NOTOX TECHNOLOGIES CORP. - Quarter Report: 2017 May (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended May 31, 2017

or

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

For the transition period from ______________ to________________

Commission file number 001-34911

TROPIC INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

(519) 421-1900

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [  ] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

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

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

APPLICABLE ONLY TO CORPORATE ISSURS:

As of July 19, 2017, the registrant’s outstanding common stock consisted of 56,892,843 shares.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Tropic International Inc.

Consolidated Financial Statements

For the Nine Months Ended May 31, 2017

(Expressed in Canadian dollars)

(unaudited)

TROPIC INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS

(EXPRESSED IN CANADIAN DOLLARS)

Contingent liability (Note 19)

See accompanying notes to the consolidated financial statements.

TROPIC INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

See accompanying notes to the consolidated financial statements.

TROPIC INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

Supplementary Information:

On June 13, 2016, the Company issued 50,000,000 shares of common stock in exchange for all of the outstanding common stock of Notox. The Company also incurred $19,519 in professional fees relating to this transaction. See Note 3.

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

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

See accompanying notes to the consolidated financial statements.

TROPIC INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

* The above presentation reflects the issued share capital of Tropic Spa Inc. until the completion of the June 28, 2013 reverse takeover, at which point it is adjusted to reflect the share capital of the Company. The above presentation also reflects a 1:2 reverse split of the Company’s common stock on August 25, 2016. See Note 16.

See accompanying notes to the consolidated financial statements.

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

1. Company Overview and Basis of Presentation

Nature and History of Operations

Tropic International, Inc. (formerly Rockford Minerals, Inc.) (the “Company”) was incorporated under the laws of the state of Nevada on October 29, 2007. The Company was a natural resource exploration company with an objective of acquiring, exploring and, if warranted and feasible, developing natural resource properties. Activities during the exploration stage included developing the business plan and raising capital.

On June 28, 2013, the Company completed a reverse takeover transaction (see Note 2) with Tropic Spa Inc. (“TSI”), a company that manufactures and sells Home Mist Tanning units that deliver a full-body application. As a result of this transaction, the Company became a holding company operating through TSI. Upon the closing of the share exchange agreement described below, the Company changed its fiscal year end from October 31 to August 31 to coincide with the fiscal year end of TSI.

On December 6, 2013, the Company changed its name to Tropic International Inc. as a result of a merger with a wholly-owned subsidiary incorporated solely to effect the name change.

On September 3, 2014, the Company’s shares became eligible for quotation on the OTCQB under the symbol TRPO.

On June 13, 2016, the Company completed an asset acquisition transaction (see Note 3) with Notox Bioscience Inc. (“Notox”), a private Nevada corporation incorporated on May 31, 2016 for the purpose of acquiring 100% of the right, title and interest in and to an exclusive license agreement (the “License Agreement”) with The Cleveland Clinic Foundation (the “Clinic”), an Ohio not-for-profit corporation. As a result of this transaction, the Company is a holding company operating through both TSI and Notox.

The accompanying consolidated financial statements include the results of operations of the Company, TSI, and Notox for the nine months ended May 31, 2017. The comparative amounts are the results of operations of the Company and TSI for the nine months ended May 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:

The Originating Companies entered into agreements with their shareholders allowing the shareholders, upon the Triggering Event, to exchange their class A shares in the Originating Companies, by exercising the option under their common share exchange warrant, for common shares in TSI.

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

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

On April 9, 2009, the Board of Directors of TSI (the “Board”) resolved that the Triggering Event had occurred and approved and issued a Notification of Triggering Event to the shareholders of the Originating Companies. The decision to exercise the Triggering Event was driven by three factors:

After November 19, 2007, and subsequent to the execution of the Agreements, Tropic Spa Group Inc. (“TSGI”) incurred an additional $2,685,104 on the continued development of the Home Mist Tanning system and the application for and acquisition of the US Patent. On March 11, 2013, TSI executed a second Share Subscription Agreement (the “Second Agreement”) with TSGI to cover the common shares of TSI issued to the shareholders of TSGI in respect of the additional costs incurred. Pursuant to the terms of the Second Agreement, TSGI subscribed for 26,034,520 common shares valued at $3,155,462 covering the period from November 20, 2007 to June 2010. Of these amounts, 3,880,745 common shares were for $470,358 received directly by TSI. The value assigned to the carrying value of the US Patent, during the year ended August 31, 2010, was $2,685,104 ($3,155,462 less $470,358). The total value assigned to the carrying value of the US Patent pursuant to the Agreements and the Second Agreement, collectively, was $6,342,279.

On October 16, 2014, the Company, through TSI, obtained an Australian patent (the “Australian Patent”) incurring application costs of $4,976. On June 21, 2016, the Company, through TSI, obtained a Canadian patent (the “Canadian Patent”), incurring application costs of $17,406. The Company, through TSI, has a patent pending which is in the process of being completed for China. Costs incurred are recorded as patents (see Note 9).

As reflected in the accompanying consolidated financial statements, the Company has a deficit of $6,770,111 (August 31, 2016 - $5,900,974), a working capital deficiency of $1,776,121 (August 31, 2016 - $934,525) and stockholders’ equity of $3,235,180 (August 31, 2016 - $3,016,652). This raises substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on its ability to raise additional capital and to implement its business plan. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management believes that actions presently being taken to obtain additional funding and implement its strategic plans provide the opportunity for the Company to continue as a going concern.

2. Reverse Takeover

On June 28, 2013 (the “Closing Date”), the Company, its wholly-owned subsidiary 1894632 Ontario Inc. (“Subco”) and TSI entered into a share exchange agreement (the “Exchange Agreement”) with certain of the shareholders of TSI (the “Selling Shareholders”) pursuant to which the Company acquired 39,015,439 common shares, or approximately 78% of the issued and outstanding shares, of TSI in exchange for the issuance of 39,015,439 preferred shares of Subco to the Selling Shareholders on a one-for-one basis. Each one preferred share of Subco is exchangeable into one share of the Company’s common stock at the option of the holder subject to the following restrictions:

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

2. Reverse Takeover (cont’d)

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:

On February 17, 2015, the Company, Subco, TSI and the Selling Shareholders entered into an amendment to the Exchange Agreement in order to correct certain administrative errors in the Exchange Agreement and provide for the post-closing execution of the Exchange Agreement by those shareholders of TSI who were not original signatories thereto. In addition, the Selling Shareholders approved certain changes to the rights, privileges, restrictions and conditions attached to the preferred shares of Subco by consent in writing. This included extending the automatic expiration date in respect of the preferred shares of Subco from June 30, 2015 to June 30, 2017. On February 22, 2017, this automatic expiration date was further extended to December 31, 2018.

3. Asset Acquisition and License Agreement

On June 13, 2016 (the “Second Closing Date”), the Company, Notox and the shareholders of Notox (the “Notox Shareholders”) entered into a share exchange agreement (the “Share Exchange Agreement”) pursuant to which the Company acquired 100% of the issued and outstanding common stock of Notox from the Notox Shareholders in exchange for the issuance of 50,000,000 shares of the Company’s common stock. See Note 16.

On the Second Closing Date, Notox and Zoran Holding Corporation (“ZHC”), a private Ontario corporation, entered into an assignment agreement (the “Assignment Agreement”) pursuant to which ZHC irrevocably assigned 100% of its right, title and interest in and to the License Agreement, as amended, to Notox. Also on the Second Closing Date, the sole officer and director of Notox and ZHC became a director and officer of the Company.

On November 23, 2016, the Company, Notox and the Notox Shareholders entered into an amendment to the Share Exchange Agreement in order to clarify certain sections in the Share Exchange Agreement, to

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

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

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.

On December 1, 2012, ZHC and the Clinic entered into the License Agreement whereby the Clinic granted ZHC an exclusive worldwide license and a non-exclusive worldwide license in the field of aesthetics and pain to make, use, offer to sell, sell and import certain products throughout the term of the License Agreement. The term continues until the expiration of the last to expire of the certain patents. The License Agreement was amended on July 30, 2013. Pursuant to the License Agreement, as amended, the Clinic will receive a royalty based on the sale of certain products, a milestone payment upon first commercial sale of the first such product and a percentage of any sublicensing revenues. In the month in which cumulative gross revenues reach a specified amount, the Clinic will be reimbursed for all incurred and to be incurred patent expenses to a specified amount. Royalties and other payments are payable quarterly. ZHC is required to achieve a commercial milestone on or before November 30, 2017, and failure to achieve this milestone, without satisfactory justification, constitutes a material breach of the License Agreement giving the Clinic the right, but not the obligation, to terminate the License Agreement. The Clinic has the right to verify ZHC’s compliance with the License Agreement.

As a result of the share exchange and on the Second Closing Date, the Notox Shareholders controlled approximately 89% of the issued and outstanding common stock of the Company (52.5% on a fully-exchanged basis) and Notox became a wholly-owned subsidiary of the Company. Notox did not meet the definition (inputs, processes and outputs criteria) of a business. The Share Exchange Agreement represented an asset acquisition and was therefore accounted for under the asset acquisition method.

Acquired intangible assets are recognized and initially measured based on their fair value plus transaction costs incurred as part of the acquisition. There was no active market to reliably determine the fair value of the License Agreement acquired. Therefore the fair value of the License Agreement was based on the par value of the common stock exchanged by the Company.

The fair value and carrying value of the License Agreement is as follows:

4. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the financial statements of the Company, TSI, Notox, Subco and 1894631 Ontario Inc., the Company’s wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated.

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to equipment, fair values of intangible assets, and useful lives of intangible assets and the likelihood of realization of its deferred tax assets. The Company bases its estimates on assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Concentration of Risk

The financial instrument which potentially subjects the Company to a concentration of credit risk is cash. The Company places its cash in an account with a high credit quality financial institution.

Significant Accounting Policies

The accompanying consolidated financial statements reflect the application of certain significant accounting policies. There have been no material changes to the Company’s significant accounting policies that are disclosed in the consolidated financial statements and notes thereto during the period ended May 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. The US Patent was issued on September 29, 2009 and is effective until September 29, 2026. The Australian and Canadian Patents are recorded at the application costs incurred less accumulated amortization. The Australian Patent was issued on October 16, 2014 and is effective until April 5, 2027. The Canadian Patent was issued on June 21, 2016 and is effective until April 5, 2027. 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

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

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

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).

Management is in the process of determining the best estimate of the useful life of the License Agreement.

Amortization and Impairment

Definite-lived intangible assets are required to be amortized using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or utilized. At this time, management is not able to determine with any amount of certainty the number of Home Mist Tanning units that will be sold over the useful lives of the patents. Accordingly, the patents are being amortized on a straight-line basis over the period of their useful lives. Management is in the process of determining the most appropriate method for amortizing the License Agreement.

Intangible assets subject to amortization are required to be reviewed for impairment. An impairment loss must be recognized if the intangible asset’s carrying amount is not recoverable and the carrying amount exceeds fair value. The Company applies the following three-step process to identify, recognize and measure impairment of intangible assets:

Because of the unique nature of a patent and a license agreement, income-producing definite-lived intangible assets, the calculation of cash flows can be very difficult to estimate. In this case, the estimated cash flows reflect the direct revenue expected to be generated by the patents and the License Agreement as well as an allocation of expenses.

Leases

The Company currently rents premises pursuant to an operating lease.

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

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

Impairment of Long-Lived Assets

Long-lived assets, including equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by it. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds its fair value.

Sales and Other Revenue

The Company sells Home Mist Tanning units and related supplies primarily on line via its website. The Company recognizes revenue when the units and supplies have been shipped to the customer, the amount to be paid by the customer is fixed or determinable and collectability is reasonably assured. Revenue is recorded net of applicable sales taxes.

Warranty

The Company is committed to supplying products of superior quality and design. Because of this commitment, it provides a limited one year warranty effective from the date of purchase. The Company warranties its Home Mist Tanning units to be free of defects. If a unit stops operating due to defects in materials or workmanship, the Company either repairs or replaces it for free.

Production Costs

Production costs consist of patent amortization, production consulting fees, equipment depreciation, materials and supplies.

Advertising Costs

The Company charges all advertising and marketing costs to expense in the period incurred.

Income Taxes

Deferred income tax is accounted for using the asset and liability method. Deferred income taxes are provided for temporary differences in recognizing certain income and expense items for financial reporting purposes and tax reporting purposes. Such deferred income taxes primarily relate to the difference between the tax bases of assets and liabilities and their financial reporting amounts. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At this time, the Company is not able to project future taxable income over the periods in which the deferred tax assets are deductible and, accordingly, management is not able to determine if it is more likely than not that the Company will realize the benefits of these deductible differences.

Derivative Financial Instruments

The Company does not have any derivative financial assets or liabilities.

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

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

Fair Value of Financial Instruments

Carrying values of cash, accounts payable and accrued liabilities, advances from related parties/shareholders and license assignment fee payable approximate fair value because of the short-term nature of these items. Amounts receivable consists primarily of Harmonized Sales Tax (“HST”) receivable from the Government of Canada. HST is not a financial instrument.

Foreign Currency

The functional currency of the Company and its subsidiaries is the Canadian dollar. The accompanying consolidated financial statements are presented in Canadian dollars.

Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the period-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Exchange differences arising on the translation of monetary items or on settlement of monetary items are recognized in the loss in the period in which they arise.

5. Loss Per Share

The following table sets forth the computation of loss per share:

6. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities;

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3 – Unobservable inputs that are supported by little or no market activity, which require management judgment or estimation.

The Company measures its financial instruments at fair value.

The carrying value of cash deposits is a reasonable estimate of its fair value due to the short maturity of the financial instrument.

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

6. Fair Value Measurements (cont’d)

The Company does not have assets and liabilities that are measured at fair value on a recurring basis.

7. Research and Development

On February 20, 2017, the Company entered into a proposal with RBC Medical Innovations (“RBC”) for RBC to develop a radio frequency treatment system, leveraging technology acquired by the Company via the License Agreement with the Clinic. Pursuant to this proposal, the Company paid an initial $73,453 (US$55,600) project stage initiation fee to RBC. See Note 3.

8. Equipment, Net

Equipment, at cost, consisted of:

Depreciation was $6,412 and $8,015 for the nine month periods ended May 31, 2017 and May 31, 2016, respectively.

9. Patents, Net

The following tables provide information regarding the patents and patents pending:

Also see Note 1 Company Overview and Basis of Presentation.

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

9. Patents, Net (cont’d)

During the period ended May 31, 2017, management identified the following indicators of impairment indicating that the patents’ carrying amounts might not be recoverable:

Management performed a recoverability test and determined that the estimated undiscounted future cash flows are greater than the patents’ carrying amounts and that, accordingly, there is no impairment.

As of May 31, 2017, amortization expense on intangible assets for the next five years was expected to be as follows:

10. License Agreement, Net

Also see Note 3 Asset Acquisition and License Agreement. The Company, Notox and the Clinic are in the process of negotiating a second amendment to the License Agreement.

11. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of:

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

12. Related Party Transactions

As at May 31, 2017, the following amounts were payable to the Company’s related parties:

Of these amounts, $255,823 (August 31, 2016 - $276,078) is included in advances from related parties/shareholders and $645,005 (August 31, 2016 - $550,079) is included in accounts payable and accrued liabilities.

During the nine months ended May 31, 2017, the Company had the following transactions with related parties:

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

12. Related Party Transactions (cont’d)

All transactions with related parties occurred in the normal course of business and were measured at the exchange amount, which was the amount of consideration agreed upon between management and the related parties.

Also see Notes 3, 13, 14 and 15.

13. Advances from Shareholders

Shareholders of the Company advanced $nil to the Company during the nine months ended May 31, 2017 (May 31, 2016 - $nil) and $nil during the year ended August 31, 2016 (2015 - $95,000). Advances payable to shareholders totaled $145,000 at May 31, 2017 (May 31, 2016 - $157,500) and $157,500 at August 31, 2016 (2015 - $157,500). These advances are unsecured and bear interest at 3% per annum. Of this amount, $nil (August 31, 2016 - $12,500) is due on demand and $145,000 (August 31, 2016 - $145,000) has no repayment terms. Interest expense of $3,255 was accrued on these advances during the nine months ended May 31, 2017 (May 31, 2016 - $3,547) and $4,738 during the year ended August 31, 2016 (2015 - $4,065). Accrued interest payable to shareholders totaled $12,286 at May 31, 2017 (May 31, 2016 - $7,840) and $9,031 at August 31, 2016 (2015 - $4,293).

14. License Assignment Fee Payable

At May 31, 2017, the balance of the license assignment fee payable to ZKC was US$600,000. The license assignment fee payable is repayable in monthly instalments of US$50,000 beginning on October 1, 2016. Upon completion of any equity financing pursuant to which the Company raises gross proceeds of at least US$1,000,000, the outstanding balance is to be repaid in full. See Note 3.

15. Commitments

On November 16, 2015, the Company entered into a consulting agreement (the “ECC Agreement”) with Edgewater Consulting Corp., a private Ontario corporation (“ECC”). Pursuant to the ECC Agreement, ECC, through its principal, acted in the capacity of CFO of the Company. The ECC Agreement was terminated effective November 10, 2016. A signing bonus of 750,000 exchangeable preferred shares of Subco was issued on August 24, 2016. As at May 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 May 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.

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

15. Commitments (cont’d)

On February 4, 2016, the Company entered into a consulting agreement (the “Old ZKC Agreement”) with Zoran K Corporation, a private Ontario corporation (“ZKC”). Pursuant to the Old ZKC Agreement, ZKC, through its principal, acted in the capacity of the Company’s exclusive sales, marketing and product development agent. On June 13, 2016, the Old ZKC Agreement was terminated and replaced by the ZKC Agreement (see below). As at May 31, 2017, there is no remuneration payable (August 31, 2016 - $nil) by the Company under the Old ZKC Agreement.

On December 22, 2016, the Company renewed its premises lease dated November 11, 2011, for one additional year from February 1, 2017 to January 31, 2018 for a rental of $13,500 per year plus HST.

On June 13, 2016, the Company entered into consulting agreements with 1040614 Ontario Ltd. (the “1040614 Agreement”), MCM Consulting (the “MCM Agreement”) and ZKC (the “ZKC Agreement”).

Pursuant to the 1040614 Agreement, the company, through its principal, performs general consulting services on behalf of the Company. Pursuant to the MCM Agreement, the sole proprietor acts in the capacity of President of the Company. Pursuant to the ZKC Agreement, ZKC, through its principal, acts in the capacity of CEO of the Company. Each consulting agreement is for a period of 10 years, with successive automatic renewal periods of two years until terminated. Pursuant to these consulting agreements, each consultant is entitled to receive the following compensation:

16. Stockholders’ Equity

The Company is authorized to issue 300,000,000 shares of common stock at a par value of $0.001.

On August 25, 2016, the Company completed a reverse split of the Company’s common stock at the ratio of one new share for every two existing shares. All share and per share amounts have been adjusted to reflect this reverse split.

At May 31, 2017, the Company had 56,892,843 shares of common stock (May 31, 2016 - 12,264,146) issued and outstanding. At August 31, 2016, the Company had 56,132,073 shares of common stock (2015 - 6,132,073) issued and outstanding.

On June 28, 2013, pursuant to the Exchange Agreement, RMI acquired 39,015,439 common shares of TSI in exchange for the issuance of 39,015,439 preferred shares of Subco to the Selling Shareholders on a one-for-one basis. As a result of the Exchange Agreement, TSI became the Company’s majority-owned subsidiary. Each preferred share of Subco is exchangeable into one share of the Company’s common stock at the option of the holder subject to certain restrictions. As at May 31, 2017 and August 31, 2016, none of the preferred shares had been exchanged.

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

16. Stockholders’ Equity (cont’d)

As a condition of the closing of the Exchange Agreement, the Company also entered into a Support Agreement and a Voting and Exchange Trust Agreement on the closing date. The Support Agreement ensures that the obligations of Subco remain effective until all of the preferred shares have been exchanged. The Voting and Exchange Trust Agreement provides and establishes a procedure whereby the voting rights attached to shares of the Company’s common stock are exercisable by the registered holders (the Selling Shareholders) of the preferred shares. The Trustee holds legal title to a Special Voting Share to which voting rights are attached for the benefit of the Selling Shareholders. The Trustee holds the Special Voting Share solely for the use and benefit of the Selling Shareholders.

Common Stock Issuances

During the nine months ended May 31, 2017, the Company completed the following common stock transactions:

During the year ended August 31, 2016, the Company completed the following common stock transactions:

No common stock transactions occurred during the nine months ended May 31, 2016 and the year ended August 31, 2015.

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

16. Stockholders’ Equity (cont’d)

Stock Subscribed

During the nine months ended May 31, 2017, $711,984 (US$530,000) in stock subscriptions was received pursuant to individual private placements. These subscriptions are for a total of:

During the nine months ended May 31, 2016, $149,991 in stock subscriptions was received pursuant to individual private placements. These subscriptions were for a total of:

Stock Purchase Warrants

The continuity of Canadian dollar denominated stock purchase warrants for the nine months ended May 31, 2017 is as follows:

The continuity of US dollar denominated stock purchase warrants for the nine months ended May 31, 2017 is as follows:

At May 31, 2017, the weighted-average remaining contractual life of US dollar warrants outstanding was 1.42 years (August 31, 2016 - nil).

As at August 31, 2016 and May 31, 2016, the Company had no stock purchase warrants outstanding.

17. Risks and Uncertainties

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect its future operating results and cause actual results to vary materially from expectations include, but are not limited to: current economic conditions, uncertainty in the potential markets for its Home Mist Tanning units and aesthetics and pain products, increasing competition, and dependence on its existing management and key personnel.

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

18. Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) has issued the following Accounting Standard Updates (“ASUs”) that may be of relevance to the Company. The Company is currently assessing the impact that the adoption of these ASUs will have on its financial statements and related disclosures.

TROPIC INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

19. Contingent Liability

Pursuant to the Exchange Agreement, as amended, the Company may be required to acquire up to 296,500 common shares of TSI, being those TSI shares still outstanding, in exchange for 148,250 preferred shares of Subco on a one-for-two basis. Such preferred shares would then be exchangeable on the same basis as the approximately 50 million Subco preferred shares currently outstanding (see Notes 2 and 16). On August 24, 2016, 21,672,623 common shares of TSI were exchanged for 10,836,312 preferred shares of Subco.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q (this “Report”) contains forward-looking statements. The forward-looking statements are contained principally in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Report. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates”, “believes”, “seeks”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “potential”, “predicts”, “projects”, “should”, “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Such statements may include, but are not limited to, information related to: anticipated operating results; relationships with our customers; consumer demand; financial resources and condition; changes in revenues; changes in profitability; changes in accounting treatment; cost of sales; selling, general and administrative expenses; interest expense; the ability to produce the liquidity or enter into agreements to acquire the capital necessary to continue our operations and take advantage of opportunities; legal proceedings and claims.

Also, forward-looking statements represent our estimates and assumptions only as of the date of this Report. You should read this Report and the documents that we reference and file or furnish as exhibits to this Report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

PRESENTATION OF INFORMATION

Except as otherwise indicated by the context, references in this Report to “we”, “us” and “our” are to the combined business of Tropic International Inc. and its consolidated subsidiaries.

This Report includes our interim unaudited consolidated financial statements as at and for the nine months ended May 31, 2017. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”). All financial information in this Report is presented in Canadian dollars, unless otherwise indicated, and should be read in conjunction with our interim unaudited consolidated financial statements and the notes thereto included in this Report.

As disclosed in our current report on Form 8-K dated July 3, 2013, on June 28, 2013 we completed a share exchange with Tropic Spa Inc., an Ontario corporation (“Tropic Spa”), 1894632 Ontario Inc., an Ontario corporation (“Subco”), and certain of the shareholders of Tropic Spa (collectively, the “Tropic Spa Shareholders”), pursuant to which we acquired 78,030,877 common shares, or approximately 78% of the issued and outstanding shares, of Tropic Spa in exchange for the issuance of 78,030,877 preferred shares of Subco, our wholly owned subsidiary, to the Tropic Spa Shareholders on a one-for-one basis (the “Share Exchange”). Each preferred share of Subco is exchangeable into one share of our common stock at the option of the holder thereof, subject to certain restrictions. As a result of the Share Exchange, Tropic Spa became our majority-owned subsidiary and the former shareholders of Tropic Spa became holders of the preferred shares of Subco, a company that has only one issued and outstanding common share which is held by us. The transaction was accounted for as a reverse takeover/recapitalization effected by a share exchange, wherein Tropic Spa is considered the acquirer for accounting and financial reporting purposes. Our consolidated financial statements are therefore, in substance, those of Tropic Spa.

Also, as disclosed in our current report on Form 8-K dated July 14, 2016, on June 13, 2016 we completed a share exchange with Notox Bioscience Inc., a Nevada corporation (“Notox”), and all the shareholders of Notox (collectively, the “Notox Shareholders”) pursuant to which we acquired all the issued and outstanding shares of Notox from the Notox Shareholders in exchange for the issuance of 100,000,000 restricted shares of our common stock to the Notox Shareholders on a 1,000-for-one basis (the “Notox Share Exchange”). In connection with the Notox Share Exchange, Notox acquired 100% of the right, title and interest in and to an exclusive license agreement (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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our results of operations and financial condition has been derived from and should be read in conjunction with our interim unaudited consolidated financial statements and the related notes thereto that appear elsewhere in this Report, as well as the “Presentation of Information” section that appears at the beginning of this Report.

Overview

We are a company in the business of developing and commercializing innovative technologies. Through Notox, we own 100% of the right, title and interest in and to the License Agreement with the Clinic formerly held by ZHC. The License Agreement grants us the exclusive license to certain patented intellectual property of the Clinic relating to the treatment of a neuromuscular defect developed by Dr. Frank Papay, MD, FACS Chairman Dermatology and Plastic Surgery Institute, Cleveland Clinic, and in particular, the ability to produce and sell products that incorporate such intellectual property in the fields of aesthetics and pain. We plan to develop this intellectual property into the world’s first credible and healthier non-toxic alternative to Botox, which is a commercial form of the botulinum toxin protein used primarily for medical and cosmetic purposes.

Through Tropic Spa, our goal is to market a unique home mist tanning system for convenient home use that delivers a full-body application and eliminates the harmful health effects associated with traditional tanning beds. The primary effect is exposure to ultraviolet (UV) radiation, and the consequences of such exposure have been well-documented by numerous organizations, including the American Cancer Society and the Canadian Cancer Society. They generally include an increase in the risk of contracting both melanoma and non-melanoma skin cancers as well as structural damage to the skin that can result in what dermatologists call “photoageing”, or premature wrinkles, freckles, leathery texture and a loss of elasticity.

To date, we have finalized the design of our product, applied for and acquired patents for it in the United States (the “US Patent”), Canada (the “Canadian Patent”) and Australia (the “Australian Patent”), and have a patent pending that is in the process of being completed for China. We have also prepared our product for market and completed two phases of test marketing initiatives, and we are currently preparing to launch a comprehensive three-phase marketing strategy.

Results of Operations

Revenue

During the nine months ended May 31, 2017, we did not generate any revenue. During the same period in 2016 we generated $863 in revenue, all of which was in the form of sales revenue.

Production Costs

During the nine months ended May 31, 2017, we incurred production costs and a gross loss of $312,411. During the nine months ended May 31, 2016, we incurred production costs of $319,958 which, when subtracted from the revenue we generated during the period, resulted in a gross loss of $319,095. Our production costs during both periods were relatively consistent and were attributable to a combination of patent amortization ($282,553 in the current period vs. $280,453 in the prior period), production-related consulting fees ($22,500 in the current period vs. $23,400 in the prior period), depreciation ($6,412 in the current period vs. $8,015 in the prior period), materials and supplies ($946 in the current period vs. $7,725 in the prior period) and writedowns of inventory ($nil in the current period vs. $365 in the prior period).

Expenses

During the nine months ended May 31, 2017, we incurred $556,726 in general and administrative expenses, compared to $398,601 during the same period in 2016. Our expenses during the nine months ended May 31, 2017 consisted of $374,037 in management-related consulting fees, $73,453 in research and development expenses, $44,334 in professional fees, $22,089 in office and miscellaneous expenses, $10,000 in rent, $9,497 in travel and entertainment expenses, $8,500 in interest on advances from related parties/shareholders, $7,666 in patent maintenance fees, $4,806 in trust and filing fees, $1,354 in marketing expenses, $732 in investor relations expenses and $258 in foreign exchange loss. During the same period in the prior year, our expenses included $283,806 in management-related consulting fees, $56,928 in professional fees, $16,883 in office and miscellaneous expenses, $9,900 in rent, $9,296 in interest on advances from related parties/shareholders, $9,250 in travel and entertainment expenses, $8,327 in marketing expenses, $2,122 in trust and filing fees and $2,089 in foreign exchange loss. Apart from the $90,231 increase in our management-related consulting fees, which was primarily attributable to engaging a new principal executive officer, and the $73,453 increase in our research and development expenses, our expenses were relatively consistent from period to period.

We did not incur any other expenses during the nine months ended May 31, 2017, whereas we incurred a $6,794 writedown of patent costs during the same period in 2016.

Net Loss

During the nine months ended May 31, 2017, we incurred a net loss and comprehensive loss of $869,137 and a net loss per share of $0.02. During the same period in the prior year, we experienced a net loss and comprehensive loss of $724,490 and a net loss per share of $0.06.

Liquidity and Capital Resources

As of May 31, 2017, we had $96,894 in cash, $344,806 in current assets, $5,356,107 in total assets, $2,120,927 in current and total liabilities and a working capital deficiency of $1,776,121. As of that date, we also had an accumulated deficit of $6,770,111.

During the nine months ended May 31, 2017, we spent $556,600 in net cash on operating activities, compared to $125,602 in net cash spending on operating activities during the same period in the prior year. The increase of approximately 443% in our cash spending on operating activities between the two periods was primarily attributable to the increase in our net loss as described above, as adjusted for certain changes in our assets and liabilities, and in particular a significant decrease in our accounts payable and accrued liabilities.

We spent $540,889 in net cash on investing activities during the nine months ended May 31, 2017, substantially all of which ($538,800) was in the form of license agreement costs. During the same period in the prior year we spent $11,743 in net cash on investing activities, all of which was associated with patent costs.

During the nine months ended May 31, 2017, we received $1,049,665 in cash from financing activities, compared to receiving $154,991 in cash from financing activities during the same period in the prior year. All of the cash we received from financing activities during the current period was in the form of proceeds from the issuance of our common stock ($395,580) and stock subscriptions received ($711,984), less certain issuance costs and shareholder advance repayments, whereas substantially all of the cash we received during the prior period was in the form of stock subscriptions received ($149,991).

During the nine months ended May 31, 2017, our cash decreased by $47,824 due to a combination of our operating, investing and financing activities.

Plan of Operations

Through Notox, our plan of operations over the next 12 months is to continue the process initiated by ZHC to design, manufacture and commercialize the Notox system and its features. We expect to work closely with the Clinic in this regard, and anticipate that we will require at least US$3,725,000 to carry out our plan, as follows:

In addition, we plan to carry out our three-phase marketing strategy and continue to develop our home mist tanning business through Tropic Spa, and we anticipate that we will require a minimum of $1,050,000 to pursue those plans, as follows:

We intend to allocate the bulk of our proposed marketing expenses to producing and airing a new infomercial, and we expect interest in our home mist tanning system to increase as a result. Such an increase will likely be accompanied by an increase in sales, which will require us to manufacture additional units and incur substantial production costs.

In connection with the foregoing, we expect to incur the following general and administrative expenses over the next 12 months. These expenses are reasonably consistent with those from prior periods, as adjusted to reflect the expected increase in our operations and the costs of maintaining our status as a public company.

We do not currently have sufficient funds to carry out our entire plan of operations, so we intend to meet the balance of our cash requirements for the next 12 months through a combination of debt financing and equity financing through private placements. Currently we are active in contacting broker/dealers in Canada and elsewhere regarding possible financing arrangements; however, we do not currently have any arrangements in place to complete any private placement financings and there is no assurance that we will be successful in completing any such financings. If we are unsuccessful in obtaining sufficient funds through our capital raising efforts, we may review other financing options, although we cannot provide any assurance that any such options will be available to us or on terms reasonably acceptable to us. Further, if we are unable to secure any additional financing then we plan to reduce the amount that we spend on our operations, including our management-related consulting fees and other general expenses, so as not to exceed the capital resources available to us. Regardless, our current cash reserves and working capital may not be sufficient to enable us to sustain our business for the next 12 months, even if we do decide to scale back our operations.

Critical Accounting Policies

Inventory

Inventory is stated at the lower of cost, computed using the first-in, first-out method, or market. If the cost of inventory exceeds its market value, a provision is made currently for the difference between the cost and market value. Our inventory consists of finished goods, components and supplies.

Equipment, Net

Equipment is stated at cost, net of accumulated depreciation. Equipment is depreciated over the estimated useful life of the asset. Mould equipment is depreciated at 20% on a declining-balance basis. The website is depreciated on a straight-line basis over five years. One-half of these rates are used in the year of acquisition. Replacements and major improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost of assets disposed of and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to operations.

Intangible Assets

Patents

The US Patent is recorded at the value attributed to the shares issued to the Originating Companies and shareholders of TGSI less accumulated amortization. The US Patent was issued on September 29, 2009 and is effective until September 29, 2026. The Australian and Canadian Patents are recorded at the application costs incurred less accumulated amortization. The Australian Patent was issued on October 16, 2014 and is effective until April 5, 2027. The Canadian Patent was issued on June 21, 2016 and is effective until April 5, 2027. The Chinese Patent was issued on December 28, 2016 and is effective until February 1, 2033. Upon expiration, the patents can be extended subject to certain changes required to secure the extension. Although the effects of obsolescence, demand, competition and other economic factors (such as stability of the industry, technological advances and legislative action that results in an uncertain or changing regulatory environment) can have an adverse effect on the industry and our product, management is not currently aware of any known adverse factors that will affect us in the future.

Costs incurred for patents which are in the process of being completed will be amortized over the life of the patent when the patent is issued.

We do not believe that there are any limits to how long our Home Mist Tanning units can sell in the market place. While we expect to be able to secure an extension to our patents prior to expiry, this cannot be predicted with certainty at this time. Accordingly, management has determined that the best estimate of the useful life of the US, Australian, Canadian and Chinese Patents are 17, 13, 11 and 16 years, respectively. At this time, we do not believe that the patents will have a residual value at the end of their useful lives.

License Agreement

The License Agreement is recorded at estimated fair value plus acquisition costs less accumulated amortization. The term of the License Agreement continues until the expiration of the last to expire of the Licensed Patents (as defined in the License Agreement).

Management is in the process of determining the best estimate of the useful life of the License Agreement.

Amortization and Impairment

Definite-lived intangible assets are required to be amortized using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or utilized. At this time, management is not able to determine with any amount of certainty the number of Home Mist Tanning units that will be sold over the useful lives of the patents. Accordingly, the patents are being amortized on a straight-line basis over the period of their useful lives. Management is in the process of determining the most appropriate method for amortizing the License Agreement.

Intangible assets subject to amortization are required to be reviewed for impairment. An impairment loss must be recognized if the intangible asset’s carrying amount is not recoverable and the carrying amount exceeds fair value. We apply the following three-step process to identify, recognize and measure impairment of intangible assets:

Because of the unique nature of a patent and a license agreement, income-producing definite-lived intangible assets, the calculation of cash flows can be very difficult to estimate. In this case, the estimated cash flows reflect the direct revenue expected to be generated by the patents and the License Agreement as well as an allocation of expenses.

Foreign Currency

Our functional currency and the functional currency of our subsidiaries is the Canadian dollar. Our consolidated financial statements are presented in Canadian dollars.

Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the period-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Exchange differences arising on the translation of monetary items or on settlement of monetary items are recognized in the loss in the period in which they arise.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Going Concern

Our financial statements have been prepared on a going concern basis, which implies we will continue to realize our assets and discharge our liabilities in the normal course of business. As at May 31, 2017, we had a working capital deficiency of $1,776,121 and an accumulated deficit of $6,770,111. Our continuation as a going concern is dependent upon the continued financial support from our stockholders, our ability to obtain necessary equity financing to continue operations, and the attainment of profitable operations. These factors raise substantial doubt regarding our ability to continue as a going concern. Our financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

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

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

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

Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) during the period ended May 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.