill is not reversed in a subsequent period. The amount of goodwill at December 31, 2011 expected to be deductible for tax purposes through the amortization method permitted by the Internal Revenue Service is approximately $698,000. Income Taxes Income taxes are accounted for under the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recoverable or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date except where they relate to items that are recognized in other comprehensive income (loss) or directly in equity, in which case the related deferred tax is also recognized in other comprehensive income (loss) or equity, respectively. Deferred tax assets, if any, are recognized only to the extent that, in the opinion of management, it is probable that deferred income tax assets will be realized. The Company is subject to income tax in both Canada and the United States. To the extent the Canadian operations generate taxable income, such income would be taxed at the applicable Canadian statutory tax rates. To date, the Company s Canadian operations have not generated taxable income. The Company has not recognized a deferred tax asset related to the resulting non-capital loss carryforwards for its Canadian operations because management has concluded that it is not probable that such deferred income tax assets will be realized. To the extent the U.S. operations generate taxable income, such income would be taxed at the applicable U.S. statutory tax rates. Based upon the level of historical taxable income and anticipated future taxable income over the periods in which the deferred tax assets are deductible, management believes it is not probable that the Company will realize the full benefit of these deferred tax assets and accordingly, has not recognized deferred tax assets in its financial statements. 15

16 3. Summary of Significant Accounting Policies, continued Leases The economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and rewards related to the ownership of the leased asset. The related asset is then recognized at the inception of the lease at the fair value of the leased asset or, if lower, the present value of the lease payments plus incidental payments, if any. A corresponding amount is recognized as a finance leasing liability, irrespective of whether some of these lease payments are payable up-front at the date of inception of the lease. Leases of land and building are classified separately and the minimum lease payments are allocated between the land and building elements in proportion to the relative fair values of the leasehold interests at the inception of the lease. Assets under finance lease are amortized on a straight-line basis, over the shorter of the useful life and the lease term. The depreciation policy for depreciable leased assets is consistent with that for depreciable assets that are owned by the Company. The corresponding finance leasing liability is reduced by lease payments less finance charges, which are expensed as part of finance costs. All other leases are accounted for as operating leases, and payments are expensed on a straight-line basis over the term of the lease. Associated costs, such as maintenance, are expensed as incurred. Provisions A provision is recognized, if, as a result of a past event, the Company has a legal or constructive obligation that can be estimated reliably and it is probable that a future outflow of economic benefits will be required to settle the obligation. The timing or amount of the outflow may still be uncertain. Provisions are measured by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and specific risks of the obligation. Where there are a number of obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. All provisions are reviewed at each reporting date and adjusted accordingly to reflect the current best estimate. Insurance Reserves The Company recognizes loss reserves primarily for re-insured physical damage claims and liability claims. The Company funds, through monthly installments, loss funds specified by the fronting insurance companies, plus underwriting expenses. For liability claims, these loss funds are used to pay up to the first $20,000, or $100,000 of such loss, depending on the policy and fronting insurer. For property claims, the Company is responsible for the first $25,000 and any amount in excess of $50,000 per vehicle per claim. Operating costs are charged for estimated losses and underwriting fees. The charges are based on the estimated ultimate liability related to claims and differ from period to period due to claim payment and settlement practices as well as changes in development factors for estimated claims incurred but not reported. On a monthly basis, the Company receives from its fronting insurance companies estimates of selected ultimate losses that are based on actuarial analysis, which management uses to estimate the Company s expected losses. Charges to operations are then adjusted to reflect these estimates. 16

17 3. Summary of Significant Accounting Policies, continued The Company recorded increases (decreases) related to changes in liability claim reserves from the prior period reserves, based on carrier reports, approximately as follows: Three Months Year Ended Ended December 31, September 30, Changes in liability claim reserves $ (200,580) $ (935,371) Contingent liabilities All contingent liabilities are continually reviewed to determine whether an outflow of economic benefits has become probable. Where a contingent liability becomes probable that an outflow of future economic benefits will be required, a provision is recognized in the period in which the change in probability occurs. If at the end of the reporting period it is no longer probable that an outflow of economic benefits will be required to settle the obligation, the provision is reversed. Employee benefits Contributions to defined contribution plans are recognized as an expense when employees have rendered service to the Company during the year, entitling them to the contributions. Share-Based payments Share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. The fair value of the options granted is recognized as an expense with a corresponding increase to contributed surplus. The fair value of the options is measured at grant date using the Black-Scholes option pricing model, taking into account the terms and conditions upon which the options were granted. The fair value is expensed over vesting period of each tranche (graded vesting). The amount recognized as an expense is adjusted to reflect the actual number of share options that will vest. At each period end date, the Company revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized in profit or loss over the remaining vesting period, with a corresponding adjustment to the contributed surplus. Share-based payment transactions with other parties are measured at the fair value of the goods or services received, except where the fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the Company obtains the goods or the counterparty renders the service. 17

18 3. Summary of Significant Accounting Policies, continued Franchise Activity The following provides a summary of the number of franchises granted, acquired and closed during the three months ended December 31, 2011 and the year ended September 30, 2011: Three Months Ended Year Ended December 31, September 30, Franchise Activity Number of franchises - beginning of period New franchises granted 1 14 Franchises closed (3) (19) Number of franchises - end of period Risk and Uncertainties The auto rental industry is highly competitive with various companies focusing on different markets, such as business and vacation travel at or near airports, insurance replacement and neighborhood rental. The success of the Company is based largely on the success of its franchisees. Franchisees are located throughout the United States and Canada. The U-Save brand is also represented internationally. The royalty revenue trend for the Company s vehicle rentals and sales is greatly influenced by the tourism cycle; consequently, the summer quarter ending in September, the (4 th ) quarter of the fiscal year, traditionally generates the highest levels of revenue, followed by the spring (3 rd ) quarter ending in June, then the fall (1 st ) quarter ending in December, which includes the Christmas holiday season and finally, the winter (2 nd ) quarter which is usually the lowest in both tourism and car sales. Although tourism is a significant part of the rental revenue, the system also caters to the local rental markets and vehicle replacement market. These markets do not necessarily follow the same cycle patterns as tourism; for example, the vehicle replacement market is typically stronger during the winter months. The insurance premiums reported are a function of the number of cars insured by the underlying franchisees. The seasonality aspects that are attributed above to the tourism cycle also greatly influence the number of vehicles a franchisee will operate and make available for rent. Additionally, as the number of airport locations increase based upon a successful opening of a new location, these airport locations tend to rent a greater number of vehicles than a local market store. Thus, as each airport location is opened, if the Company also provides that location with its vehicle liability insurance for its fleet, the overall car count of insured vehicles will increase thereby having a positive effect on this revenue stream. The Company s royalty revenue stream and insurance premiums are greatly influenced by the performance of the underlying franchisees. This can be affected in either a positive or negative manner based upon current trends in the car rental industry. 18

19 3. Summary of Significant Accounting Policies, continued Financial Instruments Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the financial instrument. Financial assets are derecognized when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is derecognized when it is extinguished, discharged, cancelled or when it expires. Financial assets and financial liabilities are measured initially at fair value plus transactions costs, except for financial assets and financial liabilities carried at fair value through profit or loss, which are measured initially at fair value. Financial assets and financial liabilities are measured subsequently as described below: Financial assets For the purpose of subsequent measurement, the Company has classified its financial assets into the following category upon initial recognition: Loans and receivables The Company has classified the following financial assets as loans and receivables: cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, related party accounts receivables, related party notes receivables and other notes receivable. These assets are initially recognized at their fair value. Total interest income, calculated using the effective interest rate method, is recognized in profit (loss). Loans and receivables are subsequently measured at their amortized cost, using the effective interest method. Under this method, estimated future cash receipts are exactly discounted over the asset s expected life, or other appropriate period, to its net carrying value. Amortized cost is the amount at which the financial asset is measured at initial recognition less principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount, and less any reduction for impairment or uncollectability. Net gains and losses arising from changes in fair value are recognized in profit (loss) upon derecognition or impairment. Financial asset impairment The Company assesses impairment of all its financial assets, except those classified at fair value through profit (loss). Management considers whether the issuer is having significant financial difficulty, whether there has been a breach in contract, such as a default or delinquency in interest or principal payments, etc, in determining whether objective evidence of impairment exists. Impairment is measured as the difference between the asset s carrying value and its fair value. Any impairment, which is not considered temporary, is included in current year profit (loss). The Company reverses impairment losses on financial assets carried at amortized cost when the decrease in impairment can be objectively related to an event occurring after the impairment loss was recognized. 19

20 3. Summary of Significant Accounting Policies, continued Financial liabilities For the purpose of subsequent measurement, the Company has classified its financial liabilities into the following category upon initial recognition: Other financial liabilities The Company has classified the following financial liabilities as other financial liabilities measured at amortized cost: accounts payable and accrued liabilities, deposits received from franchisees, insurance loss reserves and note payable. These liabilities are initially recognized at their fair value. Total interest expense, calculated using the effective interest rate method, is recognized in profit (loss). Financial liabilities measured at amortized cost are subsequently measured at amortized cost using the effective interest method. Under this method, estimated future cash payments are exactly discounted over the liability s expected life, or other appropriate period, to its net carrying value. Amortized cost is the amount at which the financial liability is measured at initial recognition less principal repayments, and plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount. Net gains and losses arising from changes in fair value are recognized in profit (loss) upon derecognition. Operating segments The Company has three reportable segments which management differentiates by similarities in products and geographical areas. Franchising to operate U-Save Auto Rental businesses in the US, franchising to operate Rent-A-Wreck vehicle rental and sales businesses in Canada, and insurance products in the US. Comprehensive income Comprehensive income (loss) includes all changes in equity of the Company. Comprehensive income (loss) is the total of profit (loss) and other comprehensive income (loss). Other comprehensive income (loss) comprises revenues, expenses, gains and losses that, in accordance with IFRS, require recognition, but are excluded from profit (loss). The Company's other comprehensive income (loss) represents foreign currency translation gains/losses related to translating the financial information of Practicar from its Canadian functional currency to US dollars for presentation purposes. 20

21 3. Summary of Significant Accounting Policies, continued Future Accounting Pronouncements The following new standards which have not been applied within these financial statements and may or may not have an effect on the Company s future financial statements: IFRS 9: Financial Instruments: Classification and Measurement (Effective for periods beginning on or after January 1, 2015) IFRS 10: Consolidated Financial Statements which replaces SIC-12, Consolidation - Special Purpose Entities and parts of IAS 27, Consolidated and Separate Financial Statements (Effective for periods beginning on or after January 1, 2013) IFRS 11: Joint Arrangements which supersedes IAS 31, Interest in Joint Ventures, and SIC-13, Jointly Controlled Entities - Non-monetary Contributions by Ventures (Effective for periods beginning on or after January 1, 2013) IFRS 12: Disclosure of Interest in Other Entities (Effective for periods beginning on or after January 1, 2013) IAS 12: Deferred Tax: Recovery of Underlying Assets (Amendments to IAS 12) (Effective for periods beginning on or after January 1, 2012) IFRS 13: Fair Value Measurement (Effective for periods beginning on or after January 1, 2013) The Company has not yet assessed the impact of these standards or determined whether they will adopt the standards early. 4. Transition to IFRS The effect of the Company s transition to IFRS, described in Note 2, is summarized in this note as follows: a. Transition exemptions and exceptions applied b. Adjustments to equity and comprehensive income as previously reported under Canadian GAAP to IFRS c. Adjustments to the Statements of Cash Flows a. Transition Elections The Company has applied the following transition exceptions and exemptions to full retrospective application of IFRS: i. In accordance with IFRS transitional provisions, the Company elected to apply IFRS exemption relating to is business combinations prospectively from October 1, As such, Canadian GAAP balances related to business combinations entered into before that date, including goodwill, have been carried forward without any adjustment. ii. In accordance with IFRS transitional provisions, the Company elected to apply IFRS exemption relating to share-based payments granted after November 7, 2002 that have vested by October 1, As such, the Company does not have to apply IFRS retrospectively to these options. iii. In accordance with IFRS transitional provisions, the Company elected to apply IFRS exemption relating to insurance contracts. As such, Canadian GAAP balances will be carried forward. iv. In accordance with IFRS transitional provisions, the Company applied mandatory exception from full retrospective application of IFRS relating to estimates. Therefore the estimates made and presented in these financial statements as of October 1, 2010 are consistent with estimates made under Canadian GAAP. 21

22 b. Adjustments to equity and comprehensive income as previously reported under Canadian GAAP to IFRS Equity at the date of transition and at December 31, 2010 and September 30, 2011 can be reconciled to the amounts reported under pre-changeover accounting standards as follows: October 1, December 31, September 30, Note Equity under Canadian GAAP $ 7,234,666 $ 7,109,498 $ 6,970,693 Transitional adjustments: Reversal of impairment on indefinite life intangible assets i 600, , ,000 Equity under IFRS $ 7,834,666 $ 7,709,498 $ 7,570,693 Total comprehensive loss for the reporting period ended December 31, 2010 can be reconciled to the amounts reported under pre-changeover accounting standards as follows: December 31, September 30, Note Total loss and comprehensive loss under Canadian GAAP $ (139,530) $ (321,421) Transitional adjustments: Forfeiture estimate and graded vesting of share-based payments ii (4,911) 10,577 Total loss and comprehensive loss under IFRS $ (144,441) $ (310,844) Certain presentation differences between pre-changeover accounting standards and IFRS have no impact on reported loss or total equity. As can be seen in the following tables, some line items are described differently (renamed) under IFRS compared to pre-changeover accounting standards, although the assets and liabilities included in these line items are unaffected. 22

23 The following table shows the total effect of the transition on the consolidated statement of financial position as of October 1, 2010: October 1, 2010 Canadian GAAP Description Note Canadian GAAP Effect on IFRS IFRS Description Balance transition Balance $ $ $ Cash and cash equivalent 2,165,389 2,165,389 Cash Restricted cash and cash equivalent 2,791,630 2,791,630 Restricted cash Accounts receivable 922, ,421 Accounts receivable Related party accounts receivable 120, ,890 Related party accounts receivable Related party notes receivable 172, ,500 Related party notes receivable Other notes receivable - - Other notes receivable Prepaid expenses 207, ,654 Prepaid expenses Property, Plant and Equipment, net 189, ,560 Property, Plant and Equipment, net Related party notes receivable 1,736,356 1,736,356 Related party notes receivable Other assets 129, ,658 Other assets Goodwill 3,959,473 3,959,473 Goodwill Other intangible assets, net i 2,383, ,000 2,983,735 Other intangible assets, net Total assets 14,779, ,000 15,379,266 Total assets Accounts payable and accrued liabilities 2,239,408 2,239,408 Accounts payable and accrued liabilities Deposits received from franchisees 244, ,517 Deposits received from franchisees Insurance loss reserves 2,560,675 2,560,675 Insurance loss reserves Current portion of note payable - - Current portion of note payable Note payable 2,500,000 2,500,000 Note payable Total liabilities 7,544,600-7,544,600 Total liabilities Share capital 15,117,041 15,117,041 Share capital Contributed surplus ii 1,506,579 42,219 1,548,798 Contributed surplus Accumulated deficit i, ii (9,563,027) 557,781 (9,005,246) Accumulated deficit Accumulated other comprehensive income 174, ,073 Accumulated other comprehensive income Total shareholders' equity 7,234, ,000 7,834,666 Total shareholders' equity Total liabilities and shareholders' equity 14,779, ,000 15,379,266 Total liabilities and shareholders' equity 23

24 The following table shows the total effect of the transition on the consolidated statement of financial position as of December 31, 2010: December 31, 2010 Canadian GAAP Description Note Canadian GAAP Effect on IFRS IFRS Description Balance transition Balance $ $ $ Cash and cash equivalent 2,148,830 2,148,830 Cash Restricted cash and cash equivalent 2,550,679 2,550,679 Restricted cash Accounts receivable 846, ,134 Accounts receivable Related party accounts receivable 137, ,840 Related party accounts receivable Related party notes receivable 172, ,500 Related party notes receivable Other notes receivable 4,500 4,500 Other notes receivable Prepaid expenses 237, ,847 Prepaid expenses Property, Plant and Equipment, net 175, ,490 Property, Plant and Equipment, net Related party notes receivable 1,736,356 1,736,356 Related party notes receivable Other notes receivable 2,522 2,522 Other notes receivable Other assets 129, ,658 Other assets Goodwill 3,959,473 3,959,473 Goodwill Other intangible assets, net i 2,351, ,000 2,951,766 Other intangible assets, net Total assets 14,453, ,000 15,053,595 Total assets Accounts payable and accrued liabilities 2,127,690 2,127,690 Accounts payable and accrued liabilities Deposits received from franchisees 247, ,767 Deposits received from franchisees Insurance loss reserves 2,468,640 2,468,640 Insurance loss reserves Current portion of note payable - - Current portion of note payable Note payable 2,500,000 2,500,000 Note payable Total liabilities 7,344,097-7,344,097 Total liabilities Share capital 15,117,041 15,117,041 Share capital Contributed surplus ii 1,520,941 47,130 1,568,071 Contributed surplus Accumulated deficit i, ii (9,708,976) 552,870 (9,156,106) Accumulated deficit Accumulated other comprehensive income 180, ,492 Accumulated other comprehensive income Total shareholders' equity 7,109, ,000 7,709,498 Total shareholders' equity Total liabilities and shareholders' equity 14,453, ,000 15,053,595 Total liabilities and shareholders' equity 24

25 The following table shows the total effect of the transition on the consolidated statement of financial position as of September 30, 2011: September 30, 2011 Canadian GAAP Description Note Canadian GAAP Effect on IFRS IFRS Description Balance transition Balance $ $ $ Cash and cash equivalent 2,586,399 2,586,399 Cash Restricted cash and cash equivalent 1,845,911 1,845,911 Restricted cash Accounts receivable 1,034,447 1,034,447 Accounts receivable Related party accounts receivable 242, ,240 Related party accounts receivable Related party notes receivable 160, ,000 Related party notes receivable Other notes receivable 43,562 43,562 Other notes receivable Prepaid expenses 236, ,701 Prepaid expenses Property, Plant and Equipment, net 169, ,746 Property, Plant and Equipment, net Related party notes receivable 1,576,355 1,576,355 Related party notes receivable Other assets 127, ,970 Other assets Goodwill 3,959,473 3,959,473 Goodwill Other intangible assets, net i 2,255, ,000 2,855,860 Other intangible assets, net Total assets 14,238, ,000 14,838,664 Total assets Accounts payable and accrued liabilities 2,883,550 2,883,550 Accounts payable and accrued liabilities Deposits received from franchisees 235, ,377 Deposits received from franchisees Insurance loss reserves 1,649,044 1,649,044 Insurance loss reserves Current portion of note payable - - Current portion of note payable Note payable 2,500,000 2,500,000 Note payable Total liabilities 7,267,971-7,267,971 Total liabilities Share capital 15,117,041 15,117,041 Share capital Contributed surplus ii 1,564,027 31,642 1,595,669 Contributed surplus Accumulated deficit i, ii (9,879,967) 568,358 (9,311,609) Accumulated deficit Accumulated other comprehensive income 169, ,592 Accumulated other comprehensive income Total shareholders' equity 6,970, ,000 7,570,693 Total shareholders' equity Total liabilities and shareholders' equity 14,238, ,000 14,838,664 Total liabilities and shareholders' equity i. In 2009, the Company recorded a loss on impairment of the Rent-A-Wreck Brand of $600,000 due to economic conditions that suggested that the original carrying value of the intangible was no longer fully recoverable. On the transition date to IFRS, these economic conditions had improved and the Company recalculated the value in use of the intangible and concluded that a reversal of the impairment would be appropriate. ii. Under Canadian GAAP, for grants of share-based payments with graded vesting, the total fair value of the awards is recognized on a straight-line basis over the employment period necessary to vest the awards. Moreover, forfeitures of awards are recognized as they occur. Under IFRS 2, each tranche in an award is considered a separate grant with a different vesting date and fair value. Each grant is accounted for on that basis. Also, an estimate of the number of share-based payments expected to be forfeited is required, which is revised if subsequent information indicates that actual forfeitures are likely to differ from the estimate. As a result, the Company adjusted its opening retained earnings on October 1, 2010 and its expense for subsequent periods for share-based payments to reflect these accounting method differences. c. Adjustments to the Statements of Cash Flows The transition from Canadian GAAP to IFRS had no significant impact on cash flows generated by the Company, except that, under IFRS, cash flows related to notes receivable and interest income are classified as operating. Under Canadian GAAP, cash flows related to notes receivable were classified as investing activities. 25