Attached files

file filename
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-Q

 

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

 

For the quarterly period ended November 30, 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   (I.R.S. Employer
incorporation or organization)   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)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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 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 Exchange Act). Yes [  ] No [X]

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [  ] No [  ]

 

APPLICABLE ONLY TO CORPORATE ISSURS:

 

As of January 19, 2018, the registrant’s outstanding common stock consisted of 57,532,843 shares.

 

 

 

 
 

 

TABLE OF CONTENTS

 

  Page
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 5
Item 3. Quantitative and Qualitative Disclosures about Market Risk 10
Item 4. Controls and Procedures 10
 
PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings 11
Item 1A. Risk Factors 11
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Mine Safety Disclosures 11
Item 5. Other Information 11
Item 6. Exhibits 11
 
SIGNATURES 13

 

 2 
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Tropic International Inc.

Consolidated Financial Statements
For the Three Months Ended November 30, 2017

(Expressed in Canadian dollars)

(unaudited)

 

  Index
   
Consolidated Balance Sheets F-1
   
Consolidated Statements of Loss and Comprehensive Loss F-2
   
Consolidated Statements of Cash Flows F-3
   
Consolidated Statements of Stockholders’ Equity F-4
   
Notes to the Consolidated Financial Statements F-5

 

 3 
 

 

TROPIC INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

   November 30, 2017   August 31, 2017 
ASSETS          
Current assets:          
Cash  $44,149   $63,144 
Amounts receivable   97,645    84,290 
Inventory (Note 9)   1    1 
Prepaid expenses   17,641    28,624 
Total current assets   159,436    176,059 
Equipment, net (Note 8)   32,487    34,197 
Patents, net (Note 9)   4    4 
License agreement, net (Notes 3 and 10)   1,265,398    1,312,265 
Total assets  $1,457,325   $1,522,525 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY          
Current liabilities:          
Accounts payable and accrued liabilities (Notes 11 and 12)  $1,233,435   $1,075,601 
Advances from related parties/shareholders (Notes 12 and 13)   418,780    415,960 
License assignment fee payable (Notes 3 and 14)   702,396    683,212 
Stock purchase warrants (Notes 4 and 16)   612,525    297,378 
Stock subscribed (Note 16)       838,674 
Total current liabilities   2,967,136    3,310,825 
Due to the Clinic (Note 3)   203,319    197,765 
    3,170,455    3,508,590 
           
Stockholders’ deficiency (Note 16):          
Common stock   1,018,256    526,182 
Additional paid-in capital   8,458,365    8,460,414 
Deficit   (11,189,751)   (10,972,661)
Total stockholders’ deficiency   (1,713,130)   (1,986,065)
Total liabilities and stockholders’ deficiency  $1,457,325   $1,522,525 

 

Contingent liability (Note 19)

 

See accompanying notes to the consolidated financial statements.

 

  F-1 

 

 

TROPIC INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

   For the Three Month Ended
November 30,
 
   2017   2016 
         
Revenue:          
Sales  $   $ 
           
Production costs:          
Amortization – license agreement (Note 10)   46,867     
Amortization – patent (Note 9)       93,773 
Consulting fees – production   570    7,800 
Depreciation (Note 8)   1,710    2,137 
Materials and supplies       62 
Total production costs   49,147    103,772 
Gross loss   (49,147)   (103,772)
           
General and administration:          
Consulting fees – management (Note 12)   117,690    125,344 
Interest on advances from related parties/shareholders (Notes 12 and 13)   2,820    2,860 
Loss (gain) on foreign exchange   36,547    (5,630)
Marketing   247    581 
Office and miscellaneous   2,480    6,926 
Professional fees   16,396    10,930 
Rent   5,700    3,300 
Travel and entertainment   1,245    3,153 
Trust and filing fees   6,139    3,898 
Total general and administration   189,264    151,362 
Loss before other items and income taxes   (238,411)   (255,134)
Other items:          
Writedown of amounts receivable   (5,746)     
Gain on revaluation of stock purchase warrants   27,067     
Loss before income taxes   (217,090)   (255,134)
Income taxes        
Net loss and comprehensive loss  $(217,090)  $(255,134)
           
Net loss per share – basic and diluted (Note 5)  $(0.00)  $(0.00)
           
Weighted-average number of shares outstanding   57,482,074    56,374,085 

 

See accompanying notes to the consolidated financial statements.

 

  F-2 

 

 

TROPIC INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED) 

 

   For the Three Months Ended
November 30,
 
   2017   2016 
         
Cash Flows Used In Operating Activities          
Net loss  $(217,090)  $(255,134)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Amortization – license agreement   46,867     
Amortization – patent       93,773 
Depreciation   1,710    2,137 
Unrealized foreign exchange on license assignment fee payable   19,184    (3,690)
Unrealized foreign exchange on due to the Clinic   5,554     
Writedown of amounts receivable   5,746      
Gain on revaluation of stock purchase warrants   (27,067)    
Changes in assets and liabilities:          
Amounts receivable   (19,101)   (4,130)
Prepaid expenses   10,983    (13,266)
Accounts payable and accrued liabilities   157,834    21,195 
Interest accrued on advances from related parties/shareholders   2,820    2,860 
Net cash used in operating activities   (12,560)   (156,255)
           
Cash Flows Used In Investing Activities          
Patent costs       (2,089)
License agreement       (134,700)
Net cash used in investing activities       (136,789)
           
Cash Flows Provided By (Used In) Financing Activities          
Proceeds from issuance of common stock       395,580 
Stock issue costs   (6,435)   (19,899)
Repayment of advances from related parties/shareholders       (38,000)
Net cash provided by (used in) financing activities   (6,435)   337,681 
           
Increase (decrease) in cash during the period   (18,995)   44,637 
Cash, beginning of period   63,144    144,718 
Cash, end of period  $44,149   $189,355 

 

Supplementary Information:

 

On November 2, 2016, the Company issued 15,000 finder’s stock purchase warrants valued at $8,742. See Note 16.

 

On November 23, 2016, the Company incurred a license assignment fee payable in the amount of $1,347,000 (US$1,000,000) relating to the acquisition of the License Agreement from ZHC. See Note 3.

 

The gross proceeds of $838,674 relating to the stock issued on September 7, 2017 and September 21, 2017 were reported as stock subscribed at August 31, 2017. See Note 16.

 

On September 7, 2017, the Company issued 5,000 finder’s stock purchase warrants valued at $2,581. See Note 16.

 

See accompanying notes to the consolidated financial statements.

 

  F-3 

 

 

TROPIC INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

   Common Stock       Additional         Total stockholders’ 
   * Common Stock   Amount   Stock subscribed  

paid-in

capital

   Deficit   equity (deficiency) 
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)
Stock issued for cash   630,000    491,041                491,041 
Stock issue costs - cash       (6,435)               (6,435)
Stock issue costs – finder’s warrants       (2,581)               (2,581)
Warrants exercised   10,000    10,049        (2,049)       8,000 
Net loss                   (217,090)   (217,090)
Balance at November 30, 2017   57,532,843   $1,018,256   $   $8,458,365   $(11,189,751)  $(1,713,130)

 

* The above presentation 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-4 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

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, TSI and Notox for the three months ended November 30, 2017. The comparative amounts are the results of operations of the Company, TSI and Notox for the three months ended November 30, 2016.

 

On November 19, 2007, TSI obtained the rights to the 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”). As of March 11, 2013, the total value assigned to the carrying value of the US Patent 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 $11,189,751 (August 31, 2017 - $10,972,661) since inception, a working capital deficiency of $2,807,700 (August 31, 2017 - $3,134,766) and a stockholders’ deficiency of $1,713,130 (August 31, 2017 - stockholders’ equity of $1,986,065). 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.

 

  F-5 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

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

 

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 November 30, 2017, the Company’s current cash liabilities total approximately $2,354,000 (August 31, 2017 - $2,175,000). Of this amount, approximately $1,887,000 – accounts payable and accrued liabilities ($926,000), advances from related parties/shareholders ($259,000) and license assignment fee payable ($702,000) – is payable to related parties and/or major shareholders who have not and will not require payment until such time as sufficient cash flow is available. Of the remaining $467,000, $46,000 was repaid subsequent to the end of the period and $120,000 is payable to an organization that is willing to continue to defer payment. To the extent the remaining $301,000 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.

 

  F-6 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

2. Reverse Takeover (cont’d)

 

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.

 

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.

 

  F-7 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

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

 

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 November 30, 2017, all accrued and unreimbursed patenting costs totalled US$157,758 ($203,319) (August 31, 2017 - US$157,758 ($197,765)).

 

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.

 

  F-8 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

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.

 

Significant Accounting Policies

 

The accompanying consolidated financial statements reflect the application of certain significant accounting policies. 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 period ended November 30, 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.

 

  F-9 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

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

 

Intangible Assets

 

Patents

 

The US Patent is recorded at the value attributed to the shares issued by TSI in connection with its acquisition 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.

 

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 were 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.

 

  F-10 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

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

 

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 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.

 

  F-11 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

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

 

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, 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.

 

  F-12 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

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

 

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 Three Months Ended November 30, 
   2017   2016 
Net loss per share:          
Net loss  $(217,090)  $(255,134)
Weighted-average shares outstanding:          
Common stock   57,532,843    56,892,843 
Number of shares used in per share computations   57,482,074    56,374,085 
Loss per share  $(0.00)  $(0.00)

 

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

 

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

 

  F-13 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

7. Design and Production – NRFTS (cont’d)

 

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 November 30, 2017, an accrual for US$55,600 ($71,657) (August 31, 2017 - US$55,600 ($69,700)) has been made for the second milestone payment.

 

8. Equipment, Net

 

Equipment, at cost, consisted of:

 

  

November 30, 2017

   August 31, 2017 
Mould equipment  $155,300   $155,300 
Website   28,875    28,875 
Equipment at cost   184,175    184,175 
Accumulated depreciation   (151,688)   (149,978)
Equipment, net  $32,487   $34,197 

 

Depreciation was $1,710 and $2,137 for the three month periods ended November 30, 2017 and 2016, respectively.

 

9. Patents, Net

 

The following tables provide information regarding the patents:

 

   November 30, 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, 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 

 

Also see Note 1.

  F-14 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

9. Patents, Net (cont’d)

 

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 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

 

   November 30, 2017 
   Gross carrying amount  

Accumulated amortization

  

Net carrying amount

 
License Agreement  $1,499,731   $234,333   $1,265,398 

 

   August 31, 2017 
   Gross carrying amount  

Accumulated amortization

  

Net carrying amount

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

 

As of November 30, 2017, amortization expense on the License Agreement for the next seven years was expected to be as follows:

 

   Amount 
Year ending:     
2018  $140,599 
2019   187,466 
2020   187,466 
2021   187,466 
2022   187,466 
Thereafter   374,935 
Total  $1,265,398 

 

During the period ended November 30, 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.

 

  F-15 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

10. License Agreement, Net (cont’d)

 

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 November 30, 2017.

 

Also see Note 3.

 

11. Accounts Payable and Accrued Liabilities

 

Accounts payable and accrued liabilities consisted of:

 

   November 30, 2017   August 31, 2017 
Trade payables  $1,081,848   $929,855 
Vendor accruals   151,587    145,746 
Accounts payable and accrued liabilities  $1,233,435   $1,075,601 

 

12. Related Party Transactions

 

At November 30, 2017, the following amounts were payable to the Company’s related parties:

 

  Advances payable to the President of the Company totaled $232,000 at November 30, 2017 (2016 - $232,000) and $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 $27,313 at November 30, 2017 (2016 - $20,353) and $25,578 at August 31, 2017 (2016 - $18,578).
     
  At November 30, 2017, the Company owed $6,176 (2016 - $7,004) to the President for reimbursable expenses incurred on the Company’s behalf. At August 31, 2017, the Company owed $5,329 (2016 - $10,477).
     
  At November 30, 2017, the Company owed $314,812 ($181,070 and US$103,772) (November 30, 2016 - $247,933 ($181,070 and US$49,790)) in consulting fees to a company controlled by the President of the Company. At August 31, 2017, the Company owed $271,984 ($181,070 and US$72,522) (2016 - $215,224 ($181,070 and US$26,040)).
     
  At November 30, 2017, the Company owed $121,598 (US$94,350) (2016 - $54,210 (US$40,368)) in consulting fees to a company controlled by the CEO of the Company. At August 31, 2017, the Company owed $79,102 (US$63,100) (2016 - $34,154 (US$26,040)).
     
  At November 30, 2017, the Company owed $301,924 ($181,070 and US$93,772) (2016 - $234,504 ($181,070 and US$39,790)) in consulting fees and $259 in reimbursable expenses (2016 - $nil) to a company controlled by a major shareholder of the Company. At August 31, 2017, the Company owed $259,448 ($181,070 and US$62,522) (2016 - $215,224 ($181,070 and US$26,040)) in consulting fees and $nil (2016 - $nil) in reimbursable expenses.
     
  At November 30, 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. At August 31, 2017, the Company owed $nil (2016 - $12,500) in shareholder advances and $761 (2016 - $761) in accrued interest on these advances.

 

  F-16 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

12. Related Party Transactions (cont’d)

 

  At November 30, 2017, the Company owed $75,000 (2016 - $75,000) to a company controlled by the Company’s former CFO. At August 31, 2017, the Company owed $75,000 (2016 - $75,000).

 

During the three months ended November 30, 2017, the Company had the following transactions with related parties:

 

  The President of the Company advanced $nil during the three months ended November 30, 2017 (2016 - $nil), and $nil to the Company during the year ended August 31, 2017 (2016 - $5,000). Interest expense of $1,735 was accrued on these advances during the three months ended November 30, 2017 (2016 - $1,775) and $7,000 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 $39,230 (US$31,250) and $41,456 (US$31,250) for the three months ended November 30, 2017 and 2016, respectively.
     
  Consulting fees paid or accrued as payable to a company controlled by the CEO of the Company were $39,230 (US$31,250) and $41,456 (US$31,250) for the three months ended November 30, 2017 and 2016, respectively.
     
  Consulting fees accrued as payable to a company controlled by a major shareholder of the Company were $39,230 (US$31,250) and $41,456 (US$31,250) for the three months ended November 30, 2017 and 2016, 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.

 

13. Advances from Shareholders

 

Shareholders of the Company advanced $nil to the Company during the three months ended November 30, 2017 (2016 - $nil) and $nil during the year ended August 31, 2017 (2016 - $nil). Advances payable to shareholders totaled $145,000 at November 30, 2017 (2016 - $145,000) and $145,000 at August 31, 2017 (2016 - $157,500). These advances are unsecured and bear interest at 3% per annum. There are no repayment terms. Interest expense of $1,085 was accrued on these advances during the three months ended November 30, 2017 (2016 - $1,085) and $4,351 during the year ended August 31, 2017 (2016 - $4,738). Accrued interest payable to shareholders totaled $14,467 at November 30, 2017 (2016 - $10,116), and $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 November 30, 2017, the balance of the license assignment fee payable to ZKC was US$545,000 ($702,396) (August 31, 2017 - US$545,000 ($683,212)). See Note 3.

 

  F-17 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

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 November 30, 2017, ECC is entitled to $75,000 (August 31, 2017 - $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 November 30, 2017, in addition to previously amounts, 1040614 and MCM are each entitled to $80,770 (August 31, 2017 - $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 November 30, 2017, there is no remuneration payable (August 31, 2017 - $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-18 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

16. Stockholders’ Equity

 

The Company is authorized to issue 500,000,000 (August 31, 2017 - 500,000,000) 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 November 30, 2017, the Company had 57,532,843 shares of common stock legally issued and outstanding (2016 - 56,892,843). 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 November 30, 2017 and August 31, 2017, 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 three months ended November 30, 2017, the Company completed the following common stock transactions:

 

  On September 7, 2017, the Company closed a US dollar financing pursuant to which the Company issued 630,000 units at US$1.00 per unit for gross proceeds of $830,674 (US$630,000), 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 September 7, 2019. $491,041 was allocated to common stock and $339,633 was allocated to stock purchase warrants. The Company paid cash finder’s fees of $6,435 (US$5,000) and issued 5,000 finder’s stock purchase warrants exercisable at US$1.40 per warrant share until July 17, 2019, valued at $2,581 and credited to stock purchase warrants.
     
  On September 21, 2017, the Company issued 10,000 shares of common stock at $0.80 per share for gross proceeds of $8,000 pursuant to the exercise of warrants during the year ended August 31, 2017. $2,049 of the gross proceeds received that was allocated to these warrants has been deducted from additional paid-in capital.

 

At August 31, 2017, the gross proceeds received of $838,674 were reported as stock subscribed.

 

  F-19 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

16. Stockholders’ Equity (cont’d)

 

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:

 

  o 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 additional paid-in capital.
     
  o 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 stock 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 stock 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 28, 2018, valued at $8,742 and credited to stock purchase warrants.

 

Stock Subscribed

 

During the three months ended November 30, 2017, there were no stock subscriptions received.

 

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 were 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.

 

  F-20 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

16. Stockholders’ Equity (cont’d)

 

Stock Purchase Warrants

 

The continuity of Canadian dollar denominated stock purchase warrants for the three months ended November 30, 2017 is as follows:

 

Expiry Date  Price   August 31, 2017   Issued   Exercised*   November 30, 2017 
October 31, 2018  $0.80    130,000            130,000 

 

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

 

At November 30, 2017, the weighted-average remaining contractual life of Canadian dollar warrants outstanding was 0.92 years (August 31, 2017 - 1.17).

 

The continuity of US dollar denominated stock purchase warrants for the three months ended November 30, 2017 is as follows:

 

Expiry Date  Price   August 31, 2017   Issued   Exercised   November 30, 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 
July 17,2019 – Finder  US$1.40        5,000        5,000 
September 7, 2019  US$1.40        630,000        630,000 
         635,770    635,000        1,270,770 

 

At November 30, 2017, the weighted-average remaining contractual life of US dollar warrants outstanding was 1.34 years (August 31, 2017 - 1.17 years).

 

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 three months ended November 30, 2017 and the year ended August 31, 2017 with the following assumptions:

 

   November 30, 2017   August 31, 2017 
Expected dividend yield   0.00%   0.00%
Risk-free interest rate   1.47%   0.54% - 0.55%
Expected stock price volatility   100.00%   100.00%
Expected life of warrants   2 years    2 years 

 

See Note 4.

 

17. 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.

 

  F-21 

 

 

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

18. Accounting Pronouncements

 

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.

 

19. Contingent Liability

 

Pursuant to the Exchange Agreement, as amended, the Company may be required to acquire up to 296,500 common shares of TSI, being those TSI shares still outstanding, in exchange for 148,250 preferred shares of Subco on a one-for-two basis. Such preferred shares would then be exchangeable on the same basis as the approximately 50 million Subco preferred shares currently outstanding (see Notes 2 and 14). On August 24, 2016, 21,672,623 common shares of TSI were exchanged for 10,836,312 preferred shares of Subco.

 

  F-22 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q (this “Report”) contains forward-looking statements. The forward-looking statements are contained principally in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section 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.

 

This Report includes our interim unaudited consolidated financial statements as at and for the three months ended November 30, 2017. 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 interim unaudited 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 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 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”). In connection with 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”) formerly 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.

 

 4 
 

 

Item 2. 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 interim unaudited consolidated financial statements and the related notes thereto that appear elsewhere in this Report, as well as 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. 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.

 

On September 26, 2017, we entered into a second amendment to the License Agreement with Notox and the Clinic, effective July 1, 2016. The purpose of this amendment was 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).

 

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, and in particular, exposure to ultraviolet (UV) radiation. The consequences of such exposure 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.

 

Results of Operations

 

Revenue

 

We did not generate any revenue during either the three months ended November 30, 2017 or the same period in 2016.

 

Production Costs

 

During the three months ended November 30, 2017, we incurred production costs of $49,147, which was equal to our gross loss for the period. During the same period in the prior year, we incurred production costs and a gross loss of $103,772. Our production costs for the three months ended November 30, 2017 included $46,867 in License Agreement amortization, $570 in production-related consulting fees and $1,710 in depreciation. During the three months ended November 30, 2016, our production costs consisted of $93,733 in patent amortization, $7,800 in production-related consulting fees, $2,137 in depreciation and $62 in materials and supplies.

 

 5 
 

 

Expenses

 

During the three months ended November 30, 2017, we incurred $189,264 in total general and administrative expenses, compared to $151,362 in such expenses during the same period in 2016.

 

Our expenses during the three months ended November 30, 2017 consisted of $117,690 in management-related consulting fees, $16,396 in professional fees, $6,139 in trust and filing fees, $5,700 in rent, $2,820 in interest on advances from related parties/shareholders, $2,480 in office and miscellaneous expenses, $1,245 in travel and entertainment expenses, $247 in marketing expenses and $36,547 in foreign exchange loss.

 

During the same period in the prior year, our expenses included $125,344 in management-related consulting fees, $10,930 in professional fees, $6,926 in office and miscellaneous expenses, $3,898 in trust and filing fees, $3,300 in rent, $3,153 in travel and entertainment expenses, $2,860 in interest on advances from shareholders and $581 in marketing expenses, as offset by a $5,630 foreign exchange gain. Apart from the $42,177 foreign exchange difference between the two periods, our expenses were relatively consistent from period-to-period.

 

The significant management-related consulting fees we incurred over both periods 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 that are denominated in U.S. dollars.

 

During the three months ended November 30, 2017, we incurred a writedown of amounts receivable in the amount of $5,746 and a $27,067 gain associated with the revaluation of certain outstanding warrants to purchase shares of our common stock for the reason described above.

 

Net Loss

 

During the three months ended November 30, 2017, we incurred a net loss and comprehensive loss of $217,090 and a net loss per share of $0.00. During the same period in the prior year, we experienced a net loss and comprehensive loss of $255,134 and a net loss per share of $0.00.

 

Liquidity and Capital Resources

 

As of November 30, 2017, we had $44,149 in cash, $159,436 in current assets, $1,457,325 in total assets, $2,967,136 in current liabilities, $3,170,455 in total liabilities and a working capital deficiency of $2,807,700. As of that date, we also had an accumulated deficit of $11,189,751.

 

During the three months ended November 30, 2017, we spent $12,560 in net cash on operating activities, compared to $156,255 in net cash spending on operating activities during the same period in the prior year. The decrease of approximately 92% in our cash spending on operating activities between the two periods was primarily attributable to the decrease in our net loss as described above, as adjusted for certain changes in our assets and liabilities, and in particular an increase of $136,639 in our accounts payable and accrued liabilities from period-to-period.

 

 6 
 

 

We spent did not spend any cash on investing activities during the three months ended November 30, 2017, whereas we spent $136,789 in net cash on investing activities during the same period in the prior year. All of this spending was associated with intangible assets, including $134,700 related to the License Agreement and $2,089 related to patent costs.

 

During the three months ended November 30, 2017, we spent $6,435 in net cash on financing activities, compared to receiving $337,681 in net cash from financing activities during the same period in the prior year. All of the cash we spent on financing activities during the current period was in the form of stock stock issuance costs, whereas substantially all of the cash we received during the same period in the prior year was in the form of proceeds from the issuance of our common stock ($395,580), less certain stock issuance costs ($19,899) and related party/shareholder advance repayments ($38,000).

 

During the three months ended November 30, 2017, our cash decreased by $18,995 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 

 

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.

 

 7 
 

 

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.

 

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 is 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 by TSI in connection with its acquisition 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.

 

 8 
 

 

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.

 

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 were 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.

 

 9 
 

 

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.

 

Going Concern

 

Our financial statements have been prepared on a going concern basis, which implies we will continue to realize our assets and discharge our liabilities in the normal course of business. As at November 30, 2017, we had a working capital deficiency of $2,807,700 and an accumulated deficit of $11,189,751. Our continuation as a going concern is dependent upon the continued financial support from our stockholders, our ability to obtain necessary equity financing to continue operations, and the attainment of profitable operations. These factors raise substantial doubt regarding our ability to continue as a going concern. Our financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

As of the end of the period covered by this Report, management, with the participation of our Chief Executive and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, management concluded that our disclosure controls and procedures were not effective due to certain deficiencies in our internal control over financial reporting. These deficiencies include the fact that we have no audit committee, traditionally have had no independent directors, and do not have a system in place to review and monitor internal control over financial reporting.

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that a reasonable possibility exists that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The deficiencies described above constitute, both individually and in the aggregate, a material weakness given their potential impact on our financial reporting and internal control over financial reporting.

 

Management is currently evaluating remediation plans for the deficiencies and will implement changes as time and financial resources allow.

 

Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) during the period ended November 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 10 
 

 

PART II – OTHER INFORMATION

 

Item 1. 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 1A. Risk Factors

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

The following documents are filed as a part of this Report:

 

Exhibit
Number
  Exhibit Description
3(i).1   Articles of Incorporation filed with the Nevada Secretary of State on October 29, 2007 (1)
     
3(i).2   Certificate of Amendment filed with the Nevada Secretary of State on August 24, 2010 (1)
     
3(i).3   Certificate of Amendment filed with the Nevada Secretary of State on April 17, 2013 (2)
     
3(i).4   Articles of Merger filed with the Nevada Secretary of State on December 6, 2013 (3)
     
3(ii).1   By-Laws (1)
     
10.1   Share Exchange Agreement dated June 28, 2013 with 1894632 Ontario Inc., Tropic Spa Inc. and the shareholders of Tropic Spa Inc. (4)
     
10.2   Amendment to Share Exchange Agreement dated February 17, 2015 with 1894632 Ontario Inc., Tropic Spa Inc. and the shareholders of Tropic Spa Inc. (5)
     
10.3   Share Exchange Agreement dated June 6, 2016 with Notox Bioscience Inc. and the shareholders of Notox Bioscience Inc. (6)

 

 11 
 

 

10.4   Amendment to Share Exchange Agreement dated November 23, 2016 with Notox Bioscience Inc. and the shareholders of Notox Bioscience Inc. (7)
     
21   1894631 Ontario Inc. (Ontario, Canada), 1894632 Ontario Inc. (Ontario, Canada), Notox Bioscience Inc. (Nevada), Tropic Spa Inc. (Ontario, Canada)
     
31.1   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2   Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB   XBRL Taxonomy Extension Label Linkbase
     
101.PRE   XBRL Taxonomy Presentation Linkbase

 

(1) Incorporated by reference from our registration statement on Form 10, filed with the SEC on October 15, 2010.
   
(2) Incorporated by reference from our quarterly report on Form 10-Q, filed with the SEC on June 20, 2013.
   
(3) Incorporated by reference from our annual report on Form 10-K, filed with the SEC on December 9, 2013.
   
(4) Incorporated by reference from our current report on Form 8-K, filed with the SEC on July 3, 2013.
   
(5) Incorporated by reference from our current report on Form 8-K, filed with the SEC on February 19, 2015.
   
(6) Incorporated by reference from our current report on Form 8-K, filed with the SEC on June 13, 2016.
   
(7) Incorporated by reference from our quarterly report on Form 10-Q, filed with the SEC on January 19, 2017.

 

 12 
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: January 19, 2018 TROPIC INTERNATIONAL INC.
     
  By: /s/ John Marmora
    John Marmora
    President, Chief Financial Officer, Principal Accounting Officer, Secretary, Treasurer, Director

 

 13