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 six
months ended February 28, 2017. The comparative amounts are the results of operations of the Company and TSI
for the six months ended February 29, 2016.
On
November 19, 2007, TSI entered into Share Subscription Agreements (the “Agreements”) with MCM Consulting Ltd., Nandoor
Enterprises Ltd., Sierra Tan Ltd., Sunshower Incorporated, Sunshower International Corporation and Tropic Spa Group Inc. (the
“Originating Companies”). Pursuant to the terms of the Agreements, the Originating Companies subscribed for, in aggregate,
18,202,503 common shares of TSI valued at $3,657,175. This assigned value was the cost to the Originating Companies, as of that
date, of developing a Home Mist Tanning system and the application for and acquisition of a United States Patent
“Apparatus
for Spray Application of a Sunless Tanning Product”
(the “US Patent”). The
Agreements included a triggering event (a “Triggering Event”) which was defined to mean the occurrence of any of the
following events:
●
|
Ninety
days after TSI has been listed as a public company on a stock exchange;
|
●
|
Ninety
days after TSI either purchases or is purchased by a company that is trading on a stock exchange; or
|
●
|
Notwithstanding
the above, ninety days after TSI has notified the Originating Companies in writing that a Triggering Event has occurred.
|
The
Originating Companies entered into agreements with their shareholders allowing the shareholders, upon the Triggering Event, to
exchange their class A shares in the Originating Companies, by exercising the option under their common share exchange warrant,
for common shares in TSI.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
1.
Company Overview and Basis of Presentation (cont’d)
On
April 9, 2009, the Board of Directors of TSI (the “Board”) resolved that the Triggering Event had occurred and approved
and issued a Notification of Triggering Event to the shareholders of the Originating Companies. The decision to exercise the Triggering
Event was driven by three factors:
●
|
The
approval of the US Patent;
|
●
|
Delivery
of the final production model on or before April 21, 2009; and
|
●
|
Implementation
of an aggressive marketing strategy.
|
After
November 19, 2007, and subsequent to the execution of the Agreements, Tropic Spa Group Inc. (“TSGI”) incurred an additional
$2,685,104 on the continued development of the Home Mist Tanning system and the application for and acquisition of the US Patent.
On March 11, 2013, TSI executed a second
Share
Subscription Agreement (the “Second Agreement”) with TSGI to cover the common shares of TSI issued to the shareholders
of TSGI in respect of the additional costs incurred. Pursuant to the terms of
the
Second Agreement, TSGI subscribed for 26,034,520 common shares valued at $3,155,462 covering the period from November 20, 2007
to June 2010. Of these amounts, 3,880,745 common shares were for $470,358 received directly by TSI. The value assigned to the
carrying value of the US Patent, during the year ended August 31, 2010, was $2,685,104 ($3,155,462 less $470,358). The total value
assigned to the carrying value of the US Patent pursuant to the Agreements and the Second Agreement, collectively, was $6,342,279.
On
October 16, 2014, the Company, through TSI, obtained an Australian patent (the “Australian Patent”) incurring application
costs of $4,976. On June 21, 2016, the Company, through TSI, obtained a Canadian patent (the “Canadian Patent”), incurring
application costs of $17,406. The Company, through TSI, has a patent pending which is in the process of being completed for China.
Costs incurred are recorded as patents (see Note 9).
As
reflected in the accompanying consolidated financial statements, the Company has a deficit of $6,418,141 (August 31, 2016 - $5,900,974),
a working capital deficiency of $1,569,729 (August 31, 2016 - $934,525) and stockholders’ equity of $3,538,716 (August 31,
2016 - $3,016,652). This raises substantial doubt about its ability to continue as a going concern. The ability of the Company
to continue as a going concern is dependent on its ability to raise additional capital and to implement its business plan. The
accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern. Management 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 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
|
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
2.
Reverse Takeover (cont’d)
●
|
Within
30 days of each six month anniversary of the Closing Date until June 30, 2015, on which date all restrictions on the preferred
shares automatically expired unless extended by the Selling Shareholders, Subco granted the holders of its preferred shares
a permission identical to the one above.
|
Upon
the closing of the Exchange Agreement, the sole officer and director of TSI became the sole officer and a director of the Company
and the Company adopted the business plan of TSI.
As
a result of the share exchange, the Selling Shareholders controlled approximately 87% of the issued and outstanding common shares
of the Company on a fully-exchanged basis as of the Closing Date. The Exchange Agreement represented a reverse takeover and was
therefore accounted for under the acquisition method with TSI as the accounting acquirer and continuing entity for accounting
and financial reporting purposes and the Company as the legal parent being the acquiree. There was no active market to reliably
determine fair value of the consideration other than the value of the identifiable assets acquired. Therefore, the purchase price
allocation of the acquisition was based on the fair value of the net liabilities acquired which was charged to additional paid-in-capital.
The
fair values of assets acquired and liabilities assumed were as follows:
Cash
|
|
$
|
1,774
|
|
Subscriptions receivable
|
|
|
10
|
|
Accounts payable and accrued liabilities
|
|
|
(32,488
|
)
|
Loan payable
to TSI
|
|
|
(25,454
|
)
|
Net
liabilities acquired
|
|
$
|
(56,158
|
)
|
On
February 17, 2015, the Company, Subco, TSI and the Selling Shareholders entered into an amendment to the Exchange Agreement in
order to correct certain administrative errors in the Exchange Agreement and provide for the post-closing execution of the Exchange
Agreement by those shareholders of TSI who were not original signatories thereto. In addition, the Selling Shareholders approved
certain changes to the rights, privileges, restrictions and conditions attached to the preferred shares of Subco by consent in
writing. This included extending the automatic expiration date in respect of the preferred shares of Subco from June 30, 2015
to June 30, 2017.
On February 22, 2017, this automatic expiration
date was further extended to December 31, 2018.
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.
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. Pursuant to the License Agreement, as amended, the Clinic
will receive a royalty based on the sale of certain products, a milestone payment upon first commercial sale of the first such
product and a percentage of any sublicensing revenues. In the month in which cumulative gross revenues reach a specified amount,
the Clinic will be reimbursed for all incurred and to be incurred patent expenses to a specified amount. Royalties and other payments
are payable quarterly. ZHC is required to achieve a commercial milestone on or before November 30, 2017, and failure to achieve
this milestone, without satisfactory justification, constitutes a material breach of the License Agreement giving the Clinic the
right, but not the obligation, to terminate the License Agreement. The Clinic has the right to verify ZHC’s compliance with
the License Agreement.
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 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 to August 31, 2016
|
|
|
19,519
|
|
Assignment fee
|
|
|
1,347,000
|
|
Carrying
value of License Agreement
|
|
$
|
1,499,731
|
|
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.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
4.
Summary of Significant Accounting Policies (cont’d)
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.
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 28, 2017.
Inventory
Inventory
is stated at the lower of cost, computed using the first-in, first-out method, or market. If the cost of inventory exceeds its
market value, a provision is made currently for the difference between the cost and market value. The Company’s inventory
consists of finished goods, components and supplies.
Equipment,
Net
Equipment
is stated at cost, net of accumulated depreciation. Equipment is depreciated over the estimated useful life of the asset. Mould
equipment is depreciated at 20% on a declining-balance basis. The website was depreciated on a straight-line basis over five years.
One-half of these rates are used in the year of acquisition. Replacements and major improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. Upon retirement or sale, the cost of assets disposed of and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to operations.
Intangible
Assets
Patents
The
US Patent is recorded at the value attributed to the shares issued to the Originating Companies and shareholders of TGSI less
accumulated amortization. The US Patent was issued on September 29, 2009 and is effective until September 29, 2026. The Australian
and Canadian Patents are 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. The Canadian Patent was issued on June 21, 2016 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.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
4.
Summary of Significant Accounting Policies (cont’d)
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, and Canadian Patents are
17, 13, and 11 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).
Management
is in the process of determining the best estimate of the useful life of the License Agreement.
Amortization
and Impairment
Definite-lived
intangible assets are required to be amortized using a method that reflects the pattern in which the economic benefits of the
intangible assets are consumed or utilized. At this time, management is not able to determine with any amount of certainty the
number of Home Mist Tanning units that will be sold over the useful lives of the patents. Accordingly, the patents are being amortized
on a straight-line basis over the period of their useful lives. Management is in the process of determining the most appropriate
method for amortizing the License Agreement.
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 an operating lease.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
4.
Summary of Significant Accounting Policies (cont’d)
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.
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.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
4.
Summary of Significant Accounting Policies (cont’d)
Fair
Value of Financial Instruments
Carrying
values of cash, accounts payable and accrued liabilities, advances from related parties/shareholders and license assignment fee
payable approximate fair value because of the short-term nature of these items. Amounts receivable consists primarily of Harmonized
Sales Tax (“HST”) receivable from the Government of Canada. HST is not a financial instrument.
Foreign
Currency
The
functional currency of the Company and its subsidiaries is the Canadian dollar. The accompanying consolidated financial statements
are presented in Canadian dollars.
Foreign
currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction.
Foreign currency monetary items are translated at the period-end exchange rate. Non-monetary items measured at historical cost
continue to be carried at the exchange rate at the date of the transaction. Exchange differences arising on the translation of
monetary items or on settlement of monetary items are recognized in the loss in the period in which they arise.
5.
Loss Per Share
The
following table sets forth the computation of loss per share:
|
|
For
the Six Months Ended
|
|
|
|
February
28, 2017
|
|
|
February
29, 2016
|
|
Net loss per share:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(517,167
|
)
|
|
$
|
(469,247
|
)
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
56,892,843
|
|
|
|
12,264,146
|
|
Number
of shares used in per share computations
|
|
|
56,632,031
|
|
|
|
12,264,146
|
|
Loss
per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
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.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
6.
Fair Value Measurements (cont’d)
The
Company does not have assets and liabilities that are measured at fair value on a recurring basis.
7.
Prepaid Expenses
On
February 20, 2017, the Company entered into a proposal with RBC Medical Innovations (“RBC”) for RBC to develop a radio
frequency treatment system, leveraging technology acquired by the Company via the License Agreement with the Clinic. Pursuant
to this proposal, the Company paid an initial $73,453 (US$55,600) project stage initiation fee to RBC See Note 3.
8.
Equipment, Net
Equipment,
at cost, consisted of:
|
|
February
28,
2017
|
|
|
August
31,
2016
|
|
Mould equipment
|
|
$
|
155,300
|
|
|
$
|
155,300
|
|
Website
|
|
|
28,875
|
|
|
|
28,875
|
|
Equipment at cost
|
|
|
184,175
|
|
|
|
184,175
|
|
Accumulated depreciation
|
|
|
(145,703
|
)
|
|
|
(141,428
|
)
|
Equipment,
net
|
|
$
|
38,472
|
|
|
$
|
42,747
|
|
Depreciation
was $4,275 and $5,343 for the six month periods ended February 28, 2017 and February 29, 2016, respectively.
9.
Patents, Net
The
following tables provide information regarding the patents and patents pending:
|
|
February
28, 2017
|
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Writedowns
|
|
|
Net
carrying amount
|
|
US Patent
|
|
$
|
6,342,279
|
|
|
$
|
2,798,064
|
|
|
$
|
—
|
|
|
$
|
3,544,215
|
|
Australian Patent
|
|
|
4,976
|
|
|
|
946
|
|
|
|
—
|
|
|
|
4,030
|
|
Canadian Patent
|
|
|
17,406
|
|
|
|
1,214
|
|
|
|
—
|
|
|
|
16,192
|
|
Patents pending
|
|
|
5,805
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,805
|
|
|
|
$
|
6,370,466
|
|
|
$
|
2,800,224
|
|
|
$
|
—
|
|
|
$
|
3,570,242
|
|
|
|
August
31, 2016
|
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Writedowns
|
|
|
Net
carrying amount
|
|
US Patent
|
|
$
|
6,342,279
|
|
|
$
|
2,611,527
|
|
|
$
|
—
|
|
|
$
|
3,730,752
|
|
Australian Patent
|
|
|
4,976
|
|
|
|
747
|
|
|
|
—
|
|
|
|
4,229
|
|
Canadian Patent
|
|
|
17,406
|
|
|
|
404
|
|
|
|
—
|
|
|
|
17,002
|
|
Patents pending
|
|
|
10,509
|
|
|
|
—
|
|
|
|
6,793
|
|
|
|
3,716
|
|
|
|
$
|
6,375,170
|
|
|
$
|
2,612,678
|
|
|
$
|
6,793
|
|
|
$
|
3,755,699
|
|
Also
see Note 1 Company Overview and Basis of Presentation.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
9.
Patents, Net (cont’d)
During
the period ended February 28, 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 and Canadian Patents.
|
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 February 28, 2017, amortization expense on intangible assets for the next five years was expected to be as follows:
|
|
Amount
|
|
Year ending:
|
|
|
|
|
2017
|
|
$
|
187,547
|
|
2018
|
|
|
375,093
|
|
2019
|
|
|
375,093
|
|
2020
|
|
|
375,093
|
|
2021
|
|
|
375,093
|
|
Thereafter
|
|
|
1,876,518
|
|
Total
|
|
$
|
3,564,437
|
|
10.
License Agreement, Net
|
|
February
28, 2017
|
|
|
|
|
Gross
carrying amount
|
|
|
|
Accumulated
amortization
|
|
|
|
Net
carrying amount
|
|
License
Agreement
|
|
$
|
1,499,731
|
|
|
$
|
—
|
|
|
$
|
1,499,731
|
|
|
|
August
31, 2016
|
|
|
|
|
Gross
carrying amount
|
|
|
|
Accumulated
amortization
|
|
|
|
Net
carrying amount
|
|
License
Agreement
|
|
$
|
152,731
|
|
|
$
|
—
|
|
|
$
|
152,731
|
|
Also
see Note 3 Asset Acquisition and License Agreement. The Company, Notox and the Clinic are in the process of negotiating a second
amendment to the License Agreement.
11.
Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consisted of:
|
|
February
28, 2017
|
|
|
August
31,
2016
|
|
Trade payables
|
|
$
|
843,982
|
|
|
$
|
751,762
|
|
Vendor accruals
|
|
|
27,000
|
|
|
|
86,228
|
|
Accounts
payable and accrued liabilities
|
|
$
|
870,982
|
|
|
$
|
837,990
|
|
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
12.
Related Party Transactions
As
at February 28, 2017, the following amounts were payable to the Company’s related parties:
●
|
Advances
payable to the President of the Company totaled $232,000 at February 28, 2017 (February 29, 2016 - $257,500) and $257,500
at August 31, 2016 (2015 - $252,500). 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 $22,069 at February
28, 2017 (February 29, 2016 - $14,684) and $18,578 at August 31, 2016 (2015 - $10,882).
|
|
|
●
|
At
February 28, 2017, the Company owed $3,984 (2016 - $15,634) to the President for reimbursable expenses incurred on the Company’s
behalf. At August 31, 2016, the Company owed $10,477 (2015 - $2,248).
|
|
|
●
|
At
February 28, 2017, the Company owed $238,307 ($181,070 and US$43,097) (February 29, 2016 - $59,600) in consulting fees to
a company controlled by the President. At August 31, 2016, the Company owed $215,224 ($181,070 and US$26,040) (2015 - $78,200).
|
|
|
●
|
At
February 28, 2017, the Company owed $95,115 (US$71,618) (February 29, 2016 - $nil) in consulting fees to a company controlled
by the CEO of the Company. At August 31, 2016, the Company owed $34,154 (US$26,040) (2015 - $nil).
|
|
|
●
|
At
February 28, 2017, the Company owed $237,540 ($181,070 and US$42,519) (February 29, 2016 - $181,070) in consulting fees to
a company controlled by a major shareholder of the Company. At August 31, 2016, the Company owed $215,224 ($181,070 and US$26,040)
(2015 - $78,200). Prior to June 13, 2016, this shareholder was not a related party.
|
|
|
●
|
At
February 28, 2017, the Company owed $75,000 (February 29, 2016 - $25,000) in consulting fees to a company controlled
by the Company’s former CFO. At August 31, 2016, the Company owed $75,000 (2015 - $nil).
|
Of
these amounts, $254,069 (August 31, 2016 - $276,078) is included in advances from related parties/shareholders and $649,946 (August
31, 2016 - $550,079) is included in accounts payable and accrued liabilities.
During
the six months ended February 28, 2017, the Company had the following transactions with related parties:
●
|
The
President of the Company advanced $nil during the six months ended February 28, 2017 (February 29, 2016 - $5,000) and $5,000
to the Company during the year ended August 31, 2016 (2015 - $7,500). Interest expense of $3,491 was accrued on these advances
during the six months ended February 28, 2017 (February 29, 2016 - $3,802) and $7,696 during the year ended August 31, 2016
(2015 - $7,572).
|
|
|
●
|
Consulting
fees paid or accrued as payable to a company controlled by the President of the Company were $82,906 (US$62,500) and $59,600
for the six months ended February 28, 2017 and February 29, 2016, respectively.
|
|
|
●
|
Consulting
fees paid or accrued as payable to a company controlled by the CEO of the Company were $82,906 (US$62,500) and $nil for the
six months ended February 28, 2017 and February 29, 2016, respectively.
|
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
12.
Related Party Transactions (cont’d)
●
|
Consulting
fees accrued as payable to a company controlled by a major shareholder of the Company were $82,906 (US$62,500) and $nil for
the six months ended February 28, 2017 and February 29, 2016, respectively. Prior to June 13, 2016, this shareholder was not
a related party.
|
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 six months ended February 28, 2017 (February 29, 2016 - $nil) and
$nil during the year ended August 31, 2016 (2015 - $95,000). Advances payable to shareholders totaled $145,000 at February 28,
2017 (February 29, 2016 - $157,500) and $157,500 at August 31, 2016 (2015 - $157,500). These advances are unsecured and bear interest
at 3% per annum. Of this amount, $nil (August 31, 2016 - $12,500) is due on demand and $145,000 (August 31, 2016 - $145,000) has
no repayment terms. Interest expense of $2,158 was accrued on these advances during the six months ended February 28, 2017 (February
29, 2016 - $2,356) and $4,738 during the year ended August 31, 2016 (2015 - $4,065). Accrued interest payable to shareholders
totaled $11,189 at February 28, 2017 (February 29, 2016 - $6,649) and $9,031 at August 31, 2016 (2015 - $4,293).
14.
License Assignment Fee Payable
At
February 28, 2017, the balance of the license assignment fee payable to ZKC was US$750,000. The license 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. See Note
3.
15.
Commitments
On
November 16, 2015, the Company entered into a consulting agreement (the “ECC Agreement”) with Edgewater Consulting
Corp., a private Ontario corporation (“ECC”). Pursuant to the ECC Agreement, ECC, through its principal, acted in
the capacity of CFO of the Company. The ECC Agreement was terminated effective November 10, 2016. A signing bonus of 750,000 exchangeable
preferred shares of Subco was issued on August 24, 2016. As at February 28, 2017, ECC is entitled to $75,000 (August 31, 2016
- $75,000) in accrued remuneration
On
December 1, 2015, the Company entered into consulting agreements with 1040614 Ontario Ltd., a private Ontario corporation (the
“Old 1040614 Agreement”) and MCM Consulting, an Ontario sole proprietorship (the “Old MCM Agreement”,
and together with the Old 1040614 Agreement, the “Old Agreements”). Pursuant to the Old 1040614 Agreement, the company,
through its principal, performed various services related to business development, strategic planning and capital-raising for
the Company. Pursuant to the Old MCM Agreement, the sole proprietor acted in the capacity of CEO of the Company. On June 13, 2016,
the Old 1040614 and MCM Agreements were terminated and replaced by the 1040614 and MCM Agreements (see below). As at February
28, 2017, in addition to previously accrued amounts, 1040614 and MCM are each entitled to $80,770 (August 31, 2016 - $80,770)
in accrued remuneration in respect of the Old Agreements.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
15.
Commitments (cont’d)
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 February 28, 2017, there is no remuneration payable (August
31, 2016 - $nil) by the Company under the Old ZKC Agreement.
On
December 22, 2016, the Company renewed its premises lease dated November 11, 2011, for one additional year from February 1, 2017
to January 31, 2018 for a rental of $13,500 per year plus HST.
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.
|
16.
Stockholders’ Equity
The
Company is authorized to issue 300,000,000 shares of common stock at a par value of $0.001.
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
February 28, 2017, the Company had 56,892,843 shares of common stock (February 29, 2016 – 6,132,073) issued and outstanding.
At August 31, 2016, the Company had 56,132,073 shares of common stock (2015 - 6,132,073) issued and outstanding.
On
June 28, 2013, pursuant to the Exchange Agreement, RMI 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 February 28, 2017 and August 31,
2016, none of the preferred shares had been exchanged.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
16.
Stockholders’ Equity (cont’d)
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 six months ended February 28, 2017, the Company completed the following common stock transactions:
●
|
On
October 31, 2016, the Company closed a concurrent Canadian and US dollar financing as follows:
|
|
●
|
Canadian
financing – the Company issued 140,000 units at $0.50 per unit for gross proceeds of $70,000, with each unit consisting
of one share of the Company’s common stock and one warrant to purchase one share of common stock exercisable at a price
of $0.80 per share until October 31, 2018.
|
|
●
|
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.
|
●
|
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.
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 per the Black Scholes valuation model, using the following
inputs:
|
Expected dividend yield
|
|
|
0.00
|
%
|
Risk-free interest rate
|
|
|
0.51
|
%
|
Expected stock price volatility
|
|
|
100.00
|
%
|
Expected life of warrants
|
|
|
2
years
|
|
Weighted average
fair value
|
|
$
|
0.5828
|
|
During
the year ended August 31, 2016, the Company completed the following common stock transactions:
●
|
50,000,000
shares of common stock were issued on June 13, 2016 at a par value of US$0.002 ($127,920; US$100,000). See Note 3. Pursuant
to a stock restriction agreement entered into on June 13, 2016, these shares cannot be sold or otherwise disposed of until
June 30, 2017.
|
No
common stock transactions occurred during the six months ended February 29, 2016 and the year ended August 31, 2015.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
16.
Stockholders’ Equity (cont’d)
Stock
Subscribed
During
the six months ended February 28, 2017, $663,550 (US$500,000) in stock subscriptions was received pursuant to two individual private
placements. These subscriptions are for a total of:
●
|
500,000
units of the Company at a price of US$1 per unit. Each unit consists of one share of the Company’s common stock and
two warrants to purchase one share of common stock per warrant exercisable at a price of US$1.40 per share for a period of
24 months from the closing date of the financing.
|
During
the six months ended February 29, 2016, $75,531 in stock subscriptions were received pursuant to five individual private placements.
These subscriptions were 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 a period to be determined.
|
|
|
●
|
100,000
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 a period to be determined.
|
Stock
Purchase Warrants
The
continuity of Canadian dollar denominated stock purchase warrants for the six months ended February 28, 2017 is
as follows:
Expiry
Date
|
|
Price
|
|
|
August
31, 2016
|
|
|
Issued
|
|
|
February
28, 2017
|
|
October
31, 2018
|
|
$
|
0.80
|
|
|
|
—
|
|
|
|
140,000
|
|
|
|
140,000
|
|
The
continuity of US dollar denominated stock purchase warrants for the six months ended February 28, 2017 is as follows:
Expiry
Date
|
|
Price
|
|
|
August
31, 2016
|
|
|
Issued
|
|
|
February
28, 2017
|
|
September 28, 2018 - Finder
|
|
|
US$1.40
|
|
|
|
—
|
|
|
|
15,000
|
|
|
|
15,000
|
|
October 31, 2018
|
|
|
US$0.80
|
|
|
|
—
|
|
|
|
220,700
|
|
|
|
220,700
|
|
November 2,
2018
|
|
|
US$1.40
|
|
|
|
—
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
—
|
|
|
|
635,700
|
|
|
|
635,700
|
|
At
February 28, 2017, the weighted-average remaining contractual life of US dollar warrants outstanding was 1.67 years (August 31,
2016 – nil).
As
at August 31, 2016 and February 29, 2016, the Company had no stock purchase warrants outstanding.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
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 and aesthetics and pain products, increasing
competition, and dependence on its existing management and key personnel.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
18.
Accounting Pronouncements
The
Financial Accounting Standards Board (“FASB”) has 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.
●
|
August
2014 – 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”) 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.
|
|
|
|
July
2015 – ASU No. 2015-11, which amended Accounting Standards Codification (“ASC”) Topic 330 Inventory 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.
|
|
|
●
|
January
2016 – ASU No. 2016-01 “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities” enhances the reporting model for financial instruments, including certain
aspects of recognition, measurement, presentation and disclosure of financial instruments. The amendments in this ASU are
effective for reporting periods beginning after December 15, 2017, with early adoption permitted.
|
|
|
●
|
February
2016 – ASU No. 2016-02 “Leases (Topic 842)” provides guidance establishing the principles to report transparent
and economically neutral information about the assets and liabilities that arise from leases. The amendments in this ASU are
effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December
15, 2020.
|
|
|
●
|
April
2016 – ASU 2016-10 “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing” clarifies the process of identifying performance obligations and provide licensing implementation guidance.
The amendments in this ASU are effective for reporting periods beginning after December 15, 2017, with early adoption permitted
for annual periods beginning after December 15, 2016.
|
|
|
●
|
May
2016 – ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients” provides guidance regarding how an entity should recognize revenue for the transfer of goods and services
to customers to reflect the consideration to which the entity expects to be entitled in exchange for those goods or services.
The amendments in this ASU are effective for reporting periods beginning after December 15, 2017, with early adoption permitted
for annual periods beginning after December 15, 2016.
|
|
|
●
|
August
2016 – ASU No. 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments” provides guidance concerning how certain cash receipts and cash payments are presented and classified in the
statement of cash flows. The amendments in this ASU are effective for reporting periods beginning after December 15, 2017,
to be applied retrospectively, with early adoption permitted.
|
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
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 16). On August 24, 2016, 21,672,623 common shares of TSI were exchanged for 10,836,312 preferred shares of Subco.
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 six months ended February 28, 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. (“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.
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 (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.