Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - NOTOX TECHNOLOGIES CORP.Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - NOTOX TECHNOLOGIES CORP.ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - NOTOX TECHNOLOGIES CORP.ex31-1.htm

 

 

 

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, 2014

 

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)

 

Nevada   None
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
1057 Parkinson Road, Unit #9
Woodstock, Ontario, Canada
  N4S 7W3
(Address of principal executive offices)   (Zip Code)

 

(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.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]

 

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 ISSUERS:

 

As of July 15, 2014, the registrant’s outstanding common stock consisted of 12,264,146 shares.

 

 

 

 
 

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements   3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   5
Item 3. Quantitative and Qualitative Disclosures about Market Risk   9
Item 4. Controls and Procedures   10
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings   11
Item 1A. Risk Factors   11
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   11
Item 3. Defaults Upon Senior Securities   11
Item 4. Mine Safety Disclosures   11
Item 5. Other Information   11
Item 6. Exhibits   11
     
SIGNATURES   12

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Tropic International Inc.

(formerly Rockford Minerals Inc.)

A Development Stage Enterprise

Consolidated Financial Statements
For the Nine Months Ended May 31, 2014

(Expressed in Canadian dollars)

(unaudited)

 

    Index
     
Consolidated Balance Sheets   F-1
     
Consolidated Statements of Loss and Comprehensive Loss   F-2
     
Consolidated Statements of Cash Flows   F-3
     
Consolidated Statements of Stockholders’ Equity   F-4
     
Notes to the Consolidated Financial Statements   F-5

 

3
 

 

TROPIC INTERNATIONAL INC.

(FORMERLY ROCKFORD MINERALS, INC.)

A DEVELOPMENT STAGE ENTERPRISE

CONSOLIDATED BALANCE SHEETS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

   May 31, 2014    August 31, 2013 
   (Unaudited)     
ASSETS          
Current assets:          
Cash  $3,595   $111,696 
Amounts receivable   6,853    9,774 
Inventory   163,459    168,713 
Prepaid expenses   2,100    2,100 
Total current assets   176,007    292,283 
Equipment, net (Note 6)   78,184    95,039 
Intangible assets, net (Note 7)   4,575,224    4,849,979 
Total assets  $4,829,415   $5,237,301 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued liabilities (Note 8)  $71,178   $50,150 
Unearned revenue       12,500 
Loans from shareholder   190,000     
Total current liabilities   261,178    62,650 
           
Stockholders’ equity (Note 11):          
Common stock   12,612    12,612 
Additional paid-in capital   8,431,728    8,431,728 
Deficit accumulated during the development stage   (3,876,103)   (3,269,689)
Total stockholders’ equity   4,568,237    5,174,651 
Total liabilities and stockholders’ equity  $4,829,415   $5,237,301 

 

Contingent liability (Note 14)

 

See accompanying notes to the consolidated financial statements.

 

F-1
 

 

TROPIC INTERNATIONAL INC.

(FORMERLY ROCKFORD MINERALS, INC.)

A DEVELOPMENT STAGE ENTERPRISE

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

    Cumulative Since     For the Nine Months Ended
May 31,
 
    Inception     2014     2013  
Revenue:                        
Sales   $ 23,378     $ 2,792     $ 6,059  
Flyer distribution     50,000       12,500       18,750  
Total revenue     73,378       15,292       24,809  
                         
Production costs:                        
Amortization – patent     1,772,106       279,806       279,806  
Consulting fees – production     178,150       22,800       22,800  
Depreciation     84,334       12,524       15,654  
Materials and supplies     103,081       7,966       6,293  
Prototype components     9,486              
Total production costs     2,147,157       323,096       324,553  
Gross loss     (2,073,779 )     (307,804 )     (299,744 )
                         
General and administration:                        
Bad debts     460              
Consulting fees – management (Note 9)     910,797       139,300       187,047  
Depreciation     21,657       4,331       4,332  
Marketing     290,128       12,900       29,233  
Office and miscellaneous     192,491       22,128       27,851  
Professional fees     282,429       94,404       55,906  
Rent     37,700       9,900       9,900  
Travel and entertainment     66,969       15,954       14,188  
Loss on foreign exchange     (307 )     (307 )      
Total general and administration     1,802,324       298,610       328,457  
Loss before income taxes     (3,876,103 )     (606,414 )     (628,201 )
Income taxes                  
Net loss and comprehensive loss   $ (3,876,103 )   $ (606,414 )   $ (628,201 )
                         
Net loss per share – basic and diluted (Note 4)           $ (0.05 )   $ (0.008 )
                         
Weighted-average number of shares outstanding             12,264,146       82,706,076  

 

See accompanying notes to the consolidated financial statements.

 

F-2
 

 

TROPIC INTERNATIONAL INC.

(FORMERLY ROCKFORD MINERALS, INC.)

A DEVELOPMENT STAGE ENTERPRISE

CONSOLIDATED STATEMENTS OF CASH FLOWS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

   Cumulative Since    For the Nine Months Ended
May 31,
 
   Inception   2014   2013 
Cash Flows From Operating Activities               
Net loss  $(3,876,103)  $(606,414)  $(628,201)
Adjustments to reconcile net loss to net cash provided by operating activities:               
Amortization - patent   1,772,106    279,806    279,806 
Depreciation   105,991    16,855    19,986 
Changes in assets and liabilities:               
Amounts receivable   (6,753)   2,921    (23,272)
Inventory   (163,459)   5,254    1,942 
Prepaid expenses   (2,100)       1,100 
Accounts payable and accrued liabilities   38,700    21,028    (20,406)
Unearned revenue       (12,500)   (18,750)
Shares issued for management services   16,297        16,297 
Net cash used in operating activities   (2,115,321)   (293,050)   (371,498)
                
Cash Flows From Investing Activities               
Purchases of equipment   (184,175)        
Cash transferred upon reverse acquisition of RMI   1,774         
Funds advanced to RMI, prior to reverse acquisition   (25,454)        
Patent costs   (5,051)   (5,051)    
Net cash used in investing activities   (212,906)   (5,051)    
               
Cash Flows From Financing Activities               
Loans from shareholder   190,000    190,000     
Proceeds from issuance of common stock   2,141,822        552,000 
Net cash provided by financing activities   2,331,822    190,000    552,000 
                
Increase (decrease) in cash during the period   3,595    (108,101)   180,502 
Cash, beginning of period       111,696    34,778 
Cash, end of period  $3,595   $3,595   $215,280 

 

Supplementary Information:

 

On November 15, 2012, TSI issued 29,000,000 shares valued at $14,500 in exchange for management services received.

 

On April 30, 2013, TSI issued 3,593,377 shares valued at $1,797 in exchange for management services received.

 

On June 28, 2013, a share recapitalization occurred pursuant to a reverse takeover transaction (see Notes 2 and 11).

 

See accompanying notes to the consolidated financial statements.

 

F-3
 

 

TROPIC INTERNATIONAL INC.

(FORMERLY ROCKFORD MINERALS, INC.)

A DEVELOPMENT STAGE ENTERPRISE

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

   Common Stock   Additional
paid-in
   Deficit
accumulated
during the
development
   Total
stockholders’
 
   Shares   Amount   capital   stage   equity 
Balance at August 31, 2011  50,166,275   $7,474,701   $   $(1,527,939)  $5,946,762 
Shares issued for cash   6,350,248    457,500            457,500 
Net loss               (960,111)   (960,111)
Balance at August 31, 2012   56,516,523    7,932,201        (2,488,050)   5,444,151 
Shares issued for cash   10,890,100    552,000            552,000 
Shares issued in exchange for management services   32,593,377    16,297            16,297 
Recapitalization on reverse takeover (see Notes 2 and 11):       (8,487,886)   8,431,728        (56,158)
Elimination of issued share capital of TSI   (100,000,000)                
Establishment of issued share capital of RMI   12,264,146                 
Net loss               (781,639)   (781,639)
Balance at August 31, 2013   *12,264,146   12,612    8,431,728    (3,269,689)   5,174,651 
Net loss               (606,414)   (606,414)
Balance at May 31, 2014   12,264,146   $12,612   $8,431,728   $(3,876,103)  $4,568,237 

 

* The above presentation reflects the issued share capital of TSI until the completion of the capital transaction, at which point it is adjusted to reflect the share capital of the legal parent company RMI.

 

 See accompanying notes to the consolidated financial statements.

 

F-4
 

 

TROPIC INTERNATIONAL INC.

(FORMERLY ROCKFORD MINERALS, INC.)

A DEVELOPMENT STAGE ENTERPRISE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

1. Company Overview and Basis of Presentation

 

Nature and History of Operations

 

Rockford Minerals, Inc. (a development stage company) (“RMI”) was incorporated under the laws of the state of Nevada on October 29, 2007. RMI 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, RMI 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, RMI became a holding company operating through TSI. Upon the closing of the Exchange Agreement, RMI changed its fiscal year end from October 31 to August 31 to coincide with the fiscal year end of TSI.

 

On December 6, 2013, RMI changed its name to Tropic International Inc. (the “Company”) as a result of a merger with Tropic International Inc., a wholly-owned subsidiary incorporated solely to effect the name change. The accompanying consolidated financial statements include the results of operations of TSI and the Company for the nine months ended May 31, 2014. The comparative amounts are the results of operations of TSI for the nine months ended May 31, 2013.

 

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 “Patent”). The Agreements included a triggering event (a “Triggering Event”) which was defined to mean the occurrence of any of the following events:

 

  Ninety days after TSI has been listed as a public company on a stock exchange;
     
  Ninety days after TSI either purchases or is purchased by a company that is trading on a stock exchange; or
     
  Notwithstanding the above, ninety days after TSI has notified the originating companies in writing that a Triggering Event has occurred.

 

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

 

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

 

  the approval of the Patent;
     
  delivery of the final production model on or before April 21, 2009; and
     
  implementation of an aggressive marketing strategy.

 

F-5
 

 

TROPIC INTERNATIONAL INC.

(FORMERLY ROCKFORD MINERALS, INC.)

A DEVELOPMENT STAGE ENTERPRISE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

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

 

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 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 are for $470,358 received directly by TSI. The value assigned to the carrying value of the 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 Patent pursuant to the Agreements and the Second Agreement, collectively, was $6,342,279.

 

The Company, through TSI, has patents pending which are in the process of being completed for Australia, Canada, China and the European Union. Costs incurred are recorded as intangible assets.

 

As reflected in the accompanying consolidated financial statements, the Company is in the development stage, has a net loss of $3,876,103 (August 31, 2013 - $3,269,689) since inception and has used cash in operations of $2,115,321 from inception. The Company has a working capital deficiency of $85,171 (August 31, 2013 – working capital of $229,633) and stockholders’ equity of $4,568,237 (August 31, 2013 - $5,174,651). 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 the Company’s ability to raise additional capital and 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”), RMI, its wholly-owned subsidiary 1896432 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 RMI acquired 78,030,877 common shares, or approximately 78% of the issued and outstanding shares, of TSI in exchange for the issuance of 78,030,877 preferred shares of Subco to the Selling Shareholders on a one-for-one basis. Subsequent to the Closing Date, no additional shares have been exchanged. Each one preferred share of Subco is exchangeable into one share of the Company’s common stock at the option of the holder subject to the following restrictions:

 

  the Selling Shareholders require the written consent of Subco to exchange, sell or otherwise dispose of, directly or indirectly, any of their preferred shares of Subco until the six month anniversary of the Closing Date;
     
  within 30 days of that time, and provided TSI has generated at least $1,000,000 in gross revenue during the preceding six month period, Subco shall permit the Selling Shareholders to require Subco to redeem an aggregate of 1% of its then-outstanding preferred shares on a pro-rata basis; and
     
  within 30 days of each six month anniversary of the Closing Date until June 30, 2015, on which date all restrictions on the preferred shares shall automatically expire unless extended by the Selling Shareholders, Subco shall grant the holders of its preferred shares a permission identical to the one above.

 

F-6
 

 

TROPIC INTERNATIONAL INC.

(FORMERLY ROCKFORD MINERALS, INC.)

A DEVELOPMENT STAGE ENTERPRISE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

2. Reverse Takeover (cont’d)

 

Upon completion of the Exchange Agreement, the sole officer and director of TSI became the sole officer and a director of RMI and RMI adopted the business plan of TSI.

 

As a result of the share exchange, the former shareholders of TSI control approximately 87% of the issued and outstanding common shares of the Company. The Exchange Agreement is a reverse takeover and therefore has been accounted for under the acquisition method with TSI as the accounting acquirer and continuing entity for accounting and financial reporting purposes and RMI as the legal parent being the acquiree. The business is in the development stage and there is 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 is based on the fair value of the net liabilities acquired which is charged to additional paid-in-capital.

 

The fair values of assets acquired and liabilities assumed are as follows:

 

Cash  $1,774 
Subscriptions receivable   10 
Accounts payable and accrued liabilities   (32,488)
Loan payable to TSI   (25,454)
Net liabilities acquired  $(56,158)

 

3. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the financial statements of the Company, TSI, Subco and 1896431 Ontario Inc., the Company’s wholly owned subsidiary. All significant inter-company balances and transactions have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to equipment, fair values of intangible assets, 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.

 

F-7
 

 

TROPIC INTERNATIONAL INC.

(FORMERLY ROCKFORD MINERALS, INC.)

A DEVELOPMENT STAGE ENTERPRISE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

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

 

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, 2014.

 

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 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

 

The Patent is recorded at the value attributed to the shares issued to the Originating Companies and shareholders of TSGI less accumulated amortization. The Patent was issued on September 29, 2009 and is effective until September 29, 2026. Upon expiration, the Patent can be extended subject to certain changes required to secure the extension. Although the effects of obsolescence, demand, competition and other economic factors (such as stability of the industry, technological advances and legislative action that results in an uncertain or changing regulatory environment) can have an adverse effect on the industry and the Company’s product, management is not currently aware of any known adverse factors that will affect the Company in the future.

 

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

 

The Company does not believe that there are any limits to how long its Home Mist Tanning units can sell in the market place. While it expects to be able to secure an extension to the Patent in 2026, this cannot be predicted with certainty at this time. Accordingly, management has determined that the best estimate of the useful life of the Patent is 17 years. At this time, the Company does not believe that the Patent will have a residual value at the end of its useful life.

 

Definite-lived intangible assets are required to be amortized using a method that reflects the pattern in which the economic benefits of the patents 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 life of the Patent. Accordingly, the Patent is being amortized on a straight-line basis over the period of its useful life.

 

As of May 31, 2014, there were no know indicators that the Patent was impaired.

 

F-8
 

 

TROPIC INTERNATIONAL INC.

(FORMERLY ROCKFORD MINERALS, INC.)

A DEVELOPMENT STAGE ENTERPRISE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

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

 

Leases

 

The Company currently rents premises pursuant to an operating lease.

 

Impairment of Long-Lived Assets

 

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

 

Sales, Other Revenue and Deferred Revenue

 

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

 

In February 2012, the Company entered into an agreement with a fitness company to insert into every Home Mist Tanning unit package shipped in Canada a brochure advertising their store locations in Canada along with other related information about their fitness stores. Pursuant to this two-year agreement, commencing March 1, 2012 and ending February 28, 2014, the Company has received $50,000 for this service. Revenue was recognized on a straight-line basis over the term of the agreement.

 

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.

 

F-9
 

 

TROPIC INTERNATIONAL INC.

(FORMERLY ROCKFORD MINERALS, INC.)

A DEVELOPMENT STAGE ENTERPRISE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

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

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At this time, the Company is not able to project future taxable income over the periods in which the deferred tax assets are deductible and, accordingly, management is not able to determine if it is more likely than not that the Company will realize the benefits of these deductible differences.

 

Derivative Financial Instruments

 

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

 

Fair Value of Financial Instruments

 

Fair values of cash, accounts payable and accrued liabilities, and loans from shareholder 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 Company’s functional currency is the Canadian dollar. The accompanying consolidated financial statements are presented in Canadian dollars. Virtually all transactions of the Company are currently in Canadian dollars.

 

4. Loss Per Share

 

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

 

   For the Nine Months Ended
May 31,
 
   2014   2013 
Net loss per share:          
Net loss  $(606,414)  $(628,201)
Weighted-average shares outstanding:          
Common stock   12,264,146    99,999,900 
Number of shares used in per share computations   12,264,146    82,706,076 
Loss per share  $(0.05)  $(0.008)

 

5. 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.

 

F-10
 

 

TROPIC INTERNATIONAL INC.

(FORMERLY ROCKFORD MINERALS, INC.)

A DEVELOPMENT STAGE ENTERPRISE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

5. Fair Value Measurements (cont’d)

  

The Company measures its financial instruments at fair value.

 

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

 

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

 

6. Equipment, Net

 

Equipment, at cost, consisted of:

 

   May 31, 2014   August 31, 2013 
Mould equipment  $155,300   $155,300 
Website   28,875    28,875 
Equipment at cost   184,175    184,175 
Accumulated depreciation   (105,991)   (89,136)
Equipment, net  $78,184   $95,039 

 

Depreciation was $16,855 and $19,986 for the nine month periods ended May 31, 2014 and 2013, respectively.

 

7. Intangible Assets, Net

 

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

 

   May 31, 2014 
   Gross carrying
amount
   Accumulated
amortization
   Net carrying
amount
 
United States Patent  $6,342,279   $1,772,106   $4,570,173 
Patents pending   5,051    -    5,051 
   $6,347,330   $1,772,106   $4,575,224 

 

   August 31, 2013 
   Gross carrying
amount
   Accumulated
amortization
   Net carrying
amount
 
United States Patent  $6,342,279   $1,492,300   $4,849,979 

 

Also see Note 1 Company Overview and Basis of Presentation.

 

F-11
 

 

TROPIC INTERNATIONAL INC.

(FORMERLY ROCKFORD MINERALS, INC.)

A DEVELOPMENT STAGE ENTERPRISE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

7. Intangible Assets, Net (cont’d)

 

As of May 31, 2014, amortization expense on intangible assets for the next five years was expected to be as follows:

 

    Amount 
Year ending:      
2014   $93,269 
2015    373,075 
2016    373,075 
2017    373,075 
2018    373,075 
Thereafter    2,984,604 
Total   $4,570,173 

 

8. Accounts Payable and Accrued Liabilities

 

Accounts payable and accrued liabilities consisted of:

 

   May 31, 2014   August 31, 2013 
Trade payables  $59,018   $38,150 
Vendor accruals   12,160    12,000 
Accounts payable and accrued liabilities  $71,178   $50,150 

 

9. Related Party Transactions

 

Consulting fees paid to the President of the Company were $nil and $16,047 for the nine month periods ended May 31, 2014 and 2013, respectively.

 

Consulting fees paid to a company controlled by the President of the Company were $66,900 and $78,600 for the nine month periods ended May 31, 2014 and 2013, respectively.

 

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

 

Also see Note 11.

 

10. Commitments

 

On January 8, 2014, the Company renewed its premises lease dated November 11, 2011 for one additional year from February 1, 2014 to January 31, 2015 for a rental of $13,200 per year plus HST.

 

F-12
 

 

TROPIC INTERNATIONAL INC.

(FORMERLY ROCKFORD MINERALS, INC.)

A DEVELOPMENT STAGE ENTERPRISE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

11. Stockholders’ Equity

 

The Company is authorized to issue 300,000,000 common shares at a par value of $0.001 (2013 – 300,000,000 common shares at a par value of $0.001).

 

At May 31, 2014 and August 31, 2013, the Company had 12,264,146 common shares legally issued and outstanding.

 

On June 28, 2013, pursuant to the Exchange Agreement, RMI acquired 78,030,877 common shares of TSI in exchange for the issuance of 78,030,877 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 common share of the Company at the option of the holder subject to certain restrictions. As at May 31, 2014 and August 31, 2013, none of the preferred shares had been exchanged into common shares. Accordingly, the number of common shares of the Company outstanding at August 31, 2013 is equal to the number of common shares outstanding immediately prior to the consummation of the Exchange Agreement.

 

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 into common shares. 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, 2014, the Company issued no shares.

 

During the year ended August 31, 2013, TSI issued 10,890,100 common shares for proceeds of $552,000 and 32,593,377 common shares in exchange for management services received valued at $16,297.

 

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, uncertainty in the potential markets for its Home Mist Tanning units, increasing competition, and dependence on its existing management and key personnel.

 

13. Accounting Pronouncements

 

There are no recently adopted accounting pronouncements or recent accounting pronouncements not yet adopted that will have a material impact on the Company’s financial statements.

 

F-13
 

 

TROPIC INTERNATIONAL INC.

(FORMERLY ROCKFORD MINERALS, INC.)

A DEVELOPMENT STAGE ENTERPRISE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(EXPRESSED IN CANADIAN DOLLARS)

(UNAUDITED)

 

14. Contingent Liability

 

Pursuant to the Exchange Agreement, the Company may be required to acquire up to 21,969,123 common shares of TSI, being those TSI shares still outstanding, in exchange for 21,969,123 preferred shares of Subco on a one-for-one basis. Such preferred shares would then be exchangeable on the same basis as the approximately 78 million Subco preferred shares currently outstanding (see Notes 2 and 11).

 

15. Subsequent Events

 

In June 2014, the Company’s President and CEO, a shareholder of the Company, loaned $50,000 to the Company. This loan amount has no fixed terms of repayment.

 

F-14
 

 

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 three and nine months ended May 31, 2014. 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 (the “Closing Date”), we completed a share exchange with Tropic Spa Inc. (“Tropic Spa”), an Ontario corporation, 1896432 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”). 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.

 

4
 

 

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 development stage company in the business of developing and commercializing an innovative home mist tanning system. Our goal is to market a unique system for convenient home use that delivers a full-body application and eliminates the harmful health effects associated with traditional tanning beds. To date, we have finalized the design of our product, applied for and acquired a United States Patent for it entitled “Apparatus for Spray Application of a Sunless Tanning Product” (the “Patent”) and have patents pending which are in the process of being completed for Australia, Canada, China and the European Union. 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.

 

Our home mist tanning system delivers a full-body application in 12 seconds resulting in a tan that develops gradually over a period of five to eight hours and lasts from between five and eight days. The packages we market contain everything an individual needs to complete 10 full-body tans in the comfort of their own home. It consists of an application unit, a tanning kit and a pre-tan kit.

 

On the Closing Date, we completed the Share Exchange whereby we acquired approximately 78% of the issued and outstanding capital stock of Tropic Spa in exchange for 78,030,877 preferred shares of Subco, our wholly owned subsidiary. As a result of the Share Exchange, Tropic Spa became our majority-owned subsidiary, we assumed the business and operations of Tropic Spa and we changed our business address from Toronto, Ontario to Woodstock, Ontario. In order to more accurately reflect our new business operations, on December 6, 2013, we changed our name from “Rockford Minerals Inc.” to “Tropic International Inc.” as a result of a merger with Tropic International Inc., our wholly-owned subsidiary that was incorporated solely to effect the name change.

 

Tropic Spa was incorporated under the laws of the Province Ontario on September 17, 2007. Its operations to date have consisted of business formation, strategic development, test marketing, technology development and capital raising activities. The majority of Tropic Spa’s marketing efforts since its inception have focused on acquiring as much data as possible from its anticipated target markets in order to prepare for the launch of its three-phase marketing strategy described elsewhere in this Report.

 

We have generated $72,259 in revenues since our inception. Our website is www.tropicspatan.com.

 

Results of Operations

 

Revenue

 

During the nine months ended May 31, 2014, we generated $15,292 in revenue, including $2,792 in sales revenue and $12,500 in revenue from flyer distribution. During the nine months ended May 31, 2013, we generated $24,809 in revenue, including $6,059 in sales revenue and $18,750 in revenue from flyer distribution. The revenue we generated from sales during both periods was due to sales of our home mist tanning units, whereas the revenue we generated from flyer distribution during both periods was attributable to an arrangement pursuant to which we agreed to insert a brochure advertising a fitness company’s locations in Canada and related information into every home mist tanning unit package we ship in Canada for a period of two years beginning on March 1, 2012. The slight decrease in our sales revenue between the two periods resulted largely from a temporary switch in our focus to transitioning from a private entity to a public company, which occurred in advance of launching our upcoming comprehensive three-phase marketing strategy.

 

5
 

 

From our inception on September 17, 2007 to May 31, 2014, we generated $73,378 in revenue, including $23,378 in sales revenue and $50,000 in revenue from flyer distribution.

 

Production Costs

 

During the nine months ended May 31, 2014, we incurred production costs of $323,096, which, when subtracted from the revenue we generated during that period, resulted in a gross loss of $307,804. During the nine months ended May 31, 2013, we incurred production costs of $324,553 and a gross loss of $299,744. Our production costs during both periods were consistent and were attributable to a combination of Patent amortization ($279,806 in each of the current period and the prior period), production-related consulting fees ($22,800 in each period), depreciation ($12,524 in the current period vs. $15,654 in the prior period) and materials and supplies ($7,966 in the current period vs. $6,293 in the prior period).

 

From our inception on September 17, 2007 to May 31, 2014, we incurred production costs of $2,147,157, including $1,772,106 in Patent amortization, $178,150 in production-related consulting fees, $84,334 in depreciation, $103,081 in materials and supplies and $9,486 in prototype component costs.

 

Expenses

 

During the nine months ended May 31, 2014, we incurred $298,610 in total expenses, compared to $328,457 during the nine months ended May 31, 2013. All the expenses we incurred during both periods were general and administrative in nature.

 

Our expenses during the nine months ended May 31, 2014 consisted of $139,300 in management-related consulting fees, $94,404 in professional fees, $22,128 in office and miscellaneous expenses, $15,954 in travel and entertainment expenses, $12,900 in marketing expenses, $9,900 in rent and $4,331 in depreciation, as offset by a foreign exchange gain of $307. During the same period in the prior year, our expenses included $187,047 in management-related consulting fees, $55,906 in professional fees, $27,851 in office and miscellaneous expenses, $14,188 in travel and entertainment expenses, $29,233 in marketing expenses, $9,900 in rent and $4,332 in depreciation. Apart from the $47,747 decrease in our management-related consulting fees and the $16,333 decrease in our marketing expenses between the two periods, the latter of which was primarily due to the temporary switch in our focus described above, as well as the $38,498 increase in our professional fees that was entirely attributable to the increased costs of maintaining our status as a public company, our expenses were relatively consistent from period-to-period.

 

From our inception on September 17, 2007 to May 31, 2014, we incurred $1,802,324 in total expenses, all of which were also general and administrative in nature. These consisted of $910,797 in management-related consulting fees, $290,128 in marketing expenses, $282,429 in professional fees, $192,491 in office and miscellaneous expenses, $66,969 in travel and entertainment expenses, $37,700 in rent, $21,657 in depreciation and $460 in bad debt expenses, as offset by a foreign exchange gain of $307.

 

Net Loss

 

During the nine months ended May 31, 2014, we incurred a net loss and comprehensive loss of $606,414 and a net loss per share of $0.05. During the same period in the prior year, we experienced a net loss and comprehensive loss of $628,201 and a net loss per share of $0.008. Since our inception, we have incurred a net loss and comprehensive loss of $3,876,103.

 

6
 

 

Liquidity and Capital Resources

 

As of May 31, 2014, we had $3,595 in cash, $176,007 in total current assets, $4,829,415 in total assets, $261,178 in total and current liabilities and a working capital deficiency of $85,171. As of that date, we also had an accumulated deficit of $3,876,103.

 

During the nine months ended May 31, 2014, we spent $293,050 in cash on operating activities, compared to $371,498 in cash spending on operating activities during the same period in the prior year. The 21% decrease in our cash spending on operating activities between the two periods was primarily attributable to certain changes in our assets and liabilities, and in particular our amounts receivable and accounts payable and accrued liabilities.

 

We spent $5,051 in cash on investing activities during the nine months ended May 31, 2014, all of which was associated with patent costs, whereas we did not spend any cash on investing activities during the prior year.

 

During the nine months ended May 31, 2014, we received $190,000 in cash from financing activities, all of which was in the form of shareholder loans. During the same period in the prior year, we received $552,000 in cash from financing activities, all of which was in the form of proceeds from the issuance of Tropic Spa’s common shares.

 

During the nine months ended May 31, 2014, our cash decreased by $108,101 due to a combination of our operating, investing and financing activities.

 

Plan of Operations

 

Our plan of operations over the next 12 months is to carry out our three-phase marketing strategy and continue to develop our business, and we anticipate that we will require a minimum of $1,629,200 to pursue those plans, as follows:

 

Description  Amount
($)
 
Marketing expenses   600,000 
Production costs   450,000 
Professional fees   150,000 
Management-related consulting fees   290,000 
Rent (including utilities)   19,200 
Travel and entertainment expenses   40,000 
Office and miscellaneous expenses   80,000 
Total   1,629,200 

 

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. The other expenses we anticipate occurring over the next 12 months 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.

 

7
 

 

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 will 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

 

The Patent is recorded at the value attributed to the shares issued to the Originating Companies and shareholders of TGSI less accumulated amortization. The Patent was issued on September 29, 2009 and is effective until September 29, 2026. Upon expiration, the Patent 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 the Patent in 2026, this cannot be predicted with certainty at this time. Accordingly, management has determined that the best estimate of the useful life of the Patent is 17 years. At this time, we do not believe that the Patent will have a residual value at the end of its useful life.

 

Definite-lived intangible assets are required to be amortized using a method that reflects the pattern in which the economic benefits of the patents 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 life of the Patent. Accordingly, the Patent is being amortized on a straight-line basis over the period of its useful life.

 

As of May 31, 2014, there were no know indicators that the Patent was impaired.

 

8
 

 

Sales, Other Revenue and Deferred Revenue

 

We sell Home Mist Tanning units and related supplies primarily on line via our website. We recognize 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.

 

In February 2012, we entered into an agreement with a fitness company to insert into every Home Mist Tanning unit package shipped in Canada a brochure advertising their store locations in Canada along with other related information about their fitness stores. Pursuant to this two-year agreement, commencing March 1, 2012 and ending February 28, 2014, we have received $50,000 for this service. Revenue is being recognized on a straight-line basis over the term of the agreement.

 

Warranty

 

We are committed to supplying products of superior quality and design. Because of this commitment, we provide a limited one year warranty effective from the date of purchase. We warranty our Home Mist Tanning units to be free of defects. If a unit stops operating due to defects in materials or workmanship, we either repair or replace it for free.

 

Foreign Currency

 

Our functional currency is the Canadian dollar. Our financial statements are presented in Canadian dollars. Virtually all transactions are currently in Canadian dollars.

 

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, 2014, we had a working capital deficiency of $85,171 and an accumulated deficit of $3,876,103. 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.

  

9
 

 

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 or independent directors, our sole director is also our sole officer, and we 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, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

10
 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of our executive officers or any of our subsidiaries, threatened against or affecting us, our common stock, any of our subsidiaries or our officers or directors of those of our subsidiaries’ in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 1A. Risk Factors

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

The following documents are filed as a part of this quarterly report.

 

Exhibit Number   Exhibit Description
     
3(i).1   Articles of Incorporation filed with the Nevada Secretary of State on October 29, 2007 (1)
     
3(i).2   Certificate of Amendment filed with the Nevada Secretary of State on August 24, 2010 (1)
     
3(i).3   Certificate of Amendment filed with the Nevada Secretary of State on April 17, 2013 (2)
     
3(i).4   Articles of Merger filed with the Nevada Secretary of State on December 6, 2013 (3)
     
3(ii).1   By-Laws (1)
     
10.1   Share Exchange Agreement dated June 28, 2013 with 1896432 Ontario Inc., Tropic Spa Inc. and the shareholders of Tropic Spa Inc. (4)
     
21   1896431 Ontario Inc. (Ontario, Canada), 1896432 Ontario Inc. (Ontario, Canada), Tropic Spa Inc. (Ontario, Canada)
     
31.1  

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     
32.1  

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB   XBRL Taxonomy Extension Label Linkbase
     
101.PRE   XBRL Taxonomy Presentation Linkbase

 

(1) Incorporated by reference from our registration statement on Form 10, filed with the SEC on October 15, 2010.
   
(2) Incorporated by reference from our quarterly report on Form 10-Q, filed with the SEC on June 20, 2013.
   
(3) Incorporated by reference from our annual report on Form 10-K, filed with the SEC on December 9, 2013.
   
(4) Incorporated by reference from our current report on Form 8-K, filed with the SEC on July 3, 2013.

 

11
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: July 15, 2014 TROPIC INTERNATIONAL INC.
     
  By: /s/ John Marmora
    John Marmora
    President, Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, Secretary, Treasurer, Director

 

12