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 nine months
ended May 31, 2018. The comparative amounts are the results of operations of the Company, TSI and Notox for the nine months ended
May 31, 2017.
On
November 19, 2007, TSI obtained the rights to the Home Mist Tanning system and the application for and acquisition of a United
States Patent
“Apparatus for Spray Application of a Sunless Tanning Product”
(the “US Patent”).
As of March 11, 2013, the total value assigned to the carrying value of the US Patent was $6,342,279.
On
October 16, 2014, the Company, through TSI, obtained an Australian patent (the “Australian Patent”), incurring application
costs of $4,976. On June 21, 2016, the Company, through TSI, obtained a Canadian patent (the “Canadian Patent”), incurring
application costs of $17,406. On December 28, 2016, the Company, through TSI, obtained a Chinese patent (the “Chinese Patent”),
incurring application costs of $5,806. Costs incurred are recorded as intangible assets. On August 31, 2017, the net carrying
amount of the patents was written down to a nominal amount of $4 (see Note 9).
As
reflected in the accompanying consolidated financial statements, the Company has a deficit of $11,481,240 (August 31, 2017 - $10,972,661)
since inception, a working capital deficiency of $2,987,971 (August 31, 2017 - $3,134,766) and a stockholders’ deficiency
of $2,004,619 (August 31, 2017 - stockholders’ equity of $1,986,065). This raises substantial doubt about its ability to
continue as a going concern. The ability of the Company to continue as a going concern is dependent on its ability to raise additional
capital and to implement its business plan. The accompanying consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
1.
Company Overview and Basis of Presentation (cont’d)
Management
has evaluated the Company’s ability to continue as a going concern by assessing its ability to meet its obligations as they
become due within one year from the date of issue of the financial statements. Management’s assessment included the following
factors:
|
●
|
The
Company’s financial condition as at the date of issue of the financial statements;
|
|
●
|
The
Company’s actual or anticipated conditional and unconditional obligations due within one year from the date of issue
of the financial statements;
|
|
●
|
The
funds necessary to maintain the Company’s operations considering its current financial condition, obligations and other
expected cash flows; and
|
|
●
|
Other
conditions and events that may affect the Company’s ability to meet its obligations within one year from the date of
issue of the financial statements.
|
The
Company’s operating expenses are estimated to be approximately $100,000 per year. As at May 31, 2018, the Company’s
current cash liabilities total approximately $2,655,000 (August 31, 2017 - $2,175,000). Of this amount, approximately $2,382,000
– accounts payable and accrued liabilities ($1,195,000), advances from related parties/shareholders ($481,000) and license
assignment fee payable ($706,000) – is payable to related parties and/or major shareholders who have not and will not require
payment until such time as sufficient cash flow is available. To the extent the remaining $273,000 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.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
2.
Reverse Takeover (cont’d)
As
a result of the share exchange, the Selling Shareholders controlled approximately 87% of the issued and outstanding common shares
of the Company on a fully-exchanged basis as of the Closing Date. The Exchange Agreement represented a reverse takeover and was
therefore accounted for under the acquisition method with TSI as the accounting acquirer and continuing entity for accounting
and financial reporting purposes and the Company as the legal parent being the acquiree. There was no active market to reliably
determine fair value of the consideration other than the value of the identifiable assets acquired. Therefore, the purchase price
allocation of the acquisition was based on the fair value of the net liabilities acquired which was charged to additional paid-in-capital.
The
fair values of assets acquired and liabilities assumed were as follows:
Cash
|
|
$
|
1,774
|
|
Subscriptions
receivable
|
|
|
10
|
|
Accounts
payable and accrued liabilities
|
|
|
(32,488
|
)
|
Loan
payable to TSI
|
|
|
(25,454
|
)
|
Net
liabilities acquired
|
|
$
|
(56,158
|
)
|
On
February 17, 2015, the Company, Subco, TSI and the Selling Shareholders entered into an amendment to the Exchange Agreement in
order to correct certain administrative errors in the Exchange Agreement and provide for the post-closing execution of the Exchange
Agreement by those shareholders of TSI who were not original signatories thereto. In addition, the Selling Shareholders approved
certain changes to the rights, privileges, restrictions and conditions attached to the preferred shares of Subco by consent in
writing. This included extending the automatic expiration date in respect of the preferred shares of Subco from June 30, 2015
to June 30, 2017. On February 22, 2017, this automatic expiration date was further extended to December 31, 2018.
3.
Asset Acquisition and License Agreement
On
June 13, 2016 (the “Second Closing Date”), the Company, Notox and the shareholders of Notox (the “Notox Shareholders”)
entered into a share exchange agreement (the “Share Exchange Agreement”) pursuant to which the Company acquired 100%
of the issued and outstanding common stock of Notox from the Notox Shareholders in exchange for the issuance of 50,000,000 shares
of the Company’s common stock.
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.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
3.
Asset Acquisition and License Agreement (cont’d)
On
December 1, 2012, ZHC and the Clinic entered into the License Agreement whereby the Clinic granted ZHC an exclusive worldwide
license and a non-exclusive worldwide license in the field of aesthetics and pain to make, use, offer to sell, sell and import
certain products throughout the term of the License Agreement. The term continues until the expiration of the last to expire of
the certain patents. The License Agreement was amended on July 30, 2013 and July 1, 2016. Pursuant to the License Agreement, as
amended, Notox is the licensee under the License Agreement and is solely responsible for making all regulatory filings and securing
regulatory approval for the products covered by the License Agreement. The Clinic will receive a royalty based on the sale of
certain products, a milestone payment within 30 days following the first commercial sale of such products and a percentage of
any sublicensing revenues. Royalties and other payments are payable quarterly. Notox is required to achieve two commercial milestones:
regulatory filings submitted to regulatory authorities by November 30, 2019 and first commercial sale within nine months following
regulatory approval. Failure to achieve these milestones, without satisfactory justification, constitutes a material breach of
the License Agreement giving the Clinic the right, but not the obligation, to convert the License Agreement to a non-exclusive
license or terminate the License Agreement. The Clinic has the right to verify Notox’s compliance with the License Agreement.
Within
30 days following Notox’s receipt of the first regulatory approval, Notox is required to reimburse the Clinic for current
patenting costs. All patenting costs, patent office fees and outside patent counsel costs will, at the Clinic’s option,
either be paid directly by Notox or by the Clinic with the Clinic invoicing Notox, provided that Notox has no obligation to pay
or reimburse the Clinic until after first regulatory approval has been obtained. Upon termination or expiration of the License
Agreement, all accrued and unreimbursed patenting costs become immediately due and payable to the Clinic. As of May 31, 2018,
all accrued and unreimbursed patenting costs totalled US$167,891 ($217,385) (August 31, 2017 - US$157,758 ($197,765)).
As
a result of the share exchange and on the Second Closing Date, the Notox Shareholders controlled approximately 89% of the issued
and outstanding common stock of the Company (52.5% on a fully-exchanged basis) and Notox became a wholly-owned subsidiary of the
Company. Notox did not meet the definition (inputs, processes and outputs criteria) of a business. The Share Exchange Agreement
represented an asset acquisition and was therefore accounted for under the asset acquisition method.
Acquired
intangible assets are recognized and initially measured based on their fair value plus transaction costs incurred as part of the
acquisition. There was no active market to reliably determine the fair value of the License Agreement acquired. Therefore the
fair value of the License Agreement was based on the par value of the common stock exchanged by the Company.
The
fair value and gross carrying value of the License Agreement is as follows:
License
Agreement
|
|
$
|
133,212
|
|
Cash
|
|
|
131
|
|
Accrued
liabilities
|
|
|
(5,423
|
)
|
Capital
stock exchanged (50,000,000 shares at US$0.002 per share)
|
|
$
|
127,920
|
|
Fair
value of License Agreement
|
|
$
|
133,212
|
|
Acquisition
costs
|
|
|
19,519
|
|
Assignment
fee (US$1,000,000)
|
|
|
1,347,000
|
|
Gross
carrying value of License Agreement
|
|
$
|
1,499,731
|
|
See
Note 10.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
4.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements include the financial statements of the Company, TSI, Notox, Subco and 1894631
Ontario Inc., the Company’s subsidiaries. All significant inter-company balances and transactions have been eliminated.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”)
requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates,
including those related to equipment, fair values of intangible assets, useful lives of intangible assets and the likelihood of
realization of its deferred tax assets
.
The Company bases its estimates on assumptions that are believed to be reasonable,
the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Concentration
of Risk
The
financial instrument which potentially subjects the Company to a concentration of credit risk is cash. The Company places its
cash in an account with a high credit quality financial institution.
Significant
Accounting Policies
The
accompanying consolidated financial statements reflect the application of certain significant accounting policies. There have
been no material changes to the Company’s significant accounting policies that are disclosed in the consolidated financial
statements and notes thereto during the period ended May 31, 2018.
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.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
4.
Summary of Significant Accounting Policies (cont’d)
Intangible
Assets
Patents
The
US Patent is recorded at the value attributed to the shares issued by TSI in connection with its acquisition less accumulated
amortization and impairment writedowns. The US Patent was issued on September 29, 2009 and is effective until September 29, 2026.
The Australian, Canadian and Chinese Patents are recorded at the application costs incurred less accumulated amortization and
impairment writedowns. The Australian Patent was issued on October 16, 2014 and is effective until April 5, 2027. The Canadian
Patent was issued on June 21, 2016 and is effective until April 5, 2027. The Chinese Patent was issued on December 28, 2016 and
is effective until February 1, 2033. Upon expiration, the patents can be extended subject to certain changes required to secure
the extension. Although the effects of obsolescence, demand, competition and other economic factors (such as stability of the
industry, technological advances and legislative action that results in an uncertain or changing regulatory environment) can have
an adverse effect on the industry and the Company’s product, management is not currently aware of any known adverse factors
that will affect the Company in the future.
Costs
incurred for patents which are in the process of being completed will be amortized over the life of the patent when the patent
is issued.
The
Company does not believe that there are any limits to how long its Home Mist Tanning units can sell in the market place. While
it expects to be able to secure extensions for its patents prior to expiry, this cannot be predicted with certainty at this time.
Accordingly, management has determined that the best estimates of useful lives of the US, Australian, Canadian and Chinese Patents
are 17, 13, 11 and 16 years, respectively. At this time, the Company does not believe that the patents will have a residual value
at the end of their useful lives.
License
Agreement
The
License Agreement is recorded at estimated fair value plus acquisition costs less accumulated amortization. The term of the License
Agreement continues until the expiration of the last to expire of the Licensed Patents (as defined in the License Agreement).
All costs related to the development of the licensed technology are expensed as incurred.
The
technology licensed by Notox is a platform that provides the Company access to four large market segments or verticals (derma,
pain, body and headache) that include the fields of aesthetics, drug-free pain management, body contouring and perspiration control.
Based on management’s experience, it takes approximately two years to fully develop each vertical, with each vertical being
developed in sequence. Accordingly, management’s best estimate of the amortization period for the License Agreement is eight
years.
Amortization
and Impairment
Definite-lived
intangible assets are required to be amortized using a method that reflects the pattern in which the economic benefits of the
intangible assets are consumed or utilized. At this time, management is not able to determine with any amount of certainty the
number of Home Mist Tanning units that will be sold over the useful lives of the patents. Accordingly, the patents were being
amortized on a straight-line basis over the period of their useful lives. The License Agreement is being amortized over eight
years based on management’s best estimate of the time required to develop the four verticals as explained above.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
4.
Summary of Significant Accounting Policies (cont’d)
Intangible
assets subject to amortization are required to be reviewed for impairment. An impairment loss must be recognized if the intangible
asset’s carrying amount is not recoverable and the carrying amount exceeds fair value. The Company applies the following
three-step process to identify, recognize and measure impairment of intangible assets:
|
●
|
Consider
whether indicators of impairment are present indicating that the intangible assets’ carrying amount might not be recoverable;
|
|
●
|
If
indicators are present, perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows
attributable to the intangible assets to their carrying amounts; and
|
|
●
|
If
the undiscounted cash flows used in the recoverability test are less than the intangible assets’ carrying amount, determine
the intangible assets’ fair value and recognize an impairment loss if the carrying amount exceeds fair value.
|
Because
of the unique nature of a patent and a license agreement, income-producing definite-lived intangible assets, the calculation of
cash flows can be very difficult to estimate. In this case, the estimated cash flows reflect the direct revenue expected to be
generated by the patents and the License Agreement as well as an allocation of expenses.
Leases
The
Company currently rents premises pursuant to an operating lease.
Impairment
of Long-Lived Assets
Long-lived
assets, including equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount should be evaluated. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by it. If the carrying amount
of the asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount
of the asset exceeds its fair value.
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.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
4.
Summary of Significant Accounting Policies (cont’d)
Warranty
The
Company is committed to supplying products of superior quality and design. Because of this commitment, it provides a limited one
year warranty effective from the date of purchase. The Company warranties its Home Mist Tanning units to be free of defects. If
a unit stops operating due to defects in materials or workmanship, the Company either repairs or replaces it for free.
Production
Costs
Production
costs consist of patent and license agreement amortization, production consulting fees, equipment depreciation, design and production
costs and materials and supplies.
Advertising
Costs
The
Company charges all advertising and marketing costs to expense in the period incurred.
Income
Taxes
Deferred
income tax is accounted for using the asset and liability method. Deferred income taxes are provided for temporary differences
in recognizing certain income and expense items for financial reporting purposes and tax reporting purposes. Such deferred income
taxes primarily relate to the difference between the tax bases of assets and liabilities and their financial reporting amounts.
Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which
deferred tax assets or liabilities are expected to be settled or realized. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this assessment. At this time, the Company is not able to
project future taxable income over the periods in which the deferred tax assets are deductible and, accordingly, management is
not able to determine if it is more likely than not that the Company will realize the benefits of these deductible differences.
Derivative
Financial Instruments
The
Company does not have any derivative financial assets or liabilities.
Fair
Value of Financial Instruments
Carrying
values of cash, accounts payable and accrued liabilities, advances from related parties/shareholders, license assignment fee payable
and stock subscribed approximate fair value because of the short-term nature of these items. Amounts receivable consists primarily
of Harmonized Sales Tax (“HST”) receivable from the Government of Canada. HST is not a financial instrument.
Foreign
Currency
The
functional currency of the Company and its subsidiaries is the Canadian dollar. The accompanying consolidated financial statements
are presented in Canadian dollars.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
4.
Summary of Significant Accounting Policies (cont’d)
Foreign
currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction.
Foreign currency monetary items are translated at the period-end exchange rate. Non-monetary items measured at historical cost
continue to be carried at the exchange rate at the date of the transaction. Exchange differences arising on the translation of
monetary items or on settlement of monetary items are recognized in the loss in the period in which they arise.
5.
Loss Per Share
The
following table sets forth the computation of loss per share:
|
|
For
the Nine Months Ended May 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(508,579
|
)
|
|
$
|
(869,137
|
)
|
Weighted-average
shares outstanding:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
57,532,843
|
|
|
|
56,719,924
|
|
Number
of shares used in per share computations
|
|
|
57,515,920
|
|
|
|
56,719,924
|
|
Loss
per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
6.
Fair Value Measurements
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. There is a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value as follows:
Level
1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities; and
Level
3 – Unobservable inputs that are supported by little or no market activity, which require management judgment or estimation.
The
Company measures its financial instruments at fair value.
The
carrying value of cash deposits is a reasonable estimate of its fair value due to the short maturity of the financial instrument.
The
Company’s stock purchase warrants are measured at fair value on a recurring basis.
7.
Design and Production – NRFTS
On
February 20, 2017, the Company entered into the Notox Radio Frequency Treatment System (“NRFTS”) Proposal (the “Proposal”)
with RBC Medical Innovations (“RBC”) to develop technology licensed by Notox. The NRFTS is comprised of two distinct
components – the disposable probe and the radio frequency generator (“RFG”) console. Pursuant to the Proposal,
RBC will execute design and production of the NRFTS and is responsible for overall program management, system integration and
development and manufacturing transfer of the RFG console. The project is to be completed in three 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 May 31, 2018, an accrual for US$55,600 ($71,657) (August 31, 2017 - US$55,600 ($69,700)) has been made for the second milestone
payment.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
8.
Equipment, Net
Equipment,
at cost, consisted of:
|
|
May
31, 2018
|
|
|
August
31, 2017
|
|
Mould
equipment
|
|
$
|
155,300
|
|
|
$
|
155,300
|
|
Website
|
|
|
28,875
|
|
|
|
28,875
|
|
Equipment
at cost
|
|
|
184,175
|
|
|
|
184,175
|
|
Accumulated
depreciation
|
|
|
(155,107
|
)
|
|
|
(149,978
|
)
|
Equipment,
net
|
|
$
|
29,068
|
|
|
$
|
34,197
|
|
Depreciation
was $5,129 and $6,412 for the nine month periods ended May 31, 2018 and 2017, respectively.
9.
Patents, Net
The
following tables provide information regarding the patents:
|
|
May
31, 2018
|
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Writedowns
|
|
|
Net
carrying amount
|
|
United
States Patent
|
|
$
|
6,342,279
|
|
|
$
|
2,984,602
|
|
|
$
|
3,357,676
|
|
|
$
|
1
|
|
Australian
Patent
|
|
|
4,976
|
|
|
|
1,145
|
|
|
|
3,830
|
|
|
|
1
|
|
Canadian
Patent
|
|
|
17,406
|
|
|
|
2,024
|
|
|
|
15,381
|
|
|
|
1
|
|
Chinese
Patent
|
|
|
5,806
|
|
|
|
1,330
|
|
|
|
4,475
|
|
|
|
1
|
|
Patents
abandoned
|
|
|
6,793
|
|
|
|
—
|
|
|
|
6,793
|
|
|
|
—
|
|
|
|
$
|
6,377,260
|
|
|
$
|
2,989,101
|
|
|
$
|
3,388,155
|
|
|
$
|
4
|
|
|
|
August
31, 2017
|
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Writedowns
|
|
|
Net
carrying amount
|
|
United
States Patent
|
|
$
|
6,342,279
|
|
|
$
|
2,984,602
|
|
|
$
|
3,357,676
|
|
|
$
|
1
|
|
Australian
Patent
|
|
|
4,976
|
|
|
|
1,145
|
|
|
|
3,830
|
|
|
|
1
|
|
Canadian
Patent
|
|
|
17,406
|
|
|
|
2,024
|
|
|
|
15,381
|
|
|
|
1
|
|
Chinese
Patent
|
|
|
5,806
|
|
|
|
1,330
|
|
|
|
4,475
|
|
|
|
1
|
|
Patents
abandoned
|
|
|
6,793
|
|
|
|
—
|
|
|
|
6,793
|
|
|
|
—
|
|
|
|
$
|
6,377,260
|
|
|
$
|
2,989,101
|
|
|
$
|
3,388,155
|
|
|
$
|
4
|
|
Also
see Note 1.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
9.
Patents, Net (cont’d)
During
the year ended August 31, 2017, management identified the following indicators of impairment indicating that the patents’
carrying amounts might not be recoverable:
|
●
|
The
inability to raise sufficient equity financing to implement its strategic plan; and
|
|
●
|
Operating
and cash flow losses since the Company completed the development of the US, Australian, Canadian and Chinese patents.
|
Management’s
intention is to license commercial tanning units for use in stores and spas in the United States, to sell personal tanning units
internationally and to supply the spray tan solution for those units. Given that management is in the process of changing its
focus in respect of the marketing and sale of the tanning units and associated products, it is not in a position to be able to
estimate the future cash flows attributable to the patents with any degree of certainty. Accordingly, the patents were written
down to a nominal amount of $4 at August 31, 2017.
In
connection with the writedown of the patents, the fact that there have been minimal sales to date and no comparable products on
the market to use as a point of reference, management is not able to determine whether inventory is stated at the lower of cost
or market. Accordingly, inventory was written down to a nominal amount of $1 at August 31, 2017.
10.
License Agreement, Net
|
|
May
31, 2018
|
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Net
carrying amount
|
|
License
Agreement
|
|
$
|
1,499,731
|
|
|
$
|
328,066
|
|
|
$
|
1,171,665
|
|
|
|
August
31, 2017
|
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Net
carrying amount
|
|
License
Agreement
|
|
$
|
1,499,731
|
|
|
$
|
187,466
|
|
|
$
|
1,312,265
|
|
As
of May 31, 2018, amortization expense on the License Agreement for the next seven years was expected to be as follows:
|
|
Amount
|
|
Year
ending:
|
|
|
|
|
2018
|
|
$
|
46,866
|
|
2019
|
|
|
187,466
|
|
2020
|
|
|
187,466
|
|
2021
|
|
|
187,466
|
|
2022
|
|
|
187,466
|
|
Thereafter
|
|
|
374,935
|
|
Total
|
|
$
|
1,171,665
|
|
During
the period ended May 31, 2018, 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.
|
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
10.
License Agreement, Net (cont’d)
The
Company has previously 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 May 31, 2018.
Also
see Note 3.
11.
Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consisted of:
|
|
May
31, 2018
|
|
|
August
31, 2017
|
|
Trade
payables
|
|
$
|
1,301,139
|
|
|
$
|
929,855
|
|
Vendor
accruals
|
|
|
167,921
|
|
|
|
145,746
|
|
Accounts
payable and accrued liabilities
|
|
$
|
1,469,060
|
|
|
$
|
1,075,601
|
|
12.
Related Party Transactions
The
following amounts were payable to the Company’s related parties:
|
●
|
At
May 31, 2018, the Company owed $232,000 in advances payable to the President of the Company (2017 - $232,000) and $232,000
at August 31, 2017 (2016 - $257,500). These advances are unsecured and bear interest at 3% per annum. Of this amount, $219,500
is due on demand and $12,500 has no repayment terms. Accrued interest payable to the President totaled $30,783 at May 31,
2018 (2017 - $23,823) and $25,578 at August 31, 2017 (2016 - $18,578).
|
|
|
|
|
●
|
At
May 31, 2018, the Company owed $51,000 in advances payable to the CEO of the Company (2017 - $nil) and $nil at August 31,
2017 (2016 - $nil). Of this amount, $46,000 is unsecured, bears interest of 2% per month and is due on demand and $5,000 has
no repayment terms. Accrued interest payable to the CEO totaled $5,263 at May 31, 2018 (2017 - $nil) and $nil at August 31,
2017 (2016 - $nil).
|
|
|
|
|
●
|
At
May 31, 2018, the Company owed $nil (2017 - $6,196) to the President of the Company for reimbursable expenses incurred on
the Company’s behalf. At August 31, 2017, the Company owed $5,329 (2016 - $10,477).
|
|
|
|
|
●
|
At
May 31, 2018, the Company owed $396,359 ($181,070 and US$166,272) (2017 - $257,033 ($181,070 and US$56,269)) in consulting
fees to a company controlled by the President of the Company. At August 31, 2017, the Company owed $271,984 ($181,070 and
US$72,522) (2016 - $215,224 ($181,070 and US$26,040)).
|
|
|
|
|
●
|
At
May 31, 2018, the Company owed $203,089 (US$156,850) (2017 - $63,243 (US$46,847)) in consulting fees to a company controlled
by the CEO of the Company. At August 31, 2017, the Company owed $79,102 (US$63,100) (2016 - $34,154 (US$26,040)).
|
|
|
|
|
●
|
At
May 31, 2018, the Company owed $383,411 ($181,070 and US$156,272) (2017 - $243,533 ($181,070 and US$46,269)) in consulting
fees to a company controlled by a major shareholder of the Company. At August 31, 2017, the Company owed $259,448 ($181,070
and US$62,522) (2016 - $215,224 ($181,070 and US$26,040)) in consulting fees.
|
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
12.
Related Party Transactions (cont’d)
|
●
|
At
May 31, 2018, the Company owed $nil (2017 - $nil) in shareholder advances and $761 (2017 - $761) in accrued interest on these
advances to the same major shareholder. At August 31, 2017, the Company owed $nil (2016 - $12,500) in shareholder advances
and $761 (2016 - $761) in accrued interest on these advances.
|
|
|
|
|
●
|
At
May 31, 2018, the Company owed $75,000 (2017 - $75,000) to a company controlled by the Company’s former CFO. At August
31, 2017, the Company owed $75,000 (2016 - $75,000).
|
During
the nine months ended May 31, 2018, the Company had the following transactions with related parties:
|
●
|
The
President of the Company advanced $nil during the nine months ended May 31, 2018 (2017 - $nil), and $nil to the Company during
the year ended August 31, 2017 (2016 - $5,000). Interest expense of $5,205 was accrued on advances payable to the President
of the Company during the nine months ended May 31, 2018 (2017 - $5,245) and $7,000 during the year ended August 31, 2017
(2016 - $7,696).
|
|
|
|
|
●
|
The
CEO of the Company advanced $51,000 during the nine months ended May 31, 2018 (2017 - $nil), and $nil to the Company during
the year ended August 31, 2017 (2016 - $nil). Interest expense of $5,263 was accrued on this advance payable to the CEO of
the Company during the nine months ended May 31, 2018 (2017 - $nil) and $nil during the year ended August 31, 2017 (2016 -
$nil).
|
|
|
|
|
●
|
Consulting
fees paid or accrued as payable to a company controlled by the President of the Company were $118,732 (US$93,750) and $124,739
(US$94,613) for the nine months ended May 31, 2018 and 2017, respectively.
|
|
|
|
|
●
|
Consulting
fees paid or accrued as payable to a company controlled by the CEO of the Company were $118,732 (US$93,750) and $124,739 (US$94,613)
for the nine months ended May 31, 2018 and 2017, respectively.
|
|
|
|
|
●
|
Consulting
fees paid or accrued as payable to a company controlled by a major shareholder of the Company were $118,732 (US$93,750) and
$124,739 (US$94,613) for the nine months ended May 31, 2018 and 2017, respectively.
|
All
transactions with related parties occurred in the normal course of business and were measured at the exchange amount, which was
the amount of consideration agreed upon between management and the related parties.
Also
see Notes 3, 13, 14 and 15.
13.
Advances from Shareholders
Advances
payable to shareholders totaled $145,000 at May 31, 2018 (2017 - $145,000) and $145,000 at August 31, 2017 (2016 - $157,500).
These advances are unsecured and bear interest at 3% per annum. There are no repayment terms. Interest expense of $3,254 was accrued
on these advances during the nine months ended May 31, 2018 (2017 - $3,255) and $4,351 during the year ended August 31, 2017 (2016
- $4,738). Accrued interest payable to shareholders totaled $16,636 at May 31, 2018 (2017 - $12,286), and $13,382 at August 31,
2017 (2016 - $9,031).
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
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 May 31, 2018, the balance of the license assignment fee payable to ZKC was US$545,000 ($705,666)
(August 31, 2017 - 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 May 31, 2018, ECC is entitled to $75,000 (August 31, 2017 - $75,000)
in accrued remuneration.
On
December 1, 2015, the Company entered into consulting agreements with 1040614 Ontario Ltd., a private Ontario corporation (the
“Old 1040614 Agreement”), and MCM Consulting, an Ontario sole proprietorship (the “Old MCM Agreement”,
and together with the Old 1040614 Agreement, the “Old Agreements”). Pursuant to the Old 1040614 Agreement, the company,
through its principal, performed various services related to business development, strategic planning and capital-raising for
the Company. Pursuant to the Old MCM Agreement, the sole proprietor acted in the capacity of CEO of the Company. On June 13, 2016,
the Old 1040614 and MCM Agreements were terminated and replaced by the 1040614 and MCM Agreements (see below). As at May 31, 2018,
1040614 and MCM are each entitled to $80,770 (August 31, 2017 - $80,770) in accrued remuneration in respect of the Old Agreements.
On
February 4, 2016, the Company entered into a consulting agreement (the “Old ZKC Agreement”) with Zoran K Corporation,
a private Ontario corporation (“ZKC”). Pursuant to the Old ZKC Agreement, ZKC, through its principal, acted in the
capacity of the Company’s exclusive sales, marketing and product development agent. On June 13, 2016, the Old ZKC Agreement
was terminated and replaced by the ZKC Agreement (see below). As at May 31, 2018, there is no remuneration payable (August 31,
2017 - $nil) by the Company under the Old ZKC Agreement.
On
June 13, 2016, the Company entered into consulting agreements with 1040614 Ontario Ltd. (the “1040614 Agreement”),
MCM Consulting (the “MCM Agreement”) and ZKC (the “ZKC Agreement”).
Pursuant
to the 1040614 Agreement, the company, through its principal, performs general consulting services on behalf of the Company. Pursuant
to the MCM Agreement, the sole proprietor acts in the capacity of President of the Company. Pursuant to the ZKC Agreement, ZKC,
through its principal, acts in the capacity of CEO of the Company. Each consulting agreement is for a period of 10 years, with
successive automatic renewal periods of two years until terminated. Pursuant to these consulting agreements, each consultant is
entitled to receive the following compensation:
|
●
|
Remuneration
– an aggregate of US$125,000 per annum plus HST on a bi-monthly basis;
|
|
●
|
EPS
Bonus – when the Company generates earnings per share of $0.05, plus any multiple thereof, the Company shall issue the
consultant 1,000,000 shares of the Company’s common stock and pay the consultant US$250,000 plus HST;
|
|
●
|
Change
of Control Bonus – immediately prior to the completion of a change of control (as defined in these consulting agreements)
the Company shall issue the consultant an aggregate of 20,000,000 shares of the Company’s common stock; and
|
|
●
|
Additional
Bonus – the company may from time to time pay the consultant one or more bonuses as determined by the Board of Directors
at its sole discretion.
|
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
15.
Commitments (cont’d)
Effective
February 3, 2018, the Company terminated the 1040614 Agreement.
On
August 31, 2017, the Company entered into a premises lease for a year beginning on September 1, 2017 for a rental of $21,000 for
the year plus HST.
16.
Stockholders’ Deficiency
The
Company is authorized to issue 500,000,000 (August 31, 2017 - 500,000,000) shares of common stock at a par value of $US0.001.
On
August 25, 2016, the Company completed a reverse split of the Company’s common stock at the ratio of one new share for every
two existing shares. All share and per share amounts have been adjusted to reflect this reverse split.
At
May 31, 2018, the Company had 57,532,843 shares of common stock legally issued and outstanding (2017 - 56,892,843 shares). 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 May 31, 2018 and August 31, 2017,
none of the preferred shares had been exchanged.
As
a condition of the closing of the Exchange Agreement, the Company also entered into a Support Agreement and a Voting and Exchange
Trust Agreement on the closing date. The Support Agreement ensures that the obligations of Subco remain effective until all of
the preferred shares have been exchanged. The Voting and Exchange Trust Agreement provides and establishes a procedure whereby
the voting rights attached to shares of the Company’s common stock are exercisable by the registered holders (the Selling
Shareholders) of the preferred shares. The Trustee holds legal title to a Special Voting Share to which voting rights are attached
for the benefit of the Selling Shareholders. The Trustee holds the Special Voting Share solely for the use and benefit of the
Selling Shareholders.
Common
Stock Issuances
During
the nine months ended May 31, 2018, the Company completed the following common stock transactions:
|
●
|
On
September 7, 2017, the Company closed a US dollar financing pursuant to which the Company issued 630,000 units at US$1.00
per unit for gross proceeds of $830,674 (US$630,000), with each unit consisting of one share of the Company’s common
stock and one warrant to purchase one share of common stock exercisable at a price of US$1.40 per share until September 7,
2019. $491,041 was allocated to common stock and $339,633 was allocated to stock purchase warrants. The Company paid cash
finder’s fees of $6,435 (US$5,000) and issued 5,000 finder’s stock purchase warrants exercisable at US$1.40 per
warrant share until July 17, 2019, valued at $2,581 and credited to stock purchase warrants.
|
|
|
|
|
●
|
On
September 21, 2017, the Company issued 10,000 shares of common stock at $0.80 per share for gross proceeds of $8,000 pursuant
to the exercise of warrants during the year ended August 31, 2017. $2,049 of the gross proceeds received that was allocated
to these warrants has been deducted from additional paid-in capital.
|
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
16.
Stockholders’ Deficiency (cont’d)
At
August 31, 2017, the gross proceeds received of $838,674 were reported as stock subscribed.
During
the year ended August 31, 2017, the Company completed the following common stock transactions:
|
●
|
On
October 31, 2016, the Company closed a concurrent Canadian and US dollar financing as follows:
|
|
o
|
Canadian
financing – the Company issued 140,000 units at $0.50 per unit for gross proceeds of $70,000, with each unit consisting
of one share of the Company’s common stock and one warrant to purchase one share of common stock exercisable at a price
of $0.80 per share until October 31, 2018. $41,314 was allocated to common stock and $28,686 was allocated to additional paid-in
capital.
|
|
|
|
|
o
|
US
financing – the Company issued 220,770 units at US$0.50 per unit for gross proceeds of $146,716 (US$110,385), with each
unit consisting of one share of the Company’s common stock and one warrant to purchase one share of common stock exercisable
at a price of US$0.80 per share until October 31, 2018. $86,027 was allocated to common stock and $60,689 was allocated to
stock purchase warrants.
|
|
●
|
On
November 2, 2016, the Company closed a US dollar financing pursuant to which the Company issued 400,000 units at US$1.00 per
unit for gross proceeds of $524,230 (US$400,000), with each unit consisting of one share of the Company’s common stock
and one warrant to purchase one share of common stock exercisable at a price of US$1.40 per share until November 2, 2018.
$286,950 was allocated to common stock and $237,280 was allocated to stock purchase warrants. The Company paid cash finder’s
fees of $19,899 and issued 15,000 finder’s stock purchase warrants exercisable at US$1.40 per warrant share until September
28, 2018, valued at $8,742 and credited to stock purchase warrants.
|
Stock
Subscribed
During
the nine months ended May 31, 2018, $10,000 in stock subscriptions was received pursuant to a private placement.
During
the year ended August 31, 2017, $838,674 ($8,000 and US$630,000) in stock subscriptions was received pursuant to individual private
placements. These subscriptions were for a total of:
|
●
|
10,000
shares of common stock of the Company at a price of $0.80 per share pursuant to the exercise of stock purchase warrants. These
shares were issued on September 21, 2017.
|
|
|
|
|
●
|
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. These units were issued on September 7, 2017.
|
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
16.
Stockholders’ Deficiency (cont’d)
Stock
Purchase Warrants
The
continuity of Canadian dollar denominated stock purchase warrants for the nine months ended May 31, 2018 is as follows:
Expiry
Date
|
|
Price
|
|
|
August
31, 2017
|
|
|
Issued
|
|
|
Exercised
|
|
|
May
31, 2018
|
|
October
31, 2018
|
|
$
|
0.80
|
|
|
|
130,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
130,000
|
|
At
May 31, 2018, the weighted-average remaining contractual life of Canadian dollar warrants outstanding was 0.42 years (August 31,
2017 - 1.17).
The
continuity of US dollar denominated stock purchase warrants for the nine months ended May 31, 2018 is as follows:
Expiry
Date
|
|
Price
|
|
|
August
31, 2017
|
|
|
Issued
|
|
|
Exercised
|
|
|
May
31, 2018
|
|
September
30, 2018 – Finder
|
|
|
US$1.40
|
|
|
|
15,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,000
|
|
October
31, 2018
|
|
|
US$0.80
|
|
|
|
220,770
|
|
|
|
—
|
|
|
|
—
|
|
|
|
220,770
|
|
November
2, 2018
|
|
|
US$1.40
|
|
|
|
400,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
400,000
|
|
July
17, 2019 – Finder
|
|
|
US$1.40
|
|
|
|
—
|
|
|
|
5,000
|
|
|
|
—
|
|
|
|
5,000
|
|
September
7, 2019
|
|
|
US$1.40
|
|
|
|
—
|
|
|
|
630,000
|
|
|
|
—
|
|
|
|
630,000
|
|
|
|
|
|
|
|
|
635,770
|
|
|
|
635,000
|
|
|
|
—
|
|
|
|
1,270,770
|
|
At
May 31, 2018, the weighted-average remaining contractual life of US dollar warrants outstanding was 0.85 years (August 31, 2017
- 1.17 years).
The
Company used the Black-Scholes Option Pricing Model to determine the fair values of unit warrants and finder’s warrants
issued pursuant to private placements during the nine months ended May 31, 2018 and the year ended August 31, 2017 with the following
assumptions:
|
|
May
31, 2018
|
|
|
August
31, 2017
|
|
Expected
dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Risk-free
interest rate
|
|
|
1.93
|
%
|
|
|
0.54%
- 0.55
|
%
|
Expected
stock price volatility
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Expected
life of warrants
|
|
|
0.33
– 1.27 years
|
|
|
|
2
years
|
|
See
Note 4.
17.
Risks and Uncertainties
The
Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect its future
operating results and cause actual results to vary materially from expectations include, but are not limited to: current economic
conditions; uncertainty in the potential markets for its Home Mist Tanning units; the design, production and marketing of NRFTS;
increasing competition; and dependence on its existing management and key personnel.
TROPIC
INTERNATIONAL INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED
IN CANADIAN DOLLARS)
(UNAUDITED)
18.
Accounting Pronouncements
The
Financial Accounting Standards Board (“FASB”) issued the following Accounting Standard Updates (“ASUs”)
that may be of relevance to the Company. The Company is currently assessing the impact that the adoption of these ASUs will have
on its financial statements and related disclosures.
|
●
|
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. The Company expects the impact of adoption of this ASU to be minimal.
|
|
|
|
|
●
|
September
2017 – ASU No. 2017-13, “Leases (Topic 842)” provides the requirements of financial accounting and reporting
for lessees and lessors and establishes principles that lessees and lessors shall apply to report useful information to users
of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease under Accounting Standards
Codification 842,
Leases
. The amendments in this ASU are effective for reporting periods beginning after December 15,
2019. The Company will be required to recognize a right-of-use asset and a lease liability for its office lease.
|
19.
Contingent Liability
Pursuant
to the Exchange Agreement, as amended, the Company may be required to acquire up to 296,500 common shares of TSI, being those
TSI shares still outstanding, in exchange for 148,250 preferred shares of Subco on a one-for-two basis. Such preferred shares
would then be exchangeable on the same basis as the approximately 50 million Subco preferred shares currently outstanding (see
Notes 2 and 14). On August 24, 2016, 21,672,623 common shares of TSI were exchanged for 10,836,312 preferred shares of Subco.
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 May 31, 2018. These
financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US
GAAP”). All financial information in this Report is presented in Canadian dollars, unless otherwise indicated, and should
be read in conjunction with our interim unaudited consolidated financial statements and the notes thereto included in this Report.
As
disclosed in our current report on Form 8-K dated July 3, 2013, on June 28, 2013 we completed a share exchange with Tropic Spa
Inc., an Ontario corporation (“Tropic Spa”), 1894632 Ontario Inc., an Ontario corporation (“Subco”), and
certain of the shareholders of Tropic Spa (collectively, the “Tropic Spa Shareholders”), pursuant to which we acquired
78,030,877 common shares, or approximately 78% of the issued and outstanding shares, of Tropic Spa in exchange for the issuance
of 78,030,877 preferred shares of Subco, our wholly owned subsidiary, to the Tropic Spa Shareholders on a one-for-one basis (the
“Share Exchange”). Each preferred share of Subco is exchangeable into one share of our common stock at the option
of the holder thereof, subject to certain restrictions. As a result of the Share Exchange, Tropic Spa became our majority-owned
subsidiary and the former shareholders of Tropic Spa became holders of the preferred shares of Subco, a company that has only
one issued and outstanding common share which is held by us. The transaction was accounted for as a reverse takeover/recapitalization
effected by a share exchange, wherein Tropic Spa is considered the acquirer for accounting and financial reporting purposes. Our
consolidated financial statements are therefore, in substance, those of Tropic Spa.
Also,
as disclosed in our current report on Form 8-K dated July 14, 2016, on June 13, 2016 we completed a share exchange with Notox
Bioscience Inc., a Nevada corporation (“Notox”), and all the shareholders of Notox (collectively, the “Notox
Shareholders”) pursuant to which we acquired all the issued and outstanding shares of Notox from the Notox Shareholders
in exchange for the issuance of 100,000,000 restricted shares of our common stock to the Notox Shareholders on a 1,000-for-one
basis (the “Notox Share Exchange”). In connection with the Notox Share Exchange, Notox acquired 100% of the right,
title and interest in and to an exclusive license agreement dated December 1, 2012, as amended on July 30, 2013 (together, the
“License Agreement”) with the Cleveland Clinic Foundation (the “Clinic”) formerly held by Zoran Holding
Corporation, a private Ontario corporation (“ZHC”), Notox became our wholly-owned subsidiary, and the Notox Shareholders
acquired approximately 89% of our issued and outstanding common stock (52.5% on a fully-exchanged basis). The transaction represented
an asset acquisition and was therefore accounted for under the asset acquisition method.
Finally,
on August 25, 2016, we completed a reverse split of our issued and outstanding common stock at the ratio of one (1) new share
for every two (2) existing shares and caused Subco to do the same. All share and per share amounts have been adjusted to reflect
the reverse split except as otherwise indicated.