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EX-32.2 - TROPIC INTERNATIONAL INC.ex32-2.htm
EX-32.1 - TROPIC INTERNATIONAL INC.ex32-1.htm
EX-31.2 - TROPIC INTERNATIONAL INC.ex31-2.htm
EX-31.1 - TROPIC INTERNATIONAL INC.ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended August 31, 2017

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to ________________

 

Commission file number 001-34911

 

TROPIC INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

 

Nevada   None

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     

1057 Parkinson Road, Unit #9

Woodstock, Ontario, Canada

  N4S 7W3
(Address of principal executive offices)   (Zip Code)

 

(519) 421-1900

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

N/A   N/A
Title of each class   Name of each exchange on which registered

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $0.001 par value

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [  ] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]
  Emerging growth company [X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [  ] No [X]

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $17,921,391.80, based on 6,892,843 shares of common stock and a price of $2.60 per share

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 57,532,843 as of December 14, 2017

 

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). None

 

 

 

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report on Form 10-K (this “Report”) contains forward-looking statements. The forward-looking statements are contained principally in the “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this Report. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates”, “believes”, “seeks”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “potential”, “predicts”, “projects”, “should”, “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Such statements may include, but are not limited to, information related to: anticipated operating results; relationships with our customers; consumer demand; financial resources and condition; changes in revenues; changes in profitability; changes in accounting treatment; cost of sales; selling, general and administrative expenses; interest expense; the ability to produce the liquidity or enter into agreements to acquire the capital necessary to continue our operations and take advantage of opportunities; legal proceedings and claims.

 

Also, forward-looking statements represent our estimates and assumptions only as of the date of this Report. You should read this Report and the documents that we reference and file or furnish as exhibits to this Report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

 

PRESENTATION OF INFORMATION

 

Except as otherwise indicated by the context, references in this Report to “we”, “us” and “our” are to the combined business of Tropic International Inc. and its consolidated subsidiaries. In this Report, the phrase the “Company” refers to Rockford Minerals Inc. prior to June 28, 2013.

 

This Report includes our audited consolidated financial statements as at and for the years ended August 31, 2017 and 2016. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”). All financial information in this Report is presented in Canadian dollars, unless otherwise indicated, and should be read in conjunction with our audited consolidated financial statements and the notes thereto included in this Report.

 

As disclosed in our current report on Form 8-K dated July 3, 2013, on June 28, 2013 (the “Closing Date”), we completed a share exchange with Tropic Spa Inc., an Ontario corporation (“Tropic Spa”), 1894632 Ontario Inc., an Ontario corporation (“Subco”), and certain of the shareholders of Tropic Spa (collectively, the “Tropic Spa Shareholders”), pursuant to which we acquired 78,030,877 common shares, or approximately 78% of the issued and outstanding shares, of Tropic Spa in exchange for the issuance of 78,030,877 preferred shares of Subco, our wholly owned subsidiary, to the Tropic Spa Shareholders on a one-for-one basis (the “Share Exchange”). Each preferred share of Subco is exchangeable into one share of our common stock at the option of the holder thereof, subject to certain restrictions. As a result of the Share Exchange, Tropic Spa became our majority-owned subsidiary and the former shareholders of Tropic Spa became holders of the preferred shares of Subco, a company that has only one issued and outstanding common share which is held by us. The transaction was accounted for as a reverse takeover/recapitalization effected by a share exchange, wherein Tropic Spa is considered the acquirer for accounting and financial reporting purposes. Our consolidated financial statements are therefore, in substance, those of Tropic Spa.

 

Also, as disclosed in our current report on Form 8-K dated July 14, 2016, on June 13, 2016 (the “Notox Closing Date”) we completed a share exchange with Notox Bioscience Inc., a Nevada corporation (“Notox”), and all the shareholders of Notox (collectively, the “Notox Shareholders”) pursuant to which we acquired all the issued and outstanding shares of Notox from the Notox Shareholders in exchange for the issuance of 100,000,000 restricted shares of our common stock to the Notox Shareholders on a 1,000-for-one basis (the “Notox Share Exchange”). As a result of the Notox Share Exchange, Notox acquired 100% of the right, title and interest in and to an exclusive license agreement dated December 1, 2012, as amended on July 30, 2013 (together, the “License Agreement”), with the Cleveland Clinic Foundation (the “Clinic”) held by Zoran Holding Corporation, a private Ontario corporation (“ZHC”), Notox became our wholly-owned subsidiary, and the Notox Shareholders acquired approximately 89% of our issued and outstanding common stock (52.5% on a fully-exchanged basis). The transaction represented an asset acquisition and was therefore accounted for under the asset acquisition method.

 

Finally, on August 25, 2016, we completed a reverse split of our issued and outstanding common stock at the ratio of one (1) new share for every two (2) existing shares and caused Subco to do the same. All share and per share amounts have been adjusted to reflect the reverse split except as otherwise indicated.

 

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TABLE OF CONTENTS

 

PART I
   
Item 1.  Business 4
Item 1A.  Risk Factors 17
Item 1B.  Unresolved Staff Comments 17
Item 2.  Properties 17
Item 3.  Legal Proceedings 17
Item 4.  Mine Safety Disclosures 17
   
PART II  
   
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 18
Item 6.  Selected Financial Data 20
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk 25
Item 8.  Financial Statements and Supplementary Data 25
Item 9.  Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 26
Item 9A.  Controls and Procedures 26
Item 9B.  Other Information 26
   
PART III  
   
Item 10.  Directors, Executive Officers and Corporate Governance 27
Item 11.  Executive Compensation 30
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 31
Item 13.  Certain Relationships and Related Transactions, and Director Independence 34
Item 14.  Principal Accounting Fees and Services 35
   
PART IV  
   
Item 15.  Exhibits, Financial Statement Schedules 37
   
SIGNATURES 39

 

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PART I

 

Item 1. Business

 

Business Overview

 

We are a company in the business of developing and commercializing innovative technologies. Through Notox, we own 100% of the right, title and interest in and to the License Agreement with the Clinic formerly held by ZHC. The License Agreement grants us the exclusive license to certain patented intellectual property of the Clinic relating to the treatment of a neuromuscular defect developed by Dr. Frank Papay, MD, FACS Chairman Dermatology and Plastic Surgery Institute, Cleveland Clinic, and in particular, the ability to produce, sell, improve and modernize products that incorporate such intellectual property in the fields of aesthetics, drug free pain management, body contouring and perspiration control. We plan to develop this intellectual property into the world’s first credible and healthier non-toxic alternative to Botox, which is a commercial form of the botulinum toxin protein used primarily for medical and cosmetic purposes.

 

Through Tropic Spa, our goal is to market unique commercial tanning systems designed primarily for spas, gyms and clinics, as well as a personal tanning solution designed for convenient home use that delivers a full-body application and eliminates the harmful health effects associated with traditional tanning beds. The primary effect is exposure to ultraviolet (UV) radiation, and the consequences of such exposure have been well-documented by numerous organizations, including the American Cancer Society and the Canadian Cancer Society. They generally include an increase in the risk of contracting both melanoma and non-melanoma skin cancers as well as structural damage to the skin that can result in what dermatologists call “photoageing”, or premature wrinkles, freckles, leathery texture and a loss of elasticity.

 

To date, we have finalized the design of our personal tanning product and applied for and acquired patents for it in the United States (the “US Patent”), Canada, Australia and China. We have also prepared our product for market, completed two phases of test marketing initiatives, and are currently exploring potential avenues for launching the product on a worldwide scale.

 

Our Corporate History and Background

 

We were incorporated as “Rockford Minerals Inc.” under the laws of the State of Nevada on October 29, 2007. From our inception until the closing of the Share Exchange, we sought to be a producer of gold and silver ore, and of other precious metals. On July 19, 2008, we acquired an undeveloped mining claim called the Rockford Lode Mining Claim located in Clark County, Nevada, for which we paid $12,000, including the cost of a geological report prepared by Sookochoff Consultants Inc. and Laurence Sookochoff, P. Eng., as a consulting geologist, for the purpose of recommending an exploration program. Due to lack of capital, we did not commence any phase of the exploration program recommended in the geological report.

 

On August 24, 2010, we filed a certificate of amendment with the Nevada Secretary of State to increase our authorized capital from 10,000,000 shares of common stock to 100,000,000, each with a par value of $0.001 per share. On April 17, 2013, we filed a certificate of amendment with the Nevada Secretary of State to increase our authorized capital from 100,000,000 shares of common stock to 300,000,000, each with a par value of $0.001 per share.

 

On June 24, 2013, we purchased one common share of Subco and one common share of 1894631 Ontario Inc., an Ontario corporation (“Callco”), from Gregory J. Neely, our former President, Chief Financial Officer, Principal Accounting Officer, Secretary, Treasurer and director. Both of these companies were incorporated on April 15, 2013 in anticipation of completing the Share Exchange, and became our wholly owned subsidiaries as a result of the share purchases.

 

Prior to the closing of the Share Exchange, we had not generated any revenue and our operations were primarily limited to capital formation, organization and development of our business plan. As a result of the Share Exchange, we ceased our prior operations and, through Tropic Spa, began to operate as a company that manufactures and sells home mist tanning units with a patent-protected feature.

 

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In order to more accurately reflect our new business operations, on December 6, 2013, we changed our name from “Rockford Minerals Inc.” to “Tropic International Inc.” as a result of a merger with our wholly-owned subsidiary that was incorporated solely to effect the name change.

 

Tropic Spa was incorporated under the laws of the Province Ontario on September 17, 2007. Its operations to date have consisted of business formation, strategic development, test marketing, technology development and capital raising activities. Its website is www.tropicspatan.com.

 

On April 11, 2013 and in anticipation of completing the Share Exchange, Tropic Spa completed a vertical amalgamation with 1893211 Ontario Inc., an Ontario corporation and its wholly owned subsidiary. The amalgamation was approved by the directors of each of Tropic Spa and 1893211 Ontario Inc., and was completed for the sole purpose of merging the two corporations and carrying on as one entity.

 

Acquisition of Tropic Spa

 

On the Closing Date, we entered into a share exchange agreement (the “Exchange Agreement”) with Subco, Tropic Spa and the Tropic Spa Shareholders pursuant to which we acquired approximately 78% of the outstanding capital stock of Tropic Spa in exchange for the issuance of 78,030,877 (39,015,439 post-split) preferred shares of Subco to the Tropic Spa Shareholders. The shares issued to the Tropic Spa Shareholders pursuant to the Share Exchange constituted 100% of Subco’s issued and outstanding preferred shares as of and immediately after the consummation of the Share Exchange. Each one preferred share of Subco (each, an “Exchangeable Share”) is exchangeable into one share of our common stock at the option of the holder thereof, subject to the following restrictions:

 

  the holders of such preferred shares may not, without the written consent of Subco, exchange, sell or otherwise dispose of, directly or indirectly, any of their preferred shares until the six month anniversary of the Closing Date;
     
  within 30 days of that time, and provided Tropic Spa has generated at least $1,000,000 in gross revenue during the preceding six month period, Subco shall permit the holders of such preferred shares to require Subco to redeem an aggregate of 1% of its then-outstanding preferred shares on a pro rata basis; and
     
  within 30 days of each six month anniversary of the Closing Date until June 30, 2015, on which date all restrictions on such preferred shares shall automatically expire unless extended by the approval of the holders thereof, Subco shall grant the holders of its preferred shares a permission identical to the one described above.

 

The foregoing restrictions do not apply to any exchange, sale or other disposition of the preferred shares of Subco by the holder thereof:

 

  to a person over which such holder exercises sole voting and investment control;
     
  upon such holder’s death by will or intestacy; or
     
  as a distribution solely to members, partners or stockholders of such holder, if the holder is a corporation, partnership or other organization.

 

The foregoing description of the preferred shares of Subco is qualified in its entirety by reference to the complete text of the rights, privileges, restrictions and conditions attached to such preferred shares (the “Exchangeable Share Provisions”), included as Appendix I to the Exchange Agreement filed as Exhibit 10.1 to our current report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on July 3, 2013.

 

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As a result of the Share Exchange, Tropic Spa became our majority-owned subsidiary and John Marmora, the sole officer and director of Tropic Spa, acquired the right to become our principal stockholder by exchanging the Exchangeable Shares he received on the Closing Date for shares of our common stock. The Share Exchange was accounted for as a reverse merger/recapitalization effected through a share exchange, with Tropic Spa as the accounting acquirer and the Company as the accounting acquiree. Unless the context suggests otherwise, when we refer in this Report to business and financial information for periods prior to the consummation of the Share Exchange, we are referring to the business and financial information of Tropic Spa.

 

In connection with the Share Exchange and on the Closing Date, Gregory J. Neely submitted his resignation as our President, Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer; John Marmora was appointed by our Board of Directors to fill the resulting vacancies; Mr. Marmora was appointed as our Chief Executive Officer and a director; Mr. Neely submitted his resignation as the President, Secretary, Treasurer and sole director of Subco and Callco, and Mr. Marmora was appointed to fill the resulting vacancies. On November 29, 2013, Mr. Neely also resigned as our director.

 

As a result of the Share Exchange, Tropic Spa became our majority-owned subsidiary and we assumed the business and operations of Tropic Spa.

 

As a condition of the closing of the Exchange Agreement, we also entered into the following agreements on the Closing Date:

 

  a Support Agreement with Subco and Callco (the “Support Agreement”); and
     
  a Voting and Exchange Trust Agreement with Subco, Callco and John Marmora (the “Trustee”), our new President, Chief Executive Officer, Chief Financial Officer, Secretary, Treasurer and director (the “Trust Agreement”).

 

The structure of the Share Exchange was determined largely based on the potential tax implications for the Tropic Spa shareholders of exchanging their common shares of Tropic Spa, an Ontario corporation, for shares of our common stock. Under s. 85(1) of the Income Tax Act (Canada), a tax-deferred “rollover” is not available where shares of a Canadian corporation are exchanged for shares of a United States corporation and, as a result, we created Subco, also an Ontario corporation, for the purpose of allowing those shareholders who elected to participate in the Share Exchange to do so on a tax-deferred “rollover” basis (i.e., by allowing them to defer any capital gain that would accrue upon the exchange of their common shares of Tropic Spa for shares of our common stock). This was achieved by issuing exchangeable preferred shares of Subco to the holders of Tropic Spa’s common shares on the Closing Date.

 

Callco, our wholly owned subsidiary, was formed solely for the purpose of avoiding a Canadian deemed dividend withholding tax payable on a dividend or other distribution of Subco to us to the extent that such a dividend or other distribution exceeds the paid-up capital of Subco. However, in order for this to take place Callco must become the holder of the one issued and outstanding common share of Subco that we currently hold, since it would then permit the dividend or other distribution to pass through Callco before being distributed to us.

 

On February 17, 2015, we entered into an amendment to the Exchange Agreement (the “Amendment Agreement”) with Subco, Tropic Spa and the Tropic Spa Shareholders in order to correct a few administrative errors in the Exchange Agreement and provide for the post-closing execution of the Exchange Agreement by those shareholders of Tropic Spa who were not original signatories thereto. The complete text of the Amendment Agreement is filed as Exhibit 10.2 to our current report on Form 8-K filed with the SEC on February 19, 2015.

 

Also on February 17, 2015, the Tropic Spa Shareholders approved certain changes to the rights, privileges, restrictions and conditions attached to the preferred shares of Subco described above by consent in writing. Of these, the only material change was the deletion of the “June 30, 2015” date in section 5(b) and its replacement with “June 30, 2017”.

 

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On August 24, 2016 and pursuant to the Exchange Agreement, as amended, we acquired a further 21,672,623 common shares, or approximately 21.5% of the issued and outstanding shares, of Tropic Spa in exchange for the issuance of 21,672,623 (10,836,312 post-split) preferred shares of Subco to certain of the shareholders of Tropic Spa. As a result, we now own 99,703,500 common shares of Tropic Spa, or approximately 99.7% of that company’s issued and outstanding capital stock.

 

Support Agreement

 

The Support Agreement provides and establishes a procedure whereby we are required to take certain actions and make certain payments and deliveries in connection with the satisfaction of the obligations of Callco and/or Subco under the Exchangeable Share Provisions. As described in the Exchangeable Share Provisions, Subco is required to deliver shares of our common stock to a holder of Exchangeable Shares upon the liquidation or insolvency of Subco, upon the redemption of Exchangeable Shares by Subco, and upon the exercise of the retraction or exchange right by such holder. The Exchangeable Share Provisions also require Subco to pay dividends on the Exchangeable Shares that are equivalent to any dividends that are paid on shares of our common stock.

 

The Support Agreement provides commercial certainty and is in the interests of the holders of Exchangeable Shares because it creates enforceable contractual rights of Subco against us so that in all relevant circumstances Subco is in a position to acquire the necessary shares of our common stock, and finance any dividend payments equivalent to dividends paid on shares of our common stock, in order to satisfy Subco’s obligations under the Exchangeable Share Provisions. In that respect, the Support Agreement includes certain covenants made by us, including that we will:

 

  not declare or pay a dividend on shares of our common stock unless Subco can simultaneously pay the same dividend on the Exchangeable Shares;
     
  ensure that Subco has a sufficient number of shares of our common stock in the event of the liquidation or insolvency of Subco to satisfy all retraction or exchange requests or redemptions of Exchangeable Shares; and
     
  as the sole holder of common shares of Subco, not cause Subco to be liquidated or dissolved.

 

In general, the Support Agreement ensures that the obligations of Subco are backstopped by covenants made by us or any successor to us. It will remain in effect until no Exchangeable Shares (or securities or rights convertible into or exchangeable for Exchangeable Shares) are held by any person other than us or any of our affiliates (in other words, until all the Exchangeable Shares have been exchanged into shares of our common stock).

 

Trust Agreement

 

The Trust Agreement provides and establishes a procedure whereby the voting rights attached to shares of our common stock are exercisable by the registered holders (the “Beneficiaries”) of the Exchangeable Shares, other than those Exchangeable Shares held by us or our affiliates, through the Trustee. The Trustee holds legal title to a special voting share (the “Special Voting Share”) to which voting rights are attached for the benefit of the Beneficiaries.

 

The Special Voting Share confers on the Trustee the number of votes equal to the number of outstanding Exchangeable Shares, other than Exchangeable Shares held by us or our affiliates, on all matters on which the holders of shares of our common stock are entitled to vote. Under the Trust Agreement, the Trustee is required to hold the Special Voting Share as trustee solely for the use and benefit of the Beneficiaries and has no power or authority to sell, transfer, vote or otherwise deal with the Special Voting Share.

 

The Trust Agreement provides a mechanism under which a Beneficiary may instruct the Trustee regarding how to vote the votes conferred by the Special Voting Share relating to such Beneficiary’s Exchangeable Shares. This mechanism ensures that Beneficiaries have a complete bundle of rights that collectively is equivalent to the rights each Beneficiary would have if it owned shares of our common stock directly, and is exercised by Beneficiaries providing written instructions to the Trustee following the mailing of any communications by us to the holders of our common stock as well as the holders of Exchangeable Shares.

 

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For commercial reasons, it is in the interests of a holder of Exchangeable Shares to obtain additional protection with respect to its ability to exercise retraction or exchange rights in the event of the liquidation or insolvency of us or Subco. As a result, the Trust Agreement also grants such holders “insolvency put rights”, including the right to automatically exchange their Exchangeable Shares for shares of our common stock upon the occurrence of certain events.

 

The right of a Beneficiary to exercise any voting rights in respect of the Exchangeable Shares held by such Beneficiary will cease immediately upon the exercise of any exchange right, automatic exchange, retraction or redemption of Exchangeable Shares for shares of our common stock, or the liquidation, dissolution or winding-up of Subco.

 

The foregoing description of the Exchange Agreement, including the Support Agreement and the Trust Agreement, includes a summary of all the material provisions but is qualified in its entirety by reference to the complete text of the Exchange Agreement filed as Exhibit 10.1 to our current report on Form 8-K filed with the SEC on July 3, 2013.

 

Acquisition of Notox

 

On June 6, 2016, we entered into a share exchange agreement (the “Notox Exchange Agreement”) with Notox and the Notox Shareholders pursuant to which we agreed to acquire 100% of the outstanding capital stock of Notox in exchange for the issuance of 100,000,000 (50,000,000 post-split) restricted shares of our common stock to the Notox Shareholders. On the Notox Closing Date, the closing of the Notox Share Exchange Agreement occurred, at which time Notox acquired 100% of the right, title and interest in and to the License Agreement, we issued the 100,000,000 restricted shares described above to the Notox Shareholders, and Notox became our wholly owned subsidiary.

 

Pursuant to a stock restriction agreement dated as of the Notox Closing Date, the shares we issued to the Notox Shareholders are subject to restrictions similar to those attached to the preferred shares of Subco. In particular, the Notox Shareholders may not sell, transfer or otherwise dispose of their shares until June 30, 2017, subject to certain limited exceptions.

 

Notox was incorporated on May 31, 2016 for the primary purpose of acquiring an interest in and to the License Agreement. As such, the Notox Share Exchange represented an asset acquisition and was accounted for under the asset acquisition method.

 

In connection with the Notox Share Exchange and on the Notox Closing Date, John Marmora submitted his resignation as our Chief Executive Officer and Zoran Konević, the sole officer and director of both Notox and ZHC, and one of the Notox Shareholders, was appointed to fill the resulting vacancy. On the Closing Date, Mr. Konević was also appointed as our director.

 

As a result of the Notox Share Exchange, we are now a holding company operating through both Tropic Spa and Notox.

 

The foregoing description of the Notox Exchange Agreement includes a summary of all the material provisions but is qualified in its entirety by reference to the complete text of the Notox Exchange Agreement filed as Exhibit 10.3 to our current report on Form 8-K filed with the SEC on June 13, 2016.

 

Reverse Split

 

On August 25, 2016, we completed a reverse split of our issued and outstanding common stock at the ratio of one (1) new share for every two (2) existing shares and caused Subco to do the same.

 

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Products

 

Notox

 

The Notox product was designed to be a non-poisonous, less expensive, longer lasting alternative to Botox®, which is a commercial form of the botulinum toxin protein manufactured by Allergan, Plc, a large publicly-traded pharmaceutical corporation, and used primarily for medical and cosmetic purposes. Notox is designed to achieve the same effects as Botox® for cosmetic procedures, drug-free pain management, migraine and perspiration control, but at a healthier level.

 

Botulinum toxin is a neurotoxic protein that is most commonly associated with the disease botulism; however, there are actually seven types of the toxin, two of which are used commercially and medically to, among other things, treat muscle spasms and diseases characterized by overactive muscle. When locally administered, the toxin is capable of spreading from the injection site to other areas of the body, a potentially fatal consequence. Disclaimers for this and other negative side effects can be found on the packaging for Botox® and seen/heard in Allergan’s advertisements for the product.

 

In cosmetic applications, botulinum toxin is generally considered safe and effective for reducing facial wrinkles; however, this may be due to the fact that the long-term effects of using the protein are not widely studied . It is injected into the muscles under wrinkles causing those muscles to relax, which results in the smoothing of the overlying skin. Following treatment, this smoothing is usually visible within days, is at its height after two weeks, and diminishes 3-4 months later as the treated muscles gradually regain function and return to their former appearance. Muscles can be treated repeatedly in order to maintain the smoothed appearance.

 

Notox is best understood as an electronic form of Botox®, in that it is intended to generate the benefits of using the drug without introducing the potentially harmful side effects that toxic chemicals can produce. The Notox system consists of two parts: a treatment probe or needle, and a unit that includes a hand piece and a generator. The generator is responsible for creating an electric current that is administered through the hand piece along with a saline solution. The needle, which is also the patented feature of the system, is attached to the hand piece and is used to inject the electric current and saline solution into the targeted nerve of the treatment recipient.

 

The saline solution’s purpose is to assist with the accuracy of the current while simultaneously cooling the treatment area. The result is that the targeted nerve is ablated or incapacitated in much the same way as it would be by using Botox®.

 

We anticipate that Notox will provide a number of advantages over its similarly-named competitor as follows:

 

  it will eliminate the potential morbidity and long-term effects of injecting botulinum toxin that an individual’s body must process and discard;
     
  treatments will be more precise and significantly less expensive;
     
  the effects of a Notox treatment will last much longer than a Botox® treatment – up  to 12 months vs, 3-4 months; and
     
  the probability of damaging the tissue surrounding the target area will be reduced.

 

The design of the treatment probe or needle is covered by U.S. Patent No. 8,512,715 “Apparatus and Method for Treating a Neuromuscular Defect” dated December 30, 2014. It is a continuation of U.S. Patent Application No. 12/541,221, filed on August 14, 2009, which claims priority from U.S. Provisional Patent Application No. 61/089,015, filed on August 14, 2008.

 

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It is important to note that the Clinic has already conducted successful animal trials using an early Notox system prototype, the results of which were published in October 2013 edition of the Journal of Plastic and Reconstructive Surgery, Volume 132, Issue 4S-1, pp. 142-143. In addition, the Clinic has performed cadaver studies that generally demonstrated sensitive tissue would not be damaged using Notox.

 

During the second quarter of 2017, we completed further cadaver studies with the Clinic’s participation for the purpose of ensuring that our needle prototype would produce the desired effect around the human eyes and forehead. Those studies were led by Dr. Papay and carried out by some of the Clinic’s key experts in the field, and generally satisfied our expectations with regard to the product.

 

In a September 2016 report, Global Industry Analysts, Inc. (“GIA”) estimated that the worldwide market for botulinum toxin would reach US$4.3 billion by 2018. This represents less than 15% of the estimated $29 billion global market for cosmetic, plastic surgery and pain management solutions. In its report, GIA suggested that the market for botulinum toxin would be stimulated by the sustained dominance of existing options, technological advances, rising product approvals and the increasing popularity of anti-aging products. It is our goal to capture a piece of this market by completing the design, testing and manufacturing of the Notox unit and treatment probe, undertaking the necessary human trials and FDA Section 510(k) clearance process, and successfully commercializing the system.

 

Home Mist Tanning System 

 

Our home mist tanning system delivers a full-body application in 12 seconds resulting in a tan that develops gradually over a period of five to eight hours and lasts from between five and eight days. The packages we market contain everything an individual needs to complete 10 full-body tans in the comfort of their own home.

 

Our tanning system was designed for home use to provide users with a salon quality tan. It consists of an application unit, a tanning kit and a pre-tan kit. The tanning kit includes our proprietary tanning solution, which is a clear fluid with a slight yellow tinge that contains a blend of DHA or dihydroxyacetone (a chemical approved by the Food and Drug Administration (the “FDA”) for use in the cosmetics industry), skin moisturizers and conditioners. DHA is a color additive that darkens the skin by reacting with amino acids in the skin’s surface. To be clear, however, the FDA’s approval of DHA is restricted to external applications only; the agency advises against inhaling, ingesting or applying DHA to the lips and eye areas; and the use of DHA in tanning booths, including misting devices, as an all-over spray has not been approved by the FDA since safety data to support its use has not been submitted to the agency for review and evaluation.

 

Our proprietary tanning solution is packaged into specially designed cosmetic bladders and housed in aerosol cans, which allows users to dispense it directly with no cross-contamination of propellant or any other material. In addition to six 2.6oz cans of the solution, the tanning kit contains a spray applicator and one touch-up can, while the pre-tan kit contains exfoliating wipes or gloves (selected by the user at the time of purchase), plastic head and foot covers and plastic protective gloves.

 

Our system may affect persons of different sizes in different manners since the amount of tanning solution dispensed from each of the unique, non-clogging mist nozzles on the unit cannot be user-adjusted. The nozzles are manufactured using a plastic injection molding process in order to ensure that they all perform in an identical fashion and are designed to emit a consistent amount of solution. As a result, during each tanning cycle the nozzles dispense a total of approximately 1.6oz of tanning solution from the cosmetic bladders. Due to this consistency, the recommend minimum and maximum user heights for our units are 4’5” and 6”, respectively. We have not made any provisions to accommodate users who fall outside of this height range, since we believe that such persons only represent an extremely small proportion of our potential customer base.

 

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Our application unit has been engineered to apply our tanning solution evenly through unique, non-clogging mist nozzles and deliver a sufficient amount of the solution in 12 seconds to provide full body coverage. Over-spray is minimal or nonexistent, and the cordless design of the unit allows it to be used in multiple locations and deliver multiple applications on a single lithium ion battery charge. Each unit contains an internal counter that indicates when there is only enough tanning solution remaining to complete two tans, and consists of a simple design that allows for the easy removal and replacement of the solution.

 

Constructed of lightweight durable plastic in a neutral tone, the application units are visually appealing, compact in size and come fully assembled, requiring only a primary battery charge of approximately four hours to begin the tanning process. The units also include a unique adjustable hanger bracket that permits simple height adjustments and both visual cues and audible electronic tones that provide important information to users as follows:

 

  when the start/stop button on the unit is pushed, the light-emitting diode (LED) on the unit flashes the color blue for 10 seconds;
     
  if no further action is taken by a user during the 10-second period, the unit automatically powers down; however, if the user again pushes the start/stop button, the unit emits an audible beep signalling that the tanning spray will be activated in six seconds;
     
  at the end of the six seconds, the unit emits an “up-tone” sound and begins to mist;
     
  during the 12 second tanning cycle, the unit emits an audible beep every three seconds in order to orient the user and suggest that they rotate 90 degrees in each three-second period (for a total of 360 degrees in 12 seconds);
     
  following the fourth audible beep, the unit emits a “down-tone” to signal the conclusion of the tanning cycle; and
     
  finally, when the reset button is pushed, the unit emits an audible beep to signal that the unit’s tan count has been reset to 10 tans.

 

The lithium ion battery included with each application unit can be fully recharged in approximately eight hours once fully depleted through a conventional North American wall socket. The batteries are provided to us by an electronics supplier based in Toronto, Ontario, Canada, who acquires them from a manufacturer in China. We do not have an agreement in place with the supplier regarding the purchase and sale of specified quantities of batteries; instead, we purchase them on an as-needed basis using conventional means.

 

Our application unit has been certified by QPS Evaluation Services, Inc. (“QPS”), a nationally and internationally accredited third-party testing, certification and field evaluation body, under certificate number LR1209. This certification provides an increased assurance of quality and safety to consumers by demonstrating that the unit has been tested to and meets the requirements of applicable Canadian and Unites States standards, since QPS’s labels and marks are accepted as equals to those of the Canadian Standards Association and Underwriters Laboratories.

 

Because we are committed to supplying products of superior quality and design, we provide a limited one year warranty on our application units. If a unit stops operating due to defects in materials or workmanship during this time, we will either repair or replace it for free.

 

In addition to the application units, we also sell tanning solution kit refills that take less than five minutes to replace. Each tanning solution kit refill contains six 2.6oz cans, which is a sufficient amount of our proprietary solution to provide 10 full-body tans. To the best of our knowledge, empty cans of our tanning solution can be recycled in the same manner as conventional aerosol cans in all jurisdictions that offer recycling alternatives to conventional waste collection.

 

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We currently sell our home mist tanning system for the base price of $300 and our tanning solution kit refills for $100, each plus applicable shipping and handling. The complete system also includes an operating manual, instructional DVD and simple power adapter.

 

Industry Overview and Competition

 

There are currently many products on the market geared towards providing users with a sunless tan. These include bronzers, gels, foams and lotions, all of which can vary dramatically in both quality and price. Based on the research we have conducted, it is our belief that these products can be quite messy and often yield unreliable results. Recently, airbrush or spray tanning products for home use have gained a foothold in the market, but anecdotal evidence suggests that these products can be tricky to apply evenly and can discolor and streak the skin if not used properly. There are also a small number of medical sunless tanning alternatives, but the market for these is extremely limited.

 

Given the uncertainty associated with applying or using many sunless tanning products, consumers have gravitated to the salon or spa in search of natural looking results. The most popular method of obtaining a sunless tan at these establishments that doesn’t include exposure to harmful ultraviolet (UV) rays is through a spray tan. However, this is generally understood to be a costly pursuit, especially over the long term.

 

A summary of the various options is provided below.

 

Bronzers, Gels, Foams and Lotions

 

Bronzers, gels, foams and lotions generally cost between $12 and $65 per bottle. Apart from bronzers, each of these products uses DHA or dihydroxyacetone as an active ingredient in order to create a reaction between the product and dead skin cells to obtain darker looking skin. In our opinion, bronzers, gels, foam and lotions can often be difficult to apply evenly, especially in hard-to-reach places, as they require users to apply the product onto their body using their hands. They frequently streak and discolor the skin if applied incorrectly, as well as leave the hands and nails of users with an undesirable orange hue. Gloves can help but the products often stick to them and create an uneven result.

 

Lotions can provide a more satisfying application than gels, but because of the moisturizing properties often added to these products they can also clog pores which may not be suitable for users with sensitive skin or who are acne-prone. Lotions also take a longer time to dry and users must wear loose clothing until they have properly dried.

 

Bronzers are simply a short term solution for a glow. They exist in gel form but often consist of a powder to be applied with a makeup brush. If applied incorrectly we believe that bronzers can look too dark and they also have the drawback of sometimes rubbing off on clothes.

 

Prominent manufacturers of bronzers, gels, foams and lotions include Banana Boat, Jergens, Hawaiian Tropic and L’Oréal.

 

Medical Alternatives

 

There are two drugs available on the market related to sunless tanning. The first of these is canthaxanthin, a colorant commonly used as a food dye. Though the FDA and Heath Canada have approved canthaxanthin as a color additive in foods (see the FDA’s “More on Tanning Products” Safety and Regulatory Information page and Health Canada’s Natural Health Products Ingredients Database), it has not been approved for use as a sunless tanning pill since consumption of large amounts has been linked to liver injury and canthaxanthin retinopathy, a form of retina discoloration.

 

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The second drug is called Melanotan II and is also known as the “Barbie drug”. Basically, it is an injectable that mimics melanin in skin. Although widely available, according to the Canadian Cancer Society both the FDA and Heath Canada have warned the public that the drug has not been tested and should be avoided until further research has been completed to test its possible side effects.

 

Home Use Airbrushing

 

Several options have been developed over time for home use airbrushing. Temptu manufactures a portable airbrushing unit that retails for US$305, with each refill costing US$45 per tanning pod. The unit was designed to tan only the face, but we believe many consumers also use it to tan their entire body. Based on our research, we understand that two tanning pods are required for such a tan, which would therefore cost a consumer $90 for one fully-body tan.

 

Luminess Tan is another manufacturer of airbrush tanning products. It sells a small portable unit for home tanning use that costs US$159 for a starter pack and US$32 for two 1.5oz bottle refills. In our opinion, the primary drawback of the Luminess Tan unit is that consumers need to have a steady hand to apply the product properly and may require a second person to apply it in hard-to-reach areas. We have also been informed that the company’s application wand may become clogged with frequent use.

 

St. Tropez, Model Co. and Victoria’s Secret, among others, have recently entered the growing “spray tan in a can” market. Their products come in mist form, but without experience we believe that consumers run the risk of leaving streaks from applying them incorrectly. It can also be difficult to access certain parts of the body with sprays, such as the back, and over-spraying can lead to an uneven tan. Users of these products must also keep the nozzle approximately six inches from their skin in order to maintain an even application. “Spray tan in a can” can cost anywhere from US$12 to US$40 per unit.

 

The SheerTan Sunless Tanning wand provides an attractive option for hard-to-reach areas such as the back. To use the product, consumers must insert the mist into the wand and then move the wand around their body. The wand is bulky and can therefore be challenging to manoeuvre, but the cost is appealing at US$40 for the starter set. However, the price of refills is comparable to others at US$50 for a set of four.

 

Home Use Spray Tanning

 

Similar to airbrushing, spray tanning provides consumers with the ability to tan their entire body without having to refill the machines quite as often. Despite our research and industry knowledge, we are not aware of any independent reports or market analysis focused on this specific segment of the sunless tanning market; however, to the best of our knowledge and belief there is only one spray machine available in the Canadian and United States home use market that is somewhat comparable to ours: the ShowerTan system manufactured by RNJ Enterprizes, LLC.

 

The ShowerTan system is a portable unit that must be used in the shower. The starter unit retails for US$345 and the refills are priced at US$45 for four single-use bottles. In order to use the system, consumers also need to purchase CO2 tanning cartridges at a cost of $23 for 10 cartridges and add both the tanning solution and cartridges to the unit. We believe that the use of CO2 cartridges poses a potential hazard to consumers, and we designed our home mist tanning system differently as a result. ShowerTan also offers bronzing drops to mix into its solution for tan customization purposes.

 

In our opinion and based on the market research we have conducted, the ShowerTan machine has an industrial feel, is rather bulky and is visually intimidating because of its complexity. In addition, the unit must be cleaned after each use, which adds to the time required to obtain consistent tanning results.

 

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Salon Airbrushing and Spray Tanning

 

Spray tans and airbrush tans are similar; however, with an airbrush tan a salon or spa technician applies the tanning solution and with a spray tan the consumer enters a private booth and is then sprayed by a machine to obtain a natural looking tan. Although there is little room for error, spray tanning has proven to be consistent and produce reliable results. Unfortunately, the cost can be high as one session from a professional salon or spa generally ranges from $40-120 plus the cost of a touch-up kit. To maintain a tan, a consumer would need to repeat the process every five to 14 days depending on his or her skin and the extent of exfoliation prior to tanning. In urban centers, the cost of professional spray tan maintenance can add up to over $1,000 per year.

 

With salon airbrushing and spray tanning, privacy can also be an issue since more bashful consumers may be uncomfortable disrobing in a strange place to receive an application. Time must also be considered, as many salons require an appointment and consumers therefore need to plan ahead and organize their schedule. For salon-based sunless tanning alternatives, time and money are the most important factors to consider.

 

The market for sunless tanning products is highly competitive with respect to performance, quality and price. We anticipate that we will directly compete with those competitors whom we identified above, as well as with other local and regional manufacturers. We may also compete with artificial sunbed tanning establishments and manufacturers and suppliers of similar products and services; however, we do not consider these direct competitors because their processes involve exposing the skin to harmful ultraviolet (UV) rays.

 

In the future, we also may face further competition from new market entrants and possible alliances between existing competitors. Some of our competitors have, or may have, greater financial, marketing and other resources. As a result, competitors may be able to respond more quickly to new or emerging trends and changes in technology, benefit from greater purchasing economies, offer more aggressive pricing to customers or devote greater resources to the promotion of their products than we are capable of accomplishing. There can be no assurance that we will be able to successfully compete in the future with such competitors, and the failure to successfully compete could have an adverse effect on our operating results.

 

Marketing Plan

 

As described above, we currently compete with several companies offering a number of different sunless tanning products. We believe the opportunity exists for us to take advantage of the very broad sunless tanning market by emphasizing the benefits of our home mist tanning system in relation to the products offered by our competitors. In this respect, we plan to focus our marketing efforts on the following competitive advantages:

 

  the speed with which our system can provide a full-body tan application;
     
  the convenience of being able to use our system in the comfort of your home;
     
  the quality of our proprietary tanning solution;
     
  the evenness with which our application unit distributes the tanning solution; and
     
  the simplicity of the application unit’s design and its corresponding ease-of-use.

 

We have not yet begun to fully implement a marketing plan. However, we have completed two phases of test marketing: one in Canada and another in the United States. These are the countries in which we expect to concentrate our operations, and both phases involved the production and airing of a basic infomercial and a coordinated introductory social media campaign. We decided to undertake these initiatives for the primary purpose of collecting data about our target markets in anticipation of formally launching the product at a time and with the cost to be determined.

 

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Suppliers

 

In addition to the supplier of our lithium ion batteries described in the “Products” section, above, we have developed relationships with two other companies that manufacture the plastic components of our application units and our proprietary tanning solution, respectively. Both of these manufacturers are located in the metropolitan area around Toronto, Ontario, Canada and, although we do not have formal supply agreements in place with them, we are able to purchase sufficient component quantities from them to fulfill demand for our products on an as-needed basis using conventional purchase orders.

 

Intellectual Property

 

Our home mist tanning system is currently protected by U.S. Patent No. 7,594,593, Canadian Patent No. 2,685,941, Australian Patent No. 2012227220 and Chinese patent No. 2323059. A summary of those patents and patent applications is provided below.

 

Type  Name  Region  Number  Date
Patent 

Apparatus for Spray

Application of a Sunless

Tanning Product

  United States   7,594,593 

January 17, 2006

(Filed) / September

29, 2009 (Issued)

Patent 

Apparatus for Spray

Application of a Sunless

Tanning Product

  Canada   2,685,941 

April 5, 2007 (Filed) /

June 21, 2016

(Granted and Issued)

Patent 

Automated Mist

Tanning Apparatus

  Australia   2012227220 

September 24, 2012

(Filed) / October 16,

2014 (Granted)

Patent 

Automated Mist

Tanning Apparatus

  China   2323059 

February 1, 2013

(Filed) / December

28, 2016 (Granted)

 

Our United States Patent is a “utility patent”, which in general terms protects the way an article is used and works. A “design patent”, on the other hand, protects the way an article looks. Other primary distinguishing features between the two types of patents are as follows: the term of a “utility patent” is 20 years measured from the filing date, whereas the term of a “design patent” is 14 years measured from the grant date; the holder of a “utility patent” are required to pay maintenance fees whereas the holder of a “design patent” is not; and the holder of a “utility patent” is able to file an international application naming various countries under the Patent Cooperation Treaty (PCT), whereas the holder of a “design patent” is not.

 

We also own the copyright in the contents of our website, the rights to the www.tropicspatan.com Internet domain name, and we guard the composition of our proprietary tanning solution as a trade secret. Other than that, we do not own any intellectual property and we have not filed for any protection of our trademark.

 

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License Agreement

 

As described elsewhere in this Report, on June 13, 2016 we completed the Notox Share Exchange and acquired 100% of the right, title and interest in and to the License Agreement with the Clinic formerly held by ZHC. The License Agreement grants us the exclusive license to certain intellectual property of the Clinic, including (i) U.S. Patent No. 8,920,816 “Apparatus and Method for Treating a Neuromuscular Defect” and associated foreign filings in various countries, (ii) improvement patents for which we elect in writing to include in the License Agreement, and (iii) foreign equivalents of any of the foregoing, and all patents issued therefrom and extensions of the same, including reissues and re-examinations. In addition, the License Agreement grants us the exclusive license to such proprietary information, trade secrets and tangible research property as is necessary to use the patent materials in the field of aesthetics and pain. Under the License Agreement, such information, secrets and property must (a) have been developed by Frank Papay, MD, (b) have been in existence as of December 1, 2012, (c) not be subject to the rights of any third parties or research sponsor restrictions, and (d) be owned by the Clinic.

 

The effective date of the License Agreement is December 1, 2012; on July 30, 2013 it was amended to incorporate a revised technology timeline, and it is valid until the expiration of the last to expire of certain patents. Pursuant to the License Agreement, we are required to pay the Clinic a royalty based on the sale of certain products, a milestone payment upon first commercial sale of the first such product and a percentage of any sublicensing revenues. In the month in which our cumulative gross revenues reach a specified amount, we must reimburse the Clinic for all incurred and to be incurred patent expenses to a specified amount. Royalties and other payments are payable quarterly.

 

On September 26, 2017, the License Agreement was amended a second time to, among other things: (i) clarify certain vague terms of the License Agreement; (ii) include us as a party for the purpose of guaranteeing the due and prompt payment and performance of all covenants, agreements, obligations and liabilities of Notox; (iii) record the Clinic’s explicit consent to the assignment from ZHC to Notox; (iv) extend the deadline for achieving the first commercial milestone (the submission of regulatory filings to applicable authorities) from November 30, 2017 to November 30, 2019; and (v) establish a second commercial milestone (the completion of at least one commercial sale within nine months of receiving regulatory approval). The effective date of the amendment was July 1, 2016.

 

Notox’s failure to achieve either of the foregoing milestones by the required dates, without satisfactory justification, will constitute a material breach of the License Agreement, as amended, giving the Clinic the right, but not the obligation, to convert the agreement to a non-exclusive license or terminate the agreement altogether. In addition, within 30 days of Notox’s receipt of initial regulatory approval, Notox is required to reimburse the Clinic for at least US$115,495 in patenting costs incurred as of July 1, 2016. All such costs incurred by the Clinic after that date will, at the Clinic’s option, either be paid directly by Notox or by the Clinic with the Clinic invoicing Notox, provided that Notox has no obligation to pay or reimburse the Clinic until after that regulatory approval has been obtained. Upon the termination or expiration of the License Agreement, all accrued and unreimbursed patenting costs become immediately due and payable by Notox to the Clinic. As of August 31, 2017, all accrued and unreimbursed patenting costs totalled $197,765 (US$157,758).

 

Employees

 

As of the date of this Report, we do not have any full time or part time employees. We currently rely on the efforts of John Marmora and Zoran Konević, our principal executive officers and directors, to manage our operations, as well as members of our informal advisory board and personnel at the Clinic to assist us in navigating certain technical and regulatory hurdles. In the future, we plan to hire workers on a contract basis from time to time as the need arises.

 

Government Regulations

 

Recent legislation regarding sunless tanning in both the United States and Canada has consistently focused on the harm posed to consumers, and minors in particular, as a result of exposure to UV rays at indoor tanning facilities. Research indicates that high risk exposure happens more commonly in teens and that blistering sunburns and overexposure during childhood greatly increase the chances of developing skin cancer later in life. Because sun (and UV) exposure in childhood and the teenage years can be so damaging, policymakers in some states have decided to regulate minors’ use of tanning devices (like tanning beds, booths and sunlamps). Currently California and Vermont ban the use of tanning beds for all minors under 18, and at least 33 states regulate the use of tanning facilities by minors. Some counties and cities also regulate the use of tanning devices.

 

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Legislators in various states and provinces are also currently debating bills that propose to ban indoor tanning for youth under the age of 18, and in some cases 14. Others have enacted laws that require in-person parental or guardian permission in order for a minor to use such facilities. Finally, most states and provinces at least require operators of indoor tanning facilities to implement time limitations on tanning beds to the manufacturer’s maximum exposure recommendation and to provide eye protection to customers.

 

The consequence of these regulations is that consumers are effectively being legislated away from using sunless tanning products or services that involve UV light exposure, leaving a gap in the market that we are aiming to fill. The amount of negative publicity surrounding the new laws has also contributed to a search by consumers for healthy tanning alternatives that provide consistent results, and we believe we are therefore well-positioned to capture a sizeable share of the rapidly-evolving sunless tanning market.

 

We are also required to comply with environmental laws regarding the manufacturing of our proprietary tanning solution and the recycling of the aerosol cans that contain the solution. However, we do not anticipate incurring any costs or effects relating to either since the manufacturing process required to produce our tanning solution results in no chemical by-products and minimal waste and our customers are responsible for recycling the aerosol cans through their local household recycling program.

 

In addition, since our proprietary tanning solution contains DHA, it is subject to the United States Federal Food, Drug, and Cosmetic Act (the “FD&C Act”) and the purview of the FDA. Section 721 of the FD&C Act authorizes the regulation of color additives, including their uses and restrictions, and DHA is listed in the regulations as a color additive for use in imparting color to the human body. However, its usage is restricted to external application, as is its use by the FDA, since the FDA has not received safety data that would allow it to consider approving DHA for use on other exposure routes such as the lips, the area of the eye or any body surface covered by a mucous membrane. This includes the use of DHA through misting tanning devices. Since it may be difficult for consumers to avoid exposure to DHA in a manner for which the chemical is not approved, we may receive requests by our customers to provide protection for their eyes and mucous membranes as part of any home mist tanning package, and we will consider such requests as the need arises.

 

Since we are only beginning to develop the intellectual property we acquired under the License Agreement, as amended, we do not believe that any government regulations will affect our operations in that regard until we are able to complete the design of the Notox unit and treatment probe.

 

Item 1A. Risk Factors

 

Not required.

 

Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item 2. Properties

 

Our executive office is located at 1057 Parkinson Road, Unit #9, Woodstock, Ontario, Canada N4S 7W3. We have leased this space at a cost of approximately $1,100 per month plus applicable taxes since December 2, 2011, and we also use it to meet our assembly, warehouse and distribution needs. On August 31, 2017, we entered into an additional one-year lease for office space in Richmond Hill, Ontario, Canada at a cost of $21,000 per year plus applicable taxes. The space is currently being leased for $700 per month plus applicable taxes.

 

We believe that these properties are generally suitable to meet our needs for the foreseeable future; however, we will continue to seek additional space as needed to satisfy our growth.

 

Item 3. Legal Proceedings

 

We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of our executive officers or any of our subsidiaries, threatened against or affecting us, our common stock, any of our subsidiaries or our officers or directors of those of our subsidiaries’ in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 17 
 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

General

 

As of the date of this Report, we have 57,532,843 shares of common stock issued and outstanding and outstanding warrants to purchase 1,400,770 shares of our common stock at prices ranging from $0.50 to US$1.40. In addition, Subco has 50,601,750 preferred shares issued and outstanding, each of which is exchangeable into one share of our common stock in accordance with the rights, privileges, restrictions and conditions attached to such preferred shares.

 

We do not have any outstanding options or other securities convertible into shares of our common stock.

 

Market Information

 

Our common stock is not traded on any exchange; however, it is quoted on the OTC Bulletin Board and OTCQB under the symbol “TRPO”. OTC Bulletin Board and OTCQB securities are not listed and traded on the floor of an organized national or regional stock exchange. Instead, OTC Bulletin Board and OTCQB securities transactions are conducted through a telephone and computer network connecting dealers. OTC Bulletin Board and OTCQB issuers are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange.

 

Trading in stocks quoted on the OTC Bulletin Board and OTCQB is often thin and is characterized by wide fluctuations in trading prices due to many factors that may have little to do with a company’s operations or business prospects. There is no assurance that there will be a market for our common stock in the future.

 

Our common stock became eligible for quotation on the OTC Bulletin Board on June 18, 2014 and the OTCQB on September 3, 2014. The following quotations reflect the high and low bids for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. The high and low bid quotations of our common stock for the periods indicated below are as follows:

 

OTCQB
Quarter Ended  High ($)   Low ($) 
August 31, 2017   2.60    0.55 
May 31, 2017   2.60    2.60 
February 28, 2017   2.60    2.60 
November 30, 2016   2.60    1.25 
August 31, 2016   1.25    1.25 
May 31, 2016   1.25    1.25 
February 28, 2016   1.25    1.25 
November 30, 2015   1.20    1.20 

 

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Holders

 

As of the date of this Report, there are approximately 58 holders of record of our common stock.

 

Dividends

 

The Exchangeable Share Provisions require Subco to pay dividends on the Exchangeable Shares that are equivalent to any dividends that we pay on shares of our common stock. The Support Agreement provides commercial certainty for the holders of Exchangeable Shares in this regard since it creates enforceable contractual rights of Subco against us so that in all relevant circumstances Subco is in a position to acquire the necessary shares of our common stock, and finance any dividend payments equivalent to dividends we decide to pay on shares of our common stock, in order to satisfy Subco’s obligations under the Exchangeable Share Provisions. The Support Agreement therefore includes, among other things, a covenant made by us that we will not declare or pay a dividend on shares of our common stock unless Subco can simultaneously pay the same dividend on the Exchangeable Shares.

 

We have not declared or paid any dividends on our common stock and, despite the language in the Exchangeable Share Provisions and the Support Agreement, we do not expect to declare or pay any such dividends for the foreseeable future. Any future decisions regarding dividends will be made by our Board of Directors. We currently intend to retain and use any future earnings for the development and expansion of our business. Our Board of Directors has complete discretion regarding the payment of dividends, and even if our Board of Directors decides to pay dividends, the form, frequency and amount will depend on our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the Board of Directors may deem relevant.

 

Penny Stock

 

Our common stock is subject to the provisions of Section 15(g) of the Exchange Act and Rule 15g-9 thereunder, commonly referred to as the “penny stock rule”. Section 15(g) sets forth certain requirements for transactions in penny stock, and Rule 15g-9(d) incorporates the definition of “penny stock” that is found in Rule 3a51-1 of the Exchange Act. The SEC generally defines a penny stock to be any equity security that has a market price less than US$5.00 per share, subject to certain exceptions. We are subject to the SEC’s penny stock rules.

 

Since our common stock is deemed to be penny stock, trading in the shares of our common stock is subject to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors. “Accredited investors” are generally persons with assets in excess of US$1,000,000 or annual income exceeding US$200,000 or US$300,000 together with their spouse. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of securities and must have the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the first transaction, of a risk disclosure document prepared by the SEC relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for penny stocks held in an account and information to the limited market in penny stocks. Consequently, these rules may restrict the ability of broker-dealer to trade and/or maintain a market in our common stock and may affect the ability of our stockholders to sell their shares.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

As of the date of this Report, we do not have any compensation plans under which our equity securities are authorized for issuance. We intend to adopt an equity compensation plan in which our directors, officers, employees and consultants will be eligible to participate. However, no formal steps have yet been taken to adopt such a plan.

 

 19 
 

 

Recent Sales of Unregistered Securities

 

On September 7, 2017, we issued and sold an aggregate of 630,000 units to two non-U.S. investors and three U.S. investors at a price of US$1.00 per unit in exchange for gross proceeds of US$630,000. Each unit consists of one share of our common stock and one warrant exercisable into one additional share at an exercise price of $1.40 per share for a period of 24 months.

 

The units were offered and sold in private transactions in reliance upon the exemptions from registration provided by Sections 4(a)(2) and 4(a)(5) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 903 of Regulation S promulgated thereunder. Our reliance on Sections 4(a)(2) and 4(a)(5) was based on the following factors: (a) the issuance of the units to the U.S. investors occurred in an isolated private transaction which did not involve a public offering; (b) there were only a limited number of investors; (c) there were no subsequent or contemporaneous public offerings of the units; (d) the securities were not broken down into smaller denominations; and (e) the negotiations for the sale of the units took place directly between the investors and us.

 

Our reliance on Rule 903 of Regulation S was based on the fact that none of the non-U.S. investors was a “U.S. person” as that term is defined in Rule 902(k) of Regulation S, that the investors acquired the units for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that the investors understood that the units may not be sold or otherwise disposed of without registration under the Securities Act and any applicable state securities laws, or an applicable exemption or exemptions therefrom.

 

In addition, the shares and warrants underlying the units are subject to restrictions similar to those attached to the preferred shares of Subco. In particular, the investors may not sell, transfer or otherwise dispose of their securities until December 31, 2018, subject to certain limited exceptions.

 

Other than as described above or as disclosed in previous quarterly reports on Form 10-Q or current reports on Form 8-K, we did not issue any equity securities that were not registered under the Securities Act during the fiscal year ended August 31, 2017.

 

Purchases of Equity Securities by the Issuer and “Affiliated Purchasers”

 

We did not purchase any shares of our common stock or other securities during the year ended August 31, 2017.

 

Item 6. Selected Financial Data

 

Not required.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our results of operations and financial condition has been derived from and should be read in conjunction with our audited consolidated financial statements and the related notes thereto that appear elsewhere in this Report, as well as Item 1 and the “Presentation of Information” section that appears at the beginning of this Report.

 

Overview

 

We are a company in the business of developing and commercializing innovative technologies. Through Notox, we own 100% of the right, title and interest in and to the License Agreement with the Clinic formerly held by ZHC, and through Tropic Spa, our goal is to market unique commercial tanning systems designed primarily for spas, gyms and clinics, as well as a personal tanning solution designed for convenient home use. To date, we have finalized the design of our personal tanning product and applied for and acquired patents in the United States, Canada, Australia and China. We have also prepared our product for market, completed two phases of test marketing initiatives, and are currently exploring potential avenues for launching the product on a worldwide scale.

 

 20 
 

 

Results of Operations

 

Revenue

 

We did not generate any revenue during the year ended August 31, 2017, whereas we generated $863 in revenue during the prior year, all of which was in the form of sales revenue from our home mist tanning units.

 

Production Costs

 

During the year ended August 31, 2017, we incurred production costs of $1,064,118, which was equal to our gross loss for the period. During the year ended August 31, 2016, we incurred production costs of $426,551, which, when subtracted from the revenue we generated during that period, resulted in a gross loss of $425,688. Our production costs during both years were attributable to a combination of amortization of the US Patent ($376,423 in the current year vs. $374,228 in the prior year), production-related consulting fees ($27,700 in the current year vs. $31,200 in the prior year), depreciation ($8,550 in the current year vs. $10,687 in the prior year), materials and supplies ($960 in the current year vs. $10,071 in the prior year) and a writedown of inventory ($122,101 in the current year vs. $365 in the prior year). In addition, we incurred $187,466 in amortization related to the License Agreement in the current year, as well as $197,765 in patenting costs and $143,153 in design and production costs attributable to the NRFTS proposal.

 

Expenses

 

During the year ended August 31, 2017, we incurred $615,208 in total general and administrative expenses, compared to $597,812 in such expenses during the year ended August 31, 2016.

 

Our expenses during the year ended August 31, 2017, consisted of $507,004 in management-related consulting fees, $82,873 in professional fees, $23,000 in travel and entertainment expenses, $22,056 in office and miscellaneous expenses, $13,367 in trust and filing fees, $12,950 in rent, $11,351 in interest on advances from related parties and shareholders, $7,666 in patent maintenance fees, $2,248 in marketing expenses and $732 in investor relations expenses, as offset by a $68,039 foreign exchange gain.

 

During the prior year, our expenses included $422,706 in management-related consulting fees, $81,929 in professional fees, $12,417 in travel and entertainment expenses, $21,934 in office and miscellaneous expenses, $20,627 in trust and filing fees, $13,200 in rent, $12,434 in interest on advances from related parties and shareholders, $9,007 in marketing expenses and $3,558 in foreign exchange loss. Apart from the $84,298 increase in our management-related consulting fees between the two years, which was primarily attributable to a general increase in our operations, and the $71,597 foreign exchange gain, our expenses were relatively consistent from year-to-year.

 

The significant management-related consulting fees we incurred over both years were paid to our principal executive officers and directors and one consultant who provides management-related services to us and is also a major shareholder.

 

Other Items

 

During the year ended August 31, 2017, we incurred a patent writedown in the amount of $3,381,362 associated with the U.S., Australian, Canadian and Chinese patents, as well as a writedown of amounts receivable in the amount of $20,332. These were offset to some extent by a $9,333 gain associated with the revaluation of certain outstanding warrants to purchase shares of our common stock. During the prior year, we incurred a patent writedown in the amount of $6,793 and no additional other expense items.

 

 21 
 

 

Net Loss

 

During the year ended August 31, 2017, we incurred a net loss and comprehensive loss of $5,071,687, approximately 2/3 of which was attributable to the patent writedown described above, and a net loss per share of $0.09. During the prior year, we experienced a net loss and comprehensive loss of $1,030,293 and a net loss per share of $0.06.

 

Liquidity and Capital Resources

 

As of August 31, 2017, we had $63,144 in cash, $176,059 in current assets, $1,522,525 in total assets, $3,310,825 in current liabilities, $3,508,590 in total liabilities and a working capital deficiency of $3,314,766. As of that date, we also had an accumulated deficit of $10,972,661.

 

During the year ended August 31, 2017, we spent $592,051 in cash on operating activities, compared to $169,166 in cash spending on operating activities during the prior year. The 350% increase in our cash spending on operating activities during the fiscal year ended August 31, 2017 was primarily attributable to certain changes in our assets and liabilities during our most recently completed fiscal year, the most significant of which by far was the $237,611 increase in our accounts payable and accrued liabilities from year-to-year.

 

We spent $665,878 and $14,818 in cash on investing activities during the years ended August 31, 2017 and 2016, respectively. Substantially the entire amount in the current year was attributable to the License Agreement, whereas substantially the entire amount in the prior year was attributable to patent costs.

 

During the year ended August 31, 2017, we received $1,176,355 in cash from financing activities, including $838,674 in stock subscriptions and $395,580 in proceeds from the issuance of our common stock, less $19,899 in stock issue costs and $38,000 in advances that we repaid to related parties and shareholders. During the prior year, we received $320,366 in cash from financing activities, substantially all of which was in the form of stock subscriptions received.

 

During the year ended August 31, 2017, our cash decreased by $81,574 due to a combination of our operating, investing and financing activities.

 

Plan of Operations 

 

Our plan of operations over the next 12 months is to continue the process initiated by ZHC to design, manufacture and commercialize the Notox system and its features. We expect to work closely with the Clinic in this regard, and anticipate that we will require at least US$4,675,000 to carry out our plan, as follows:

 

Description  Amount
(US$)
 
Design, testing and prototyping the Notox unit (including $111,200 in milestone payments to RBC)   600,000 
Design, testing and prototyping the Notox treatment probe   1,400,000 
Acquisition costs payable to ZHC   450,000 
Human trial expenses   950,000 
FDA Section 510(k) notification costs and CE marking expenses   750,000 
Marketing and inventory expenses   525,000 
Total   4,675,000 

 

 22 
 

 

In addition, over the next 12 months our plan of operations through Tropic Spa is to carry out a complete evaluation of the home tanning system’s potential and to develop the commercial side of the tanning business, including through possible licensing arrangements both domestically and abroad. We do not anticipate spending any specific amounts for these purposes, as the evaluation and development described above will be covered by our general and administrative expenses described below.

 

We expect to incur the following general and administrative expenses over the next 12 months. These expenses are reasonably consistent with those from prior periods, as adjusted to reflect the expected increase in our operations and the costs of maintaining our status as a public company.

 

Description  Amount
($)
 
Professional fees and filing fees   120,000 
Management-related consulting fees   500,000 
Rent (including utilities)   30,000 
Travel and entertainment expenses   25,000 
Office and miscellaneous expenses   25,000 
Total   700,000 

 

We do not currently have sufficient funds to carry out our entire plan of operations, so we intend to meet the balance of our cash requirements for the next 12 months through a combination of debt financing and equity financing through private placements. Currently we are active in contacting broker/dealers in Canada and elsewhere regarding possible financing arrangements; however, we do not currently have any agreements in place to complete any private placement financings and there is no assurance that we will be successful in completing any such financings. If we are unsuccessful in obtaining sufficient funds through our capital raising efforts, we may review other financing options, although we cannot provide any assurance that any such options will be available to us or on terms reasonably acceptable to us. Further, if we are unable to secure any additional financing then we plan to reduce the amount that we spend on our operations, including management-related consulting fees and other general and administrative expenses, so as not to exceed the capital resources available to us.

 

 23 
 

 

Critical Accounting Policies

 

Inventory

 

Inventory is stated at the lower of cost, computed using the first-in, first-out method, or market. If the cost of inventory exceeds its market value, a provision is made currently for the difference between the cost and market value. Our inventory consists of finished goods, components and supplies.

 

Equipment, Net

 

Equipment is stated at cost, net of accumulated depreciation. Equipment is depreciated over the estimated useful life of the asset. Mould equipment is depreciated at 20% on a declining-balance basis. The website was depreciated on a straight-line basis over five years. One-half of these rates are used in the year of acquisition. Replacements and major improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost of assets disposed of and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to operations.

 

Intangible Assets

 

Patents

 

The US Patent is recorded at the value attributed to the shares issued to the Originating Companies and shareholders of TGSI less accumulated amortization and impairment writedowns. The US Patent was issued on September 29, 2009 and is effective until September 29, 2026. The Australian, Canadian and Chinese Patents are recorded at the application costs incurred less accumulated amortization and impairment writedowns. The Australian Patent was issued on October 16, 2014 and is effective until April 5, 2027. The Canadian Patent was issued on June 21, 2016 and is effective until April 5, 2027. The Chinese Patent was issued on December 28, 2016 and is effective until February 1, 2033. Upon expiration, the patents can be extended subject to certain changes required to secure the extension. Although the effects of obsolescence, demand, competition and other economic factors (such as stability of the industry, technological advances and legislative action that results in an uncertain or changing regulatory environment) can have an adverse effect on the industry and our product, management is not currently aware of any known adverse factors that will affect us in the future.

 

Costs incurred for patents which are in the process of being completed will be amortized over the life of the patent when the patent is issued.

 

We do not believe that there are any limits to how long our Home Mist Tanning units can sell in the market place. While we expect to be able to secure an extension to our patents prior to expiry, this cannot be predicted with certainty at this time. Accordingly, management has determined that the best estimate of the useful life of the US, Australian, Canadian and Chinese Patents are 17, 13, 11 and 16 years, respectively. At this time, we do not believe that the patents will have a residual value at the end of their useful lives.

 

License Agreement

 

The License Agreement is recorded at estimated fair value plus acquisition costs less accumulated amortization. The term of the License Agreement continues until the expiration of the last to expire of the Licensed Patents (as defined in the License Agreement). All costs related to the development of the licensed technology are expensed as incurred.

 

The technology licensed by Notox is a platform that provides us access to four large market segments or verticals (derma, pain, body and headache) that include the fields of aesthetics, drug-free pain management, body contouring and perspiration control. Based on management’s experience, it takes approximately two years to fully develop each vertical, with each vertical being developed in sequence. Accordingly, management’s best estimate of the amortization period for the License Agreement is eight years.

 

 24 
 

 

Amortization and Impairment

 

Definite-lived intangible assets are required to be amortized using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or utilized. At this time, management is not able to determine with any amount of certainty the number of Home Mist Tanning units that will be sold over the useful lives of the patents. Accordingly, the patents are being amortized on a straight-line basis over the period of their useful lives. The License Agreement is being amortized over eight years based on management’s best estimate of the time required to develop the four verticals as explained above.

 

Intangible assets subject to amortization are required to be reviewed for impairment. An impairment loss must be recognized if the intangible asset’s carrying amount is not recoverable and the carrying amount exceeds fair value. We apply the following three-step process to identify, recognize and measure impairment of intangible assets:

 

  Consider whether indicators of impairment are present indicating that the intangible assets’ carrying amount might not be recoverable;
  If indicators are present, perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the intangible assets to their carrying amounts; and
  If the undiscounted cash flows used in the recoverability test are less than the intangible assets’ carrying amount, determine the intangible assets’ fair value and recognize an impairment loss if the carrying amount exceeds fair value.

 

Because of the unique nature of a patent and a license agreement, income-producing definite-lived intangible assets, the calculation of cash flows can be very difficult to estimate. In this case, the estimated cash flows reflect the direct revenue expected to be generated by the patents and the License Agreement as well as an allocation of expenses.

 

Foreign Currency

 

Our functional currency and the functional currency of our subsidiaries is the Canadian dollar. Our consolidated financial statements are presented in Canadian dollars.

 

Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the period-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Exchange differences arising on the translation of monetary items or on settlement of monetary items are recognized in the loss in the period in which they arise.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Not required.

 

Item 8. Financial Statements and Supplementary Data

 

Tropic International Inc.

Consolidated Financial Statements

Year Ended August 31, 2017

(Expressed in Canadian dollars)

 

  Index
   
Report of Independent Registered Public Accounting Firm F-1
   
Consolidated Balance Sheets F-2
   
Consolidated Statements of Loss and Comprehensive Loss F-3
   
Consolidated Statements of Cash Flows F-4
   
Consolidated Statement of Stockholders’ Equity F-5
   
Notes to the Consolidated Financial Statements F-6

 

 25 
 

 

TROPIC INTERNATIONAL INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED AUGUST 31, 2017

 

EXPRESSED IN CANADIAN DOLLARS

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders of Tropic International Inc.:

 

We have audited the accompanying consolidated balance sheets of Tropic International Inc. (the “Company”) as of August 31, 2017 and 2016, and the related consolidated statements of loss and comprehensive loss, stockholders’ equity (deficiency), and cash flows for each of the years in the three-year period ended August 31, 2017. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tropic International Inc. as of August 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended August 31, 2017, in conformity with U.S. generally accepted accounting principles.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has a deficit of $10,972,661 since inception, a working capital deficiency of $3,134,766, and stockholders’ deficiency of $1,986,065 as of August 31, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

Vancouver, Canada

December 14, 2017

 

F-1
 

 

TROPIC INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS

(EXPRESSED IN CANADIAN DOLLARS)

 

  

August 31, 2017

  

August 31, 2016

 
ASSETS          
Current assets:          
Cash  $63,144   $144,718 
Amounts receivable   84,290    75,738 
Inventory (Note 9)   1    122,318 
Prepaid expenses   28,624    3,300 
Total current assets   176,059    346,074 
Equipment, net (Note 8)   34,197    42,747 
Patents, net (Note 9)   4    3,755,699 
License agreement, net (Notes 3 and 10)   1,312,265    152,731 
Total assets  $1,522,525   $4,297,251 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)          
Current liabilities:          
Accounts payable and accrued liabilities (Notes 11 and 12)  $1,075,601   $837,990 
Advances from related parties/shareholders (Notes 12 and 13)   415,960    442,609 
License assignment fee payable (Notes 3 and 14)   683,212     
Stock purchase warrants (Notes 4 and 16)   297,378     
Stock subscribed (Note 16)   838,674     
Total current liabilities   3,310,825    1,280,599 
Due to the Clinic (Note 3)   197,765     
    3,508,590    1,280,599 
           
Stockholders’ equity (Note 16):          
Common stock   526,182    140,532 
Stock subscribed       345,366 
Additional paid-in capital   8,460,414    8,431,728 
Deficit   (10,972,661)   (5,900,974)
Total stockholders’ equity (deficiency)   (1,986,065)   3,016,652 
Total liabilities and stockholders’ equity (deficiency)  $1,522,525   $4,297,251 

 

Contingent liability (Note 20)

Subsequent events (Note 21)

 

See accompanying notes to the consolidated financial statements.

 

F-2
 

 

TROPIC INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(EXPRESSED IN CANADIAN DOLLARS)

 

   Years Ended August 31, 
   2017   2016   2015 
Revenue:               
Sales  $   $863   $4,514 
                
Production costs:               
Amortization – license agreement (Note 10)   187,466         
Amortization – patent (Note 9)   376,423    374,228    373,075 
Consulting fees – production   27,700    31,200    31,200 
Depreciation (Note 8)   8,550    10,687    13,358 
Design and production – NRFTS (Note 7)   143,153         
Materials and supplies   960    10,071    14,981 
Patenting costs – the Clinic (Note 3)   197,765         
Writedown of inventory (Note 9)   122,101    365    6,209 
Total production costs   1,064,118    426,551    438,823 
Gross loss   (1,064,118)   (425,688)   (434,309)
                
General and administration:               
Consulting fees – management (Note 12)   507,004    422,706    185,056 
Depreciation           5,774 
Interest on advances from related parties/shareholders (Notes 12 and 13)   11,351    12,434    11,637 
Investor relations   732         
Loss (gain) on foreign exchange   (68,039)   3,558    4,159 
Marketing   2,248    9,007    16,789 
Office and miscellaneous   22,056    21,934    22,427 
Patent maintenance fees   7,666         
Professional fees   82,873    81,929    54,295 
Rent   12,950    13,200    13,200 
Travel and entertainment   23,000    12,417    10,803 
Trust and filing fees   13,367    20,627    16,177 
Total general and administration   615,208    597,812    340,317 
Loss before other items and income taxes   (1,679,326)   (1,023,500)   (774,626)
Other items:               
Writedown of patents (Note 9)   (3,381,362)   (6,793)    
Writedown of amounts receivable   (20,332)        
Gain on revaluation of warrants   9,333         
Loss before income taxes   (5,071,687)   (1,030,293)   (774,626)
Income taxes            
Net loss and comprehensive loss  $(5,071,687)  $(1,030,293)  $(774,626)
                
Net loss per share – basic and diluted (Note 5)  $(0.09)  $(0.06)  $(0.13)
                
Weighted-average number of shares outstanding   56,606,971    16,924,423    6,132,073 

 

See accompanying notes to the consolidated financial statements.

 

F-3
 

 

TROPIC INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(EXPRESSED IN CANADIAN DOLLARS)

 

   Years Ended August 31, 
   2017   2016   2015 
             
Cash Flows Used In Operating Activities               
Net loss  $(5,071,687)  $(1,030,293)  $(774,626)
Adjustments to reconcile net loss to net cash provided by operating activities:               
Amortization – license agreement   187,466         
Amortization – patent   376,423    374,228    373,075 
Depreciation   8,550    10,687    19,132 
Writedown of amounts receivable   20,332         
Writedown of inventory   122,101    365    6,209 
Writedown of patents   3,381,362    6,793     
Gain on revaluation of warrants   (9,333)        
Changes in assets and liabilities:               
Amounts receivable   (28,884)   (72,057)   3,746 
Inventory   216    8,019    11,386 
Prepaid expenses   (25,324)       (1,200)
Accounts payable and accrued liabilities   237,611    520,658    214,497 
Due to the Clinic   197,765         
Interest accrued on advances from related parties/shareholders   11,351    12,434    11,637 
Net cash used in operating activities   (592,051)   (169,166)   (136,144)
                
Cash Flows Used In Investing Activities               
Patent costs   (2,090)   (14,949)   (6,038)
License agreement   (663,788)        
Cash transferred upon acquisition of Notox       131     
Net cash used in investing activities   (665,878)   (14,818)   (6,038)
                
Cash Flows Provided By Financing Activities               
Proceeds from issuance of common stock   395,580         
Stock issue costs   (19,899)        
Stock subscriptions received   838,674    315,366    30,000 
Advances from related parties/shareholders       5,000    102,500 
Repayment of advances from related parties/shareholders   (38,000)        
Net cash provided by financing activities   1,176,355    320,366    132,500 
                
Increase (decrease) in cash during the year   (81,574)   136,382    (9,682)
Cash, beginning of year   144,718    8,336    18,018 
Cash, end of year  $63,144   $144,718   $8,336 

 

On June 13, 2016, the Company issued 50,000,000 shares of common stock in exchange for all of the outstanding common shares of Notox. The Company also incurred $19,519 in professional fees relating to this transaction. See Note 3.

 

See accompanying notes to the consolidated financial statements.

 

F-4
 

 

TROPIC INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(EXPRESSED IN CANADIAN DOLLARS)

 

   Common Stock                 
   * Common Stock   Amount   Stock subscribed   Additional
paid-in
capital
   Deficit   Total stockholders’ equity (deficiency) 
Balance at August 31, 2012   56,516,523   $7,932,201   $   $   $(2,488,050)  $5,444,151 
Stock issued for cash   10,890,100    552,000                552,000 
Stock issued in exchange for management services   32,593,377    16,297                16,297 
Recapitalization on reverse takeover (see Notes 2 and 16)       (8,487,886)       8,431,728        (56,158)
Elimination of issued common stock of TSI   (100,000,000)                    
Establishment of issued common stock of Rockford Minerals Inc.   6,132,073                     
Net loss                   (781,639)   (781,639)
Balance at August 31, 2013   6,132,073    12,612        8,431,728    (3,269,689)   5,174,651 
Net loss                   (826,366)   (826,366)
Balance at August 31, 2014   6,132,073    12,612        8,431,728    (4,096,055)   4,348,285 
Net loss                   (774,626)   (774,626)
Stock subscribed           30,000            30,000 
Balance at August 31, 2015   6,132,073    12,612    30,000    8,431,728    (4,870,681)   3,603,659 
Stock subscribed           315,366            315,366 
Stock issued for asset acquisition (Notes 3 and 16)   50,000,000    127,920                127,920 
Net loss                   (1,030,293)   (1,030,293)
Balance at August 31, 2016   56,132,073    140,532    345,366    8,431,728    (5,900,974)   3,016,652 
Stock issued for cash   760,770    414,291    (345,366)   28,686        97,611 
Stock issue costs – cash       (19,899)               (19,899)
Stock issue costs – finder’s warrants       (8,742)               (8,742)
Net loss                   (5,071,687)   (5,071,687)
Balance at August 31, 2017   56,892,843   $526,182   $   $8,460,414   $(10,972,661)  $(1,986,065)

 

*The above presentation reflects the issued share capital of Tropic Spa Inc. until the completion of the June 28, 2013 reverse takeover, at which point it is adjusted to reflect the share capital of the Company. The above presentation also reflects a 1:2 reverse split of the Company’s common stock on August 25, 2016. See Note 16.

 

See accompanying notes to the consolidated financial statements.

 

F-5
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

 

1. Company Overview and Basis of Presentation

 

Nature and History of Operations

 

Tropic International Inc. (formerly Rockford Minerals, Inc.) (the “Company”) was incorporated under the laws of the state of Nevada on October 29, 2007. The Company was a natural resource exploration company with an objective of acquiring, exploring and, if warranted and feasible, developing natural resource properties. Activities during the exploration stage included developing the business plan and raising capital.

 

On June 28, 2013, the Company completed a reverse takeover transaction (see Note 2) with Tropic Spa Inc. (“TSI”), a company that manufactures and sells Home Mist Tanning units that deliver a full-body application. As a result of this transaction, the Company became a holding company operating through TSI. Upon the closing of the share exchange agreement described below, the Company changed its fiscal year end from October 31 to August 31 to coincide with the fiscal year end of TSI.

 

On December 6, 2013, the Company changed its name to Tropic International Inc. as a result of a merger with a wholly-owned subsidiary incorporated solely to effect the name change.

 

On September 3, 2014, the Company’s shares became eligible for quotation on the OTCQB under the symbol TRPO.

 

On June 13, 2016, the Company completed an asset acquisition transaction (see Note 3) with Notox Bioscience Inc. (“Notox”), a private Nevada corporation incorporated on May 31, 2016 for the purpose of acquiring 100% of the right, title and interest in and to an exclusive license agreement (the “License Agreement”) with The Cleveland Clinic Foundation (the “Clinic”), an Ohio not-for-profit corporation. As a result of this transaction, the Company is a holding company operating through both TSI and Notox.

 

The accompanying consolidated financial statements include the results of operations of the Company and TSI for the years ended August 31, 2017 and 2016 and of Notox for the year ended August 31, 2017, and the period from June 13, 2016 to August 31, 2016.

 

On November 19, 2007, TSI entered into Share Subscription Agreements (the “Agreements”) with MCM Consulting Ltd., Nandoor Enterprises Ltd., Sierra Tan Ltd., Sunshower Incorporated, Sunshower International Corporation and Tropic Spa Group Inc. (the “Originating Companies”). Pursuant to the terms of the Agreements, the Originating Companies subscribed for, in aggregate, 18,202,503 common shares of TSI valued at $3,657,175. This assigned value was the cost to the Originating Companies, as of that date, of developing a Home Mist Tanning system and the application for and acquisition of a United States Patent “Apparatus for Spray Application of a Sunless Tanning Product” (the “US Patent”). The Agreements included a triggering event (a “Triggering Event”) which was defined to mean the occurrence of any of the following events:

 

  Ninety days after TSI has been listed as a public company on a stock exchange;
  Ninety days after TSI either purchases or is purchased by a company that is trading on a stock exchange; or
  Notwithstanding the above, ninety days after TSI has notified the Originating Companies in writing that a Triggering Event has occurred.

 

The Originating Companies entered into agreements with their shareholders allowing the shareholders, upon the Triggering Event, to exchange their class A shares in the Originating Companies, by exercising the option under their common share exchange warrant, for common shares in TSI.

 

F-6
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

 

1. Company Overview and Basis of Presentation (cont’d)

 

On April 9, 2009, the Board of Directors of TSI (the “Board”) resolved that the Triggering Event had occurred and approved and issued a Notification of Triggering Event to the shareholders of the Originating Companies. The decision to exercise the Triggering Event was driven by three factors:

 

  The approval of the US Patent;
  Delivery of the final production model on or before April 21, 2009; and
  Implementation of an aggressive marketing strategy.

 

After November 19, 2007, and subsequent to the execution of the Agreements, Tropic Spa Group Inc. (“TSGI”) incurred an additional $2,685,104 on the continued development of the Home Mist Tanning system and the application for and acquisition of the US Patent. On March 11, 2013, TSI executed a second Share Subscription Agreement (the “Second Agreement”) with TSGI to cover the common shares of TSI issued to the shareholders of TSGI in respect of the additional costs incurred. Pursuant to the terms of the Second Agreement, TSGI subscribed for 26,034,520 common shares valued at $3,155,462 covering the period from November 20, 2007 to June 2010. Of these amounts, 3,880,745 common shares were for $470,358 received directly by TSI. The value assigned to the carrying value of the US Patent, during the year ended August 31, 2010, was $2,685,104 ($3,155,462 less $470,358). The total value assigned to the carrying value of the US Patent pursuant to the Agreements and the Second Agreement, collectively, was $6,342,279. 

 

On October 16, 2014, the Company, through TSI, obtained an Australian patent (the “Australian Patent”), incurring application costs of $4,976. On June 21, 2016, the Company, through TSI, obtained a Canadian patent (the “Canadian Patent”), incurring application costs of $17,406. On December 28, 2016, the Company, through TSI, obtained a Chinese patent (the “Chinese Patent”), incurring application costs of $5,806. Costs incurred are recorded as intangible assets. On August 31, 2017, the net carrying amount of the patents was written down to a nominal amount of $4 (see Note 9).

 

As reflected in the accompanying consolidated financial statements, the Company has a deficit of $10,972,661 (August 31, 2016 - $5,900,974) since inception, a working capital deficiency of $3,134,766 (August 31, 2016 - $934,525) and a stockholders’ deficiency of $1,986,065 (August 31, 2016 - stockholders’ equity of $3,016,652). This raises substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on its ability to raise additional capital and to implement its business plan. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Management has evaluated the Company’s ability to continue as a going concern by assessing its ability to meet its obligations as they become due within one year from the date of issue of the financial statements. Management’s assessment included the following factors:

 

  The Company’s financial condition as at the date of issue of the financial statements;
  The Company’s actual or anticipated conditional and unconditional obligations due within one year from the date of issue of the financial statements;
  The funds necessary to maintain the Company’s operations considering its current financial condition, obligations and other expected cash flows; and
  Other conditions and events that may affect the Company’s ability to meet its obligations within one year from the date of issue of the financial statements.

 

The Company’s operating expenses are estimated to be approximately $100,000  per year. As at August 31, 2017, the Company’s current cash liabilities total approximately $2,175,000. Of this amount, approximately $1,767,000 – accounts payable and accrued liabilities ($668,000), advances from related parties/shareholders ($416,000) and license assignment fee payable ($683,000) – are payable to related parties and/or major shareholders who have not and will not require payment until such time as sufficient

 

F-7
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

 

1. Company Overview and Basis of Presentation (cont’d)

 

cash flow is available. Of the remaining $408,000, $51,000 was repaid subsequent to year end and $117,000 is payable to organizations that are willing to continue to defer payment. To the extent that $206,000 of the remaining $240,000 cannot be deferred and sufficient equity financing has not been raised to make the payment required, management will advance funds to the Company, if appropriate.

 

2. Reverse Takeover

 

On June 28, 2013 (the “Closing Date”), the Company, its wholly-owned subsidiary 1894632 Ontario Inc. (“Subco”) and TSI entered into a share exchange agreement (the “Exchange Agreement”) with certain of the shareholders of TSI (the “Selling Shareholders”) pursuant to which the Company acquired 39,015,439 common shares, or approximately 78% of the issued and outstanding shares, of TSI in exchange for the issuance of 39,015,439 preferred shares of Subco to the Selling Shareholders on a one-for-one basis. Each one preferred share of Subco is exchangeable into one share of the Company’s common stock at the option of the holder subject to the following restrictions:

 

  The Selling Shareholders required the written consent of Subco to exchange, sell or otherwise dispose of, directly or indirectly, any of their preferred shares of Subco until the six month anniversary of the Closing Date;
  Within 30 days of that time, and provided TSI generated at least $1,000,000 in gross revenue during the preceding six month period, Subco permitted the Selling Shareholders to require Subco to redeem an aggregate of 1% of its then-outstanding preferred shares on a pro-rata basis; and
  Within 30 days of each six month anniversary of the Closing Date until June 30, 2015, on which date all restrictions on the preferred shares automatically expired unless extended by the Selling Shareholders, Subco granted the holders of its preferred shares a permission identical to the one above.

 

Upon the closing of the Exchange Agreement, the sole officer and director of TSI became the sole officer and a director of the Company and the Company adopted the business plan of TSI.

 

As a result of the share exchange, the Selling Shareholders controlled approximately 87% of the issued and outstanding common shares of the Company on a fully-exchanged basis as of the Closing Date. The Exchange Agreement represented a reverse takeover and was therefore accounted for under the acquisition method with TSI as the accounting acquirer and continuing entity for accounting and financial reporting purposes and the Company as the legal parent being the acquiree. There was no active market to reliably determine fair value of the consideration other than the value of the identifiable assets acquired. Therefore, the purchase price allocation of the acquisition was based on the fair value of the net liabilities acquired which was charged to additional paid-in-capital.

 

The fair values of assets acquired and liabilities assumed were as follows:

 

Cash  $1,774 
Subscriptions receivable   10 
Accounts payable and accrued liabilities   (32,488)
Loan payable to TSI   (25,454)
Net liabilities acquired  $(56,158)

 

On February 17, 2015, the Company, Subco, TSI and the Selling Shareholders entered into an amendment to the Exchange Agreement in order to correct certain administrative errors in the Exchange Agreement and provide for the post-closing execution of the Exchange Agreement by those shareholders of TSI who were not original signatories thereto. In addition, the Selling Shareholders approved certain changes to the rights, privileges, restrictions and conditions attached to the preferred shares of Subco by consent in writing. This included extending the automatic expiration date in respect of the preferred shares of Subco from June 30, 2015 to June 30, 2017. On February 22, 2017, this automatic expiration date was further extended to December 31, 2018.

 

F-8
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS

 

3. Asset Acquisition and License Agreement

 

On June 13, 2016 (the “Second Closing Date”), the Company, Notox and the shareholders of Notox (the “Notox Shareholders”) entered into a share exchange agreement (the “Share Exchange Agreement”) pursuant to which the Company acquired 100% of the issued and outstanding common stock of Notox from the Notox Shareholders in exchange for the issuance of 50,000,000 shares of the Company’s common stock. See Note 16.

 

On the Second Closing Date, Notox and Zoran Holding Corporation (“ZHC”), a private Ontario corporation, entered into an assignment agreement (the “Assignment Agreement”) pursuant to which ZHC irrevocably assigned 100% of its right, title and interest in and to the License Agreement, as amended, to Notox. Also on the Second Closing Date, the sole officer and director of Notox and ZHC became a director and officer of the Company.

 

On November 23, 2016, the Company, Notox and the Notox Shareholders entered into an amendment to the Share Exchange Agreement in order to clarify certain sections in the Share Exchange Agreement, to provide for an assignment fee and to describe how the Company will use the proceeds of any equity financing completed after the Second Closing Date. In consideration for inducing ZHC to enter into the Assignment Agreement, the Company will pay an aggregate of US$1,000,000 to ZKC in the form of a one-time assignment fee. See Note 14.

 

On December 1, 2012, ZHC and the Clinic entered into the License Agreement whereby the Clinic granted ZHC an exclusive worldwide license and a non-exclusive worldwide license in the field of aesthetics and pain to make, use, offer to sell, sell and import certain products throughout the term of the License Agreement. The term continues until the expiration of the last to expire of the certain patents. The License Agreement was amended on July 30, 2013 and July 1, 2016. Pursuant to the License Agreement, as amended, Notox is the licensee under the License Agreement and is solely responsible for making all regulatory filings and securing regulatory approval for the products covered by the License Agreement. The Clinic will receive a royalty based on the sale of certain products, a milestone payment within 30 days following the first commercial sale of such products and a percentage of any sublicensing revenues. Royalties and other payments are payable quarterly. Notox is required to achieve two commercial milestones: regulatory filings submitted to regulatory authorities by November 30, 2019 and first commercial sale within nine months following regulatory approval. Failure to achieve these milestones, without satisfactory justification, constitutes a material breach of the License Agreement giving the Clinic the right, but not the obligation, to convert the License Agreement to a non-exclusive license or terminate the License Agreement. The Clinic has the right to verify Notox’s compliance with the License Agreement.

 

Within 30 days following Notox’s receipt of the first regulatory approval, Notox is required to reimburse the Clinic for current patenting costs. All patenting costs, patent office fees and outside patent counsel costs will, at the Clinic’s option, either be paid directly by Notox or by the Clinic with the Clinic invoicing Notox, provided that Notox has no obligation to pay or reimburse the Clinic until after first regulatory approval has been obtained. Upon termination or expiration of the License Agreement, all accrued and unreimbursed patenting costs become immediately due and payable to the Clinic. As of August 31, 2017, all accrued and unreimbursed patenting costs totalled US$157,758 ($197,765).

 

Subsequent to year end, the Company, Notox and the Clinic entered into the second amendment to the License Agreement. See Note 21.

 

F-9
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS

 

3. Asset Acquisition and License Agreement (cont’d)

 

As a result of the share exchange and on the Second Closing Date, the Notox Shareholders controlled approximately 89% of the issued and outstanding common stock of the Company (52.5% on a fully-exchanged basis) and Notox became a wholly-owned subsidiary of the Company. Notox did not meet the definition (inputs, processes and outputs criteria) of a business. The Share Exchange Agreement represented an asset acquisition and was therefore accounted for under the asset acquisition method.

 

Acquired intangible assets are recognized and initially measured based on their fair value plus transaction costs incurred as part of the acquisition. There was no active market to reliably determine the fair value of the License Agreement acquired. Therefore the fair value of the License Agreement was based on the par value of the common stock exchanged by the Company.

 

The fair value and gross carrying value of the License Agreement is as follows:

 

License Agreement  $133,212 
Cash   131 
Accrued liabilities   (5,423)
Capital stock exchanged (50,000,000 shares at US$0.002 per share)  $127,920 
Fair value of License Agreement  $133,212 
Acquisition costs   19,519 
Assignment fee (US$1,000,000)   1,347,000 
Gross carrying value of License Agreement  $1,499,731 

 

See Note 10.

 

4. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the financial statements of the Company, TSI, Notox, Subco and 1894631 Ontario Inc., the Company’s wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to equipment, fair values of intangible assets, useful lives of intangible assets and the likelihood of realization of its deferred tax assets. The Company bases its estimates on assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

 

Concentration of Risk

 

The financial instrument which potentially subjects the Company to a concentration of credit risk is cash. The Company places its cash in an account with a high credit quality financial institution.

 

F-10
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS

 

4. Summary of Significant Accounting Policies (cont’d)

 

Significant Accounting Policies

 

The accompanying consolidated financial statements reflect the application of certain significant accounting policies. Other than the addition of “Stock Purchase Warrants”, there have been no material changes to the Company’s significant accounting policies that are disclosed in the consolidated financial statements and notes thereto during the year ended August 31, 2017.

 

Inventory

 

Inventory is stated at the lower of cost, computed using the first-in, first-out method, or market. If the cost of inventory exceeds its market value, a provision is made currently for the difference between the cost and market value. The Company’s inventory consists of finished goods, components and supplies.

 

Equipment, Net

 

Equipment is stated at cost, net of accumulated depreciation. Equipment is depreciated over the estimated useful life of the asset. Mould equipment is depreciated at 20% on a declining-balance basis. The website was depreciated on a straight-line basis over five years. One-half of these rates are used in the year of acquisition. Replacements and major improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost of assets disposed of and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to operations.

 

Intangible Assets

 

Patents

 

The US Patent is recorded at the value attributed to the shares issued to the Originating Companies and shareholders of TGSI less accumulated amortization and impairment writedowns. The US Patent was issued on September 29, 2009 and is effective until September 29, 2026. The Australian, Canadian and Chinese Patents are recorded at the application costs incurred less accumulated amortization and impairment writedowns. The Australian Patent was issued on October 16, 2014 and is effective until April 5, 2027. The Canadian Patent was issued on June 21, 2016 and is effective until April 5, 2027. The Chinese Patent was issued on December 28, 2016 and is effective until February 1, 2033. Upon expiration, the patents can be extended subject to certain changes required to secure the extension. Although the effects of obsolescence, demand, competition and other economic factors (such as stability of the industry, technological advances and legislative action that results in an uncertain or changing regulatory environment) can have an adverse effect on the industry and the Company’s product, management is not currently aware of any known adverse factors that will affect the Company in the future.

 

Costs incurred for patents which are in the process of being completed will be amortized over the life of the patent when the patent is issued.

 

The Company does not believe that there are any limits to how long its Home Mist Tanning units can sell in the market place. While it expects to be able to secure extensions for its patents prior to expiry, this cannot be predicted with certainty at this time. Accordingly, management has determined that the best estimates of useful lives of the US, Australian, Canadian and Chinese Patents are 17, 13, 11 and 16 years, respectively. At this time, the Company does not believe that the patents will have a residual value at the end of their useful lives.

 

F-11
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS

 

4. Summary of Significant Accounting Policies (cont’d)

 

License Agreement

 

The License Agreement is recorded at estimated fair value plus acquisition costs less accumulated amortization. The term of the License Agreement continues until the expiration of the last to expire of the Licensed Patents (as defined in the License Agreement). All costs related to the development of the licensed technology are expensed as incurred.

 

The technology licensed by Notox is a platform that provides the Company access to four large market segments or verticals (derma, pain, body and headache) that include the fields of aesthetics, drug-free pain management, body contouring and perspiration control. Based on management’s experience, it takes approximately two years to fully develop each vertical, with each vertical being developed in sequence. Accordingly, management’s best estimate of the amortization period for the License Agreement is eight years.

 

Amortization and Impairment

 

Definite-lived intangible assets are required to be amortized using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or utilized. At this time, management is not able to determine with any amount of certainty the number of Home Mist Tanning units that will be sold over the useful lives of the patents. Accordingly, the patents are being amortized on a straight-line basis over the period of their useful lives. The License Agreement is being amortized over eight years based on management’s best estimate of the time required to develop the four verticals as explained above.

 

Intangible assets subject to amortization are required to be reviewed for impairment. An impairment loss must be recognized if the intangible asset’s carrying amount is not recoverable and the carrying amount exceeds fair value. The Company applies the following three-step process to identify, recognize and measure impairment of intangible assets:

 

  Consider whether indicators of impairment are present indicating that the intangible assets’ carrying amount might not be recoverable;
  If indicators are present, perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the intangible assets to their carrying amounts; and
  If the undiscounted cash flows used in the recoverability test are less than the intangible assets’ carrying amount, determine the intangible assets’ fair value and recognize an impairment loss if the carrying amount exceeds fair value.

 

Because of the unique nature of a patent and a license agreement, income-producing definite-lived intangible assets, the calculation of cash flows can be very difficult to estimate. In this case, the estimated cash flows reflect the direct revenue expected to be generated by the patents and the License Agreement as well as an allocation of expenses.

 

Leases

 

The Company currently rents premises pursuant to two operating leases.

 

Impairment of Long-Lived Assets

 

Long-lived assets, including equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by it. If the carrying amount of the

 

F-12
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS

 

4. Summary of Significant Accounting Policies (cont’d)

 

asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds its fair value.

 

Stock Purchase Warrants

 

When the Company undertakes a private placement, it may issue units comprised of common stock of the Company and warrants to acquire common stock of the Company. Warrants with a strike price denominated in the Company’s functional currency (the Canadian dollar) are considered to be indexed to the Company’s stock and are classified as equity. Warrants with a strike price denominated in a currency other than the Company’s functional currency are considered not to be indexed to the Company’s stock and are classified as a liability. Warrants classified as equity are initially measured at fair value. Subsequent changes in fair value are not recognized as long as the warrants continue to be classified as equity. Warrants classified as a liability are initially measured at fair value with changes in fair value recorded in profit or loss in each reporting period.

 

Sales

 

The Company has Home Mist Tanning units and related supplies available for sale, primarily online via its website. The Company recognizes revenue when the units and supplies have been shipped to the customer, the amount to be paid by the customer is fixed or determinable and collectability is reasonably assured. Revenue is recorded net of applicable sales taxes.

 

Warranty

 

The Company is committed to supplying products of superior quality and design. Because of this commitment, it provides a limited one year warranty effective from the date of purchase. The Company warranties its Home Mist Tanning units to be free of defects. If a unit stops operating due to defects in materials or workmanship, the Company either repairs or replaces it for free.

 

Production Costs

 

Production costs consist of patent and license agreement amortization, production consulting fees, equipment depreciation, design and production costs and materials and supplies.

 

Advertising Costs

 

The Company charges all advertising and marketing costs to expense in the period incurred.

 

Income Taxes

 

Deferred income tax is accounted for using the asset and liability method. Deferred income taxes are provided for temporary differences in recognizing certain income and expense items for financial reporting purposes and tax reporting purposes. Such deferred income taxes primarily relate to the difference between the tax bases of assets and liabilities and their financial reporting amounts. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At this time, the Company is not able to project future taxable income over the periods in which the deferred tax assets are deductible and,

 

F-13
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS

 

4. Summary of Significant Accounting Policies (cont’d)

 

accordingly, management is not able to determine if it is more likely than not that the Company will realize the benefits of these deductible differences.

 

Derivative Financial Instruments

 

The Company does not have any derivative financial assets or liabilities.

 

Fair Value of Financial Instruments

 

Carrying values of cash, accounts payable and accrued liabilities, advances from related parties/shareholders, license assignment fee payable and stock subscribed approximate fair value because of the short-term nature of these items. Amounts receivable consists primarily of Harmonized Sales Tax (“HST”) receivable from the Government of Canada. HST is not a financial instrument.

 

Foreign Currency

 

The functional currency of the Company and its subsidiaries is the Canadian dollar. The accompanying consolidated financial statements are presented in Canadian dollars.

 

Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the period-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Exchange differences arising on the translation of monetary items or on settlement of monetary items are recognized in the loss in the period in which they arise.

 

5. Loss Per Share

 

The following table sets forth the computation of loss per share:

 

   For the Years Ended August 31, 
   2017   2016   2015 
Net loss per share:            
Net loss  $(5,071,687)  $(1,030,293)  $(774,626)
Weighted-average shares outstanding:               
Common stock   56,892,843    56,132,073    6,132,073 
Number of shares used in per share  computations   56,606,971    16,924,423    6,132,073 
Loss per share  $(0.09)  $(0.06)  $(0.13)

 

6. Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities;

 

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

 

F-14
 

 

 

6. Fair Value Measurements (cont’d)

 

Level 3 – Unobservable inputs that are supported by little or no market activity, which require management judgment or estimation.

 

The Company measures its financial instruments at fair value.

 

The carrying value of cash deposits is a reasonable estimate of its fair value due to the short maturity of the financial instrument.

 

The Company’s stock purchase warrants are measured at fair value on a recurring basis.

 

7. Design and Production - NRFTS

 

On February 20, 2017, the Company entered into the Notox Radio Frequency Treatment System (“NRFTS”) Proposal (the “Proposal”) with RBC Medical Innovations (“RBC”) to develop technology licensed by Notox. The NRFTS is comprised of two distinct components – the disposable probe and the radio frequency generator (“RFG”) console. Pursuant to the Proposal, RBC will execute design and production of the NRFTS and is responsible for overall program management, system integration and development and manufacturing transfer of the RFG console. The project is to be completed in three stages on a fixed-fee basis at an estimated cost of US$1,748,000. The NRFTS planning stage proposes three milestones payments – project stage initiation (US$55,600), completion of product requirements and documentation (US$55,600) and all stage deliverables and completion (US$55,800). During the year ended August 31, 2017, the Company paid the US$55,600 ($73,453) project stage initiation milestone payment and as at August 31, 2017, an accrual for US$55,600 ($69,700) has been made for the second milestone payment.

 

8. Equipment, Net

 

Equipment, at cost, consisted of:

 

  

August 31, 2017

   August 31, 2016 
Mould equipment  $155,300   $155,300 
Website   28,875    28,875 
 Equipment at cost   184,175    184,175 
Accumulated depreciation   (149,978)   (141,428)
 Equipment, net  $34,197   $42,747 

 

Depreciation was $8,550, $10,687 and $19,132 for the years ended August 31, 2017, 2016 and 2015 respectively.

 

F-15
 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

 

9. Patents, Net

 

The following tables provide information regarding the patents:

 

   August 31, 2017 
   Gross carrying amount  

Accumulated amortization

   Writedowns  

Net carrying amount

 
United States Patent  $6,342,279   $2,984,602   $3,357,676   $1 
Australian Patent   4,976    1,145    3,830    1 
Canadian Patent   17,406    2,024    15,381    1 
Chinese Patent   5,806    1,330    4,475    1 
Patents abandoned   6,793        6,793     
   $6,377,260   $2,989,101   $3,388,155   $4 

 

   August 31, 2016 
   Gross carrying amount  

Accumulated amortization

  

Writedowns

  

Net carrying amount

 
United States Patent  $6,342,279   $2,611,527   $   $3,730,752 
Australian Patent   4,976    747        4,229 
Canadian Patent   17,406    404        17,002 
Patents pending   10,509        6,793    3,716 
   $6,375,170   $2,612,678   $6,793   $3,755,699 

 

Also see Note 1.

 

During the year ended August 31, 2017, management identified the following indicators of impairment indicating that the patents’ carrying amounts might not be recoverable:

 

  The inability to raise sufficient equity financing to implement its strategic plan; and
  Operating and cash flow losses since the Company completed the development of the US, Australian, Canadian and Chinese patents.

 

Management’s intention is to license commercial tanning units for use in stores and spas in the United States, to sell personal tanning units internationally and to supply the spray tan solution for those units. Given that management is in the process of changing its focus in respect of the marketing and sale of the tanning units and associated products, it is not in a position to be able to estimate the future cash flows attributable to the patents with any degree of certainty. Accordingly, the patents were written down to a nominal amount of $4 at August 31, 2017.

 

In connection with the writedown of the patents, the fact that there have been minimal sales to date, no sales subsequent to year end and no comparable products on the market to use as a point of reference, management is not able to determine whether inventory is stated at the lower of cost or market. Accordingly, inventory was written down to a nominal amount of $1 at August 31, 2017.

 

10. License Agreement, Net

 

   August 31, 2017 
   Gross carrying amount  

Accumulated amortization

  

Net carrying amount

 
License Agreement  $1,499,731   $187,466   $1,312,265 

 

   August 31, 2016 
   Gross carrying amount  

Accumulated amortization

  

Net carrying amount

 
License Agreement  $152,731   $   $152,731 

 

F-16
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

 

10. License Agreement, Net (cont’d)

 

As of August 31, 2017, amortization expense on the License Agreement for the next seven years was expected to be as follows:

 

   Amount 
Year ending:     
2018  $187,466 
2019   187,466 
2020   187,466 
2021   187,466 
2022   187,466 
Thereafter   374,935 
Total  $1,312,265 

 

During the year ended August 31, 2017, management identified the following indicators of impairment indicating that the License Agreement’s carrying amount might not be recoverable:

 

  The inability to raise sufficient equity financing to implement its strategic plan; and
  Operating and cash flow losses since inception.

 

The Company has performed a recoverability test by preparing a five-year proforma projection of the undiscounted future cash flows attributable to the License Agreement. The undiscounted cash flows exceed the carrying value of the License Agreement as at August 31, 2017.

 

Also see Note 3.

 

11. Accounts Payable and Accrued Liabilities

 

Accounts payable and accrued liabilities consisted of:

 

   August 31,  2017   August 31,  2016 
Trade payables  $929,855   $751,762 
Vendor accruals   145,746    86,228 
Accounts payable and accrued liabilities  $1,075,601   $837,990 

 

12. Related Party Transactions

 

At August 31, 2017, the following amounts were payable to the Company’s related parties:

 

  Advances payable to the President totaled $232,000 at August 31, 2017 (2016 - $257,500). These advances are unsecured and bear interest at 3% per annum. Of this amount, $219,500 is due on demand and $12,500 has no repayment terms. Accrued interest payable to the President totaled $25,578 at August 31, 2017 (2016 - $18,578).
     
  At August 31, 2017, the Company owed $5,329 (2016 - $10,477) to the President for reimbursable expenses incurred on the Company’s behalf.
     
  At August 31, 2017, the Company owed $271,984 ($181,070 and US$72,522) in consulting fees to a company controlled by the President. At August 31, 2016, the Company owed $215,224 ($181,070 and US$26,040).
     
  At August 31, 2017, the Company owed $79,102 (US$63,100) in consulting fees to a company controlled by the CEO of the Company. At August 31, 2016, the Company owed $34,154 (US$26,040).
     
  At August 31, 2017, the Company owed $259,448 ($181,070 and US$62,522) in consulting fees to a company controlled by a major shareholder of the Company. At August 31, 2016, the Company owed $215,224 ($181,070 and US$26,040). Prior to June 13, 2016, this shareholder was not a related party.

 

F-17
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

 

12. Related Party Transactions (cont’d)

 

  At August 31, 2017, the Company owed $nil (2016 - $12,500) in shareholder advances and $761 (2016 - $761) in accrued interest on these advances to the same major shareholder. Prior to June 13, 2016, this shareholder was not a related party.
     
  At August 31, 2017, the Company owed $75,000 (2016 - $75,000) to a company controlled by the Company’s former CFO.

 

During the year ended August 31, 2017, the Company had the following transactions with related parties:

 

  The President of the Company advanced $nil during the year ended August 31, 2017 (2016 - $5,000). Interest expense of $7,000 was accrued on these advances during the year ended August 31, 2017 (2016 - $7,696).
     
  Consulting fees paid or accrued as payable to a company controlled by the President of the Company were $163,466 (US$125,000), $136,665 ($102,870 and US$26,040), and $88,400 for the years ended August 31, 2017, 2016 and 2015, respectively.
     
  Consulting fees paid or accrued as payable to a company controlled by the CEO of the Company were $163,466 (US$125,000), $67,509 (US$56,040), and $nil for the years ended August 31, 2017, 2016 and 2015 respectively.
     
  Consulting fees accrued as payable to a company controlled by a major shareholder of the Company were $163,466 (US$125,000), $136,665 ($102,870 and US$26,040), and $88,400 for the years ended August 31, 2017, 2016 and 2015, respectively. Prior to June 13, 2016, this company was not a related party.
     
  Consulting fees accrued as payable to a company controlled by the former CFO of the Company were $nil, $75,000 and $nil for the years ended August 31, 2017, 2016 and 2015 respectively.

 

All transactions with related parties occurred in the normal course of business and were measured at the exchange amount, which was the amount of consideration agreed upon between management and the related parties.

 

Also see Notes 3, 13, 14 and 15.

 

F-18
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

 

13. Advances from Shareholders

 

Shareholders of the Company advanced $nil to the Company during the year ended August 31, 2017 (2016 - $nil). Advances payable to shareholders totaled $145,000 at August 31, 2017 (2016 - $157,500). These advances are unsecured and bear interest at 3% per annum. Of this amount, $nil (2016 - $12,500) is due on demand and $145,000 (2016 - $145,000) has no repayment terms. Interest expense of $4,351 was accrued on these advances during the year ended August 31, 2017 (2016 - $4,738). Accrued interest payable to shareholders totaled $13,382 at August 31, 2017 (2016 - $9,031).

 

14. License Assignment Fee Payable

 

Pursuant to the amendment to the Share Exchange Agreement, the Company will pay an aggregate of US$1,000,000 to ZKC in the form of a one-time assignment fee. The assignment fee payable is repayable in monthly instalments of US$50,000 beginning on October 1, 2016. Upon completion of any equity financing pursuant to which the Company raises gross proceeds of at least US$1,000,000, the outstanding balance is to be repaid in full. At August 31, 2017, the balance of the license assignment fee payable to ZKC was US$545,000 ($683,212). See Note 3.

 

15. Commitments

 

On November 16, 2015, the Company entered into a consulting agreement (the “ECC Agreement”) with Edgewater Consulting Corp., a private Ontario corporation (“ECC”). Pursuant to the ECC Agreement, ECC, through its principal, acted in the capacity of CFO of the Company. The ECC Agreement was terminated effective November 10, 2016. A signing bonus of 750,000 exchangeable preferred shares of Subco was issued on August 24, 2016. As at August 31, 2017, ECC is entitled to $75,000 (August 31, 2016 - $75,000) in accrued remuneration.

 

On December 1, 2015, the Company entered into consulting agreements with 1040614 Ontario Ltd., a private Ontario corporation (the “Old 1040614 Agreement”), and MCM Consulting, an Ontario sole proprietorship (the “Old MCM Agreement”, and together with the Old 1040614 Agreement, the “Old Agreements”). Pursuant to the Old 1040614 Agreement, the company, through its principal, performed various services related to business development, strategic planning and capital-raising for the Company. Pursuant to the Old MCM Agreement, the sole proprietor acted in the capacity of CEO of the Company. On June 13, 2016, the Old 1040614 and MCM Agreements were terminated and replaced by the 1040614 and MCM Agreements (see below). As at August 31, 2017, in addition to previously accrued amounts, 1040614 and MCM are each entitled to $80,770 (August 31, 2016 - $80,770) in accrued remuneration in respect of the Old Agreements.

 

On February 4, 2016, the Company entered into a consulting agreement (the “Old ZKC Agreement”) with Zoran K Corporation, a private Ontario corporation (“ZKC”). Pursuant to the Old ZKC Agreement, ZKC, through its principal, acted in the capacity of the Company’s exclusive sales, marketing and product development agent. On June 13, 2016, the Old ZKC Agreement was terminated and replaced by the ZKC Agreement (see below). As at August 31, 2017, there is no remuneration payable (August 31, 2016 - $nil) by the Company under the Old ZKC Agreement.

 

On June 13, 2016, the Company entered into consulting agreements with 1040614 Ontario Ltd. (the “1040614 Agreement”), MCM Consulting (the “MCM Agreement”) and ZKC (the “ZKC Agreement”).

 

Pursuant to the 1040614 Agreement, the company, through its principal, performs general consulting services on behalf of the Company. Pursuant to the MCM Agreement, the sole proprietor acts in the capacity of President of the Company. Pursuant to the ZKC Agreement, ZKC, through its principal, acts in the capacity of CEO of the Company. Each consulting agreement is for a period of 10 years, with successive automatic renewal periods of two years until terminated. Pursuant to these consulting agreements, each consultant is entitled to receive the following compensation:

 

  Remuneration – an aggregate of US$125,000 per annum plus HST on a bi-monthly basis;
  EPS Bonus – when the Company generates earnings per share of $0.05, plus any multiple thereof, the Company shall issue the consultant 1,000,000 shares of the Company’s common stock and pay the consultant US$250,000 plus HST;
  Change of Control Bonus – immediately prior to the completion of a change of control (as defined in these consulting agreements) the Company shall issue the consultant an aggregate of 20,000,000 shares of the Company’s common stock; and
  Additional Bonus – the company may from time to time pay the consultant one or more bonuses as determined by the Board of Directors at its sole discretion.

 

On July 17, 2017, the Company renewed its premises lease dated November 11, 2011 for an additional six months from August 1, 2017 to January 31, 2018 for a rental of $700 a month ($4,200 total) plus HST. 

 

On August 31, 2017, the Company entered into a second premises lease for a year beginning on September 1, 2017 for a rental of $21,000 for the year plus HST. 

 

F-19
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

 

16. Stockholders’ Equity

 

The Company is authorized to issue 500,000,000 (2016 – 300,000,000) shares of common stock at a par value of $US0.001.

 

On August 25, 2016, the Company completed a reverse split of the Company’s common stock at the ratio of one new share for every two existing shares. All share and per share amounts have been adjusted to reflect this reverse split.

 

At August 31, 2017, the Company had 56,892,843 shares of common stock legally issued and outstanding (2016 – 56,132,073 shares).

 

On June 28, 2013, pursuant to the Exchange Agreement, the Company acquired 39,015,439 common shares of TSI in exchange for the issuance of 39,015,439 preferred shares of Subco to the Selling Shareholders on a one-for-one basis. As a result of the Exchange Agreement, TSI became the Company’s majority-owned subsidiary. Each preferred share of Subco is exchangeable into one share of the Company’s common stock at the option of the holder subject to certain restrictions. As at August 31, 2017 and 2016, none of the preferred shares had been exchanged.

 

As a condition of the closing of the Exchange Agreement, the Company also entered into a Support Agreement and a Voting and Exchange Trust Agreement on the closing date. The Support Agreement ensures that the obligations of Subco remain effective until all of the preferred shares have been exchanged. The Voting and Exchange Trust Agreement provides and establishes a procedure whereby the voting rights attached to shares of the Company’s common stock are exercisable by the registered holders (the Selling Shareholders) of the preferred shares. The Trustee holds legal title to a Special Voting Share to which voting rights are attached for the benefit of the Selling Shareholders. The Trustee holds the Special Voting Share solely for the use and benefit of the Selling Shareholders.

 

Common Stock Issuances

 

During the year ended August 31, 2017, the Company completed the following common stock transactions:

 

  On October 31, 2016, the Company closed a concurrent Canadian and US dollar financing as follows:

 

  Canadian financing – the Company issued 140,000 units at $0.50 per unit for gross proceeds of $70,000, with each unit consisting of one share of the Company’s common stock and one warrant to purchase one share of common stock exercisable at a price of $0.80 per share until October 31, 2018. $41,314 was allocated to common stock and $28,686 was allocated to share purchase warrants.
  US financing – the Company issued 220,770 units at US$0.50 per unit for gross proceeds of $146,716 (US$110,385), with each unit consisting of one share of the Company’s common stock and one warrant to purchase one share of common stock exercisable at a price of US$0.80 per share until October 31, 2018. $86,027 was allocated to common stock and $60,689 was allocated to share purchase warrants.

 

  On November 2, 2016, the Company closed a US dollar financing pursuant to which the Company issued 400,000 units at US$1.00 per unit for gross proceeds of $524,230 (US$400,000), with each unit consisting of one share of the Company’s common stock and one warrant to purchase one share of common stock exercisable at a price of US$1.40 per share until November 2, 2018. $286,950 was allocated to common stock and $237,280 was allocated to share purchase warrants. The Company paid cash finder’s fees of $19,899 and issued 15,000 finder’s stock purchase warrants exercisable at US$1.40 per warrant share until September 30, 2018, valued at $8,742.

 

During the year ended August 31, 2016, the Company completed the following common stock transactions:

 

  50,000,000 shares of common stock were issued on June 13, 2016 at a par value of US$0.002 ($127,920; US$100,000). See Note 3. Pursuant to a stock restriction agreement entered into on June 13, 2016, these shares cannot be sold or otherwise disposed of until June 30, 2017.

 

 

F-20
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

 

16. Stockholders’ Equity (cont’d)

 

Stock Subscribed

 

During the year ended August 31, 2017, $838,674 ($8,000 and US$630,000) in stock subscriptions was received pursuant to individual private placements. These subscriptions are for a total of:

 

  10,000 shares of common stock of the Company at a price of $0.80 per share pursuant to the exercise of stock purchase warrants.
  630,000 units of the Company at a price of US$1.00 per unit. Each unit consists of one share of the Company’s common stock and one warrant to purchase one share of common stock exercisable at a price of US$1.40 per share for a period of 24 months from the closing date of the financing.

 

 

During the year ended August 31, 2016, $315,366 in stock subscriptions was received pursuant to 12 individual private placements. These subscriptions are for a total of:

 

  80,000 units of the Company at a price of $0.50 per unit. Each unit consists of one share of the Company’s common stock and one warrant to purchase one share of common stock exercisable at a price of $0.80 per share for two years.
  220,770 units of the Company at a price of US$0.50 per unit. Each unit consists of one share of the Company’s common stock and one warrant to purchase one share of common stock exercisable at a price of US$0.80 per share for two years.
  100,000 units of the Company at a price of US$1.00 per unit. Each unit consists of one share of the Company’s common stock and one warrant to purchase one share of common stock exercisable at a price of US$1.40 per share for two years.

 

Stock Purchase Warrants

 

The continuity of Canadian dollar denominated stock purchase warrants for the year ended August 31, 2017 is as follows:

 

Expiry Date  Price   August 31, 2016   Issued   Exercised*   August 31, 2017 
October 31, 2018  $0.80        140,000    (10,000)   130,000 

 

*Common stock related to 10,000 Canadian dollar warrants exercised during the year ended August 31, 2017 was issued subsequent to year end on September 7, 2017 and $8,000 received from the exercise is included in stock subscribed at August 31, 2017. See Note 21.

 

At August 31, 2017, the weighted-average remaining contractual life of Canadian dollar warrants outstanding was 1.17 years (August 31, 2016 - nil).

 

The continuity of US dollar denominated stock purchase warrants for the year ended August 31, 2017 is as follows:

 

Expiry Date  Price   August 31, 2016   Issued   August 31, 2017 
September 30, 2018 - Finder   US$1.40        15,000    15,000 
October 31, 2018   US$0.80        220,770    220,770 
November 2, 2018   US$1.40        400,000    400,000 
             635,770    635,770 

 

At August 31, 2017, the weighted-average remaining contractual life of US dollar warrants outstanding was 1.17 years (August 31, 2016 - nil).

 

F-21
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

 

 

16. Stockholders’ Equity (cont’d)

 

The Company used the Black-Scholes Option Pricing Model to determine the fair values of unit warrants and finder’s warrants issued pursuant to private placements during the year ended August 31, 2017 with the following assumptions:

 

Expected dividend yield   0.00%
Risk-free interest rate   0.54% - 0.55%
Expected stock price volatility   100.00%
Expected life of warrants   2years

 

See Note 4.

 

17. Taxes

 

Income tax expense differs from the amounts computed by applying the statutory income tax rate to net loss before income taxes as follows:

 

   Year Ended August 31, 
   2017   2016   2015 
Net loss before income taxes  $(5,071,687)  $(1,030,293)  $(774,626)
Tax rate   (1)   (1)   (1)
Calculated income tax recovery   (1,391,061)   (273,260)   (205,497)
Adjustment for deductible and non-deductible amounts   1,130,327    48,858    46,994 
Unrecognized benefit of non-capital losses   260,734    224,402    158,503 
Income tax recovery  $   $   $ 

 

(1) Canada – 26.50%; United States – 34%

 

Deferred Taxes

 

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes. Significant components of the Company’s deferred tax assets are as follows:

 

   August 31, 2017   August 31, 2016 
Deferred tax assets:          
Net operating loss carryforwards  $1,784,000   $1,100,000 
Temporary deductible differences (net)   834,000    (246,000)
Permanent difference       249,000 
    2,618,000    1,103,000 
Valuation allowance   (2,618,000)   (1,103,000)
Net deferred tax assets  $   $ 

 

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. A valuation allowance was established based upon management’s inability to determine whether sufficient future profits will be generated.

 

The Company has approximately $6,579,000 of United States and Canadian net operating loss carryforwards expiring from 2024 to 2037.

 

F-22
 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

 

18. Risks and Uncertainties

 

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect its future operating results and cause actual results to vary materially from expectations include, but are not limited to: current economic conditions; uncertainty in the potential markets for its Home Mist Tanning units; the design, production and marketing of NRFTS; increasing competition; and dependence on its existing management and key personnel.

 

19. Accounting Pronouncements

 

During the year ended August 31, 2017, the Financial Accounting Standards Board (“FASB”) issued the following Accounting Standard Updates (“ASUs”) that may be of relevance to the Company. The Company is currently assessing the impact that the adoption of these ASUs will have on its financial statements and related disclosures.

 

  October 2016 – ASU No. 2016-17, “Consolidation (Topic 810)” amends consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (“VIE”) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted.
     
  February 2017 – ASU No. 2017-05, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)” clarifies the scope of asset derecognition guidance and accounting for the partial sale of non-financial assets, as well as provides guidance for recognizing gains and losses from the transfer of non-financial assets in contracts with non-customers. The amendments in this ASU are effective for reporting periods beginning after December 15, 2017, with early adoption permitted.

 

20. Contingent Liability

 

Pursuant to the Exchange Agreement, as amended, the Company may be required to acquire up to 296,500 common sh