NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
1.
Company Overview and Basis of Presentation
Nature
and History of Operations
Tropic
International Inc. (formerly Rockford Minerals, Inc.) (the “Company”) was incorporated under the laws of the state
of Nevada on October 29, 2007. The Company was a natural resource exploration company with an objective of acquiring, exploring
and, if warranted and feasible, developing natural resource properties. Activities during the exploration stage included developing
the business plan and raising capital.
On
June 28, 2013, the Company completed a reverse takeover transaction (see Note 2) with Tropic Spa Inc. (“TSI”), a company
that manufactures and sells Home Mist Tanning units that deliver a full-body application. As a result of this transaction, the
Company became a holding company operating through TSI. Upon the closing of the share exchange agreement described below, the
Company changed its fiscal year end from October 31 to August 31 to coincide with the fiscal year end of TSI.
On
December 6, 2013, the Company changed its name to Tropic International Inc. as a result of a merger with a wholly-owned subsidiary
incorporated solely to effect the name change.
On
September 3, 2014, the Company’s shares became eligible for quotation on the OTCQB under the symbol TRPO.
On
June 13, 2016, the Company completed an asset acquisition transaction (see Note 3) with Notox Bioscience Inc. (“Notox”),
a private Nevada corporation incorporated on May 31, 2016 for the purpose of acquiring 100% of the right, title and interest in
and to an exclusive license agreement (the “License Agreement”) with The Cleveland Clinic Foundation (the “Clinic”),
an Ohio not-for-profit corporation. As a result of this transaction, the Company is a holding company operating through both TSI
and Notox.
The
accompanying consolidated financial statements include the results of operations of the Company and TSI for the years ended August
31, 2017 and 2016 and of Notox for the year ended August 31, 2017, and the period from June 13, 2016 to August 31, 2016.
On
November 19, 2007, TSI entered into Share Subscription Agreements (the “Agreements”) with MCM Consulting Ltd., Nandoor
Enterprises Ltd., Sierra Tan Ltd., Sunshower Incorporated, Sunshower International Corporation and Tropic Spa Group Inc. (the
“Originating Companies”). Pursuant to the terms of the Agreements, the Originating Companies subscribed for, in aggregate,
18,202,503 common shares of TSI valued at $3,657,175. This assigned value was the cost to the Originating Companies, as of that
date, of developing a Home Mist Tanning system and the application for and acquisition of a United States Patent
“Apparatus
for Spray Application of a Sunless Tanning Product”
(the “US Patent”). The Agreements included a triggering
event (a “Triggering Event”) which was defined to mean the occurrence of any of the following events:
|
●
|
Ninety
days after TSI has been listed as a public company on a stock exchange;
|
|
●
|
Ninety
days after TSI either purchases or is purchased by a company that is trading on a stock exchange; or
|
|
●
|
Notwithstanding
the above, ninety days after TSI has notified the Originating Companies in writing that a Triggering Event has occurred.
|
The
Originating Companies entered into agreements with their shareholders allowing the shareholders, upon the Triggering Event, to
exchange their class A shares in the Originating Companies, by exercising the option under their common share exchange warrant,
for common shares in TSI.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
1.
Company Overview and Basis of Presentation (cont’d)
On
April 9, 2009, the Board of Directors of TSI (the “Board”) resolved that the Triggering Event had occurred and approved
and issued a Notification of Triggering Event to the shareholders of the Originating Companies. The decision to exercise the Triggering
Event was driven by three factors:
|
●
|
The
approval of the US Patent;
|
|
●
|
Delivery
of the final production model on or before April 21, 2009; and
|
|
●
|
Implementation
of an aggressive marketing strategy.
|
After
November 19, 2007, and subsequent to the execution of the Agreements, Tropic Spa Group Inc. (“TSGI”) incurred an additional
$2,685,104 on the continued development of the Home Mist Tanning system and the application for and acquisition of the US Patent.
On March 11, 2013, TSI executed a second
Share
Subscription Agreement (the “Second Agreement”) with TSGI to cover the common shares of TSI issued to the shareholders
of TSGI in respect of the additional costs incurred. Pursuant to the terms of
the
Second Agreement, TSGI subscribed for 26,034,520 common shares valued at $3,155,462 covering the period from November 20, 2007
to June 2010. Of these amounts, 3,880,745 common shares were for $470,358 received directly by TSI. The value assigned to the
carrying value of the US Patent, during the year ended August 31, 2010, was $2,685,104 ($3,155,462 less $470,358). The total value
assigned to the carrying value of the US Patent pursuant to the Agreements and the Second Agreement, collectively, was $6,342,279.
On
October 16, 2014, the Company, through TSI, obtained an Australian patent (the “Australian Patent”), incurring application
costs of $4,976. On June 21, 2016, the Company, through TSI, obtained a Canadian patent (the “Canadian Patent”), incurring
application costs of $17,406. On December 28, 2016, the Company, through TSI, obtained a Chinese patent (the “Chinese Patent”),
incurring application costs of $5,806. Costs incurred are recorded as intangible assets. On August 31, 2017, the net carrying
amount of the patents was written down to a nominal amount of $4 (see Note 9).
As
reflected in the accompanying consolidated financial statements, the Company has a deficit of $10,972,661 (August 31, 2016 - $5,900,974)
since inception, a working capital deficiency of $3,134,766 (August 31, 2016 - $934,525) and a stockholders’ deficiency
of $1,986,065 (August 31, 2016 - stockholders’ equity of $3,016,652). This raises substantial doubt about its ability to
continue as a going concern. The ability of the Company to continue as a going concern is dependent on its ability to raise additional
capital and to implement its business plan. The accompanying consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
Management
has evaluated the Company’s ability to continue as a going concern by assessing its ability to meet its obligations as they
become due within one year from the date of issue of the financial statements. Management’s assessment included the following
factors:
|
●
|
The
Company’s financial condition as at the date of issue of the financial statements;
|
|
●
|
The
Company’s actual or anticipated conditional and unconditional obligations due within one year from the date of issue
of the financial statements;
|
|
●
|
The
funds necessary to maintain the Company’s operations considering its current financial condition, obligations and other
expected cash flows; and
|
|
●
|
Other
conditions and events that may affect the Company’s ability to meet its obligations within one year from the date of
issue of the financial statements.
|
The
Company’s operating expenses are estimated to be approximately $100,000 per year. As at August 31, 2017, the Company’s
current cash liabilities total approximately $2,175,000. Of this amount, approximately $1,767,000 – accounts payable and
accrued liabilities ($668,000), advances from related parties/shareholders ($416,000) and license assignment fee payable ($683,000)
– are payable to related parties and/or major shareholders who have not and will not require payment until such time as
sufficient
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
1.
Company Overview and Basis of Presentation (cont’d)
cash
flow is available. Of the remaining $408,000, $51,000 was repaid subsequent to year end and $117,000 is payable to organizations
that are willing to continue to defer payment. To the extent that $206,000 of the remaining $240,000 cannot be deferred and sufficient
equity financing has not been raised to make the payment required, management will advance funds to the Company, if appropriate.
2.
Reverse Takeover
On
June 28, 2013 (the “Closing Date”), the Company, its wholly-owned subsidiary 1894632 Ontario Inc. (“Subco”)
and TSI entered into a share exchange agreement (the “Exchange Agreement”) with certain of the shareholders of TSI
(the “Selling Shareholders”) pursuant to which the Company acquired 39,015,439 common shares, or approximately 78%
of the issued and outstanding shares, of TSI in exchange for the issuance of 39,015,439 preferred shares of Subco to the Selling
Shareholders on a one-for-one basis. Each one preferred share of Subco is exchangeable into one share of the Company’s common
stock at the option of the holder subject to the following restrictions:
|
●
|
The
Selling Shareholders required the written consent of Subco to exchange, sell or otherwise dispose of, directly or indirectly,
any of their preferred shares of Subco until the six month anniversary of the Closing Date;
|
|
●
|
Within
30 days of that time, and provided TSI generated at least $1,000,000 in gross revenue during the preceding six month period,
Subco permitted the Selling Shareholders to require Subco to redeem an aggregate of 1% of its then-outstanding preferred shares
on a pro-rata basis; and
|
|
●
|
Within
30 days of each six month anniversary of the Closing Date until June 30, 2015, on which date all restrictions on the preferred
shares automatically expired unless extended by the Selling Shareholders, Subco granted the holders of its preferred shares
a permission identical to the one above.
|
Upon
the closing of the Exchange Agreement, the sole officer and director of TSI became the sole officer and a director of the Company
and the Company adopted the business plan of TSI.
As
a result of the share exchange, the Selling Shareholders controlled approximately 87% of the issued and outstanding common shares
of the Company on a fully-exchanged basis as of the Closing Date. The Exchange Agreement represented a reverse takeover and was
therefore accounted for under the acquisition method with TSI as the accounting acquirer and continuing entity for accounting
and financial reporting purposes and the Company as the legal parent being the acquiree. There was no active market to reliably
determine fair value of the consideration other than the value of the identifiable assets acquired. Therefore, the purchase price
allocation of the acquisition was based on the fair value of the net liabilities acquired which was charged to additional paid-in-capital.
The
fair values of assets acquired and liabilities assumed were as follows:
Cash
|
|
$
|
1,774
|
|
Subscriptions
receivable
|
|
|
10
|
|
Accounts
payable and accrued liabilities
|
|
|
(32,488
|
)
|
Loan
payable to TSI
|
|
|
(25,454
|
)
|
Net
liabilities acquired
|
|
$
|
(56,158
|
)
|
On
February 17, 2015, the Company, Subco, TSI and the Selling Shareholders entered into an amendment to the Exchange Agreement in
order to correct certain administrative errors in the Exchange Agreement and provide for the post-closing execution of the Exchange
Agreement by those shareholders of TSI who were not original signatories thereto. In addition, the Selling Shareholders approved
certain
changes to the rights, privileges, restrictions and conditions
attached to the preferred shares of Subco by consent in writing. This included extending the automatic expiration date in respect
of the preferred shares of Subco from June 30, 2015 to June 30, 2017. On February 22, 2017, this automatic expiration date was
further extended to December 31, 2018.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS
3.
Asset Acquisition and License Agreement
On
June 13, 2016 (the “Second Closing Date”), the Company, Notox and the shareholders of Notox (the “Notox Shareholders”)
entered into a share exchange agreement (the “Share Exchange Agreement”) pursuant to which the Company acquired 100%
of the issued and outstanding common stock of Notox from the Notox Shareholders in exchange for the issuance of 50,000,000 shares
of the Company’s common stock. See Note 16.
On
the Second Closing Date, Notox and Zoran Holding Corporation (“ZHC”), a private Ontario corporation, entered into
an assignment agreement (the “Assignment Agreement”) pursuant to which ZHC irrevocably assigned 100% of its right,
title and interest in and to the License Agreement, as amended, to Notox. Also on the Second Closing Date, the sole officer and
director of Notox and ZHC became a director and officer of the Company.
On
November 23, 2016, the Company, Notox and the Notox Shareholders entered into an amendment to the Share Exchange Agreement in
order to clarify certain sections in the Share Exchange Agreement, to provide for an assignment fee and to describe how the Company
will use the proceeds of any equity financing completed after the Second Closing Date. In consideration for inducing ZHC to enter
into the Assignment Agreement, the Company will pay an aggregate of US$1,000,000 to ZKC in the form of a one-time assignment fee.
See Note 14.
On
December 1, 2012, ZHC and the Clinic entered into the License Agreement whereby the Clinic granted ZHC an exclusive worldwide
license and a non-exclusive worldwide license in the field of aesthetics and pain to make, use, offer to sell, sell and import
certain products throughout the term of the License Agreement. The term continues until the expiration of the last to expire of
the certain patents. The License Agreement was amended on July 30, 2013 and July 1, 2016. Pursuant to the License Agreement, as
amended, Notox is the licensee under the License Agreement and is solely responsible for making all regulatory filings and securing
regulatory approval for the products covered by the License Agreement. The Clinic will receive a royalty based on the sale of
certain products, a milestone payment within 30 days following the first commercial sale of such products and a percentage of
any sublicensing revenues. Royalties and other payments are payable quarterly. Notox is required to achieve two commercial milestones:
regulatory filings submitted to regulatory authorities by November 30, 2019 and first commercial sale within nine months following
regulatory approval. Failure to achieve these milestones, without satisfactory justification, constitutes a material breach of
the License Agreement giving the Clinic the right, but not the obligation, to convert the License Agreement to a non-exclusive
license or terminate the License Agreement. The Clinic has the right to verify Notox’s compliance with the License Agreement.
Within
30 days following Notox’s receipt of the first regulatory approval, Notox is required to reimburse the Clinic for current
patenting costs. All patenting costs, patent office fees and outside patent counsel costs will, at the Clinic’s option,
either be paid directly by Notox or by the Clinic with the Clinic invoicing Notox, provided that Notox has no obligation to pay
or reimburse the Clinic until after first regulatory approval has been obtained. Upon termination or expiration of the License
Agreement, all accrued and unreimbursed patenting costs become immediately due and payable to the Clinic. As of August 31, 2017,
all accrued and unreimbursed patenting costs totalled US$157,758 ($197,765).
Subsequent
to year end, the Company, Notox and the Clinic entered into the second amendment to the License Agreement. See Note 21.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS
3.
Asset Acquisition and License Agreement (cont’d)
As
a result of the share exchange and on the Second Closing Date, the Notox Shareholders controlled approximately 89% of the issued
and outstanding common stock of the Company (52.5% on a fully-exchanged basis) and Notox became a wholly-owned subsidiary of the
Company. Notox did not meet the definition (inputs, processes and outputs criteria) of a business. The Share Exchange Agreement
represented an asset acquisition and was therefore accounted for under the asset acquisition method.
Acquired
intangible assets are recognized and initially measured based on their fair value plus transaction costs incurred as part of the
acquisition. There was no active market to reliably determine the fair value of the License Agreement acquired. Therefore the
fair value of the License Agreement was based on the par value of the common stock exchanged by the Company.
The
fair value and gross carrying value of the License Agreement is as follows:
License
Agreement
|
|
$
|
133,212
|
|
Cash
|
|
|
131
|
|
Accrued
liabilities
|
|
|
(5,423
|
)
|
Capital
stock exchanged (50,000,000 shares at US$0.002 per share)
|
|
$
|
127,920
|
|
Fair
value of License Agreement
|
|
$
|
133,212
|
|
Acquisition
costs
|
|
|
19,519
|
|
Assignment
fee (US$1,000,000)
|
|
|
1,347,000
|
|
Gross
carrying value of License Agreement
|
|
$
|
1,499,731
|
|
See
Note 10.
4.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements include the financial statements of the Company, TSI, Notox, Subco and 1894631
Ontario Inc., the Company’s wholly-owned subsidiaries. All significant inter-company balances and transactions have been
eliminated.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”)
requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates,
including those related to equipment, fair values of intangible assets, useful lives of intangible assets and the likelihood of
realization of its deferred tax assets
.
The Company bases its estimates on assumptions that are believed to be reasonable,
the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Concentration
of Risk
The
financial instrument which potentially subjects the Company to a concentration of credit risk is cash. The Company places its
cash in an account with a high credit quality financial institution.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS
4.
Summary of Significant Accounting Policies (cont’d)
Significant
Accounting Policies
The
accompanying consolidated financial statements reflect the application of certain significant accounting policies. Other than
the addition of “Stock Purchase Warrants”, there have been no material changes to the Company’s significant
accounting policies that are disclosed in the consolidated financial statements and notes thereto during the year ended August
31, 2017.
Inventory
Inventory
is stated at the lower of cost, computed using the first-in, first-out method, or market. If the cost of inventory exceeds its
market value, a provision is made currently for the difference between the cost and market value. The Company’s inventory
consists of finished goods, components and supplies.
Equipment,
Net
Equipment
is stated at cost, net of accumulated depreciation. Equipment is depreciated over the estimated useful life of the asset. Mould
equipment is depreciated at 20% on a declining-balance basis. The website was depreciated on a straight-line basis over five years.
One-half of these rates are used in the year of acquisition. Replacements and major improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. Upon retirement or sale, the cost of assets disposed of and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to operations.
Intangible
Assets
Patents
The
US Patent is recorded at the value attributed to the shares issued to the Originating Companies and shareholders of TGSI less
accumulated amortization and impairment writedowns. The US Patent was issued on September 29, 2009 and is effective until September
29, 2026. The Australian, Canadian and Chinese Patents are recorded at the application costs incurred less accumulated amortization
and impairment writedowns. The Australian Patent was issued on October 16, 2014 and is effective until April 5, 2027. The Canadian
Patent was issued on June 21, 2016 and is effective until April 5, 2027. The Chinese Patent was issued on December 28, 2016 and
is effective until February 1, 2033. Upon expiration, the patents can be extended subject to certain changes required to secure
the extension. Although the effects of obsolescence, demand, competition and other economic factors (such as stability of the
industry, technological advances and legislative action that results in an uncertain or changing regulatory environment) can have
an adverse effect on the industry and the Company’s product, management is not currently aware of any known adverse factors
that will affect the Company in the future.
Costs
incurred for patents which are in the process of being completed will be amortized over the life of the patent when the patent
is issued.
The
Company does not believe that there are any limits to how long its Home Mist Tanning units can sell in the market place. While
it expects to be able to secure extensions for its patents prior to expiry, this cannot be predicted with certainty at this time.
Accordingly, management has determined that the best estimates of useful lives of the US, Australian, Canadian and Chinese Patents
are 17, 13, 11 and 16 years, respectively. At this time, the Company does not believe that the patents will have a residual value
at the end of their useful lives.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS
4.
Summary of Significant Accounting Policies (cont’d)
License
Agreement
The
License Agreement is recorded at estimated fair value plus acquisition costs less accumulated amortization. The term of the License
Agreement continues until the expiration of the last to expire of the Licensed Patents (as defined in the License Agreement).
All costs related to the development of the licensed technology are expensed as incurred.
The
technology licensed by Notox is a platform that provides the Company access to four large market segments or verticals (derma,
pain, body and headache) that include the fields of aesthetics, drug-free pain management, body contouring and perspiration control.
Based on management’s experience, it takes approximately two years to fully develop each vertical, with each vertical being
developed in sequence. Accordingly, management’s best estimate of the amortization period for the License Agreement is eight
years.
Amortization
and Impairment
Definite-lived
intangible assets are required to be amortized using a method that reflects the pattern in which the economic benefits of the
intangible assets are consumed or utilized. At this time, management is not able to determine with any amount of certainty the
number of Home Mist Tanning units that will be sold over the useful lives of the patents. Accordingly, the patents are being amortized
on a straight-line basis over the period of their useful lives. The License Agreement is being amortized over eight years based
on management’s best estimate of the time required to develop the four verticals as explained above.
Intangible
assets subject to amortization are required to be reviewed for impairment. An impairment loss must be recognized if the intangible
asset’s carrying amount is not recoverable and the carrying amount exceeds fair value. The Company applies the following
three-step process to identify, recognize and measure impairment of intangible assets:
|
●
|
Consider
whether indicators of impairment are present indicating that the intangible assets’ carrying amount might not be recoverable;
|
|
●
|
If
indicators are present, perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows
attributable to the intangible assets to their carrying amounts; and
|
|
●
|
If
the undiscounted cash flows used in the recoverability test are less than the intangible assets’ carrying amount, determine
the intangible assets’ fair value and recognize an impairment loss if the carrying amount exceeds fair value.
|
Because
of the unique nature of a patent and a license agreement, income-producing definite-lived intangible assets, the calculation of
cash flows can be very difficult to estimate. In this case, the estimated cash flows reflect the direct revenue expected to be
generated by the patents and the License Agreement as well as an allocation of expenses.
Leases
The
Company currently rents premises pursuant to two operating leases.
Impairment
of Long-Lived Assets
Long-lived
assets, including equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount should be evaluated. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by it. If the carrying amount
of the
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS
4.
Summary of Significant Accounting Policies (cont’d)
asset
exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the
asset exceeds its fair value.
Stock
Purchase Warrants
When
the Company undertakes a private placement, it may issue units comprised of common stock of the Company and warrants to acquire
common stock of the Company. Warrants with a strike price denominated in the Company’s functional currency (the Canadian
dollar) are considered to be indexed to the Company’s stock and are classified as equity. Warrants with a strike price denominated
in a currency other than the Company’s functional currency are considered not to be indexed to the Company’s stock
and are classified as a liability. Warrants classified as equity are initially measured at fair value. Subsequent changes in fair
value are not recognized as long as the warrants continue to be classified as equity. Warrants classified as a liability are initially
measured at fair value with changes in fair value recorded in profit or loss in each reporting period.
Sales
The
Company has Home Mist Tanning units and related supplies available for sale, primarily online via its website. The Company recognizes
revenue when the units and supplies have been shipped to the customer, the amount to be paid by the customer is fixed or determinable
and collectability is reasonably assured. Revenue is recorded net of applicable sales taxes.
Warranty
The
Company is committed to supplying products of superior quality and design. Because of this commitment, it provides a limited one
year warranty effective from the date of purchase. The Company warranties its Home Mist Tanning units to be free of defects. If
a unit stops operating due to defects in materials or workmanship, the Company either repairs or replaces it for free.
Production
Costs
Production
costs consist of patent and license agreement amortization, production consulting fees, equipment depreciation, design and production
costs and materials and supplies.
Advertising
Costs
The
Company charges all advertising and marketing costs to expense in the period incurred.
Income
Taxes
Deferred
income tax is accounted for using the asset and liability method. Deferred income taxes are provided for temporary differences
in recognizing certain income and expense items for financial reporting purposes and tax reporting purposes. Such deferred income
taxes primarily relate to the difference between the tax bases of assets and liabilities and their financial reporting amounts.
Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which
deferred tax assets or liabilities are expected to be settled or realized. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this assessment. At this time, the Company is not able to
project future taxable income over the periods in which the deferred tax assets are deductible and,
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS
4.
Summary of Significant Accounting Policies (cont’d)
accordingly,
management is not able to determine if it is more likely than not that the Company will realize the benefits of these deductible
differences.
Derivative
Financial Instruments
The
Company does not have any derivative financial assets or liabilities.
Fair
Value of Financial Instruments
Carrying
values of cash, accounts payable and accrued liabilities, advances from related parties/shareholders, license assignment fee payable
and stock subscribed approximate fair value because of the short-term nature of these items. Amounts receivable consists primarily
of Harmonized Sales Tax (“HST”) receivable from the Government of Canada. HST is not a financial instrument.
Foreign
Currency
The
functional currency of the Company and its subsidiaries is the Canadian dollar. The accompanying consolidated financial statements
are presented in Canadian dollars.
Foreign
currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction.
Foreign currency monetary items are translated at the period-end exchange rate. Non-monetary items measured at historical cost
continue to be carried at the exchange rate at the date of the transaction. Exchange differences arising on the translation of
monetary items or on settlement of monetary items are recognized in the loss in the period in which they arise.
5.
Loss Per Share
The
following table sets forth the computation of loss per share:
|
|
For
the Years Ended August 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,071,687
|
)
|
|
$
|
(1,030,293
|
)
|
|
$
|
(774,626
|
)
|
Weighted-average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
56,892,843
|
|
|
|
56,132,073
|
|
|
|
6,132,073
|
|
Number
of shares used in per share computations
|
|
|
56,606,971
|
|
|
|
16,924,423
|
|
|
|
6,132,073
|
|
Loss
per share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.13
|
)
|
6.
Fair Value Measurements
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. There is a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value as follows:
Level
1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities; and
6.
Fair Value Measurements (cont’d)
Level
3 – Unobservable inputs that are supported by little or no market activity, which require management judgment or estimation.
The
Company measures its financial instruments at fair value.
The
carrying value of cash deposits is a reasonable estimate of its fair value due to the short maturity of the financial instrument.
The
Company’s stock purchase warrants are measured at fair value on a recurring basis.
7.
Design and Production - NRFTS
On
February 20, 2017, the Company entered into the Notox Radio Frequency Treatment System (“NRFTS”) Proposal (the “Proposal”)
with RBC Medical Innovations (“RBC”) to develop technology licensed by Notox. The NRFTS is comprised of two distinct
components – the disposable probe and the radio frequency generator (“RFG”) console. Pursuant to the Proposal,
RBC will execute design and production of the NRFTS and is responsible for overall program management, system integration and
development and manufacturing transfer of the RFG console. The project is to be completed in three stages on a fixed-fee basis
at an estimated cost of US$1,748,000. The NRFTS planning stage proposes three milestones payments – project stage initiation
(US$55,600), completion of product requirements and documentation (US$55,600) and all stage deliverables and completion (US$55,800).
During the year ended August 31, 2017, the Company paid the US$55,600 ($73,453) project stage initiation milestone payment and
as at August 31, 2017, an accrual for US$55,600 ($69,700) has been made for the second milestone payment.
8.
Equipment, Net
Equipment,
at cost, consisted of:
|
|
August
31, 2017
|
|
|
August
31, 2016
|
|
Mould
equipment
|
|
$
|
155,300
|
|
|
$
|
155,300
|
|
Website
|
|
|
28,875
|
|
|
|
28,875
|
|
Equipment
at cost
|
|
|
184,175
|
|
|
|
184,175
|
|
Accumulated
depreciation
|
|
|
(149,978
|
)
|
|
|
(141,428
|
)
|
Equipment,
net
|
|
$
|
34,197
|
|
|
$
|
42,747
|
|
Depreciation
was $8,550, $10,687 and $19,132 for the years ended August 31, 2017, 2016 and 2015 respectively.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
9.
Patents, Net
The
following tables provide information regarding the patents:
|
|
August
31, 2017
|
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Writedowns
|
|
|
Net
carrying amount
|
|
United
States Patent
|
|
$
|
6,342,279
|
|
|
$
|
2,984,602
|
|
|
$
|
3,357,676
|
|
|
$
|
1
|
|
Australian
Patent
|
|
|
4,976
|
|
|
|
1,145
|
|
|
|
3,830
|
|
|
|
1
|
|
Canadian
Patent
|
|
|
17,406
|
|
|
|
2,024
|
|
|
|
15,381
|
|
|
|
1
|
|
Chinese
Patent
|
|
|
5,806
|
|
|
|
1,330
|
|
|
|
4,475
|
|
|
|
1
|
|
Patents
abandoned
|
|
|
6,793
|
|
|
|
—
|
|
|
|
6,793
|
|
|
|
—
|
|
|
|
$
|
6,377,260
|
|
|
$
|
2,989,101
|
|
|
$
|
3,388,155
|
|
|
$
|
4
|
|
|
|
August
31, 2016
|
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Writedowns
|
|
|
Net
carrying amount
|
|
United
States Patent
|
|
$
|
6,342,279
|
|
|
$
|
2,611,527
|
|
|
$
|
—
|
|
|
$
|
3,730,752
|
|
Australian
Patent
|
|
|
4,976
|
|
|
|
747
|
|
|
|
—
|
|
|
|
4,229
|
|
Canadian
Patent
|
|
|
17,406
|
|
|
|
404
|
|
|
|
—
|
|
|
|
17,002
|
|
Patents
pending
|
|
|
10,509
|
|
|
|
—
|
|
|
|
6,793
|
|
|
|
3,716
|
|
|
|
$
|
6,375,170
|
|
|
$
|
2,612,678
|
|
|
$
|
6,793
|
|
|
$
|
3,755,699
|
|
Also
see Note 1.
During
the year ended August 31, 2017, management identified the following indicators of impairment indicating that the patents’
carrying amounts might not be recoverable:
|
●
|
The
inability to raise sufficient equity financing to implement its strategic plan; and
|
|
●
|
Operating
and cash flow losses since the Company completed the development of the US, Australian, Canadian and Chinese patents.
|
Management’s
intention is to license commercial tanning units for use in stores and spas in the United States, to sell personal tanning units
internationally and to supply the spray tan solution for those units. Given that management is in the process of changing its
focus in respect of the marketing and sale of the tanning units and associated products, it is not in a position to be able to
estimate the future cash flows attributable to the patents with any degree of certainty. Accordingly, the patents were written
down to a nominal amount of $4 at August 31, 2017.
In
connection with the writedown of the patents, the fact that there have been minimal sales to date, no sales subsequent to year
end and no comparable products on the market to use as a point of reference, management is not able to determine whether inventory
is stated at the lower of cost or market. Accordingly, inventory was written down to a nominal amount of $1 at August 31, 2017.
10.
License Agreement, Net
|
|
August
31, 2017
|
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Net
carrying amount
|
|
License
Agreement
|
|
$
|
1,499,731
|
|
|
$
|
187,466
|
|
|
$
|
1,312,265
|
|
|
|
August
31, 2016
|
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Net
carrying amount
|
|
License
Agreement
|
|
$
|
152,731
|
|
|
$
|
—
|
|
|
$
|
152,731
|
|
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
10.
License Agreement, Net (cont’d)
As
of August 31, 2017, amortization expense on the License Agreement for the next seven years was expected to be as follows:
|
|
Amount
|
|
Year
ending:
|
|
|
|
|
2018
|
|
$
|
187,466
|
|
2019
|
|
|
187,466
|
|
2020
|
|
|
187,466
|
|
2021
|
|
|
187,466
|
|
2022
|
|
|
187,466
|
|
Thereafter
|
|
|
374,935
|
|
Total
|
|
$
|
1,312,265
|
|
During
the year ended August 31, 2017, management identified the following indicators of impairment indicating that the License Agreement’s
carrying amount might not be recoverable:
|
●
|
The
inability to raise sufficient equity financing to implement its strategic plan; and
|
|
●
|
Operating
and cash flow losses since inception.
|
The
Company has performed a recoverability test by preparing a five-year proforma projection of the undiscounted future cash flows
attributable to the License Agreement. The undiscounted cash flows exceed the carrying value of the License Agreement as at August
31, 2017.
Also
see Note 3.
11.
Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consisted of:
|
|
August
31, 2017
|
|
|
August
31, 2016
|
|
Trade
payables
|
|
$
|
929,855
|
|
|
$
|
751,762
|
|
Vendor
accruals
|
|
|
145,746
|
|
|
|
86,228
|
|
Accounts
payable and accrued liabilities
|
|
$
|
1,075,601
|
|
|
$
|
837,990
|
|
12.
Related Party Transactions
At
August 31, 2017, the following amounts were payable to the Company’s related parties:
|
●
|
Advances
payable to the President totaled $232,000 at August 31, 2017 (2016 - $257,500). These advances are unsecured and bear interest
at 3% per annum. Of this amount, $219,500 is due on demand and $12,500 has no repayment terms. Accrued interest payable to
the President totaled $25,578 at August 31, 2017 (2016 - $18,578).
|
|
|
|
|
●
|
At
August 31, 2017, the Company owed $5,329 (2016 - $10,477) to the President for reimbursable expenses incurred on the Company’s
behalf.
|
|
|
|
|
●
|
At
August 31, 2017, the Company owed $271,984 ($181,070 and US$72,522) in consulting fees to a company controlled by the President.
At August 31, 2016, the Company owed $215,224 ($181,070 and US$26,040).
|
|
|
|
|
●
|
At
August 31, 2017, the Company owed $79,102 (US$63,100) in consulting fees to a company controlled by the CEO of the Company.
At August 31, 2016, the Company owed $34,154 (US$26,040).
|
|
|
|
|
●
|
At
August 31, 2017, the Company owed $259,448 ($181,070 and US$62,522) in consulting fees to a company controlled by a major
shareholder of the Company. At August 31, 2016, the Company owed $215,224 ($181,070 and US$26,040). Prior to June 13, 2016,
this shareholder was not a related party.
|
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
12.
Related Party Transactions (cont’d)
|
●
|
At
August 31, 2017, the Company owed $nil (2016 - $12,500) in shareholder advances and $761 (2016 - $761) in accrued interest
on these advances to the same major shareholder. Prior to June 13, 2016, this shareholder was not a related party.
|
|
|
|
|
●
|
At
August 31, 2017, the Company owed $75,000 (2016 - $75,000) to a company controlled by the Company’s former CFO.
|
During
the year ended August 31, 2017, the Company had the following transactions with related parties:
|
●
|
The
President of the Company advanced $nil during the year ended August 31, 2017 (2016 - $5,000). Interest expense of $7,000 was
accrued on these advances during the year ended August 31, 2017 (2016 - $7,696).
|
|
|
|
|
●
|
Consulting
fees paid or accrued as payable to a company controlled by the President of the Company were $163,466 (US$125,000), $136,665
($102,870 and US$26,040), and $88,400 for the years ended August 31, 2017, 2016 and 2015, respectively.
|
|
|
|
|
●
|
Consulting
fees paid or accrued as payable to a company controlled by the CEO of the Company were $163,466 (US$125,000), $67,509 (US$56,040),
and $nil for the years ended August 31, 2017, 2016 and 2015 respectively.
|
|
|
|
|
●
|
Consulting
fees accrued as payable to a company controlled by a major shareholder of the Company were $163,466 (US$125,000), $136,665
($102,870 and US$26,040), and $88,400 for the years ended August 31, 2017, 2016 and 2015, respectively. Prior to June 13,
2016, this company was not a related party.
|
|
|
|
|
●
|
Consulting
fees accrued as payable to a company controlled by the former CFO of the Company were $nil, $75,000 and $nil for the years
ended August 31, 2017, 2016 and 2015 respectively.
|
All
transactions with related parties occurred in the normal course of business and were measured at the exchange amount, which was
the amount of consideration agreed upon between management and the related parties.
Also
see Notes 3, 13, 14 and 15.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
13.
Advances from Shareholders
Shareholders
of the Company advanced $nil to the Company during the year ended August 31, 2017 (2016 - $nil). Advances payable to shareholders
totaled $145,000 at August 31, 2017 (2016 - $157,500). These advances are unsecured and bear interest at 3% per annum. Of this
amount, $nil (2016 - $12,500) is due on demand and $145,000 (2016 - $145,000) has no repayment terms. Interest expense of $4,351
was accrued on these advances during the year ended August 31, 2017 (2016 - $4,738). Accrued interest payable to shareholders
totaled $13,382 at August 31, 2017 (2016 - $9,031).
14.
License Assignment Fee Payable
Pursuant
to the amendment to the Share Exchange Agreement, the Company will pay an aggregate of US$1,000,000 to ZKC in the form of a one-time
assignment fee. The assignment fee payable is repayable in monthly instalments of US$50,000 beginning on October 1, 2016. Upon
completion of any equity financing pursuant to which the Company raises gross proceeds of at least US$1,000,000, the outstanding
balance is to be repaid in full. At August 31, 2017, the balance of the license assignment fee payable to ZKC was US$545,000 ($683,212).
See Note 3.
15.
Commitments
On
November 16, 2015, the Company entered into a consulting agreement (the “ECC Agreement”) with Edgewater Consulting
Corp., a private Ontario corporation (“ECC”). Pursuant to the ECC Agreement, ECC, through its principal, acted in
the capacity of CFO of the Company. The ECC Agreement was terminated effective November 10, 2016. A signing bonus of 750,000 exchangeable
preferred shares of Subco was issued on August 24, 2016. As at August 31, 2017, ECC is entitled to $75,000 (August 31, 2016 -
$75,000) in accrued remuneration.
On
December 1, 2015, the Company entered into consulting agreements with 1040614 Ontario Ltd., a private Ontario corporation (the
“Old 1040614 Agreement”), and MCM Consulting, an Ontario sole proprietorship (the “Old MCM Agreement”,
and together with the Old 1040614 Agreement, the “Old Agreements”). Pursuant to the Old 1040614 Agreement, the company,
through its principal, performed various services related to business development, strategic planning and capital-raising for
the Company. Pursuant to the Old MCM Agreement, the sole proprietor acted in the capacity of CEO of the Company. On June 13, 2016,
the Old 1040614 and MCM Agreements were terminated and replaced by the 1040614 and MCM Agreements (see below). As at August 31,
2017, in addition to previously accrued amounts, 1040614 and MCM are each entitled to $80,770 (August 31, 2016 - $80,770) in accrued
remuneration in respect of the Old Agreements.
On
February 4, 2016, the Company entered into a consulting agreement (the “Old ZKC Agreement”) with Zoran K Corporation,
a private Ontario corporation (“ZKC”). Pursuant to the Old ZKC Agreement, ZKC, through its principal, acted in the
capacity of the Company’s exclusive sales, marketing and product development agent. On June 13, 2016, the Old ZKC Agreement
was terminated and replaced by the ZKC Agreement (see below). As at August 31, 2017, there is no remuneration payable (August
31, 2016 - $nil) by the Company under the Old ZKC Agreement.
On
June 13, 2016, the Company entered into consulting agreements with 1040614 Ontario Ltd. (the “1040614 Agreement”),
MCM Consulting (the “MCM Agreement”) and ZKC (the “ZKC Agreement”).
Pursuant
to the 1040614 Agreement, the company, through its principal, performs general consulting services on behalf of the Company. Pursuant
to the MCM Agreement, the sole proprietor acts in the capacity of President of the Company. Pursuant to the ZKC Agreement, ZKC,
through its principal, acts in the capacity of CEO of the Company. Each consulting agreement is for a period of 10 years, with
successive automatic renewal periods of two years until terminated. Pursuant to these consulting agreements, each consultant is
entitled to receive the following compensation:
|
●
|
Remuneration
– an aggregate of US$125,000 per annum plus HST on a bi-monthly basis;
|
|
●
|
EPS
Bonus – when the Company generates earnings per share of $0.05, plus any multiple thereof, the Company shall issue the
consultant 1,000,000 shares of the Company’s common stock and pay the consultant US$250,000 plus HST;
|
|
●
|
Change
of Control Bonus – immediately prior to the completion of a change of control (as defined in these consulting agreements)
the Company shall issue the consultant an aggregate of 20,000,000 shares of the Company’s common stock; and
|
|
●
|
Additional
Bonus – the company may from time to time pay the consultant one or more bonuses as determined by the Board of Directors
at its sole discretion.
|
On
July 17, 2017, the Company renewed its premises lease dated November 11, 2011 for an additional six months from August 1, 2017
to January 31, 2018 for a rental of $700 a month ($4,200 total) plus HST.
On
August 31, 2017, the Company entered into a second premises lease for a year beginning on September 1, 2017 for a rental of $21,000
for the year plus HST.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
16.
Stockholders’ Equity
The
Company is authorized to issue 500,000,000 (2016 – 300,000,000) shares of common stock at a par value of $US0.001.
On
August 25, 2016, the Company completed a reverse split of the Company’s common stock at the ratio of one new share for every
two existing shares. All share and per share amounts have been adjusted to reflect this reverse split.
At
August 31, 2017, the Company had 56,892,843 shares of common stock legally issued and outstanding (2016 – 56,132,073 shares).
On
June 28, 2013, pursuant to the Exchange Agreement, the Company acquired 39,015,439 common shares of TSI in exchange for the issuance
of 39,015,439 preferred shares of Subco to the Selling Shareholders on a one-for-one basis. As a result of the Exchange Agreement,
TSI became the Company’s majority-owned subsidiary. Each preferred share of Subco is exchangeable into one share of the
Company’s common stock at the option of the holder subject to certain restrictions. As at August 31, 2017 and 2016, none
of the preferred shares had been exchanged.
As
a condition of the closing of the Exchange Agreement, the Company also entered into a Support Agreement and a Voting and Exchange
Trust Agreement on the closing date. The Support Agreement ensures that the obligations of Subco remain effective until all of
the preferred shares have been exchanged. The Voting and Exchange Trust Agreement provides and establishes a procedure whereby
the voting rights attached to shares of the Company’s common stock are exercisable by the registered holders (the Selling
Shareholders) of the preferred shares. The Trustee holds legal title to a Special Voting Share to which voting rights are attached
for the benefit of the Selling Shareholders. The Trustee holds the Special Voting Share solely for the use and benefit of the
Selling Shareholders.
Common
Stock Issuances
During
the year ended August 31, 2017, the Company completed the following common stock transactions:
|
●
|
On
October 31, 2016, the Company closed a concurrent Canadian and US dollar financing as follows:
|
|
●
|
Canadian
financing – the Company issued 140,000 units at $0.50 per unit for gross proceeds of $70,000, with each unit consisting
of one share of the Company’s common stock and one warrant to purchase one share of common stock exercisable at a price
of $0.80 per share until October 31, 2018. $41,314 was allocated to common stock and $28,686 was allocated to share purchase
warrants.
|
|
●
|
US
financing – the Company issued 220,770 units at US$0.50 per unit for gross proceeds of $146,716 (US$110,385), with each
unit consisting of one share of the Company’s common stock and one warrant to purchase one share of common stock exercisable
at a price of US$0.80 per share until October 31, 2018. $86,027 was allocated to common stock and $60,689 was allocated to
share purchase warrants.
|
|
●
|
On
November 2, 2016, the Company closed a US dollar financing pursuant to which the Company issued 400,000 units at US$1.00 per
unit for gross proceeds of $524,230 (US$400,000), with each unit consisting of one share of the Company’s common stock
and one warrant to purchase one share of common stock exercisable at a price of US$1.40 per share until November 2, 2018.
$286,950 was allocated to common stock and $237,280 was allocated to share purchase warrants. The Company paid cash finder’s
fees of $19,899 and issued 15,000 finder’s stock purchase warrants exercisable at US$1.40 per warrant share until September
30, 2018, valued at $8,742.
|
During
the year ended August 31, 2016, the Company completed the following common stock transactions:
|
●
|
50,000,000
shares of common stock were issued on June 13, 2016 at a par value of US$0.002 ($127,920; US$100,000). See Note 3. Pursuant
to a stock restriction agreement entered into on June 13, 2016, these shares cannot be sold or otherwise disposed of until
June 30, 2017.
|
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
16.
Stockholders’ Equity (cont’d)
Stock
Subscribed
During
the year ended August 31, 2017, $838,674 ($8,000 and US$630,000) in stock subscriptions was received pursuant to individual private
placements. These subscriptions are for a total of:
|
●
|
10,000
shares of common stock of the Company at a price of $0.80 per share pursuant to the exercise of stock purchase warrants.
|
|
●
|
630,000
units of the Company at a price of US$1.00 per unit. Each unit consists of one share of the Company’s common stock and
one warrant to purchase one share of common stock exercisable at a price of US$1.40 per share for a period of 24 months from
the closing date of the financing.
|
During
the year ended August 31, 2016, $315,366 in stock subscriptions was received pursuant to 12 individual private placements. These
subscriptions are for a total of:
|
●
|
80,000
units of the Company at a price of $0.50 per unit. Each unit consists of one share of the Company’s common stock and
one warrant to purchase one share of common stock exercisable at a price of $0.80 per share for two years.
|
|
●
|
220,770
units of the Company at a price of US$0.50 per unit. Each unit consists of one share of the Company’s common stock and
one warrant to purchase one share of common stock exercisable at a price of US$0.80 per share for two years.
|
|
●
|
100,000
units of the Company at a price of US$1.00 per unit. Each unit consists of one share of the Company’s common stock and
one warrant to purchase one share of common stock exercisable at a price of US$1.40 per share for two years.
|
Stock
Purchase Warrants
The
continuity of Canadian dollar denominated stock purchase warrants for the year ended August 31, 2017 is as follows:
Expiry
Date
|
|
Price
|
|
|
August
31, 2016
|
|
|
Issued
|
|
|
Exercised*
|
|
|
August
31, 2017
|
|
October
31, 2018
|
|
$
|
0.80
|
|
|
|
—
|
|
|
|
140,000
|
|
|
|
(10,000
|
)
|
|
|
130,000
|
|
*Common
stock related to 10,000 Canadian dollar warrants exercised during the year ended August 31, 2017 was issued subsequent to year
end on September 7, 2017 and $8,000 received from the exercise is included in stock subscribed at August 31, 2017. See
Note 21.
At
August 31, 2017, the weighted-average remaining contractual life of Canadian dollar warrants outstanding was 1.17 years (August
31, 2016 - nil).
The
continuity of US dollar denominated stock purchase warrants for the year ended August 31, 2017 is as follows:
Expiry
Date
|
|
Price
|
|
|
August
31, 2016
|
|
|
Issued
|
|
|
August
31, 2017
|
|
September
30, 2018 - Finder
|
|
|
US$1.40
|
|
|
|
—
|
|
|
|
15,000
|
|
|
|
15,000
|
|
October
31, 2018
|
|
|
US$0.80
|
|
|
|
—
|
|
|
|
220,770
|
|
|
|
220,770
|
|
November
2, 2018
|
|
|
US$1.40
|
|
|
|
—
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
—
|
|
|
|
635,770
|
|
|
|
635,770
|
|
At
August 31, 2017, the weighted-average remaining contractual life of US dollar warrants outstanding was 1.17 years (August 31,
2016 - nil).
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
16.
Stockholders’ Equity (cont’d)
The
Company used the Black-Scholes Option Pricing Model to determine the fair values of unit warrants and finder’s warrants
issued pursuant to private placements during the year ended August 31, 2017 with the following assumptions:
Expected
dividend yield
|
|
|
0.00
|
%
|
Risk-free
interest rate
|
|
|
0.54%
- 0.55
|
%
|
Expected
stock price volatility
|
|
|
100.00
|
%
|
Expected
life of warrants
|
|
|
2years
|
|
See
Note 4.
17.
Taxes
Income
tax expense differs from the amounts computed by applying the statutory income tax rate to net loss before income taxes as follows:
|
|
Year
Ended August 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net
loss before income taxes
|
|
$
|
(5,071,687
|
)
|
|
$
|
(1,030,293
|
)
|
|
$
|
(774,626
|
)
|
Tax
rate
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Calculated
income tax recovery
|
|
|
(1,391,061
|
)
|
|
|
(273,260
|
)
|
|
|
(205,497
|
)
|
Adjustment
for deductible and non-deductible amounts
|
|
|
1,130,327
|
|
|
|
48,858
|
|
|
|
46,994
|
|
Unrecognized
benefit of non-capital losses
|
|
|
260,734
|
|
|
|
224,402
|
|
|
|
158,503
|
|
Income
tax recovery
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
Canada – 26.50%; United States – 34%
Deferred
Taxes
Deferred
income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes. Significant components of the Company’s deferred tax assets are as follows:
|
|
August
31, 2017
|
|
|
August
31, 2016
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
1,784,000
|
|
|
$
|
1,100,000
|
|
Temporary
deductible differences (net)
|
|
|
834,000
|
|
|
|
(246,000
|
)
|
Permanent
difference
|
|
|
—
|
|
|
|
249,000
|
|
|
|
|
2,618,000
|
|
|
|
1,103,000
|
|
Valuation
allowance
|
|
|
(2,618,000
|
)
|
|
|
(1,103,000
|
)
|
Net
deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
Realization
of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. A valuation allowance
was established based upon management’s inability to determine whether sufficient future profits will be generated.
The
Company has approximately $6,579,000 of United States and Canadian net operating loss carryforwards expiring from 2024 to 2037
.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
18.
Risks and Uncertainties
The
Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect its future
operating results and cause actual results to vary materially from expectations include, but are not limited to: current economic
conditions; uncertainty in the potential markets for its Home Mist Tanning units; the design, production and marketing of NRFTS;
increasing competition; and dependence on its existing management and key personnel.
19.
Accounting Pronouncements
During
the year ended August 31, 2017, the Financial Accounting Standards Board (“FASB”) issued the following Accounting
Standard Updates (“ASUs”) that may be of relevance to the Company. The Company is currently assessing the impact that
the adoption of these ASUs will have on its financial statements and related disclosures.
|
●
|
October
2016 – ASU No. 2016-17, “Consolidation (Topic 810)” amends consolidation guidance on how a reporting entity
that is the single decision maker of a variable interest entity (“VIE”) should treat indirect interests in the
entity held through related parties that are under common control with the reporting entity when determining whether it is
the primary beneficiary of that VIE. The amendments in this ASU are effective for reporting periods beginning after December
15, 2016, with early adoption permitted.
|
|
|
|
|
●
|
February
2017 – ASU No. 2017-05, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic
610-20)” clarifies the scope of asset derecognition guidance and accounting for the partial sale of non-financial assets,
as well as provides guidance for recognizing gains and losses from the transfer of non-financial assets in contracts with
non-customers. The amendments in this ASU are effective for reporting periods beginning after December 15, 2017, with early
adoption permitted.
|
20.
Contingent Liability
Pursuant
to the Exchange Agreement, as amended, the Company may be required to acquire up to 296,500 common shares of TSI, being those
TSI shares still outstanding, in exchange for 148,250 preferred shares of Subco on a one-for-two basis. Such preferred shares
would then be exchangeable on the same basis as the approximately 50 million Subco preferred shares currently outstanding (see
Notes 2 and 14). On August 24, 2016, 21,672,623 common shares of TSI were exchanged for 10,836,312 preferred shares of Subco.
21.
Subsequent Events
On
September 7, 2017, the Company closed a US dollar financing pursuant to which the Company issued 630,000 units at US$1.00
per unit for gross proceeds of $830,674 (US$630,000). Each unit consists of one share of the Company’s common stock and
one warrant to purchase one share of common stock exercisable at a price of US$1.40 per share until September 7, 2019. The Company
paid US$5,000 cash and issued 5,000 finder’s warrants exercisable at US$1.40 per warrant share until July 17, 2019 as finder’s
fees.
On
September 21, 2017, the Company issued 10,000 shares of common stock at $0.80 per share for gross proceeds of $8,000 pursuant
to the exercise of warrants during the year ended August 31, 2017.
On
September 26, 2017, the Company, Notox and the Clinic entered into the second amendment to the License Agreement effective July
1, 2016. See Note 3.