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 Tropic International
Inc., a wholly-owned subsidiary incorporated solely to effect the name change. The accompanying consolidated financial statements
include the results of operations of TSI and the Company for the nine month periods ended May 31, 2016 and 2015.
On
September 3, 2014, the Company’s shares became eligible for quotation on the OTCQB under the symbol TRPO.
On
November 19, 2007, TSI entered into Share Subscription Agreements (the “Agreements”) with MCM Consulting Ltd., Nandoor
Enterprises Ltd., Sierra Tan Ltd., Sunshower Incorporated, Sunshower International Corporation and Tropic Spa Group Inc. (the
“Originating Companies”). Pursuant to the terms of the Agreements, the Originating Companies subscribed for, in aggregate,
18,202,503 common shares of TSI valued at $3,657,175. This assigned value was the cost to the Originating Companies, as of that
date, of developing a Home Mist Tanning system and the application for and acquisition of a United States Patent
“Apparatus
for Spray Application of a Sunless Tanning Product”
(the “US Patent”).
The Agreements included a triggering event (a “Triggering Event”) which was defined to mean the occurrence of any
of the following events:
|
●
|
Ninety
days after TSI has been listed as a public company on a stock exchange;
|
|
|
|
|
●
|
Ninety
days after TSI either purchases or is purchased by a company that is trading on a stock exchange; or
|
|
|
|
|
●
|
Notwithstanding
the above, ninety days after TSI has notified the Originating Companies in writing that a Triggering Event has occurred.
|
The
Originating Companies entered into agreements with their shareholders allowing the shareholders, upon the Triggering Event, to
exchange their class A shares in the Originating Companies, by exercising the option under their common share exchange warrant,
for common shares in TSI.
On
April 9, 2009, the Board of Directors of TSI (the “Board”) resolved that the Triggering Event had occurred and approved
and issued a Notification of Triggering Event to the shareholders of the Originating Companies. The decision to exercise the Triggering
Event was driven by three factors:
|
●
|
The
approval of the US Patent;
|
|
|
|
|
●
|
Delivery
of the final production model on or before April 21, 2009; and
|
|
|
|
|
●
|
Implementation
of an aggressive marketing strategy.
|
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
1.
Company Overview and Basis of Presentation (cont’d)
After
November 19, 2007, and subsequent to the execution of the Agreements, Tropic Spa Group Inc. (“TSGI”) incurred an additional
$2,685,104 on the continued development of the Home Mist Tanning system and the application for and acquisition of the US Patent.
On March 11, 2013, TSI executed a second Share Subscription Agreement (the “Second Agreement”) with TSGI to cover
the common shares of TSI issued to the shareholders of TSGI in respect of the additional costs incurred. Pursuant to the terms
of
the Second
Agreement, TSGI subscribed for 26,034,520 common shares valued at $3,155,462 covering the period from November 20, 2007 to June
2010. Of these amounts, 3,880,745 common shares are for $470,358 received directly by TSI. The value assigned to the carrying
value of the US Patent, during the year ended August 31, 2010, was $2,685,104 ($3,155,462 less $470,358). The total value assigned
to the carrying value of the US Patent pursuant to the Agreements and the Second Agreement, collectively, was $6,342,279.
On
October 16, 2014, the Company, through TSI, obtained an Australian patent (“Australian Patent”), incurring application
costs of $4,975.
The
Company, through TSI, has patents pending which are in the process of being completed for Canada and China. Costs incurred are
recorded as intangible assets (see Note 7).
As
reflected in the accompanying consolidated financial statements, the Company has a deficit of $5,595,171 (August 31, 2015 - $4,870,681)
since inception, a working capital deficiency of $862,526 (August 31, 2015 - $571,546) and stockholders’ equity of $3,029,160
(August 31, 2015 - $3,603,659). This raises substantial doubt about its ability to continue as a going concern. The ability of
the Company to continue as a going concern is dependent on its ability to raise additional capital and to implement its business
plan. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern. Management believes that actions presently being taken to obtain additional funding
and implement its strategic plans provide the opportunity for the Company to continue as a going concern.
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 78,030,877 common shares, or approximately 78%
of the issued and outstanding shares, of TSI in exchange for the issuance of 78,030,877 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 require 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 has generated at least $1,000,000 in gross revenue during the preceding six month period,
Subco shall permit 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, 2017, on which date all restrictions on the preferred
shares shall automatically expire unless extended by the Selling Shareholders, Subco shall grant the holders of its preferred
shares a permission identical to the one above.
|
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
2.
Reverse Takeover (cont’d)
Upon
completion of the Exchange Agreement, the sole officer and director of TSI became the sole officer and a director of the Company
and the Company adopted the business plan of TSI.
As
a result of the share exchange, the former shareholders of TSI control approximately 87% of the issued and outstanding common
shares of the Company. The Exchange Agreement is a reverse takeover and therefore has been 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. The business is in the development stage and 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 are 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.
3.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements include the financial statements of the Company, TSI, Subco and 1894631 Ontario
Inc., the Company’s wholly-owned subsidiary. 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, and 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.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
3.
Summary of Significant Accounting Policies (cont’d)
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 February 29, 2016.
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 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
The
US Patent is recorded at the value attributed to the shares issued to the Originating Companies and shareholders of TGSI less
accumulated amortization. The US Patent was issued on September 29, 2009 and is effective until September 29, 2026. The Australian
Patent is recorded at the application costs incurred less accumulated amortization. The Australian Patent was issued on October
16, 2014 and is effective until April 5, 2027. 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 estimate of the useful life of the US Patent is 17 years and the Australian
Patent is 13 years. At this time, the Company does not believe that the patents will have a residual value at the end of their
useful lives.
Definite-lived
intangible assets are required to be amortized using a method that reflects the pattern in which the economic benefits of the
patents are consumed or utilized. At this time, management is not able to determine with any amount of certainty the number of
Home Mist Tanning units that will be sold over the useful lives of the patents. Accordingly, the patents are being amortized on
a straight-line basis over the period of their useful lives.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
3.
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 the patents:
|
●
|
Consider
whether indicators of impairment are present indicating that the patent’s 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 patent to its carrying amount; and
|
|
|
|
|
●
|
If
the undiscounted cash flows used in the recoverability test are less than the patent’s carrying amount, determine the
patent’s fair value and recognize an impairment loss if the carrying amount exceeds fair value.
|
Because
of the unique nature of a patent, an income-producing definite-lived intangible asset, 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 patent
as well as an allocation of expenses.
Leases
The
Company currently rents premises pursuant to an operating lease.
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.
Sales
and Other Revenue
The
Company sells Home Mist Tanning units and related supplies primarily on line via its website. The Company recognizes revenue when
the units and supplies have been shipped to the customer, the amount to be paid by the customer is fixed or determinable and collectability
is reasonably assured. Revenue is recorded net of applicable sales taxes.
Warranty
The
Company is committed to supplying products of superior quality and design. Because of this commitment, it provides a limited one
year warranty effective from the date of purchase. The Company warranties its Home Mist Tanning units to be free of defects. If
a unit stops operating due to defects in materials or workmanship, the Company either repairs or replaces it for free.
Production
Costs
Production
costs consist of patent amortization, production consulting fees, equipment depreciation, materials and supplies.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
3.
Summary of Significant Accounting Policies (cont’d)
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
Fair
values of cash, accounts payable and accrued liabilities, and advances from shareholders approximate fair value because of the
short-term nature of these items. Amounts receivable consists primarily of Harmonized Sales Tax (“HST”) receivable
from the Government of Canada. HST is not a financial instrument.
Foreign
Currency
The
functional currency of the Company and its subsidiaries is the Canadian dollar. The accompanying consolidated financial statements
are presented in Canadian dollars.
Foreign
currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction.
Foreign currency monetary items are translated at the period-end exchange rate. Non-monetary items measured at historical cost
continue to be carried at the exchange rate at the date of the transaction. Exchange differences arising on the translation of
monetary items or on settlement of monetary items are recognized in the loss in the period in which they arise.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
4.
Loss Per Share
The
following table sets forth the computation of loss per share:
|
|
For
the Nine Months Ended May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(724,490
|
)
|
|
$
|
(565,117
|
)
|
Weighted-average
shares outstanding:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
12,264,146
|
|
|
|
12,264,146
|
|
Number
of shares used in per share computations
|
|
|
12,264,146
|
|
|
|
12,264,146
|
|
Loss
per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
5.
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 does not have assets and liabilities that are measured at fair value on a recurring basis.
6.
Equipment, Net
Equipment,
at cost, consisted of:
|
|
May
31, 2016
|
|
|
August
31, 2015
|
|
Mould
equipment
|
|
$
|
155,300
|
|
|
$
|
155,300
|
|
Website
|
|
|
28,875
|
|
|
|
28,875
|
|
Equipment
at cost
|
|
|
184,175
|
|
|
|
184,175
|
|
Accumulated
depreciation
|
|
|
(138,756
|
)
|
|
|
(130,741
|
)
|
Equipment,
net
|
|
$
|
45,419
|
|
|
$
|
53,434
|
|
Depreciation
was $8,015 and $14,350 for the nine month periods ended May 31, 2016 and 2015, respectively.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
7.
Intangible Assets, Net
The
following tables provide information regarding the patents and patents pending:
|
|
May
31, 2016
|
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Writedowns
|
|
|
Net
carrying amount
|
|
United
States Patent
|
|
$
|
6,342,279
|
|
|
$
|
2,518,256
|
|
|
$
|
-
|
|
|
$
|
3,824,023
|
|
Australian
Patent
|
|
|
4,975
|
|
|
|
647
|
|
|
|
-
|
|
|
|
4,328
|
|
Patents
pending
|
|
|
24,710
|
|
|
|
-
|
|
|
|
6,794
|
|
|
|
17,916
|
|
|
|
$
|
6,371,964
|
|
|
$
|
2,518,903
|
|
|
$
|
6,794
|
|
|
$
|
3,846,267
|
|
|
|
August
31, 2015
|
|
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Net
carrying amount
|
|
United
States Patent
|
|
$
|
6,342,279
|
|
|
$
|
2,238,450
|
|
|
$
|
4,103,829
|
|
Patents
pending
|
|
|
17,942
|
|
|
|
-
|
|
|
|
17,942
|
|
|
|
$
|
6,360,221
|
|
|
$
|
2,238,450
|
|
|
$
|
4,121,771
|
|
Also
see Note 1 Company Overview and Basis of Presentation.
During
the period ended May 31, 2016, management identified the following indicators of impairment indicating that the patents’
carrying amounts might not be recoverable:
|
●
|
The
inability to raise equity financing to implement its strategic plan; and
|
|
|
|
|
●
|
Operating
and cash flow losses since the Company completed the development of the US Patent.
|
Management
performed a recoverability test and determined that the estimated undiscounted future cash flows are greater than the patents’
carrying amounts and that, accordingly, there is no impairment.
As
of May 31, 2016, amortization expense on intangible assets for the next five years was expected to be as follows:
|
|
|
Amount
|
|
Year
ending:
|
|
|
|
|
|
2016
|
|
|
$
|
93,368
|
|
2017
|
|
|
|
373,473
|
|
2018
|
|
|
|
373,473
|
|
2019
|
|
|
|
373,473
|
|
2020
|
|
|
|
373,473
|
|
Thereafter
|
|
|
|
2,241,091
|
|
Total
|
|
|
$
|
3,828,351
|
|
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
8.
Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consisted of:
|
|
May
31, 2016
|
|
|
August
31, 2015
|
|
Trade
payables
|
|
$
|
572,699
|
|
|
$
|
279,890
|
|
Vendor
accruals
|
|
|
14,000
|
|
|
|
12,500
|
|
Accounts
payable and accrued liabilities
|
|
$
|
586,699
|
|
|
$
|
292,390
|
|
9.
Related Party Transactions
The
President of the Company advanced $5,000 during the nine months ended May 31, 2016 (2015 - $7,500) and $7,500 to the Company during
the year ended August 31, 2015 (2014 - $245,000). Advances payable to the President totaled $257,500 at May 31, 2016 (2015 - $252,500)
and $252,500 at August 31, 2015 (2014 - $245,000). These advances are unsecured and bear interest at 3% per annum. Of this amount,
$245,000 is due on demand and $12,500 has no repayment terms. Interest expense of $5,749 was accrued on these advances during
the nine months ended May 31, 2016 (2015 - $5,607) and $7,572 during the year ended August 31, 2015 (2014 - $3,310). Accrued interest
payable to the President totaled $16,631 at May 31, 2016 (2015 - $8,917) and $10,882 at August 31, 2015 (2014 - $3,310).
Consulting
fees paid or accrued as payable to a company controlled by the President of the Company were $97,100 and $66,300 for the nine
months ended May 31, 2016 and 2015, respectively.
Consulting
fees accrued as payable to a company controlled by the CFO of the Company were $50,000 and $nil for the nine months ended May
31, 2016 and 2015, respectively.
At
May 31, 2016, the Company owed $288,945 (2015 - $270,995) to its President, including the above advances and accrued interest
and $14,814 (2015 - $9,578) for reimbursable expenses incurred on the Company’s behalf. At August 31, 2015, the Company
owed $265,630 (2014 - $262,272) to its President, including the above advances and accrued interest and $2,248 (2014 - $13,962)
for reimbursable expenses incurred on the Company’s behalf.
At
May 31, 2016, the Company owed $175,300 (2015 - $56,100) in consulting fees to a company controlled by the President of the Company.
At August 31, 2015, the Company owed $78,200 (2014 - $nil) in consulting fees to a company controlled by the President of the
Company.
At
May 31, 2016, the Company owed $50,000 (2015 - $nil) in consulting fees to a company controlled by the CFO of the Company.
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 Note 12.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
10.
Advances from Shareholders
Shareholders
of the Company advanced $nil to the Company during the nine months ended May 31, 2016 (2015 - $95,000) and $95,000 during the
year ended August 31, 2015 (2014 - $62,500). Advances payable to shareholders totaled $157,500 at May 31, 2016 (2015 - $157,500)
and $157,500 at August 31, 2015 (2014 - $62,500). These advances are unsecured and bear interest at 3% per annum. Of this amount,
$12,500 is due on demand and $145,000 has no repayment terms. Interest expense of $3,547 was accrued on these advances during
the nine months ended May 31, 2016 (2015 - $2,930) and $4,065 during the year ended August 31, 2015 (2014 - $228). Accrued interest
payable to shareholders totaled $7,840 at May 31, 2016 (2015 - $3,158) and $4,293 at August 31, 2015 (2014 - $228).
11.
Commitments
Pursuant
to a consulting agreement entered into on November 16, 2015 with Edgewater Consulting Corp. (“ECC”), the Company is
required to cause Subco to issue 1,500,000 exchangeable preferred shares to ECC. On the one year anniversary of the agreement,
the Company shall cause an additional 1,500,000 exchangeable preferred shares to be issued to ECC. If ECC ceases to be engaged
by the Company on the six month anniversary of either date, the issuance of these shares can be automatically rescinded.
On
February 4, 2016, the Company entered into a consulting agreement with a company (the “Consultant”), whereby the Consultant,
through its principal, is to provide to the Company assistance in developing marketing plans, raising capital, and other strategic
planning. This agreement runs for three years, with the Company to pay to the Consultant US$10,000 at the agreement date (paid),
US$10,000 30 days following the agreement date (paid), and another US$5,000 30 days thereafter (paid), as well as a 10% cash commission
on sales facilitated by the Consultant and an 8% cash and warrants commission for the sale of equity securities to investors introduced
by the Consultant. If the Consultant raises an aggregate of $2,000,000 in gross proceeds from the sale of equity securities to
investors, the Company shall appoint the principal of the Consultant as Company CEO.
On
February 10, 2016, the Company renewed its premises lease dated November 11, 2011 for one additional year from February 1, 2016
to January 31, 2017 for a rental of $13,200 per year plus HST.
12.
Stockholders’ Equity
The
Company is authorized to issue 300,000,000 shares of common stock at a par value of $0.001.
At
May 31, 2016 and August 31, 2015, the Company had 12,264,146 shares of common stock legally issued and outstanding.
On
June 28, 2013, pursuant to the Exchange Agreement, RMI acquired 78,030,877 common shares of TSI in exchange for the issuance of
78,030,877 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 May 31, 2016 and August 31, 2015,
none of the preferred shares had been exchanged. Accordingly, the number of shares of the Company’s common stock outstanding
at May 31, 2016 is equal to the number of shares outstanding immediately prior to the consummation of the Exchange Agreement.
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.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
12.
Stockholders’ Equity (cont’d)
Common
Stock Issuances
During
the nine months ended May 31, 2016 and the year ended August 31, 2015, the Company issued no shares.
During
the nine months ended May 31, 2016, $149,991 (2015 - $15,000) in stock subscriptions were received pursuant to five individual
private placements. These subscriptions are for a total of:
|
●
|
160,000
units of the Company at a price of $0.25 per unit. Each unit consists of one share of the Company’s common stock and
one warrant to purchase one share of common stock exercisable at a price of $0.40 per share for two years.
|
|
|
|
|
●
|
322,340
units of the Company at a price of US$0.25 per unit. Each unit consists of one share of the Company’s common stock and
one warrant to purchase one share of common stock exercisable at a price of US$0.40 per share for two years.
|
During
the year ended August 31, 2015, $30,000 (2014 - $nil) in stock subscriptions were received pursuant to three individual private
placements. These subscriptions were for a total of 120,000 units of the Company at a price of $0.25 per unit. Each unit consists
of one share of the Company’s common stock and one warrant to purchase one share of common stock exercisable at a price
of $0.40 per share for two years.
13.
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, increasing competition, and dependence on its
existing management and key personnel.
14.
Accounting Pronouncements
In
June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-10, which amended Accounting Standards Codification (“ASC”) Topic 915 Development Stage Entities. The amendment
eliminates certain financial reporting requirements surrounding development stage entities, including an amendment to the variable
interest entities guidance in ASC Topic 810, Consolidation. The amendment removes the definition of a development stage entity
from the ASC, thereby removing the financial reporting distinction between development stage entities and other entities from
U.S. GAAP. Consequently, the amendment eliminates the requirements for development stage entities to (1) present inception-to-date
information in the statements of income, cash flows and shareholder equity, (2) label the financial statements as those of a development
stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose
the first year in which the entity is no longer a development stage entity. This amendment is effective for fiscal years beginning
after December 15, 2014, and interim periods therein. The Company adopted this amendment effective September 1, 2015 and, as a
result, the Company is no longer presenting or disclosing the information previously required under Topic 915. The adoption of
this amendment alters the disclosure requirements of the Company, but it does not have any impact on the Company’s financial
position or results of operations for the current or any prior reporting period.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
14.
Accounting Pronouncements (cont’d)
In
August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15
is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s
ability to continue as a going concern and to provide related footnote disclosures. The amendments in this ASU are effective for
reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is currently assessing the impact
the adoption of ASU 2014-15 will have on its financial statements and related disclosures.
In
July 2015, the FASB issued ASU No. 2015-11, which amended Accounting Standards Codification (“ASC”) Topic 330 Inventory.
The amendment simplifies the measurement of inventory, applying to inventories for which cost is determined by methods other than
last-in first-out (LIFO) and the retail inventory method (RIM), specifying that an entity should measure inventory at the lower
of cost and net realizable value instead of at the lower of cost or market. The amendments in this ASU are effective for fiscal
years beginning after December 15, 2016, and interim periods therein. The Company is currently assessing the impact the adoption
of the amendment will have on its financial statements and related disclosures.
15.
Contingent Liability
Pursuant
to the Exchange Agreement, as amended, the Company may be required to acquire up to 21,969,123 common shares of TSI, being those
TSI shares still outstanding, in exchange for 21,969,123 preferred shares of Subco on a one-for-one basis. Such preferred shares
would then be exchangeable on the same basis as the approximately 78 million Subco preferred shares currently outstanding (see
Notes 2 and 12).
16.
Subsequent Event
On
June 6, 2016,
the Company entered into a share exchange agreement with Notox Bioscience Inc. (“Notox”),
a private Nevada corporation, and all the shareholders of Notox (the “Notox Shareholders”) pursuant to which the Company
agreed to acquire all the issued and outstanding capital stock of Notox from the Notox Shareholders in consideration for the issuance
of 100,000,000 restricted shares of Company common stock.
The
share exchange occurred on June 13, 2016, at which time Notox acquired
100% of the right, title
and interest in and to an exclusive license agreement with the Cleveland Clinic Foundation held by Zoran Holding Corporation,
a private Ontario corporation, the Company issued the 100,000,000 restricted shares described above to the Notox Shareholders,
and Notox became a wholly-owned subsidiary of the Company.
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 and nine months ended May 31,
2016. These financial statements have been prepared in accordance with generally accepted accounting principles in the United
States (“US GAAP”). All financial information in this Report is presented in Canadian dollars, unless otherwise indicated,
and should be read in conjunction with our 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 (the “Closing Date”), we completed
a share exchange with Tropic Spa Inc. (“Tropic Spa”), an Ontario corporation, 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.