NOTOX TECHNOLOGIES CORP. - Quarter Report: 2020 February (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 February 29, 2020

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

NOTOX TECHNOLOGIES CORP.

(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)

Securities registered pursuant to Section 12(b) of the Act:

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 every Interactive Data File required to be submitted 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 such files). Yes [X] No [  ]

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 May 29, 2020, the registrant’s outstanding common stock consisted of 57,821,593 shares.

TABLE OF CONTENTS

Item 1. Financial Statements

Notox Technologies Corp.

Condensed Consolidated Financial Statements
For the Three and Six Months Ended February 29, 2020

(Expressed in Canadian dollars)

(unaudited)

NOTOX TECHNOLOGIES CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

Contingent liability (Note 14)

Subsequent event (Note 15)

See accompanying notes to the condensed consolidated financial statements

NOTOX TECHNOLOGIES CORP.

CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

See accompanying notes to the condensed consolidated financial statements.

NOTOX TECHNOLOGIES CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

Period ended February 29, 2020, non-cash information: Issuance of shares for subscription received in advance of $261,692 including warrants at a fair value of $88,338 presented as liabilities.

See accompanying notes to the condensed consolidated financial statements.

NOTOX TECHNOLOGIES CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

See accompanying notes to the condensed consolidated financial statements.

NOTOX TECHNOLOGIES CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

1. Company Overview and Basis of Presentation

Nature and History of Operations

Notox Technologies Corp. (the “Company”) was incorporated under the laws of the state of Nevada on October 29, 2007. The Company has transitioned into developing, commercializing and promoting its patented Notox aesthetic and drug free pain management platform. The Company’s goals are to market a credible, non-toxic alternative to Botox and subsequently develop other features of its Notox technology such as drug-free pain management, body countering, skin tightening and anti-perspiration. In addition, the Company is seeking to build its distribution capabilities for other medical and aesthetic products around the world.

On June 28, 2013, the Company completed a reverse takeover transaction with Tropic Spa Inc. (“TSI”), a private Ontario corporation that manufactured and sold 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.

On June 13, 2016, the Company completed an asset acquisition transaction 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.

On December 27, 2018, the automatic expiration date for the preferred shares of 1894632 Ontario Inc. (“Subco”) issued in connection with the TSI reverse takeover transaction was extended to December 31, 2020.

On December 1, 2019, the Company entered into an option and put agreement (the “Definitive Agreement”) with Xthetica Inc. (“NewCo”), a newly incorporated Nevada corporation, and the sole shareholder of NewCo (the “NewCo Shareholder”) pursuant to which the NewCo Shareholder granted the Company the sole and exclusive right and option to purchase all of the issued and outstanding capital stock of NewCo (the “NewCo Stock”) in exchange for the issuance of an aggregate of up to 10,000,000 shares of the Company’s common stock and warrants to purchase up to 10,000,000 shares of the Company’s common stock. The option is exercisable by the Company in tranches over a period of three years beginning on January 1, 2021.

Each share issued upon the exercise of an option will be issued at a deemed price per share equal to the value of the Company’s common stock on the OTCQB (or such other stock exchange or quotation medium on which the shares are then trading) on the date of issuance, while each warrant issued upon the exercise of an option will be exercisable into one share of the Company’s common stock at a price of US$1.40 per share for a period of three years from the date of issuance, subject to standard adjustments for stock splits, stock dividends and the like.

Pursuant to the Definitive Agreement, the Company granted the NewCo Shareholder a corresponding series of put rights covering the NewCo Stock, also exercisable in tranches over a period of three years beginning on January 1, 2021. Each put right allows the NewCo Shareholder to cause the Company to purchase up to a certain number of shares of NewCo Stock in exchange for the issuance of a certain number of shares of the Company’s common stock plus warrants to purchase shares of the Company’s stock on the same terms as described above. The exercise of each put right is subject to Xthetica Canada Inc. (“Xthetica CA”), a newly incorporated Canadian federal corporation and subsidiary of the Company, achieving certain EBITDA milestones in each of its financial years, as reflected in the audited financial statements of Xthetica CA.

Assuming the full exercise of the option or put rights, of which there is no guarantee, NewCo will become a wholly owned subsidiary of the Company. To date, no option or put rights have been exercised.

Concurrent with the execution of the Definitive Agreement, the Company entered into an assignment agreement (the “Assignment Agreement”) with Xthetica Inc., an Ontario corporation owned by the NewCo Shareholder (the “Assignor”), pursuant to which the Assignor assigned all of its rights, title and interest in and to certain of its assets to Xthetica CA.

The accompanying condensed consolidated financial statements include the financial statements of Xthetica CA since the acquisition date. Please refer to Note 5 for further details.

NOTOX TECHNOLOGIES CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

1. Company Overview and Basis of Presentation (continued)

Going Concern

As reflected in the accompanying condensed consolidated financial statements, the Company has a deficit of $13,120,246 (August 31, 2019 - $12,418,531) since inception, a working capital deficiency of $2,843,648 (August 31, 2019 - $3,586,763) and a stockholders’ deficiency of $812,058 (August 31, 2019 - $2,827,020). 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 condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Management has evaluated the Company’s ability to continue as a going concern by assessing its ability to meet its obligations as they become due within one year from the date of issue of the financial statements. Management’s assessment included the following factors:

The Company’s CEO and President have committed to providing financing if and when necessary to fund the operating expenses for the year ended August 31, 2020.

Basis of Presentation and Measurement

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and the Securities and Exchange Commission (“SEC”) instructions to Form 10-Q and Article 8 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements and should be read in conjunction with the Company’s audited financial statements for the years ended August 31, 2019 and 2018 and their accompanying notes.

The accompanying unaudited condensed consolidated financial statements are expressed in Canadian Dollars (“CAD”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position and results of operations for the interim periods presented have been reflected herein. Operating results for the six months ended February 29, 2020 are not necessarily indicative of the results that may be expected for the year ending August 31, 2020.

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated.

2. Summary of Significant Accounting Policies

Principles of Consolidation

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

NOTOX TECHNOLOGIES CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

2. Summary of Significant Accounting Policies (continued)

Use of Estimates

The preparation of financial statements in conformity with US 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 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.

Fair Value of Financial Instruments

Carrying values of cash, receivables, accounts payable and accrued liabilities, advances from related parties/shareholders, stock purchase warrants, license assignment fee and accrued interest payable, due to the clinic and stock subscribed in advance approximate fair value because of the short-term nature of these items.

Business Combination

Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The Company measures goodwill as the fair value of the consideration transferred, including the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount of the identifiable assets and liabilities assumed, all measured as of the acquisition date.

The Company determines the fair value of the consideration based on the fair value of the net assets acquired. Transaction costs, other than those associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred.

Intangible Assets

Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, definite-life intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which they relate. All other expenditures are recognized in profit or loss as incurred.

Intangible assets have been amortized based on the useful life as below:

Patents - 8 years; and

Trademarks, License Agreement and customer base - 5 years

NOTOX TECHNOLOGIES CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

3. 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 Company’s only financial instrument that is classified as Level 1 is cash. Stock purchase warrants are valued as Level 2. The fair value of the other financial assets and liabilities approximate their carrying value due to the short-term nature of the instruments. Due to the Clinic’s fair value approximates its carrying amount as the amounts are accrued.

NOTOX TECHNOLOGIES CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

4. License Agreement, Net

Under the License Agreement, Notox has an 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. Royalties and other payments are payable quarterly. Notox is required to achieve two commercial milestones: first commercial sale within nine months following regulatory approval, and regulatory filings submitted to regulatory authorities by November 30, 2019. The Clinic and Notox are working on completing an amendment to the License Agreement that would extend the November 30, 2019 deadline referenced above, based on the clear development milestones and schedule.

As of February, 29, 2020, all accrued and unreimbursed patenting costs totaled $274,773 (August 31, 2019 - $264,113). 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.

Pursuant to above, the gross carrying value of the License Agreement is as follows:

As of February, 29, 2020, amortization expense on the License Agreement for the next five years was expected to be as follows:

NOTOX TECHNOLOGIES CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

5. Business Combination

On December 1, 2019, the Company entered into the Definitive Agreement with NewCo and the NewCo Shareholder, and concurrently, Xthetica CA entered into the Assignment Agreement with the Assignor. (Note 1)

The transaction was accounted for as a business combination, as the group of assets of the Assignor met the definition of a business. No transaction costs were incurred and expensed as a result of the acquisition. On completion of the business combination, the Company determined the fair value of the consideration based on the fair value of the net assets acquired. Due to the timing of the acquisition, the fair values assigned to the net assets acquired are preliminary and may be revised by the Company within 12 months from the date of acquisition as additional information is received.

The fair value of identifiable assets acquired and liabilities assumed as at the acquisition date are as follows:

Pursuant to above, the gross carrying value of the intangible assets is as follows:

6. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of:

NOTOX TECHNOLOGIES CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

7. Related Party Transactions and Balances

The Company’s transactions with related parties were carried out on normal commercial terms and in the course of the Company’s business. Other than disclosed elsewhere in the Company’s condensed consolidated financial statements, related party transactions are as follows:

a) Related party balances

Advances from related parties include:

Accounts payable and accrued liabilities include:

b) Related party transactions

During the six months ended February 29, 2020, the Company had the following transactions with related parties:

During the six months ended February 29, 2020 and 2019, the Company had the following transactions with related parties:

8. Advances from Shareholders

Advances payable to shareholders totaled $160,000 at February 29, 2020 (August 31, 2019 - $160,000). These advances are unsecured and bear interest at 3% per annum, with no specific repayment terms. As at February 29, 2020 accrued interest payable to shareholders totaled $24,264 (August 31, 2019 - $21,871).

9. License Assignment Fee and Accrued Interest Payable

Pursuant to an amendment to the Share Exchange Agreement between the Company, Notox and the shareholders of Notox, the Company is required to pay an aggregate of US$1,000,000 to Zoran K Corporation, a private Ontario corporation (“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.

Since September 1, 2017, interest of 24% per annum, compounding annually, has been accrued on the outstanding balance payable. Interest expense of US$382,450 ($508,268) was accrued on the balance payable as at February 29, 2020. At February 29, 2020, the balance of the license assignment fee payable and interest payable to ZKC was US$877,450 ($1,159,145) (August 31, 2019 - US$783,667 ($1,042,561)). See Note 4.

NOTOX TECHNOLOGIES CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

10. Commitments

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 principal of 1040614 performed 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:

Effective February 3, 2018, the Company terminated the 1040614 Agreement.

The Company renewed its premises lease for another year during the previous fiscal year on April 1, 2019 for $5,520 plus HST per annum for a period of twelve months.

11. Stockholders’ Deficiency

Authorized stock

As at February 29, 2020, the Company was authorized to issue 500,000,000 (August 31, 2019 - 500,000,000) shares of common stock at a par value of US$0.001.

On October 9, 2018, the Company’s shareholders and directors approved a change of the Company’s name from Tropic International Inc. to Notox Technologies Corp. and an increase in the Company’s authorized common stock to 500,000,000 shares. The name change and authorized common stock increase were effected November 19, 2018. At February 29, 2020, the Company had 57,821,593 shares of common stock legally issued and outstanding (August 31, 2019 - 57,625,343).

On June 28, 2013, pursuant to the reverse takeover transaction with TSI, the Company acquired 39,015,439 common shares of TSI in exchange for the issuance of 39,015,439 preferred shares of Subco to certain of the shareholders of TSI on a one-for-one basis. As a result of the transaction, TSI became the Company’s majority-owned subsidiary. Each preferred share of Subco is exchangeable into one share of the Company’s common stock at the option of the holder subject to certain restrictions. As at February 29, 2020 and August 31, 2019, none of the preferred shares had been exchanged.

On August 24, 2016, a further 21,672,623 common shares of TSI were exchanged for 10,836,312 preferred shares of Subco.

NOTOX TECHNOLOGIES CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

11. Stockholders’ Deficiency (continued)

Share issuances

During the six months ended February 29, 2020, the Company:

Stock Purchase Warrants

The continuity of Canadian dollar denominated stock purchase warrants for the six months ended February 29, 2020 is as follows:

The continuity of US dollar denominated stock purchase warrants for the six months ended February 29, 2020 is as follows:

At February 29, 2020, the stock purchase warrants were fair valued at $87,671 (August 31, 2019 - $1,776) and the weighted-average remaining contractual life of US dollar warrants outstanding was 1.9 years (August 31, 2019 - 0.02 years).

NOTOX TECHNOLOGIES CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

11. Stockholders’ Deficiency (continued)

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 three and six months ended February 29, 2020 and the year ended August 31, 2019 with the following assumptions:

12. 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; the Company’s degree of success in securing regulatory approval and marketing products developed pursuant to the License Agreement; increasing competition; and dependence on its existing management and key personnel.

13. Accounting Pronouncements

In November 2019, the FASB issued ASU 2019-10, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 842, Leases”, to introduce amendments which will affect the effective dates of the above noted Topics. The Company is evaluating the impact this standard will have on the Company’s financial statements.

In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”, to introduce amendments which will affect the recognition and measurement of financial instruments, including derivatives and hedging. Only Topic 4 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is evaluating the impact this standard will have on the Company’s financial statements.

In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842)”, to introduce amendments which will affect all lessors that are not manufactures or dealers, and those which are depository and lending entities. The amendments in this update amend Topic 842, and are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently in the process of evaluating the effects of this pronouncement on the condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Changes to Disclosure Requirements for Fair Value Measurements”, which will improve the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements, and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company will be evaluating the impact this standard will have on the Company’s financial statements.

14. Contingent Liability

Pursuant to the reverse takeover transaction with TSI, 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 49,851,751 Subco preferred shares currently outstanding. See Note 11.

NOTOX TECHNOLOGIES CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

15. Subsequent Event

The Company’s management has evaluated subsequent events up to May 29, 2020, the filing date of the accompanying condensed consolidated financial statements, pursuant to the requirements of ASC 855 and has determined that there have been events that have occurred that would require a disclosure in the condensed consolidated financial statements.

Subsequent to February 29, 2020, the outbreak of the novel strain of coronavirus identified as COVID-19 has resulted in a widespread health crisis that has affected economies and financial markets around the world. The full impact of the COVID-19 pandemic continues to evolve. Management is actively monitoring the global situation and its effects on the sector and the Company’s financial position and operations. To the date of the issuance of these financial statements, the Company is still assessing the potential risks and uncertainties arising from COVID-19, which will be accounted for when reliable estimates become available. Actual effects will depend on many factors beyond the control and knowledge of management.

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; and the effect of the COVID-19 pandemic.

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.

In March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, economies and financial markets globally, leading to an economic downturn. It has also disrupted the normal operations of many businesses, including ours. This outbreak could decrease spending, adversely affect demand for our products and harm our business and results of operations. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak and its effects on our business or results of operations at this time.

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 Notox Technologies Corp. and its consolidated subsidiaries.

This Report includes our interim unaudited condensed consolidated financial statements for the three and six months ended February 29, 2020. 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 condensed 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 condensed 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.

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 condensed 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 sell, improve and modernize products that incorporate such intellectual property in the fields of aesthetics, drug free pain management, body contouring and perspiration control. 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.

On September 26, 2017, we entered into a second amendment to the License Agreement with Notox and the Clinic, effective July 1, 2016. The purpose of this amendment was to, among other things: (i) clarify certain vague terms of the License Agreement; (ii) include us as a party for the purpose of guaranteeing the due and prompt payment and performance of all covenants, agreements, obligations and liabilities of Notox; (iii) record the Clinic’s explicit consent to the assignment from ZHC to Notox; (iv) extend the deadline for achieving the first commercial milestone (the submission of regulatory filings to applicable authorities) from November 30, 2017 to November 30, 2019; and (v) establish a second commercial milestone (the completion of at least one commercial sale within nine months of receiving regulatory approval). Since late 2019, we have been engaged in discussions with the Clinic to extend the November 30, 2019 date referenced in the preceding sentence. Those discussions have been delayed by the onset of the COVID-19 pandemic and associated travel restrictions, but are still ongoing.

Through Tropic Spa, we have finalized the design of a personal tanning product and applied for and acquired patents for it in the United States (the “US Patent”), Canada, Australia and China. The product consists of a unique tanning system designed for spas, gyms, clinics and convenient home use that delivers a full-body application and eliminates the harmful health effects associated with traditional tanning beds, and in particular, exposure to ultraviolet (UV) radiation. We are currently seeking to establish licensing opportunities for Tropic Spa’s intellectual property, but have not entered into any formal arrangements as of the date of this Report.

On December 1, 2019, we entered into an option and put agreement (the “Definitive Agreement”) with Xthetica Inc. (“NewCo”), a newly incorporated Nevada corporation, and Manny Kapur, the sole shareholder of NewCo, pursuant to which Mr. Kapur granted us the sole and exclusive right and option to purchase all of the issued and outstanding capital stock of NewCo (the “NewCo Stock”) in exchange for the issuance of an aggregate of up to 10,000,000 shares of our common stock and warrants to purchase up to 10,000,000 shares of our common stock. The option is exercisable by us in tranches over a period of three years beginning on January 1, 2021.

Each share issued upon the exercise of an option will be issued at a deemed price per share equal to the value of our common stock on the OTCQB (or such other stock exchange or quotation medium on which the shares are then trading) on the date of issuance, while each warrant issued upon the exercise of an option will be exercisable into one share of our common stock at a price of US$1.40 per share for a period of three years from the date of issuance, subject to standard adjustments for stock splits, stock dividends and the like.

Pursuant to the Definitive Agreement, we granted Mr. Kapur a corresponding series of put rights covering the NewCo Stock, also exercisable in tranches over a period of three years beginning on January 1, 2021. Each put right allows Mr. Kapur to cause us to purchase up to a certain number of shares of NewCo Stock in exchange for the issuance of a certain number of shares of our common stock plus warrants to purchase shares of our stock on the same terms as described above. Importantly, the exercise of each put right is subject to Xthetica Canada Inc. (“Xthetica CA”), a newly incorporated Canadian federal corporation and our subsidiary, achieving certain EBITDA milestones in each of its financial years, as reflected in the audited financial statements of Xthetica CA.

Assuming the full exercise of the option or put rights, of which there is no guarantee, NewCo will become our wholly owned subsidiary.

In connection with the execution and delivery of the Definitive Agreement, Xthetica Inc. (“Xthetica”), a private Ontario, Canada corporation owned by Mr. Kapur, entered into an assignment agreement with Xthetica CA, in the form attached as Appendix 1 to the Definitive Agreement (the “Assignment Agreement”), pursuant to which Xthetica assigned 100% of its right, title and interest in and to certain assets to Xthetica CA. The assets include Xthetica’s rights and obligations under a series of license and distribution agreements with manufacturers of medical aesthetics products, certain of Xthetica’s inventory, and the goodwill of Xthetica.

Xthetica CA provides products, services and training to a large number of aesthetic clinics and nurses in Canada, mainly in Ontario, Quebec and to a lesser extent, Manitoba, Alberta and British Columbia. The company uses an internal sales force and works closely and together with manufacturers and distribution partners to educate and train for new product launches.

Results of Operations

Three Months Ended February 29, 2020

Revenue

During the three months ended February 29, 2020, we generated $1,003,180 in revenue, all of which was in the form of sales revenue through Xthetica CA. We did not generate any revenue during the same period in the prior year.

Production Costs

During the three months ended February 29, 2020, we incurred production costs of $553,154 and realized a gross margin of $450,026. During the same period in the prior year, we incurred production costs and a gross loss of $46,866. Our production costs for the three months ended February 29, 2020 consisted of $460,213 in COGS, $46,868 in License Agreement amortization costs and $46,073 in royalty expenses, whereas our production costs during the same period in the prior year consisted solely of License Agreement amortization costs.

Expenses

During the three months ended February 29, 2020, we incurred $909,468 in total general and administrative expenses, compared to incurring $306,922 in such expenses during the same period in the prior year. This increase was generally due to the completion of the Xthetica acquisition and the commencement of operations by Xthetica CA during the recent quarter.

Our material expenses during the three months ended February 29, 2020 consisted of the following:

During the same period in the prior year, our material expenses included $225,379 in foreign exchange loss, $53,595 in interest on a license assignment fee payable, $11,854 in professional fees, $6,185 in trust and filing fees, $5,530 in rent and $3,136 in interest on advances from related parties/shareholders.

Substantially all of the changes described above were due to the increase in our operations, through Xthetica CA, following the closing of the Definitive Agreement and Assignment Agreement.

Other Items

During the three months ended February 29, 2019, we generated a $4,326 gain associated with the revaluation of certain outstanding warrants to purchase shares of our common stock that were denominated in U.S. dollars, generated $2,800 in other income and received $4,172 in discounts.

Net Loss

During the three months ended February 29, 2020, we incurred a net loss and comprehensive loss of $458,775 and a net loss per share of $0.01. During the same period in the prior year, we experienced a net loss and comprehensive loss of $342,490 and a net loss per share of $0.01.

Six Months Ended February 29, 2020

Revenue

During the six months ended February 29, 2020, we generated $1,003,180 in revenue, all of which was in the form of sales revenue through Xthetica CA. We did not generate any revenue during the same period in the prior year.

Production Costs

During the six months ended February 29, 2020, we incurred production costs of $607,958 and realized a gross margin of $395,222. During the same period in the prior year, we incurred production costs and a gross loss of $101,546. Our production costs for the six months ended February 29, 2020 consisted of $460,213 in COGS, $93,735 in License Agreement amortization costs, $46,073 in royalty expenses and $7,937 in patenting costs, compared to $93,733 in License Agreement amortization costs and $7,813 in patenting costs during the same period in the prior year.

Expenses

During the six months ended February 29, 2020, we incurred $1,099,380 in total general and administrative expenses, compared to $518,186 in such expenses during the same period in the prior year.

Our material expenses during the six months ended February 29, 2020 consisted of $217,565 in salaries and benefits to employees of Xthetica CA, $214,307 in management-related consulting fees, $172,237 in office and miscellaneous expenses, $123,810 in interest on a license assignment fee payable, $90,320 in amortization of intangible assets, $84,908 in professional fees, $76,386 in advertising and promotion expenses, $49,012 in travel and entertainment expenses, $33,209 in trust and filing fees, $12,600 in taxes, $10,278 in rent, $8,885 in foreign loss, and $5,863 in interest on advances from related parties/shareholders.

During the same period in the prior year, our material expenses included $263,137 in foreign exchange loss, $106,495 in interest on a license assignment fee payable, $81,999 in management-related consulting fees, $32,334 in professional fees, $14,979 in trust and filing fees, $10,780 in rent and $5,956 in interest on advances from related parties/shareholders.

As was the case during the three months ended February 29, 2020, substantially all of the changes described above were due to the increase in our operations, through Xthetica CA, following the closing of the Definitive Agreement and Assignment Agreement.

Other Items

During the six months ended February 29, 2020, we generated a $1,776 gain associated with the revaluation of certain outstanding warrants to purchase shares of our common stock that are denominated in U.S. dollars. During the same period in the prior year, we incurred a writedown of amounts receivable in the amount of $8,753, a $46,083 gain associated with the revaluation of certain outstanding warrants to purchase shares of our common stock that are denominated in U.S. dollars, and a $109,808 gain on the expiration of certain outstanding warrants to purchase shares of our common stock that are also denominated in U.S. dollars. In addition, we generated $2,800 in other income and received $4,172 in discounts as described above.

Net Loss