UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year endedAugust 31, 2019
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 number001-34911
NOTOX TECHNOLOGIES CORP.
(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.) | |
95 Mural Street, Suite 600 Richmond Hill, Ontario, Canada | L4B 3G2 | |
| (Address of principal executive offices) | (Zip Code) |
(519) 421-1900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ]No [X]
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 [ ] 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.
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [X] | Smaller reporting company [X] |
| Emerging growth company [X] |
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 Act).
Yes [ ]No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.$20,893,440, based on 7,625,343 shares of common stock and a price of $2.74 per share
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.57,625,343 as of November 29, 2019
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).None
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K (this “Report”) contains forward-looking statements. The forward-looking statements are contained principally in the “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections 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 Notox Technologies Corp. (formerly, Tropic International Inc.) and its consolidated subsidiaries. In this Report, the phrase the “Company” refers to Rockford Minerals Inc. prior to June 28, 2013.
This Report includes our audited consolidated financial statements as at and for the years ended August 31, 2019 and 2018. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”). All financial information in this Report is presented in Canadian dollars, unless otherwise indicated, and should be read in conjunction with our audited 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., an Ontario corporation (“Tropic Spa”), 1894632 Ontario Inc., an Ontario corporation (“Subco”), and certain of the shareholders of Tropic Spa (collectively, the “Tropic Spa Shareholders”), pursuant to which we acquired 78,030,877 common shares, or approximately 78% of the issued and outstanding shares, of Tropic Spa in exchange for the issuance of 78,030,877 preferred shares of Subco, our wholly owned subsidiary, to the Tropic Spa Shareholders on a one-for-one basis (the “Share Exchange”). Each preferred share of Subco is exchangeable into one share of our common stock at the option of the holder thereof, subject to certain restrictions. As a result of the Share Exchange, Tropic Spa became our majority-owned subsidiary and the former shareholders of Tropic Spa became holders of the preferred shares of Subco, a company that has only one issued and outstanding common share which is held by us. The transaction was accounted for as a reverse takeover/recapitalization effected by a share exchange, wherein Tropic Spa is considered the acquirer for accounting and financial reporting purposes. Our consolidated financial statements are therefore, in substance, those of Tropic Spa.
Also, as disclosed in our current report on Form 8-K dated July 14, 2016, on June 13, 2016 (the “Notox Closing Date”) 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”) 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.
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TABLE OF CONTENTS
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Business 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.
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.
Our Corporate History and Background
We were incorporated as “Rockford Minerals Inc.” under the laws of the State of Nevada on October 29, 2007. From our inception until the closing of the Share Exchange, we sought to be a producer of gold and silver ore, and of other precious metals. On July 19, 2008, we acquired an undeveloped mining claim called the Rockford Lode Mining Claim located in Clark County, Nevada, for which we paid $12,000, including the cost of a geological report prepared by Sookochoff Consultants Inc. and Laurence Sookochoff, P. Eng., as a consulting geologist, for the purpose of recommending an exploration program. Due to lack of capital, we did not commence any phase of the exploration program recommended in the geological report.
On August 24, 2010, we filed a certificate of amendment with the Nevada Secretary of State to increase our authorized capital from 10,000,000 shares of common stock to 100,000,000, each with a par value of $0.001 per share. On April 17, 2013, we filed a certificate of amendment with the Nevada Secretary of State to increase our authorized capital from 100,000,000 shares of common stock to 300,000,000, each with a par value of $0.001 per share.
On June 24, 2013, we purchased one common share of Subco and one common share of 1894631 Ontario Inc., an Ontario corporation (“Callco”), from Gregory J. Neely, our former President, Chief Financial Officer, Principal Accounting Officer, Secretary, Treasurer and director. Both of these companies were incorporated on April 15, 2013 in anticipation of completing the Share Exchange, and became our wholly owned subsidiaries as a result of the share purchases.
Prior to the closing of the Share Exchange, we had not generated any revenue and our operations were primarily limited to capital formation, organization and development of our business plan. As a result of the Share Exchange, we ceased our prior operations and, through Tropic Spa, began to operate as a company that manufactures and sells home mist tanning units with a patent-protected feature.
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 our wholly-owned subsidiary that was incorporated solely to effect the name change.
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Tropic Spa was incorporated under the laws of the Province Ontario on September 17, 2007. On April 11, 2013 and in anticipation of completing the Share Exchange, Tropic Spa completed a vertical amalgamation with 1893211 Ontario Inc., an Ontario corporation and its wholly owned subsidiary. The amalgamation was approved by the directors of each of Tropic Spa and 1893211 Ontario Inc., and was completed for the sole purpose of merging the two corporations and carrying on as one entity.
Acquisition of Tropic Spa
On the Closing Date, we entered into a share exchange agreement (the “Exchange Agreement”) with Subco, Tropic Spa and the Tropic Spa Shareholders pursuant to which we acquired approximately 78% of the outstanding capital stock of Tropic Spa in exchange for the issuance of 78,030,877 (39,015,439 post-split) preferred shares of Subco to the Tropic Spa Shareholders. The shares issued to the Tropic Spa Shareholders pursuant to the Share Exchange constituted 100% of Subco’s issued and outstanding preferred shares as of and immediately after the consummation of the Share Exchange. Each one preferred share of Subco (each, an “Exchangeable Share”) is exchangeable into one share of our common stock at the option of the holder thereof, subject to the following restrictions:
| ● | the holders of such preferred shares may not, without the written consent of Subco, exchange, sell or otherwise dispose of, directly or indirectly, any of their preferred shares until the six month anniversary of the Closing Date; | |
| ● | within 30 days of that time, and provided Tropic Spa has generated at least $1,000,000 in gross revenue during the preceding six month period, Subco shall permit the holders of such preferred shares 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 such preferred shares shall automatically expire unless extended by the approval of the holders thereof, Subco shall grant the holders of its preferred shares a permission identical to the one described above. |
The foregoing restrictions do not apply to any exchange, sale or other disposition of the preferred shares of Subco by the holder thereof:
| ● | to a person over which such holder exercises sole voting and investment control; | |
| ● | upon such holder’s death by will or intestacy; or | |
| ● | as a distribution solely to members, partners or stockholders of such holder, if the holder is a corporation, partnership or other organization. |
The foregoing description of the preferred shares of Subco is qualified in its entirety by reference to the complete text of the rights, privileges, restrictions and conditions attached to such preferred shares (the “Exchangeable Share Provisions”), included as Appendix I to the Exchange Agreement filed as Exhibit 10.1 to our current report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on July 3, 2013.
As a result of the Share Exchange, Tropic Spa became our majority-owned subsidiary and John Marmora, the sole officer and director of Tropic Spa, acquired the right to become our principal stockholder by exchanging the Exchangeable Shares he received on the Closing Date for shares of our common stock. The Share Exchange was accounted for as a reverse merger/recapitalization effected through a share exchange, with Tropic Spa as the accounting acquirer and the Company as the accounting acquiree. Unless the context suggests otherwise, when we refer in this Report to business and financial information for periods prior to the consummation of the Share Exchange, we are referring to the business and financial information of Tropic Spa.
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In connection with the Share Exchange and on the Closing Date, Gregory J. Neely submitted his resignation as our President, Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer; John Marmora was appointed by our Board of Directors to fill the resulting vacancies; Mr. Marmora was appointed as our Chief Executive Officer and a director; Mr. Neely submitted his resignation as the President, Secretary, Treasurer and sole director of Subco and Callco, and Mr. Marmora was appointed to fill the resulting vacancies. On November 29, 2013, Mr. Neely also resigned as our director.
As a result of the Share Exchange, Tropic Spa became our majority-owned subsidiary and we assumed the business and operations of Tropic Spa.
As a condition of the closing of the Exchange Agreement, we also entered into the following agreements on the Closing Date:
| ● | a Support Agreement with Subco and Callco (the “Support Agreement”); and | |
| ● | a Voting and Exchange Trust Agreement with Subco, Callco and John Marmora (the “Trustee”), our new President, Chief Executive Officer, Chief Financial Officer, Secretary, Treasurer and director (the “Trust Agreement”). |
The structure of the Share Exchange was determined largely based on the potential tax implications for the Tropic Spa shareholders of exchanging their common shares of Tropic Spa, an Ontario corporation, for shares of our common stock. Under s. 85(1) of theIncome Tax Act (Canada), a tax-deferred “rollover” is not available where shares of a Canadian corporation are exchanged for shares of a United States corporation and, as a result, we created Subco, also an Ontario corporation, for the purpose of allowing those shareholders who elected to participate in the Share Exchange to do so on a tax-deferred “rollover” basis (i.e., by allowing them to defer any capital gain that would accrue upon the exchange of their common shares of Tropic Spa for shares of our common stock). This was achieved by issuing exchangeable preferred shares of Subco to the holders of Tropic Spa’s common shares on the Closing Date.
Callco, our wholly owned subsidiary, was formed solely for the purpose of avoiding a Canadian deemed dividend withholding tax payable on a dividend or other distribution of Subco to us to the extent that such a dividend or other distribution exceeds the paid-up capital of Subco. However, in order for this to take place Callco must become the holder of the one issued and outstanding common share of Subco that we currently hold, since it would then permit the dividend or other distribution to pass through Callco before being distributed to us.
On February 17, 2015, we entered into an amendment to the Exchange Agreement (the “Amendment Agreement”) with Subco, Tropic Spa and the Tropic Spa Shareholders in order to correct a few administrative errors in the Exchange Agreement and provide for the post-closing execution of the Exchange Agreement by those shareholders of Tropic Spa who were not original signatories thereto. The complete text of the Amendment Agreement is filed as Exhibit 10.2 to our current report on Form 8-K filed with the SEC on February 19, 2015.
Also on February 17, 2015, the Tropic Spa Shareholders approved certain changes to the rights, privileges, restrictions and conditions attached to the preferred shares of Subco described above by consent in writing. Of these, the only material change was the deletion of the “June 30, 2015” date in section 5(b) and its replacement with “June 30, 2017”.
On August 24, 2016 and pursuant to the Exchange Agreement, as amended, we acquired a further 21,672,623 common shares, or approximately 21.5% of the issued and outstanding shares, of Tropic Spa in exchange for the issuance of 21,672,623 (10,836,312 post-split) preferred shares of Subco to certain of the shareholders of Tropic Spa. As a result, we now own 99,703,500 common shares of Tropic Spa, or approximately 99.7% of that company’s issued and outstanding capital stock.
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On February 22, 2017, the holders of 69.53% of the issued and outstanding preferred shares of Subco approved a change to the rights, privileges, restrictions and conditions attached to such shares by consent in writing in order to delete the “June 30, 2017” date in section 5(b) and replace it with “December 31, 2018”. This date represents the date on which all restrictions attached to the preferred shares will automatically expire unless extended by the approval of the holders thereof, and effectively meant that those shares could be exchanged into shares of our common stock for an additional 18 months, subject to certain limited exceptions.
On December 27, 2018, the holders of 68.91% of the issued and outstanding preferred shares of Subco approved a further extension to the “December 31, 2018” date referenced above to “December 31, 2020”.
Support Agreement
The Support Agreement provides and establishes a procedure whereby we are required to take certain actions and make certain payments and deliveries in connection with the satisfaction of the obligations of Callco and/or Subco under the Exchangeable Share Provisions. As described in the Exchangeable Share Provisions, Subco is required to deliver shares of our common stock to a holder of Exchangeable Shares upon the liquidation or insolvency of Subco, upon the redemption of Exchangeable Shares by Subco, and upon the exercise of the retraction or exchange right by such holder. The Exchangeable Share Provisions also require Subco to pay dividends on the Exchangeable Shares that are equivalent to any dividends that are paid on shares of our common stock.
The Support Agreement provides commercial certainty and is in the interests of the holders of Exchangeable Shares because it creates enforceable contractual rights of Subco against us so that in all relevant circumstances Subco is in a position to acquire the necessary shares of our common stock, and finance any dividend payments equivalent to dividends paid on shares of our common stock, in order to satisfy Subco’s obligations under the Exchangeable Share Provisions. In that respect, the Support Agreement includes certain covenants made by us, including that we will:
| ● | not declare or pay a dividend on shares of our common stock unless Subco can simultaneously pay the same dividend on the Exchangeable Shares; | |
| ● | ensure that Subco has a sufficient number of shares of our common stock in the event of the liquidation or insolvency of Subco to satisfy all retraction or exchange requests or redemptions of Exchangeable Shares; and | |
| ● | as the sole holder of common shares of Subco, not cause Subco to be liquidated or dissolved. |
In general, the Support Agreement ensures that the obligations of Subco are backstopped by covenants made by us or any successor to us. It will remain in effect until no Exchangeable Shares (or securities or rights convertible into or exchangeable for Exchangeable Shares) are held by any person other than us or any of our affiliates (in other words, until all the Exchangeable Shares have been exchanged into shares of our common stock).
Trust Agreement
The Trust Agreement provides and establishes a procedure whereby the voting rights attached to shares of our common stock are exercisable by the registered holders (the “Beneficiaries”) of the Exchangeable Shares, other than those Exchangeable Shares held by us or our affiliates, through the Trustee. The Trustee holds legal title to a special voting share (the “Special Voting Share”) to which voting rights are attached for the benefit of the Beneficiaries.
The Special Voting Share confers on the Trustee the number of votes equal to the number of outstanding Exchangeable Shares, other than Exchangeable Shares held by us or our affiliates, on all matters on which the holders of shares of our common stock are entitled to vote. Under the Trust Agreement, the Trustee is required to hold the Special Voting Share as trustee solely for the use and benefit of the Beneficiaries and has no power or authority to sell, transfer, vote or otherwise deal with the Special Voting Share.
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The Trust Agreement provides a mechanism under which a Beneficiary may instruct the Trustee regarding how to vote the votes conferred by the Special Voting Share relating to such Beneficiary’s Exchangeable Shares. This mechanism ensures that Beneficiaries have a complete bundle of rights that collectively is equivalent to the rights each Beneficiary would have if it owned shares of our common stock directly, and is exercised by Beneficiaries providing written instructions to the Trustee following the mailing of any communications by us to the holders of our common stock as well as the holders of Exchangeable Shares.
For commercial reasons, it is in the interests of a holder of Exchangeable Shares to obtain additional protection with respect to its ability to exercise retraction or exchange rights in the event of the liquidation or insolvency of us or Subco. As a result, the Trust Agreement also grants such holders “insolvency put rights”, including the right to automatically exchange their Exchangeable Shares for shares of our common stock upon the occurrence of certain events.
The right of a Beneficiary to exercise any voting rights in respect of the Exchangeable Shares held by such Beneficiary will cease immediately upon the exercise of any exchange right, automatic exchange, retraction or redemption of Exchangeable Shares for shares of our common stock, or the liquidation, dissolution or winding-up of Subco.
The foregoing description of the Exchange Agreement, including the Support Agreement and the Trust Agreement, includes a summary of all the material provisions but is qualified in its entirety by reference to the complete text of the Exchange Agreement filed as Exhibit 10.1 to our current report on Form 8-K filed with the SEC on July 3, 2013.
Acquisition of Notox
On June 6, 2016, we entered into a share exchange agreement (the “Notox Exchange Agreement”) with Notox and the Notox Shareholders pursuant to which we agreed to acquire 100% of the outstanding capital stock of Notox in exchange for the issuance of 100,000,000 (50,000,000 post-split) restricted shares of our common stock to the Notox Shareholders. On the Notox Closing Date, the closing of the Notox Share Exchange Agreement occurred, at which time Notox acquired 100% of the right, title and interest in and to the License Agreement, we issued the 100,000,000 restricted shares described above to the Notox Shareholders, and Notox became our wholly owned subsidiary.
Pursuant to a stock restriction agreement dated as of the Notox Closing Date, the shares we issued to the Notox Shareholders are subject to restrictions similar to those attached to the preferred shares of Subco. In particular, the Notox Shareholders could not sell, transfer or otherwise dispose of their shares until June 30, 2017, subject to certain limited exceptions.
Notox was incorporated on May 31, 2016 for the primary purpose of acquiring an interest in and to the License Agreement. As such, the Notox Share Exchange represented an asset acquisition and was accounted for under the asset acquisition method.
In connection with the Notox Share Exchange and on the Notox Closing Date, John Marmora submitted his resignation as our Chief Executive Officer and Zoran Konević, the sole officer and director of both Notox and ZHC, and one of the Notox Shareholders, was appointed to fill the resulting vacancy. On the Closing Date, Mr. Konević was also appointed as our director.
As a result of the Notox Share Exchange, we are now a holding company operating through both Tropic Spa and Notox.
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The foregoing description of the Notox Exchange Agreement includes a summary of all the material provisions but is qualified in its entirety by reference to the complete text of the Notox Exchange Agreement filed as Exhibit 10.3 to our current report on Form 8-K filed with the SEC on June 13, 2016.
Reverse Split
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.
RFTS Proposal
On February 20, 2017, Notox entered into a radio frequency treatment system (“RFTS”) proposal (the “Proposal”) with RBC Medical Innovations of Lenexa, Kansas (“RBC”) to develop the technology licensed by Notox. Under the Proposal, RBC is responsible for completing the design and production of the two main RTFS components, a generator console and a disposable treatment probe.
The material terms of the Proposal called for RBC to produce commercial-equivalent consoles and probes for use by Notox in human trials during the fourth quarter of 2017; test the consoles and probes for the purpose of providing technical data for Food and Drug Administration (“FDA”) Section 510(k) and CE marking submissions; and perform volume production of the components. In exchange for these services, Notox agreed to pay RBC according to a staged, fixed-fee approach that includes a $56,000 initial payment, to be followed by two similarly-sized payments prior to the completion of the planning stage. The cost to complete the second (design and testing) and third (manufacturing transfer) stages are expected to be considerably more expensive, with exact numbers to be confirmed only upon the conclusion of the previous stage. In general, however, we plan to budget $1,750,000 to bring the console to market, plus up to $800,000 in order to develop the probe in a process to be led by RBC.
Over the past 12 months and for a variety of reasons, we decided to postpone the development of the Notox technology under the Proposal; however, we plan to continue pursuing the technology’s development with RBC or another FDA-certified service provider during the current fiscal year.
Name Change
On October 9, 2018, the holders of a majority of our issued and outstanding common stock on a fully-converted basis approved the following corporate actions:
| ● | a name change from Tropic International Inc. to Notox Technologies Corp. (the “Name Change”); | |
| ● | an authorized capital increase from 300,000,000 shares of common stock, par value $0.001, to 500,000,000 shares of common stock, par value $0.001 (the “Authorized Capital Increase”); and | |
| ● | an update to our existing bylaws by amending and restating them in their entirety to, among other things, reflect the Name Change (the “Bylaw Amendment”). |
On November 19, 2018, we filed a Certificate of Amendment with the Nevada Secretary of State in order to effect the Name Change and Authorized Capital Increase. Generally speaking, the purpose of the Authorized Capital Increase was to reorganize our capital structure, which management believes will better position us to attract financing, while the purpose of the Bylaw Amendment was to modernize our bylaws and make them more comprehensive.
Products
Notox
The Notox product was designed to be a non-poisonous, less expensive, longer lasting alternative to Botox®, which is a commercial form of the botulinum toxin protein manufactured by Allergan, Plc, a large publicly-traded pharmaceutical corporation, and used primarily for medical and cosmetic purposes. Notox is designed to achieve the same effects as Botox® for cosmetic procedures, drug-free pain management, migraine and perspiration control, but at a healthier level.
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Botulinum toxin is a neurotoxic protein that is most commonly associated with the disease botulism; however, there are actually seven types of the toxin, two of which are used commercially and medically to, among other things, treat muscle spasms and diseases characterized by overactive muscle. When locally administered, the toxin is capable of spreading from the injection site to other areas of the body, a potentially fatal consequence. Disclaimers for this and other negative side effects can be found on the packaging for Botox® and seen/heard in Allergan’s advertisements for the product.
In cosmetic applications, botulinum toxin is generally considered safe and effective for reducing facial wrinkles; however, this may be due to the fact that the long-term effects of using the protein are not widely studied. It is injected into the muscles under wrinkles causing those muscles to relax, which results in the smoothing of the overlying skin. Following treatment, this smoothing is usually visible within days, is at its height after two weeks, and diminishes 3-4 months later as the treated muscles gradually regain function and return to their former appearance. Muscles can be treated repeatedly in order to maintain the smoothed appearance.
Notox is best understood as an electronic form of Botox®, in that it is intended to generate the benefits of using the drug without introducing the potentially harmful side effects that toxic chemicals can produce. The Notox system consists of two parts: a treatment probe or needle, and a unit that includes a hand piece and a generator. The generator is responsible for creating an electric current that is administered through the hand piece along with a saline solution. The needle, which is also the patented feature of the system, is attached to the hand piece and is used to inject the electric current and saline solution into the targeted nerve of the treatment recipient.
The saline solution’s purpose is to assist with the accuracy of the current while simultaneously cooling the treatment area. The result is that the targeted nerve is ablated or incapacitated in much the same way as it would be by using Botox®.
We anticipate that Notox will provide a number of advantages over its similarly-named competitor as follows:
| ● | it will eliminate the potential morbidity and long-term effects of injecting botulinum toxin that an individual’s body must process and discard; | |
| treatments will be more precise and significantly less expensive; | ||
| ● | the effects of a Notox treatment will last much longer than a Botox® treatment – up to 12 months vs. 3-4 months; and | |
| ● | the probability of damaging the tissue surrounding the target area will be reduced. |
The design of the treatment probe or needle is covered by U.S. Patent No. 8,512,715 “Apparatus and Method for Treating a Neuromuscular Defect” dated December 30, 2014. It is a continuation of U.S. Patent Application No. 12/541,221, filed on August 14, 2009, which claims priority from U.S. Provisional Patent Application No. 61/089,015, filed on August 14, 2008.
It is important to note that the Clinic has already conducted successful animal trials using an early Notox system prototype, the results of which were published in October 2013 edition of the Journal of Plastic and Reconstructive Surgery, Volume 132, Issue 4S-1, pp. 142-143. In addition, the Clinic has performed cadaver studies that generally demonstrated sensitive tissue would not be damaged using Notox.
During the second quarter of 2017, we completed further cadaver studies with the Clinic’s participation for the purpose of ensuring that our needle prototype would produce the desired effect around the human eyes and forehead. Those studies were led by Dr. Papay and carried out by some of the Clinic’s key experts in the field, and generally satisfied our expectations with regard to the product.
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In a September 2016 report, Global Industry Analysts, Inc. (“GIA”) estimated that the worldwide market for botulinum toxin would reach US$4.3 billion by 2018. This represents less than 15% of the estimated $29 billion global market for cosmetic, plastic surgery and pain management solutions. In its report, GIA suggested that the market for botulinum toxin would be stimulated by the sustained dominance of existing options, technological advances, rising product approvals and the increasing popularity of anti-aging products. It is our goal to capture a piece of this market by completing the design, testing and manufacturing of the Notox unit and treatment probe, undertaking the necessary human trials and FDA Section 510(k) clearance process, and successfully commercializing the system.
During the third and fourth quarters of 2019, we successfully completed the design of the hand piece portion of the Notox unit. It was our intention to design a unique form that would differ from the existing ones in the aesthetic market, a sensitivity that stems from the fact that the hand piece is the only part of the Notox unit that is both visible to patients and physically held by administrators during the Notox procedure. The designed form of the hand piece is ergonomic and user-friendly for both short- and long-term use. We believe that the design is potentially patentable and will explore that possibility in the coming months.
Home Mist Tanning System
Our home mist tanning system is capable of delivering 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 previously marketed contained everything an individual would need to complete 10 full-body tans in the comfort of their own home.
Our tanning system was designed for home use to provide users with a salon quality tan. It consists of an application unit, a tanning kit and a pre-tan kit. The tanning kit includes our proprietary tanning solution, which is a clear fluid with a slight yellow tinge that contains a blend of DHA or dihydroxyacetone (a chemical approved by the FDA for use in the cosmetics industry), skin moisturizers and conditioners. DHA is a color additive that darkens the skin by reacting with amino acids in the skin’s surface. To be clear, the FDA’s approval of DHA is restricted to external applications only; the agency advises against inhaling, ingesting or applying DHA to the lips and eye areas; and the use of DHA in tanning booths, including misting devices, as an all-over spray has not been approved by the FDA since safety data to support its use has not been submitted to the agency for review and evaluation.
Our proprietary tanning solution is packaged into specially designed cosmetic bladders and housed in aerosol cans, which allows users to dispense it directly with no cross-contamination of propellant or any other material. In addition to six 2.6oz cans of the solution, the tanning kit contains a spray applicator and one touch-up can, while the pre-tan kit contains exfoliating wipes or gloves (selected by the user at the time of purchase), plastic head and foot covers and plastic protective gloves.
Our system may affect persons of different sizes in different manners since the amount of tanning solution dispensed from each of the unique, non-clogging mist nozzles on the unit cannot be user-adjusted. The nozzles are manufactured using a plastic injection molding process in order to ensure that they all perform in an identical fashion and are designed to emit a consistent amount of solution. As a result, during each tanning cycle the nozzles dispense a total of approximately 1.6oz of tanning solution from the cosmetic bladders. Due to this consistency, the recommend minimum and maximum user heights for our units are 4’5” and 6”, respectively. We have not made any provisions to accommodate users who fall outside of this height range, since we believe that such persons only represent an extremely small proportion of our potential customer base.
Our application unit has been engineered to apply our tanning solution evenly through unique, non-clogging mist nozzles and deliver a sufficient amount of the solution in 12 seconds to provide full body coverage. Over-spray is minimal or nonexistent, and the cordless design of the unit allows it to be used in multiple locations and deliver multiple applications on a single lithium ion battery charge. Each unit contains an internal counter that indicates when there is only enough tanning solution remaining to complete two tans, and consists of a simple design that allows for the easy removal and replacement of the solution.
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Constructed of lightweight durable plastic in a neutral tone, the application units are visually appealing, compact in size and come fully assembled, requiring only a primary battery charge of approximately four hours to begin the tanning process. The units also include a unique adjustable hanger bracket that permits simple height adjustments and both visual cues and audible electronic tones that provide important information to users as follows:
| ● | when the start/stop button on the unit is pushed, the light-emitting diode (LED) on the unit flashes the color blue for 10 seconds; | |
| ● | if no further action is taken by a user during the 10-second period, the unit automatically powers down; however, if the user again pushes the start/stop button, the unit emits an audible beep signalling that the tanning spray will be activated in six seconds; | |
| ● | at the end of the six seconds, the unit emits an “up-tone” sound and begins to mist; | |
| ● | during the 12 second tanning cycle, the unit emits an audible beep every three seconds in order to orient the user and suggest that they rotate 90 degrees in each three-second period (for a total of 360 degrees in 12 seconds); | |
| ● | following the fourth audible beep, the unit emits a “down-tone” to signal the conclusion of the tanning cycle; and | |
| ● | finally, when the reset button is pushed, the unit emits an audible beep to signal that the unit’s tan count has been reset to 10 tans. |
The lithium ion battery included with each application unit can be fully recharged in approximately eight hours once fully depleted through a conventional North American wall socket. The batteries are provided to us by an electronics supplier based in Toronto, Ontario, Canada, who acquires them from a manufacturer in China. We do not have an agreement in place with the supplier regarding the purchase and sale of specified quantities of batteries; instead, we purchase them on an as-needed basis using conventional means.
Our application unit has been certified by QPS Evaluation Services, Inc. (“QPS”), a nationally and internationally accredited third-party testing, certification and field evaluation body, under certificate number LR1209. This certification provides an increased assurance of quality and safety to consumers by demonstrating that the unit has been tested to and meets the requirements of applicable Canadian and Unites States standards, since QPS’s labels and marks are accepted as equals to those of the Canadian Standards Association and Underwriters Laboratories.
Because we are committed to supplying products of superior quality and design, we provide a limited one year warranty on our application units. If a unit stops operating due to defects in materials or workmanship during this time, we will either repair or replace it for free.
In addition to the application units, we also sell tanning solution kit refills that take less than five minutes to replace. Each tanning solution kit refill contains six 2.6oz cans, which is a sufficient amount of our proprietary solution to provide 10 full-body tans. To the best of our knowledge, empty cans of our tanning solution can be recycled in the same manner as conventional aerosol cans in all jurisdictions that offer recycling alternatives to conventional waste collection.
We currently sell our home mist tanning system for the base price of $300 and our tanning solution kit refills for $100, each plus applicable shipping and handling. The complete system also includes an operating manual, instructional DVD and simple power adapter.
Proposed Acquisition
On July 19, 2019, we entered into binding letter of intent (the “LOI”) with Xthetica Inc. (“Xthetica”), a private Ontario, Canada corporation, pursuant to which we agreed to acquire all of the issued and outstanding capital stock of Xthetica Inc. (“NewCo”), a newly incorporated Nevada corporation owned by the sole shareholder of Xthetica, from that shareholder in exchange for an aggregate of 10,000,000 restricted shares of our common stock and warrants to purchase 10,000,000 restricted shares of our common stock, in each case issuable over a period of three years.
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NewCo was recently formed for the purpose of acquiring 100% of the right, title and interest in and to certain assets owned by Xthetica (collectively, the “Assets”), including Xthetica’s rights and obligations under a series of distribution agreements with manufacturers of medical aesthetics products, access to all of Xthetica’s current inventory for the purpose of selling the same, and the goodwill of Xthetica. The effective date of the Asset acquisition is expected to be July 1, 2019.
Pursuant to the LOI, the parties agreed to work together to determine the appropriate structure for the proposed transaction (the “Transaction”), which will be governed by a definitive agreement that set outs in full the terms of the Transaction. The definitive agreement was expected to be executed on or before August 15, 2019, with the closing date of the Transaction no later than 30 days thereafter (or such other date as the parties may agree upon in writing). Due to a variety of circumstances, many of which were beyond our control, the definitive agreement has not yet been executed; however, we continue to work diligently with Xthetica and its sole shareholder to move the Transaction forward, and in fact advanced approximately $86,000 to Xthetica during the fourth quarter of our fiscal year.
The shares and warrants issuable by the Company to the sole shareholder of Xthetica or his assigns are anticipated to be issued as follows:
| (a) | 1,000,000 shares and 1,000,000 warrants on or before December 31, 2019; | |
| (b) | 3,000,000 shares and 3,000,000 warrants on or before December 31, 2020; and | |
| (c) | 6,000,000 shares and 6,000,000 warrants on or before December 31, 2021. |
Each share is expected to 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 will be exercisable into one share of our common stock at a price of US$1.40 per share for a period of three (3) years from the date of issuance, subject to standard adjustments for stock splits, stock dividends and the like.
The LOI also requires us to cause a new wholly owned subsidiary to enter into employment or consulting agreements in form and substance acceptable to Xthetica with a maximum of seven (7) individuals recommended to us by Xthetica. In furtherance of this goal, we incorporated Xthetica Canada Inc. (“Xthetica Canada”), a Canadian federal corporation, as our wholly owned subsidiary on July 7, 2019. The particulars of the employment and consulting arrangements, including the compensation payable by us (through Xthetica Canada) to the individuals, are currently being negotiated in good faith by us, Xthetica and the applicable individuals, and the LOI specifically grants us the right to solicit and engage those persons.
The LOI includes a number of closing conditions, including the completion of satisfactory due diligence, the completion of the assignment of the Assets by Xthetica to NewCo or Xthetica Canada, and the satisfactory review by the parties of the tax and securities implications of the Transaction.
Upon the completion of the Transaction, of which there is no guarantee, NewCo will become our wholly owned operating subsidiary.
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Intellectual Property
License Agreement
As described elsewhere in this Report, on June 13, 2016 we completed the Notox Share Exchange and acquired 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 intellectual property of the Clinic, including (i) U.S. Patent No. 8,920,816 “Apparatus and Method for Treating a Neuromuscular Defect” and associated foreign filings in various countries, (ii) improvement patents for which we elect in writing to include in the License Agreement, and (iii) foreign equivalents of any of the foregoing, and all patents issued therefrom and extensions of the same, including reissues and re-examinations. In addition, the License Agreement grants us the exclusive license to such proprietary information, trade secrets and tangible research property as is necessary to use the patent materials in the field of aesthetics and pain. Under the License Agreement, such information, secrets and property must (a) have been developed by Frank Papay, MD, (b) have been in existence as of December 1, 2012, (c) not be subject to the rights of any third parties or research sponsor restrictions, and (d) be owned by the Clinic.
The effective date of the License Agreement is December 1, 2012; on July 30, 2013 it was amended to incorporate a revised technology timeline, and it is valid until the expiration of the last to expire of certain patents. Pursuant to the License Agreement, we are required to pay the Clinic a royalty based on the sale of certain products, a milestone payment upon first commercial sale of the first such product and a percentage of any sublicensing revenues. In the month in which our cumulative gross revenues reach a specified amount, we must reimburse the Clinic for all incurred and to be incurred patent expenses to a specified amount. Royalties and other payments are payable quarterly.
On September 26, 2017, the License Agreement was amended a second time 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). The effective date of the amendment was July 1, 2016.
Notox’s failure to achieve either of the foregoing milestones by the required dates, without satisfactory justification, will constitute a material breach of the License Agreement, as amended, giving the Clinic the right, but not the obligation, to convert the agreement to a non-exclusive license or terminate the agreement altogether. In addition, within 30 days of Notox’s receipt of initial regulatory approval, Notox is required to reimburse the Clinic for at least US$115,495 in patenting costs incurred as of July 1, 2016. All such costs incurred by the Clinic after that date will, at the Clinic’s option, either be paid directly by Notox or by the Clinic with the Clinic invoicing Notox, provided that Notox has no obligation to pay or reimburse the Clinic until after that regulatory approval has been obtained. Upon the termination or expiration of the License Agreement, all accrued and unreimbursed patenting costs become immediately due and payable by Notox to the Clinic. As of August 31, 2019, all accrued and unreimbursed patenting costs totalled $264,113 (US$198,640).
We are currently working with the Clinic on completing an amendment to the License Agreement to extend the November 30, 2019 milestone deadline referenced above, and expect to finalize that no later than March 31, 2020.
Tanning System
Our home mist tanning system is currently protected by U.S. Patent No. 7,594,593, which is described below.
| Type | Name | Region | Number | Date | ||||
| Patent | Apparatus for Spray Application of a Sunless Tanning Product | United States | 7,594,593 | January 17, 2006 (Filed) / September 29, 2009 (Issued) |
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Our United States Patent is a “utility patent”, which in general terms protects the way an article is used and works. A “design patent”, on the other hand, protects the way an article looks. Other primary distinguishing features between the two types of patents are as follows: the term of a “utility patent” is 20 years measured from the filing date, whereas the term of a “design patent” is 14 years measured from the grant date; the holder of a “utility patent” are required to pay maintenance fees whereas the holder of a “design patent” is not; and the holder of a “utility patent” is able to file an international application naming various countries under the Patent Cooperation Treaty (PCT), whereas the holder of a “design patent” is not.
We also previously held Canadian, Australian and Chinese patents regarding the system, but were recently informed that those patents had lapsed or expired.
We also own the copyright in the contents of our website and we guard the composition of our proprietary tanning solution as a trade secret. Other than that, we do not own any intellectual property and we have not filed for any protection of our trademarks.
Employees
As of the date of this Report, we do not have any full time or part time employees. We currently rely on the efforts of Zoran Konević and John Marmora, our principal executive officers and directors, to manage our operations, as well as members of our informal advisory board and personnel at the Clinic to assist us in navigating certain technical and regulatory hurdles. In the future, we plan to hire workers on a contract basis from time to time as the need arises.
Government Regulations
Since we are only beginning to develop the intellectual property we acquired under the License Agreement, as amended, we do not believe that any government regulations will affect our operations in that regard until we are able to complete the design of the Notox unit and treatment probe.
In terms of our tanning system, legislation regarding sunless tanning in both the United States and Canada has consistently focused on the harm posed to consumers, and minors in particular, as a result of exposure to UV rays at indoor tanning facilities. Research indicates that high risk exposure happens more commonly in teens and that blistering sunburns and overexposure during childhood greatly increase the chances of developing skin cancer later in life. Because sun (and UV) exposure in childhood and the teenage years can be so damaging, policymakers in many states and provinces have decided to regulate minors’ use of tanning devices (like tanning beds, booths and sunlamps). Some counties and cities also regulate their use. In addition, most states and provinces at least require operators of indoor tanning facilities to implement time limitations on tanning beds to the manufacturer’s maximum exposure recommendation and to provide eye protection to customers.
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The consequence of these regulations is that consumers are effectively being legislated away from using sunless tanning products or services that involve UV light exposure, leaving a gap in the market. The amount of negative publicity surrounding the laws has also contributed to a search by consumers for healthy tanning alternatives that provide consistent results.
We are also required to comply with environmental laws regarding the manufacturing of our proprietary tanning solution. However, we do not anticipate incurring any costs or effects relating to this since we are not currently manufacturing the solution and the process required to produce the solution results in no chemical by-products and minimal waste.
Since our proprietary tanning solution contains DHA, it is subject to the United States Federal Food, Drug, and Cosmetic Act (the “FD&C Act”) and the purview of the FDA. Section 721 of the FD&C Act authorizes the regulation of color additives, including their uses and restrictions, and DHA is listed in the regulations as a color additive for use in imparting color to the human body. However, its usage is restricted to external application, as is its use by the FDA, since the FDA has not received safety data that would allow it to consider approving DHA for use on other exposure routes such as the lips, the area of the eye or any body surface covered by a mucous membrane. This includes the use of DHA through misting tanning devices.
Not required.
Item 1B. Unresolved Staff Comments
Not applicable.
Our executive office is located at 95 Mural Street, Suite 600, Richmond Hill, Ontario, Canada L4B 3G2. We currently lease this space at a cost of approximately $500 per month plus applicable taxes.
We believe that this property is generally suitable to meet our needs for the foreseeable future; however, we will continue to seek additional space as needed to satisfy our growth.
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 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
General
As of the date of this Report, we have 57,625,343 shares of common stock issued and outstanding. In addition, Subco has 50,601,750 preferred shares issued and outstanding, each of which is exchangeable into one share of our common stock in accordance with the rights, privileges, restrictions and conditions attached to such preferred shares.
We do not have any outstanding warrants, options or other securities convertible into shares of our common stock.
Market Information
Our common stock is not traded on any exchange; however, it is quoted on the OTCQB under the symbol “NTOX”. OTCQB securities are not listed and traded on the floor of an organized national or regional stock exchange. Instead, OTCQB securities transactions are conducted through a telephone and computer network connecting dealers. OTCQB issuers are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange.
Trading in stocks quoted on the OTCQB is often thin and is characterized by wide fluctuations in trading prices due to many factors that may have little to do with a company’s operations or business prospects. There is no assurance that there will be a market for our common stock in the future.
Our common stock became eligible for quotation on the OTC Bulletin Board on June 18, 2014 and the OTCQB on September 3, 2014. The following quotations reflect the high and low bids for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. The high and low bid quotations of our common stock for the periods indicated below are as follows:
| OTCQB | ||||||||
| Quarter Ended | High (US$) | Low (US$) | ||||||
| August 31, 2019 | 4.50 | 2.70 | ||||||
| May 31, 2019 | 2.74 | 2.74 | ||||||
| February 28, 2019 | 5.00 | 1.98 | ||||||
| November 30, 2018 | 2.00 | 1.98 | ||||||
| August 31, 2018 | 2.00 | 2.00 | ||||||
| May 31, 2018 | 2.60 | 1.45 | ||||||
| February 28, 2018 | 1.90 | 1.50 | ||||||
| November 30, 2017 | 2.00 | 0.60 | ||||||
Holders
As of the date of this Report, there are approximately 62 holders of record of our common stock.
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Dividends
The Exchangeable Share Provisions require Subco to pay dividends on the Exchangeable Shares that are equivalent to any dividends that we pay on shares of our common stock. The Support Agreement provides commercial certainty for the holders of Exchangeable Shares in this regard since it creates enforceable contractual rights of Subco against us so that in all relevant circumstances Subco is in a position to acquire the necessary shares of our common stock, and finance any dividend payments equivalent to dividends we decide to pay on shares of our common stock, in order to satisfy Subco’s obligations under the Exchangeable Share Provisions. The Support Agreement therefore includes, among other things, a covenant made by us that we will not declare or pay a dividend on shares of our common stock unless Subco can simultaneously pay the same dividend on the Exchangeable Shares.
We have not declared or paid any dividends on our common stock and, despite the language in the Exchangeable Share Provisions and the Support Agreement, we do not expect to declare or pay any such dividends for the foreseeable future. Any future decisions regarding dividends will be made by our Board of Directors. We currently intend to retain and use any future earnings for the development and expansion of our business. Our Board of Directors has complete discretion regarding the payment of dividends, and even if our Board of Directors decides to pay dividends, the form, frequency and amount will depend on our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the Board of Directors may deem relevant.
Penny Stock
Our common stock is subject to the provisions of Section 15(g) of the Exchange Act and Rule 15g-9 thereunder, commonly referred to as the “penny stock rule”. Section 15(g) sets forth certain requirements for transactions in penny stock, and Rule 15g-9(d) incorporates the definition of “penny stock” that is found in Rule 3a51-1 of the Exchange Act. The SEC generally defines a penny stock to be any equity security that has a market price less than US$5.00 per share, subject to certain exceptions. We are subject to the SEC’s penny stock rules.
Since our common stock is deemed to be penny stock, trading in the shares of our common stock is subject to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors. “Accredited investors” are generally persons with assets in excess of US$1,000,000 or annual income exceeding US$200,000 or US$300,000 together with their spouse. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of securities and must have the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the first transaction, of a risk disclosure document prepared by the SEC relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for penny stocks held in an account and information to the limited market in penny stocks. Consequently, these rules may restrict the ability of broker-dealer to trade and/or maintain a market in our common stock and may affect the ability of our stockholders to sell their shares.
Securities Authorized for Issuance under Equity Compensation Plans
As of the date of this Report, we do not have any compensation plans under which our equity securities are authorized for issuance. We intend to adopt an equity compensation plan in which our directors, officers, employees and consultants will be eligible to participate. However, no formal steps have yet been taken to adopt such a plan.
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Recent Sales of Unregistered Securities
On July 3, 2019, we issued and sold an aggregate of 80,000 shares of common stock to one non-U.S. investor and one U.S. investor at a price of US$1.00 per share in exchange for gross proceeds of US$80,000.
These shares were offered and sold in private transactions in reliance upon the exemptions from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 903 of Regulation S promulgated under the Securities Act. Our reliance on Section 4(a)(2) was based on the fact that there was only one U.S. investor and the issuance was an isolated private transaction by us which did not involve a public offering. Our reliance on Rule 903 of Regulation S was based on the fact that the non-U.S. investor was not a “U.S. person” as that term is defined in Rule 902(k) of Regulation S, that the investor acquired the securities for investment purposes for its own account and not as a nominee or agent, and not with a view to the resale or distribution thereof, and that the investor understood that the securities may not be sold or otherwise disposed of without registration under the Securities Act and any applicable state securities laws, or an applicable exemption or exemptions therefrom.
Other than as described above or as disclosed in previous quarterly reports on Form 10-Q or current reports on Form 8-K, we did not issue any equity securities that were not registered under the Securities Act during the fiscal year ended August 31, 2019.
Purchases of Equity Securities by the Issuer and “Affiliated Purchasers”
We did not purchase any shares of our common stock or other securities during the year ended August 31, 2019.
Item 6. Selected Financial Data
Not required.
Item 7. 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 audited consolidated financial statements and the related notes thereto that appear elsewhere in this Report, as well as Item 1 and 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, and through Tropic Spa, we are seeking to establish licensing opportunities for certain intellectual property associated with a personal tanning system.
Results of Operations
Revenue
We did not generate any revenue during the years ended August 31, 2019 or 2018.
Production Costs
During the year ended August 31, 2019, we incurred production costs of $219,537, which was equal to our gross loss for the period. During the year ended August 31, 2018, we incurred production costs of $216,617, which was also equal to our gross loss for the period. Our production costs during both years were attributable to a combination of amortization of the License Agreement ($187,466 in each year), patenting costs ($32,071 in the current year vs. $21,201 in the prior year), production-related consulting fees ($Nil in the current year vs. $2,820 in the prior year), depreciation ($Nil in the current year vs. $5,129 in the prior year) and a writedown of inventory ($Nil in the current year vs. $1 in the prior year).
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Expenses
During the year ended August 31, 2019, we incurred $753,472 in total general and administrative expenses, compared to $803,456 in such expenses during the year ended August 31, 2018.
Our expenses during the year ended August 31, 2019, consisted of $338,429 in management-related consulting fees, $209,596 in interest on the license assignment fee payable to ZKC, $108,591 in professional fees, $24,655 in trust and filing fees $13,202 in rent, $12,059 in interest on advances from related parties/shareholders, $8,166 in office and miscellaneous expenses and $2,790 in travel and entertainment expenses, plus a foreign exchange loss of $35,984.
During the prior year, our expenses included $384,829 in management-related consulting fees, $167,123 in interest on the license assignment fee payable to ZKC, $105,744 in professional fees, $25,918 in rent, $24,016 in trust and filing fees, $12,854 in office and miscellaneous expenses, $10,549 in interest on advances from related parties/shareholders, $6,331 in travel and entertainment expenses and $1,653 in patent maintenance fees, plus a foreign exchange loss of $64,439.
Apart from the $46,400 decrease in our management-related consulting fees between the two years, the $42,473 increase in interest on the license assignment fee we accrued during the current year, and the change in our foreign exchange gain, our expenses were relatively consistent from year-to-year.
The significant management-related consulting fees we incurred over both years were paid to our principal executive officers and one consultant (during a portion of the prior year only) who provided management-related services to us and is also a major shareholder.
Other Items
During the year ended August 31, 2019, we incurred a $20,749 writedown of sales tax receivable and generated $6,972 in other income. During the same year, we also incurred a $351,741 gain on the revaluation of warrants to purchase shares of our common stock, most of which was associated with the expiry of certain of the warrants.
During the prior year, we incurred a $49,755 writedown of sales tax receivable and a $29,068 loss on the disposal of equipment, which was partially offset by a recovery of inventory written down in the amount of $1,996. We also incurred a $286,075 gain on the revaluation of warrants to purchase shares of our common stock, most of which was again associated with the expiry of certain of the warrants.
Net Loss
During the year ended August 31, 2019, we incurred a net loss and comprehensive loss of $635,045 and a net loss per shares of $0.01. During the prior year, we experienced a net loss and comprehensive loss of $810,825 and a net loss per share of $0.01.
Liquidity and Capital Resources
As of August 31, 2019, we had $14,843 in cash, $136,593 in current assets, $1,160,449 in total assets, $3,731,708 in current liabilities, $3,987,469 in total liabilities and a working capital deficiency of $3,586,763. As of that date, we also had an accumulated deficit of $12,418,531.
During the year ended August 31, 2019, we spent $154,860 in net cash on operating activities, compared to $109,494 in net cash spending on operating activities during the prior year. The increase in our cash spending on operating activities during the fiscal year ended August 31, 2019 was primarily attributable to certain changes in our assets and liabilities during the year, the most significant of which was the $389,876 increase in our accounts payable and accrued liabilities from year-to-year.
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We spent $153,519 in net cash on investing activities during the year ended August 31, 2019, including $86,519 in advances to Xthetica and $67,000 in net payments on the license assignment fee payable to ZKC. We did not spend any net cash on investing activities during the prior year.
During the year ended August 31, 2019, we received $317,558 in net cash from financing activities, including $251,692 in stock subscriptions and $114,890 in proceeds from the issuance of our common stock, less $49,024 in advances that we repaid to related parties and shareholders. During the prior year, we received $52,014 in net cash from financing activities, including $51,000 in advances from related parties/shareholders and $10,000 in stock subscriptions, less $6,435 in stock issue costs and $2,551 in proceeds from the exercise of warrants.
During the year ended August 31, 2019, our cash increased by $9,179 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 continue the process initiated by ZHC to design, manufacture and commercialize the Notox system and its features. We expect to work closely with the Clinic in this regard, and anticipate that we will require at least US$5,025,000 to carry out our plan, as follows:
| Description | Amount (US$) | |||
| Design, testing and prototyping the Notox unit (including $111,200 in milestone payments to RBC) | 600,000 | |||
| Design, testing and prototyping the Notox treatment probe | 1,400,000 | |||
| Acquisition costs payable to ZHC | 800,000 | |||
| Human trial expenses | 950,000 | |||
| FDA Section 510(k) notification costs and CE marking expenses | 750,000 | |||
| Marketing and inventory expenses | 525,000 | |||
| Total | 5,025,000 | |||
In addition, over the next 12 months our plan of operations through Tropic Spa is to create licensing opportunities for Tropic Spa’s intellectual property, and in particular, its US, Canadian, Australian and Chinese patents. We plan to target existing and highly-recognized brands in the tanning industry, both locally and internationally, that may be drawn to Tropic Spa’s technology in order to better serve their existing customers and enhance their competitive advantage. We do not anticipate spending any specific amounts for this purpose, as the creation of such opportunities will be covered by our general and administrative expenses described below.
We expect to incur the following general and administrative expenses over the next 12 months. These expenses are reasonably consistent with those from prior periods, as adjusted to reflect the expected increase in our operations and the costs of maintaining our status as a public company.
| 21 |
| Description | Amount ($) | |||
| Professional fees and filing fees | 120,000 | |||
| Management-related consulting fees | 333,000 | |||
| Rent (including utilities) | 30,000 | |||
| Travel and entertainment expenses | 25,000 | |||
| Office and miscellaneous expenses | 25,000 | |||
| Total | 533,000 | |||
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 agreements 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 management-related consulting fees and other general and administrative expenses, so as not to exceed the capital resources available to us.
Critical Accounting Policies
Intangible Assets
Patents
The US Patent is recorded at the value attributed to the shares issued by Tropic Spa in connection with its acquisition less accumulated amortization and impairment writedowns. The US Patent was issued on September 29, 2009 and is effective until September 29, 2026. The Australian, Canadian and Chinese Patents are recorded at the application costs incurred less accumulated amortization and impairment writedowns. The Australian Patent was issued on October 16, 2014 and is effective until April 5, 2027. The Canadian Patent was issued on June 21, 2016 and is effective until April 5, 2027. The Chinese Patent was issued on December 28, 2016 and is effective until February 1, 2033. Upon expiration, the patents can be extended subject to certain changes required to secure the extension. Although the effects of obsolescence, demand, competition and other economic factors (such as stability of the industry, technological advances and legislative action that results in an uncertain or changing regulatory environment) can have an adverse effect on the industry and saleability of patented products, management is not currently aware of any known adverse factors that will affect the patents 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.
At the time that the patents were issued, we did not believe that there were any limits to how long the Home Mist Tanning units could sell in the marketplace. Accordingly, management had determined that the best estimate of the useful lives of the US, Australian, Canadian and Chinese Patents were 17, 13, 11 and 16 years, respectively. During the year ended August 31, 2017 management was not in a position to be able to estimate the future cash flows attributable to the patents with any degree of certainty. Accordingly, the patents were written down to a nominal amount of $4.
| 22 |
License Agreement
The License Agreement is recorded at estimated fair value plus acquisition costs less accumulated amortization. The term of the License Agreement continues until the expiration of the last to expire of the Licensed Patents (as defined in the License Agreement). All costs related to the development of the licensed technology are expensed as incurred.
The technology licensed by Notox is a platform that provides us access to four large market segments or verticals (derma, pain, body and headache) that include the fields of aesthetics, drug-free pain management, body contouring and perspiration control. Based on management’s experience, it takes approximately two years to fully develop each vertical, with each vertical being developed in sequence. Accordingly, management’s best estimate of the amortization period for the License Agreement is eight years.
Amortization and Impairment
Definite-lived intangible assets are required to be amortized using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or utilized. Management was not able to determine with any amount of certainty the number of Home Mist Tanning units that would be sold over the useful lives of the patents. Accordingly, the patents were being amortized on a straight-line basis over the period of their useful lives. The License Agreement is being amortized over eight years based on management’s best estimate of the time required to develop the four verticals as explained above.
Intangible assets subject to amortization are required to be reviewed for impairment. An impairment loss must be recognized if the intangible asset’s carrying amount is not recoverable and the carrying amount exceeds fair value. We apply the following three-step process to identify, recognize and measure impairment of intangible assets:
| ● | Consider whether indicators of impairment are present indicating that the intangible assets’ carrying amount might not be recoverable; | |
| ● | If indicators are present, perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the intangible assets to their carrying amounts; and | |
| ● | If the undiscounted cash flows used in the recoverability test are less than the intangible assets’ carrying amount, determine the intangible assets’ fair value and recognize an impairment loss if the carrying amount exceeds fair value. |
Because of the unique nature of a patent and a license agreement, income-producing definite-lived intangible assets, the calculation of cash flows can be very difficult to estimate. In this case, the estimated cash flows reflect the direct revenue expected to be generated by the License Agreement as well as an allocation of expenses.
Foreign Currency
Our functional currency and the functional currency of our subsidiaries is the Canadian dollar. Our consolidated financial statements are presented in Canadian dollars.
Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the period-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Exchange differences arising on the translation of monetary items or on settlement of monetary items are recognized in the loss in the period in which they arise.
| 23 |
Stock Purchase Warrants
When we undertake a private placement, we may issue units comprised of our common stock and warrants to acquire our common stock. Warrants with a strike price denominated in our functional currency (the Canadian dollar) are considered to be indexed to our stock and are classified as equity. Warrants with a strike price denominated in a currency other than our functional currency are considered not to be indexed to our stock and are classified as a liability. Warrants classified as equity are initially measured at fair value. Subsequent changes in fair value are not recognized as long as the warrants continue to be classified as equity. Warrants classified as a liability are initially measured at fair value with changes in fair value recorded in profit or loss in each reporting period.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required.
Item 8. Financial Statements and Supplementary Data
Notox Technologies Corp.
Consolidated Financial Statements
Year Ended August 31, 2019
(Expressed in Canadian dollars)
| 24 |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Directors of
Notox Technologies Corp.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Notox Technologies Corp. (the “Company”), as of August 31, 2019, and the related consolidated statements of loss and comprehensive loss, cash flows and stockholders’ deficiency for the year ended August 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Notox Technologies Corp. as of August 31, 2019, and the results of its operations and its cash flows for the year ended August 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2019.
“DAVIDSON & COMPANY LLP”
| Vancouver, Canada | Chartered Professional Accountants |
November 29, 2019
| F-1 |
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
| August 31, 2019 | August 31, 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 14,843 | $ | 5,664 | ||||
| Amounts receivable | 6,584 | 6 | ||||||
| Sales tax receivable | 94,726 | 72,295 | ||||||
| Prepaid expenses | 20,440 | 24,048 | ||||||
| Total current assets | 136,593 | 102,013 | ||||||
| Advances – Xthetica (Note 15) | 86,519 | — | ||||||
| Patents, net | 4 | 4 | ||||||
| License agreement, net (Note 4) | 937,333 | 1,124,799 | ||||||
| Total assets | $ | 1,160,449 | $ | 1,226,816 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities (Note 5) | $ | 1,972,567 | $ | 1,582,691 | ||||
| Advances from related parties/shareholders (Notes 6 and 7) | 444,760 | 477,509 | ||||||
| License assignment fee and accrued interest payable (Note 8) | 1,042,561 | 882,257 | ||||||
| Stock purchase warrants (Note 10) | 1,776 | 353,517 | ||||||
| Stock subscribed in advance (Note 10) | 261,692 | 10,000 | ||||||
| Total current liabilities | 3,723,356 | 3,305,974 | ||||||
| Due to the Clinic (Note 4) | 264,113 | 227,707 | ||||||
| 3,987,469 | 3,533,681 | |||||||
| Stockholders’ deficiency (Note 10): | ||||||||
| Common stock | 1,133,146 | 1,018,256 | ||||||
| Additional paid-in capital | 8,458,365 | 8,458,365 | ||||||
| Accumulated Deficit | (12,418,531 | ) | (11,783,486 | ) | ||||
| Total stockholders’ deficiency | (2,827,020 | ) | (2,306,865 | ) | ||||
| Total liabilities and stockholders’ deficiency | $ | 1,160,449 | $ | 1,226,816 | ||||
Contingent liability (Note 14)
Subsequent event (Note 15)
See accompanying notes to the consolidated financial statements.
| F-2 |
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(EXPRESSED IN CANADIAN DOLLARS)
For the Year Ended August 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenue: | ||||||||
| Sales | $ | — | $ | — | ||||
| Production costs: | ||||||||
| Amortization – license agreement (Note 4) | 187,466 | 187,466 | ||||||
| Consulting fees – production | — | 2,820 | ||||||
| Depreciation | — | 5,129 | ||||||
| Patenting costs – the Clinic | 32,071 | 21,201 | ||||||
| Write-down of inventory | — | 1 | ||||||
| Total production costs | 219,537 | 216,617 | ||||||
| Gross loss | (219,537 | ) | (216,617 | ) | ||||
| General and administration: | ||||||||
| Consulting fees – management (Note 6) | 338,429 | 384,829 | ||||||
| Interest on advances from related parties/shareholders (Notes 6 and 7) | 12,059 | 10,549 | ||||||
| Interest on license assignment fee payable (Note 8) | 209,596 | 167,123 | ||||||
| Loss on foreign exchange | 35,984 | 64,439 | ||||||
| Office and miscellaneous | 8,166 | 12,854 | ||||||
| Patent maintenance fees | — | 1,653 | ||||||
| Professional fees | 108,591 | 105,744 | ||||||
| Rent | 13,202 | 25,918 | ||||||
| Travel and entertainment | 2,790 | 6,331 | ||||||
| Trust and filing fees | 24,655 | 24,016 | ||||||
| Total general and administration | 753,472 | 803,456 | ||||||
| Loss before other items and income taxes | (973,009 | ) | (1,020,073 | ) | ||||
| Other items: | ||||||||
| Other income | 6,972 | — | ||||||
| Gain on revaluation of derivative liabilities (Note 10) | 351,741 | 286,075 | ||||||
| Write-down of receivables | (20,749 | ) | (49,755 | ) | ||||
| Loss on disposal of equipment | — | (29,068 | ) | |||||
| Recovery of inventory written down | — | 1,996 | ||||||
| Loss before income taxes | (635,045 | ) | (810,825 | ) | ||||
| Income taxes (Note 13) | — | — | ||||||
| Loss and comprehensive loss | $ | (635,045 | ) | (810,825 | ) | |||
| Loss per share – basic and diluted | $ | (0.01 | ) | $ | (0.01 | ) | ||
| Weighted-average number of shares outstanding – basic and diluted | 57,563,463 | 57,520,185 | ||||||
See accompanying notes to the consolidated financial statements.
| F-3 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN CANADIAN DOLLARS)
| For the Year Ended August 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Loss | $ | (635,045 | ) | $ | (810,825 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Amortization - license agreement | 187,466 | 187,466 | ||||||
| Depreciation | — | 5,129 | ||||||
| Unrealized foreign exchange on advances from related parties/shareholders | 4,216 | — | ||||||
| Unrealized foreign exchange on license assignment fee payable | 17,708 | 31,922 | ||||||
| Unrealized foreign exchange and expense on due to Clinic | 4,335 | 8,741 | ||||||
| Write-down of inventory | — | 1 | ||||||
| Write-down of receivables | 20,749 | 49,755 | ||||||
| Interest accrued on advances from related parties/shareholders | 12,059 | 10,549 | ||||||
| Interest accrued on license assignment fee payable | 209,596 | 167,123 | ||||||
| Write-off of equipment | — | 29,068 | ||||||
| Gain on revaluation of derivative liabilities | (351,741 | ) | (283,524 | ) | ||||
| Changes in assets and liabilities: | ||||||||
| Amounts receivable | (6,578 | ) | (6 | ) | ||||
| Sales tax receivable | (43,180 | ) | (37,760 | ) | ||||
| Prepaid expenses | 3,608 | 4,576 | ||||||
| Accounts payable and accrued liabilities | 389,876 | 507,090 | ||||||
| Due to the Clinic | 32,071 | 21,201 | ||||||
| Net cash used in operating activities | (154,860 | ) | (109,494 | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Advances to Xthetica | (86,519 | ) | — | |||||
| Payments on license assignment fee, net | (67,000 | ) | — | |||||
| Net cash used in investing activities | (153,519 | ) | — | |||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds from private placements | 104,890 | — | ||||||
| Stock issue costs | — | (6,435 | ) | |||||
| Stock subscribed in advance | 261,692 | 10,000 | ||||||
| Advances from related parties/shareholders, net | (49,024 | ) | 51,000 | |||||
| Proceeds from exercise of warrant | — | (2,551 | ) | |||||
| Net cash provided by financing activities | 317,558 | 52,014 | ||||||
| Increase in cash during the year | 9,179 | (57,480 | ) | |||||
| Cash, beginning of year | 5,664 | 63,144 | ||||||
| Cash, end of year | $ | 14,843 | $ | 5,664 | ||||
| Supplementary Cash Flow Information: | ||||||||
| Interest paid | — | — | ||||||
| Taxes paid | $ | — | $ | — | ||||
See accompanying notes to the consolidated financial statements.
| F-4 |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
| Common Stock | Additional paid-in | Total stockholders’ | ||||||||||||||||||
| Share | Amount | capital | Deficit | deficiency | ||||||||||||||||
| Balance at August 31, 2017 | 56,892,843 | $ | 526,182 | $ | 8,460,414 | $ | (10,972,661 | ) | $ | (1,986,065 | ) | |||||||||
| Stock issued for cash | 630,000 | 491,041 | — | — | 491,041 | |||||||||||||||
| Stock issue costs – cash | — | (6,435 | ) | — | — | (6,435 | ) | |||||||||||||
| Stock issue costs – finder’s warrants | — | (2,581 | ) | — | — | (2,581 | ) | |||||||||||||
| Warrants exercised | 10,000 | 10,049 | (2,049 | ) | — | 8,000 | ||||||||||||||
| Loss | — | — | — | (810,825 | ) | (810,825 | ) | |||||||||||||
| Balance at August 31, 2018 | 57,532,843 | $ | 1,018,256 | $ | 8,458,365 | $ | (11,783,486 | ) | $ | (2,306,865 | ) | |||||||||
| Shares issued for warrants exercised in the prior year | 12,500 | 10,000 | — | — | 10,000 | |||||||||||||||
| Stock issued for cash | 80,000 | 104,890 | — | — | 104,890 | |||||||||||||||
| Loss | — | — | — | (635,045 | ) | (635,045 | ) | |||||||||||||
Balance at August 31, 2019 | 57,625,343 | $ | 1,133,146 | $ | 8,458,365 | $ | (12,418,531 | ) | $ | (2,827,020 | ) | |||||||||
See accompanying notes to the consolidated financial statements.
| F-5 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
1. Company Overview for the Year Ended August 31, 2019
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 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 expiration date for the preferred shares of 1894632 Ontario Inc. (“Subco”), was extended to December 31, 2020. The initial expiration date was part of amendment to the initial Exchange Agreement signed on February 17, 2015.
Going Concern
As reflected in the accompanying consolidated financial statements, the Company has a deficit of $12,418,531 (August 31, 2018 - $11,783,486) since inception, a working capital deficiency of $3,586,763 (August 31, 2018 - $3,203,961) and a stockholders’ deficiency of $2,827,020 (August 31, 2018 - $2,306,865). This raises substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on its ability to raise additional capital and to implement its business plan. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Management has evaluated the Company’s ability to continue as a going concern by assessing its ability to meet its obligations as they become due within one year from the date of issue of the financial statements. Management’s assessment included the following factors:
| ● | The Company’s financial condition as at the date of issue of the financial statements; | |
| ● | The Company’s actual or anticipated conditional and unconditional obligations due within one year from the date of issue of the financial statements; | |
| ● | The funds necessary to maintain the Company’s operations considering its current financial condition, obligations and other expected cash flows; and | |
| ● | Other conditions and events that may affect the Company’s ability to meet its obligations within one year from the date of issue of the financial statements. |
The Company’s 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 consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and 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 have been reflected herein.
The audited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated.
| F-6 |
NOTOX TECHNOLOGIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the financial statements of the Company, Tropic Spa International (“TSI”), Notox, 1894632 Ontario Inc. (“Subco”), and 1894631 Ontario Inc., the Company’s subsidiaries. All significant inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to fair values of intangible assets, useful lives of intangible assets and the likelihood of realization of its deferred tax assets. The Company bases its estimates on assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Concentration of Risk
The financial instrument which potentially subjects the Company to a concentration of credit risk is cash, amounts receivable, sales tax receivable, and advances to Xthetica. The Company places its cash in an account with a high credit quality financial institution.
Significant Accounting Policies
The accompanying consolidated financial statements reflect the application of certain significant accounting policies. There have been no material changes to the Company’s significant accounting policies that are disclosed in the consolidated financial statements and notes thereto during the year ended August 31, 2019.
Patents
The US Patent is recorded at the value attributed to the shares issued by TSI in connection with its acquisition less accumulated amortization and impairment write-downs. The US Patent was issued on September 29, 2009 and is effective until September 29, 2026. The Australian, Canadian and Chinese Patents are recorded at the application costs incurred less accumulated amortization and impairment write-downs. The Australian Patent was issued on October 16, 2014 and is effective until April 5, 2027. The Canadian Patent was issued on June 21, 2016 and is effective until April 5, 2027. The Chinese Patent was issued on December 28, 2016 and is effective until February 1, 2033. Upon expiration, the patents can be extended subject to certain changes required to secure the extension. Although the effects of obsolescence, demand, competition and other economic factors (such as stability of the industry, technological advances and legislative action that results in an uncertain or changing regulatory environment) can have an adverse effect on the industry and saleability of patented products, management is not currently aware of any known adverse factors that will affect the patents 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.
At the time that the patents were issued, the Company did not believe that there were any limits to how long the Home Mist Tanning units could sell in the market place. Accordingly, management had determined that the best estimates of useful lives of the US, Australian, Canadian and Chinese Patents were 17, 13, 11 and 16 years, respectively. During the year ended August 31, 2017 management was not in a position to be able to estimate the future cash flows attributable to the patents with any degree of certainty. Accordingly, the patents were written down to a nominal amount of $4.
Subsequent to August 31, 2019, the Company was notified that the Canadian, Australian and Chinese patents had lapsed or expired.
License Agreement
The License Agreement is recorded at estimated fair value plus acquisition costs less accumulated amortization and impairment write-downs. The term of the License Agreement continues until the expiration of the last to expire of the Licensed Patents (as defined in the License Agreement). All costs related to the development of the licensed technology are expensed as incurred.
| F-7 |
NOTOX TECHNOLOGIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
The technology licensed by Notox is a platform that provides the Company access to four large market segments or verticals (derma, pain, body and headache) that include the fields of aesthetics, drug-free pain management, body contouring and perspiration control. Based on management’s experience, it takes approximately two years to fully develop each vertical, with each vertical being developed in sequence. Accordingly, management’s best estimate of the amortization period for the License Agreement is eight years.
Amortization and Impairment
Definite-lived intangible assets are required to be amortized using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or utilized. Management was not able to determine with any amount of certainty the number of Home Mist Tanning units that would be sold over the useful lives of the patents. Accordingly, the patents were being amortized on a straight-line basis over the period of their useful lives. The License Agreement is being amortized over eight years based on management’s best estimate of the time required to develop the four verticals as explained above.
Intangible assets subject to amortization are required to be reviewed for impairment. An impairment loss must be recognized if the intangible asset’s carrying amount is not recoverable and the carrying amount exceeds fair value. The Company applies the following three-step process to identify, recognize and measure impairment of intangible assets:
| ● | Consider whether indicators of impairment are present indicating that the intangible assets’ carrying amount might not be recoverable; |
| ● | If indicators are present, perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the intangible assets to their carrying amounts; and |
| ● | If the undiscounted cash flows used in the recoverability test are less than the intangible assets’ carrying amount, determine the intangible assets’ fair value and recognize an impairment loss if the carrying amount exceeds fair value. |
Because of the unique nature of a patent and a license agreement, income-producing definite-lived intangible assets, the calculation of cash flows can be very difficult to estimate. In this case, the estimated cash flows reflect the direct revenue expected to be generated by the License Agreement as well as an allocation of expenses.
Leases
The Company currently rents premises classified as a short-term lease as the length of the lease is only 12 months. Therefore, the Company does not need to apply ASC 842 lease recognition and measurement requirements, and the lease is treated as an operating lease.
Impairment of Long-Lived Assets
Long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by it. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds its fair value.
Stock Purchase Warrants
When the Company undertakes a private placement, it may issue units comprised of common stock of the Company and warrants to acquire common stock of the Company. Warrants with a strike price denominated in the Company’s functional currency (the Canadian dollar) are considered to be indexed to the Company’s stock and are classified as equity. Warrants with a strike price denominated in a currency other than the Company’s functional currency are considered not to be indexed to the Company’s stock and are classified as a liability. Warrants classified as equity are initially measured at fair value. Subsequent changes in fair value are not recognized as long as the warrants continue to be classified as equity. Warrants classified as a liability are initially measured at fair value with changes in fair value recorded in profit or loss in each reporting period.
| F-8 |
NOTOX TECHNOLOGIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
Production Costs
Production costs consist of patent and license agreement amortization, production consulting fees, equipment depreciation, design and production costs, materials and supplies and patenting costs.
Advertising Costs
The Company charges all advertising and marketing costs to expense in the period incurred.
Income Taxes
Deferred income tax is accounted for using the asset and liability method. Deferred income taxes are provided for temporary differences in recognizing certain income and expense items for financial reporting purposes and tax reporting purposes. Such deferred income taxes primarily relate to the difference between the tax bases of assets and liabilities and their financial reporting amounts. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At this time, the Company is not able to project future taxable income over the periods in which the deferred tax assets are deductible and, accordingly, management is not able to determine if it is more likely than not that the Company will realize the benefits of these deductible differences.
Fair Value of Financial Instruments
Carrying values of cash, receivables, accounts payable and accrued liabilities, advances from related parties/shareholders, license assignment fee and accrued interest payable and stock subscribed approximate fair value because of the short-term nature of these items. The fair value of stock purchase warrants is determined using Level 3 inputs in the Black-Scholes model.
Foreign Currency
The functional currency of the Company and its subsidiaries is the Canadian dollar. The accompanying consolidated financial statements are presented in Canadian dollars.
Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the period-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Exchange differences arising on the translation of monetary items or on settlement of monetary items are recognized in the loss in the period in which they arise.
Loss per Share – basic and diluted
The Company has adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 260-10 which provides for calculation of “basic” and “diluted” loss per share. Basic loss per share includes no dilution and is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the year. Diluted loss per share reflect the potential dilution of securities that could share in the earnings of an entity. Diluted loss per share exclude all potentially dilutive shares if their effect is anti-dilutive. There were no potentially dilutive shares outstanding as at August 31, 2019 and 2018.
| F-9 |
NOTOX TECHNOLOGIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
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.
4. License Agreement, Net
On December 1, 2012, Zoran Holding Corporation (“ZHC”) and the Clinic entered into the License Agreement whereby the Clinic granted ZHC 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 towards the definitive agreement that would extend the above date, to a new date, based on the clear development milestones and schedule to be agreed upon not later than March 31, 2020.
As of August 31, 2019, all accrued and unreimbursed patenting costs totaled $264,113 (August 31, 2018 - $227,707). 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:
| August 31, 2019 | ||||||||||||
| Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||
| License Agreement | $ | 1,499,731 | $ | 562,398 | $ | 937,333 | ||||||
| August 31, 2018 | ||||||||||||
| Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||
| License Agreement | $ | 1,499,731 | $ | 374,932 | $ | 1,124,799 | ||||||
As of August 31, 2019, amortization expense on the License Agreement for the next five years was expected to be as follows:
| Amount | ||||
| Year ending: | ||||
| 2020 | $ | 187,466 | ||
| 2021 | 187,466 | |||
| 2022 | 187,466 | |||
| 2023 | 187,466 | |||
| 2024 | 187,469 | |||
| Total | $ | 937,333 | ||
| F-10 |
NOTOX TECHNOLOGIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
5. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of:
| August 31, 2019 | August 31, 2018 | |||||||
| Trade payables | $ | 1,193,429 | $ | 1,412,277 | ||||
| Vendor accruals | 779,138 | 170,414 | ||||||
| Accounts payable and accrued liabilities | $ | 1,972,567 | $ | 1,582,691 | ||||
6. 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 consolidated financial statements, related party transactions are as follows:
a) Related party balances
Advances from related parties include:
| ● | At August 31, 2019, the Company owed $232,000 (August 31, 2018 - $232,000) in advances payable to the President of the Company. These advances are unsecured and bear interest at 3% per annum. Accrued interest payable to the President totaled $39,498 at August 31, 2019 (August 31, 2018 - $32,538). | |
| ● | At August 31, 2019, the Company is owed $8,609 (August 31, 2018 - the Company owed $51,000) in advances receivable by the CEO of the Company. This balance bears no interest and has no repayment terms. |
Accounts payable and accrued liabilities include:
| ● | At August 31, 2019, the Company owed $658,022 (August 31, 2018 - $438,935) in consulting fees to a company controlled by the President of the Company. | |
| ● | At August 31, 2019, the Company owed $470,381 (August 31, 2018 - $245,564) in consulting fees to a company controlled by the CEO of the Company. | |
| ● | At August 31, 2019, the Company owed $353,246 (August 31, 2018 - $330,688) in consulting fees to a company controlled by a major shareholder of the Company. |
b) Related party transactions
During the year ended August 31, 2019, the Company had the following transactions with related parties:
| ● | Consulting fees expense of $159,452 (August 31, 2018 - $159,674) in connection with the services provided by a company controlled by the President of the Company. | |
| ● | Consulting fees expense of $166,132 (August 31, 2018 - $159,674) in connection with the services provided by a company controlled by the CEO of the Company. | |
| ● | Consulting fees expense of $nil (August 31, 2018 - $65,481) in connection with the services provided by a company controlled by a major shareholder of the Company. | |
| ● | Interest expense of $6,960 (August 31, 2018 - $13,721) in connection with advances owing to the President and other shareholders of the Company. |
7. Advances from Shareholders
Advances payable to shareholders totaled $145,000 at August 31, 2019 (August 31, 2018 - $145,000). These advances are unsecured and bear interest at 3% per annum, with no specific repayment terms. Interest expense of $4,350 was incurred on these advances during the year ended August 31, 2019 (August 31, 2018 - $3,589). As at August 31, 2019 accrued interest payable to shareholders totaled $21,321 (August 31, 2018 - $16,971).
8. License assignment fee and accrued interest payable
Pursuant to the amendment to the Share Exchange Agreement, the Company will 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.
| F-11 |
NOTOX TECHNOLOGIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
Since September 1, 2017, interest of 24% per annum, compounding annually, has been accrued on the outstanding balance payable. Interest expense of US$288,667 ($384,133) was accrued on the balance payable as at August 31, 2019. At August 31, 2019, the balance of the license assignment fee payable and interest payable to ZKC was US$783,667 ($1,042,561) (August 31, 2018 - US$675,800 ($882,257)). See Note 4.
9. 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, MCM, through its principal, performs general consulting services on behalf of the Company. Pursuant to the MCM Agreement, the sole proprietor acts in the capacity of President of the Company. Pursuant to the ZKC Agreement, ZKC, through its principal, acts in the capacity of CEO of the Company. Each consulting agreement is for a period of 10 years, with successive automatic renewal periods of two years until terminated. Pursuant to these consulting agreements, each consultant is entitled to receive the following compensation:
| ● | Remuneration – an aggregate of US$125,000 per annum plus HST on a bi-monthly basis; | |
| ● | EPS Bonus – when the Company generates earnings per share of $0.05, plus any multiple thereof, the Company shall issue the consultant 1,000,000 shares of the Company’s common stock and pay the consultant US$250,000 plus HST; | |
| ● | Change of Control Bonus – immediately prior to the completion of a change of control (as defined in these consulting agreements) the Company shall issue the consultant an aggregate of 20,000,000 shares of the Company’s common stock; and | |
| ● | Additional Bonus – the company may from time to time pay the consultant one or more bonuses as determined by the Board of Directors at its sole discretion. |
Effective February 3, 2018, the Company terminated the 1040614 Agreement.
As at August 31, 2019, the Company renewed its premises lease for another year beginning on April 1, 2019 for $5,520 plus HST per annum for a period of twelve months.
10. Stockholders’ Deficiency
Authorized stock
As at August 31, 2019, the Company was authorized to issue 500,000,000 (August 31, 2018 - 300,000,000) 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 August 31, 2019, the Company had 57,625,343 shares of common stock legally issued and outstanding (2018 - 57,532,843). Of those shares, 50,993,270 were restricted and 6,632,073 were unrestricted.
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 August 31, 2019 and August 31, 2018, 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.
Share issuances
During the year ended August 31, 2018, the Company completed the following common stock transactions:
| ● | On September 21, 2017, the Company closed a US dollar financing pursuant to which the Company issued 630,000 units at US$1.00 per unit for gross proceeds of $830,674, with each unit consisting of one share of the Company’s common stock and one warrant to purchase one share of common stock exercisable at a price of US$1.40 per share until September 7, 2019. $491,041 was allocated to common stock and $339,633 was allocated to stock purchase warrants. The Company paid cash finder’s fees of $6,435 and issued 5,000 finder’s stock purchase warrants exercisable at US$1.40 per warrant share until July 17, 2019, valued at $2,581 and credited to stock purchase warrants. |
| ● | On September 21, 2017, the Company issued 10,000 shares of common stock at $0.80 per share for gross proceeds of $8,000 pursuant to the exercise of warrants during the year ended August 31, 2017. $2,049 of the gross proceeds received that was allocated to these warrants has been deducted from additional paid-in capital. |
| F-12 |
NOTOX TECHNOLOGIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
During the year ended August 31, 2019, the Company completed the following common stock transactions:
| ● | During the previous year ended August 31, 2018, $10,000 in stock subscriptions was received pursuant to the exercise of 12,500 warrants at a price of $0.80 per share in February 2018. The shares were issued in November 2018. |
| ● | On July 3, 2019, the Company issued 80,000 shares of common stock through a private placement with a fair value of $104,890 at a price of U$1.00 per share. |
Stock subscribed in advance
During the year ended August 31, 2019, the Company received proceeds of $261,692 (US$195,000) as consideration for unit and share private placements, and the exercise of 6,250 warrants. The units/shares were not issued as of August 31, 2019 and have therefore been classified as a liability.
Stock Purchase Warrants
The continuity of Canadian dollar denominated stock purchase warrants for the six months ended August 31, 2019 is as follows:
Expiry Date | Price | August 31, 2017 | Issued | Exercised | August 31, 2018 | Issued | Expired | August 31, 2019 | ||||||||||||||||||||||||
| October 31, 2018 | $ | 0.80 | 130,000 | — | (12,500 | ) | 117,500 | — | (117,500 | ) | — | |||||||||||||||||||||
At August 31, 2019, the weighted-average remaining contractual life of Canadian dollar warrants outstanding was 0.00 years (August 31, 2018 - 0.17).
The continuity of US dollar denominated stock purchase warrants for the year ended August 31, 2019 is as follows:
| Expiry Date | Price US$ | August 31, 2017 | Issued | August 31, 2018 | Exercised* | Issued | Expired | August 31, 2019 | ||||||||||||||||||||||||
| September 30, 2018 – Finder | 1.40 | 15,000 | — | 15,000 | — | — | (15,000 | ) | — | |||||||||||||||||||||||
| October 31, 2018 | 0.80 | 220,770 | — | 220,770 | (6,250 | ) | — | (214,520 | ) | — | ||||||||||||||||||||||
| November 2, 2018 | 1.40 | 400,000 | — | 400,000 | — | — | (400,000 | ) | — | |||||||||||||||||||||||
| July 17, 2019 – Finder | 1.40 | — | 5,000 | 5,000 | — | — | (5,000 | ) | — | |||||||||||||||||||||||
| September 7, 2019 | 1.40 | — | 630,000 | 630,000 | — | — | — | 630,000 | ||||||||||||||||||||||||
| 635,770 | 635,000 | 1,270,770 | (6,250 | ) | — | (634,520 | ) | 630,000 | ||||||||||||||||||||||||
*warrants exercised during the year ended August 31, 2019 have not yet issued shares.
At August 31, 2019, the stock purchase warrants were fair valued at $1,776 (August 31, 2018 – $353,517) and the weighted-average remaining contractual life of US dollar warrants outstanding was 0.02 years (August 31, 2018 – 0.59 years). During the year ended August 31, 2019, the Company recognized a gain on revaluation of $351,741 (August 31, 2018 - 286,075)
| F-13 |
NOTOX TECHNOLOGIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
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 years ended August 31, 2019 and 2018 with the following assumptions:
| August 31, 2019 | August 31, 2018 | |||||||
| Expected dividend yield | 0.00 | % | 0.00 | % | ||||
| Risk-free interest rate | 1.78 | % | 1.47% - 2.04 | % | ||||
| Expected stock price volatility | 100.00 | % | 100.00 | % | ||||
| Expected life of warrants | 0.02 years | 0.08 – 2 years | ||||||
11. 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.
12. Accounting Pronouncements
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 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.
13. Income Taxes
The provision for income taxes differs from that computed at combined corporate tax rate of approximately 26% as follows:
Income tax recovery
| August 31, 2019 | August 31, 2018 | |||||||
| Net Loss | $ | (635,045 | ) | $ | (810,825 | ) | ||
| Expected income tax recovery | (165,112 | ) | (199,277 | ) | ||||
| Non-deductible differences | 232,440 | (77,794 | ) | |||||
| Other temporary difference | (190,840 | ) | — | |||||
| Change in valuation allowance | 123,512 | 277,071 | ||||||
| $ | — | $ | — | |||||
| F-14 |
NOTOX TECHNOLOGIES CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
Deferred tax assets
| August 31, 2019 | August 31, 2018 | |||||||
| Non-capital loss carry forwards | $ | 3,222,279 | $ | 2,029,000 | ||||
| Other temporary differences | 192,660 | 753,000 | ||||||
| Change in valuation allowances | (3,414,939 | ) | (2,782,000 | ) | ||||
| $ | — | $ | — | |||||
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. A valuation allowance was established based upon management’s inability to determine whether sufficient future profits will be generated.
As of August 31, 2019, and 2018 the Company has approximately $11,258,939 and $7,844,000, respectively, of non-capital losses available to offset future taxable income. These losses will expire between 2024 to 2039.
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 10.
15. Subsequent Event
The Company’s management has evaluated subsequent events up to November 29, 2019, the date the consolidated financial statements were issued, 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 consolidated financial statements.
| (i) | On July 19, 2019, the Company entered into a binding letter of intent (“LOI”) to acquire the shares of Xthetica Inc. (“Xthetica”), a private Ontario corporation in the business of distributing, marketing and selling a variety of medical aesthetics products, for the issuance of 10,000,000 units, which includes one common share and one warrant each. The Company has not yet entered into a binding definitive agreement which will supersede the LOI in its entirety and govern the completion of the transaction. As at August 31, 2019, the Company has advanced $86,519 to Xthetica. Subsequent to August 31, 2019, the Company has advanced or paid expenses on behalf of Xthetica of $108,488 and received amounts of $186,000 from Xthetica. |
| F-15 |
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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.
Internal Control over Financial Reporting
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). Under the supervision of our Chief Executive Officer and Chief Financial Officer, our management conducted an assessment of the effectiveness of our internal control over financial reporting as of August 31, 2019 using the criteria established in the 2013Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
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 below constitute, both individually and in the aggregate, a material weakness given their potential impact on our financial reporting and internal control over financial reporting.
In its assessment of the effectiveness of our internal control over financial reporting as of August 31, 2019, management determined that there were deficiencies that constitute, both individually and in the aggregate, a material weakness. These deficiencies include the fact that we have no audit committee, traditionally have had no independent directors, and do not have a system in place to review and monitor internal control over financial reporting.
Management is currently evaluating remediation plans for the deficiencies and will implement changes as time and financial resources allow.
Changes in 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 our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
| 25 |
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
As of the date of this Report, the names, ages and positions of our executive officers and directors are as follows:
| Name | Age | Position | ||
| Zoran Konević | 61 | Chief Executive Officer, Director | ||
| John Marmora | 66 | President, Chief Financial Officer, Principal Accounting Officer, Secretary, Treasurer, Director |
Zoran Konević – Chief Executive Officer, Director
Mr. Konević was appointed as our Chief Executive Officer and director on June 13, 2016. He is an independent consultant who, through his various holding companies, has been investing in early stage businesses in a variety of industries for over 30 years. Those industries range from manufacturing and technology to licensing and bioscience. In addition to providing capital, Mr. Konević’s participation has included creating strategic marketing themes, securing distribution channels and using international relations to benefit the subject entities.
John Marmora – President, Chief Financial Officer, Principal Accounting Officer, Secretary, Treasurer, Director
Mr. Marmora was appointed as our President, Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, Secretary, Treasurer and director on the Closing Date. On November 16, 2015, he resigned as our Chief Financial Officer and Principal Accounting Officer, but was reappointed to those positions on November 10, 2016. Mr. Marmora has served as the President, Secretary, Treasurer and sole director of Tropic Spa since its inception on September 17, 2007.
Mr. Marmora has more than three decades of operational and management experience in a wide variety of industries. In 2003, he founded MCM Consulting, a sole proprietorship that manufactured and marketed a sunless tanning system, and since that time, he has been involved in the development, manufacturing and marketing of the patented sunless tanning system currently owned by Tropic Spa.
From 1977 to 1983, Mr. Marmora served as the President of Celmar Productions Inc., an award-winning company in the business of writing and producing jingles for commercial radio and television. Following that, he acted as the President of Erotico Music Inc., a music company that wrote and produced international commercial recordings and managed recording artists, from 1990 to 2004. During this period, Mr. Marmora engaged in the negotiation of multimillion-dollar contracts on behalf of the company’s clients with record labels such as Universal Music and Arista Records (a wholly owned subsidiary of Sony Music Entertainment). Over the course of his music career, he earned several notable awards for work on various recordings, including the 2002 SOCAN Songwriter of the Year Award (Pop Music) and a 2004 Juno for Instrumental Album of the Year.
Neither Mr. Marmora nor Mr. Konević has been a director of any company with a class of securities registered pursuant to section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or subject to the requirements of section 15(d) of the Exchange Act, or any company registered as an investment company under the Investment Company Act of 1940, during the past five years.
| 26 |
Corporate Governance
Our business and affairs are managed under the direction of our Board of Directors, which currently consists of Mr. Konević and Mr. Marmora.
Term of Office
Our directors are elected to serve until our next annual meeting of stockholders and until their successors have been elected and qualified. Our officers are appointed to serve until the meeting of our Board of Directors following the next annual meeting of our stockholders and until their successors have been elected and qualified.
Board Committees
We do not have an audit, nominating or compensation committee. We intend, however, to establish an audit committee and a compensation committee of our Board of Directors in the future. We envision that the audit committee will be primarily responsible for reviewing the services performed by our auditors and evaluating our accounting policies and our system of internal controls. The compensation committee will be primarily responsible for reviewing and approving our salary and benefits policies (including stock options) and other compensation of our executive officers.
Significant Employees
Other than our executive officers, we do not expect any other individuals to make a significant contribution to our business.
Family Relationships
There are no family relationships among our directors or executive officers or persons nominated or chosen by us to become directors or executive officers.
Legal Proceedings
None of our directors, executive officers, promoters or control persons has been involved in any of the following events during the past 10 years:
| ● | any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; | |
| ● | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
| ● | being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; | |
| ● | being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated any federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated; | |
| ● | being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any law or regulation prohibiting mail or wire fraud or fraud in connection with any business activity; |
| 27 |
| ● | being the subject of, or a party to, any judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated relating to an alleged violation of any federal or state securities or commodities law or regulation or any law or regulation respecting financial institutions or insurance companies; or | |
| ● | being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any stock, commodities or derivatives exchange or other self-regulatory organization. |
Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Code of Ethics
We have not yet adopted a code of ethics because we have not yet finalized the content of such a code.
Management Agreements
On November 16, 2015, we entered into a consulting agreement with a corporation controlled by Azmatali Mehrali, our former Chief Financial Officer and Principal Accounting Officer, pursuant to which, among other things, we agreed to cause Subco to issue an aggregate of 1,500,000 exchangeable preferred shares to Mr. Mehrali’s corporation over two years, all of which could be rescinded in certain limited circumstances. In addition, the consulting agreement provided that we would pay Mr. Mehrali’s corporation fees of $100,000 per year plus applicable taxes upon raising an aggregate of $500,000 in gross proceeds from the sale of debt or equity securities, and grant that corporation a bonus tied to our earnings per share results in any fiscal year during the term of the agreement. On August 24, 2016, we caused Subco to issue 750,000 of the foregoing exchangeable preferred shares to Mr. Mehrali’s corporation and as at August 31, 2019, we owed $75,000 in accrued remuneration to the corporation. Effective November 10, 2016, this agreement was terminated.
On December 1, 2015, we entered into consulting agreements with 1040614 Ontario Ltd., a private Ontario corporation (“1040614”) and MCM Consulting, an Ontario sole proprietorship (“MCM”). Pursuant to those agreements, 1040614, through its principal, performed various services related to business development, strategic planning and capital-raising for us and MCM, through its sole proprietor, John Marmora, our office and director, acted as our Chief Executive Officer. On June 13, 2016, those agreements were terminated and replaced by new consulting agreements.
On February 4, 2016, we entered into a consulting agreement with Zoran K Corporation, a private Ontario corporation (“ZKC”). Pursuant to that agreement, ZKC, through its principal, Zoran Konević, acted as our exclusive sales, marketing and product development agent. On June 13, 2016, the agreement was terminated and replaced by a new consulting agreement.
On June 13, 2016, we entered into new consulting agreements with 1040614 (the “1040614 Agreement”), MCM (the “MCM Agreement”) and ZKC (the “ZKC Agreement”). Pursuant to the 1040614 Agreement, 1040614, through its principal, performs general consulting services on our behalf; pursuant to the MCM Agreement, MCM, through Mr. Marmora, acts as our President; and pursuant to the ZKC Agreement, ZKC, through Mr. Konević, acts as our Chief Executive Officer. Each consulting agreement is for a period of 10 years, with successive automatic renewal periods of two years until terminated. Pursuant to these consulting agreements, each consultant is entitled to receive the following compensation:
| ● | Remuneration – an aggregate of US$125,000 per annum plus applicable taxes on a bi-monthly basis; |
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| ● | EPS Bonus – when we generate earnings per share of US$0.05, plus any multiple thereof, we are required issue the consultant 1,000,000 shares of our common stock and pay the consultant US$250,000 plus applicable taxes; | |
| ● | Change of Control Bonus – immediately prior to the completion of a change of control (as defined in these consulting agreements) we are required to issue the consultant an aggregate of 20,000,000 shares of our common stock; and | |
| ● | Additional Bonus – we may from time to time pay the consultant one or more bonuses as determined by our Board of Directors at its sole discretion. |
Section 16(a) Beneficial Ownership Compliance Reporting
Section 16(a) of the Exchange Act requires a company’s directors and officers, and persons who own more than 10% of any class of a company’s equity securities which are registered under Section 12 of the Exchange Act, to file with the SEC reports of ownership on Form 3 and reports of changes in ownership on Forms 4 and 5. Such officers, directors and 10% stockholders are also required to furnish the company with copies of all Section 16(a) reports they file. Based solely on our review of the copies of such forms received by us and on written representations from certain reporting persons as August 31, 2019, we believe that all Section 16(a) reports applicable to our officers, directors and 10% stockholders with respect to our fiscal year ended August 31, 2019 have not been filed.
Item 11. Executive Compensation
Summary Compensation Table
The following sets forth information with respect to the compensation awarded or paid to John Marmora, our President, Chief Financial Officer, Secretary, Treasurer and director, and Zoran Konević, our Chief Executive Officer and director, for all services rendered in all capacities to us and our subsidiaries over the past two fiscal years. We do not have any other executive officers and no other individual received total compensation from us in excess of US$100,000 during those years. Pursuant to Item 402(a)(5) of Regulation S-K we have omitted certain columns from the table since there was no compensation awarded to, earned by or paid to these individuals required to be reported in such columns in either year.
| Name and Principal Position | Year Ended August 31 | Salary ($) | Total ($) | |||||||||
| Zoran Konević, Chief Executive Officer (1) | 2019 | 166,186 | 166,186 | |||||||||
| 2018 | 159,674 | 159,674 | ||||||||||
| John Marmora, President (2) | 2019 | 166,186 | 166,186 | |||||||||
| 2018 | 159,674 | 159,674 | ||||||||||
| (1) | Zoran Konević was appointed as our Chief Executive Officer and director on June 13, 2016. |
| (2) | John Marmora was appointed as our President, Chief Executive Officer, Secretary, Treasurer and director on the Closing Date, has served as the President, Secretary, Treasurer and sole director of Tropic Spa since the company’s inception on September 17, 2007, and was our Chief Financial Officer and Principal Accounting Officer from the Closing Date until November 16, 2015. On November 10, 2016, Mr. Marmora was reappointed as our Chief Financial Officer and Principal Accounting Officer. |
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Outstanding Equity Awards at Fiscal Year-End
As of August 31, 2019, we did not have any outstanding equity awards.
Benefit Plans
We do not have any pension plan, profit sharing plan or similar plan for the benefit of our officers, directors or employees. However, we may establish such plans in the future.
Director Compensation
We have not compensated any of our directors for their service on the Board of Directors. Management directors are not compensated for their service as directors; however, they may receive compensation for their services as employees or consultants. The compensation received by our management directors is shown in the “Summary Compensation Table” above.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information regarding our common stock beneficially owned as of the date of this Report for (i) each stockholder known to be the beneficial owner of 5% or more of our outstanding shares of common stock, (ii) each of our officers and directors and (iii) our officers and directors as a group. A person is considered to beneficially own any shares over which such person, directly or indirectly, exercises sole or shared voting or investment power, or over which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options or warrants or otherwise. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our officers and directors is exercised solely by the beneficial owner thereof.
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For the purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of our common stock that such person has the right to acquire within 60 days. For the purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership.
| Title of Class | Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class (1) | Total Voting Power (2) | ||||||||||
| Common Stock | Zoran Konević (3) 123 Commerce Valley Drive East, Suite 333 Thornhill, Ontario, Canada L3T 7W8 | 30,000,000 | 52.1 | 27.8 | ||||||||||
| Common Stock | John Marmora (4) 95 Mural Street, Suite 600 Richmond Hill, Ontario, Canada L4B 3G2 | 19,346,678 | (5) | 26.3 | 17.9 | |||||||||
| All Officers and Directors as a Group | 49,346,678 | 78.4 | 45.7 | |||||||||||
| Special Voting Shares (6) | John Marmora (4) 95 Mural Street, Suite 600 Richmond Hill, Ontario, Canada L4B 3G2 | 1 | 100 | - | ||||||||||
| All Officers and Directors as a Group | 1 | 100 | - | |||||||||||
| Common Stock | Gerry Racicot PO Box 1041, 345691 Quaker Street Norwich, Ontario, Canada N0J 1P0 | 16,700,011 | 22.5 | 15.4 | ||||||||||
| (1) | Based on 57,625,343 shares of our common stock issued and outstanding as of the date hereof as well as the exchange of all preferred shares of Subco owned by the applicable holder into shares of our common stock. For clarity, the percentage ownership does not reflect the exchange of preferred shares of Subco into shares of our common stock by any person other than the applicable holder. |
| (2) | Based on the exchange of all 50,601,750 issued and outstanding preferred shares of Subco for shares of our common stock. |
| (3) | Zoran Konević is our Chief Executive Officer and director. |
| (4) | John Marmora is our President, Chief Financial Officer, Principal Accounting Officer, Secretary, Treasurer and director, is the Trustee under the Trust Agreement, and is the only person who possesses the right to exchange preferred shares of Subco for shares of our common stock within 60 days, since any such exchange can only be completed with the written consent of Subco. |
| (5) | Includes 3,299,989 shares of our common stock and 16,046,689 preferred shares of Subco, each of which exchangeable into one share of our common stock. Pursuant to the Exchangeable Share Provisions, the applicable holder may not exercise investment power over either the shares of our common stock or the preferred shares of Subco until a redemption has occurred, but may exercise voting power over the shares of our common stock through the operation of the Trust Agreement. |
| (6) | The Special Voting Share confers on the Trustee the number of votes equal to the number of outstanding preferred shares of Subco, other than such shares held by us or our affiliates, on all matters on which the holders of shares of our common stock are entitled to vote. |
Trust Agreement
As described in the “Business” section of this Report, the Trust Agreement provides and establishes a procedure whereby the voting rights attached to shares of our common stock are exercisable by the registered holders (the “Beneficiaries”) of the preferred shares of Subco (the “Exchangeable Shares”), other than those Exchangeable Shares held by us or our affiliates, through the trustee, John Marmora, who is also one of our principal executive officers and directors (the “Trustee”). The Trustee’s address is included in the table above, and he holds legal title to a special voting share (the “Special Voting Share”) to which voting rights are attached for the benefit of the Beneficiaries.
The Special Voting Share confers on the Trustee the number of votes equal to the number of outstanding Exchangeable Shares, other than Exchangeable Shares held by us or our affiliates, on all matters on which the holders of shares of our common stock are entitled to vote. Under the Trust Agreement, the Trustee is required to hold the Special Voting Share as trustee solely for the use and benefit of the Beneficiaries and has no power or authority to sell, transfer, vote or otherwise deal with the Special Voting Share.
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The Trust Agreement provides a mechanism under which a Beneficiary may instruct the Trustee regarding how to vote the votes conferred by the Special Voting Share relating to such Beneficiary’s Exchangeable Shares. This mechanism ensures that Beneficiaries have a complete bundle of rights that collectively is equivalent to the rights each Beneficiary would have if it owned shares of our common stock directly, and is exercised by Beneficiaries providing written instructions to the Trustee following the mailing of any communications by us to the holders of our common stock as well as the holders of Exchangeable Shares.
For commercial reasons, it is in the interests of a holder of Exchangeable Shares to obtain additional protection with respect to its ability to exercise retraction or exchange rights in the event of the liquidation or insolvency of us or Subco. As a result, the Trust Agreement also grants such holders “insolvency put rights”, including the right to automatically exchange their Exchangeable Shares for shares of our common stock upon the occurrence of certain events.
The right of a Beneficiary to exercise any voting rights in respect of the Exchangeable Shares held by such Beneficiary will cease immediately upon the exercise of any exchange right, automatic exchange, retraction or redemption of Exchangeable Shares for shares of our common stock, or the liquidation, dissolution or winding-up of Subco.
The foregoing description of the Trust Agreement is qualified in its entirety by reference to the complete text of the Trust Agreement include as Appendix 3 to the Exchange Agreement filed as Exhibit 10.1 to our current report on Form 8-K filed with the SEC on July 3, 2013.
Changes in Control
As of the date of this Report, we are not aware of any arrangements, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in our control.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The following includes a summary of transactions since September 1, 2016, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds US$120,000 and in which any related person had or will have a direct or indirect material interest. We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.
| ● | At August 31, 2019, Zoran Konević, our Chief Executive Officer and director, owed us $8,609 (2018 - we owed $51,000). This balance bears no interest and has no repayment terms. | |
| ● | At August 31, 2019, advances payable to Mr. Marmora totaled $232,000 (2018 - $232,000). These advances are unsecured and bear interest at 3% per annum. Of this amount, $219,500 is due on demand and $12,500 has no repayment terms. Accrued interest payable to Mr. Marmora totaled $39,498 at August 31, 2019 (2018 - $32,538). | |
| ● | For the years ended August 31, 2019, 2018 and 2017, consulting fees paid or accrued as payable to MCM Consulting, a sole proprietorship controlled by Mr. Marmora (“MCM”), were $166,132 (US$125,000), $159,674 (US$125,000) and $163,466 (US$125,000), respectively. | |
| ● | For the years ended August 31, 2019, 2018 and 2017, consulting fees paid or accrued as payable to Zoran K Corporation, a company controlled by Zoran Konević, our Chief Executive Officer and director (“ZKC”) were $166,132 (US$125,000), $159,674 (US$125,000) and $163,466 (US$125,000). |
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| ● | For the years ended August 31, 2019, 2018 and 2017, consulting fees accrued as payable to a company controlled by a major shareholder were $Nil, $65,481 (US$52,803) and $163,466 (US$125,000), respectively. | |
| ● | At August 31, 2019, we owed $1,481,649 (US$842,107) (2018 - $1,105,924 (US$565,257)) in consulting fees to MCM, ZKC and a company controlled by a major shareholder. | |
| ● | At August 31, 2019, we owed $658,022 ($181,070 and US$358,800) (2018 - $438,935 ($181,070 and US$197,522)) in consulting fees to MCM. | |
| ● | At August 31, 2019, we owed $Nil (2017 - $15,737) to Mr. Marmora for reimbursable expenses incurred on our behalf. | |
| ● | At August 31, 2019, we owed $470,381 (US$353,803) (2018 - $245,564 (US$188,100)) in consulting fees to ZKC. | |
| ● | At August 31, 2019, we owed $352,246 ($181,070 and US$114,606) (2018 - $330,688 ($181,070 and US$114,608)) in consulting fees to a company controlled by a major shareholder. |
Other than as described above, we have not entered into any transactions with our officers, directors, persons nominated for these positions, beneficial owners of 5% or more of our common stock, or family members of those persons wherein the amount involved in the transaction or a series of similar transactions exceeded the lesser of US$120,000 or 1% of the average of our total assets for the last two fiscal years.
Director Independence
Because our common stock is not currently listed on a national securities exchange, we currently use the definition in NASDAQ Listing Rule 5605(a)(2) for determining director independence, which provides that an “independent director” is a person other than an executive officer or employee of the company or any other individual having a relationship which, in the opinion of the company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:
| ● | the director is, or at any time during the past three years was, an employee of the company; | |
| ● | the director or a family member of the director accepted any compensation from the company in excess of US$120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service); | |
| ● | a family member of the director is, or at any time during the past three years was, an executive officer of the company; | |
| ● | the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or US$200,000, whichever is greater (subject to certain exclusions); | |
| ● | the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or | |
| ● | the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit. |
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We have determined that our directors do not meet this definition of independence due to the fact that they are also our executive officers.
We do not currently have a separately designated audit, nominating or compensation committee.
Item 14. Principal Accountant Fees and Services
Audit and Non-Audit Fees
The following table sets forth the fees for professional services rendered by our current auditors, Davidson & Company LLP, and our former auditors, DeVisser Gray LLP, in connection with the audit of our financial statements for the years ended August 31, 2019 and 2018, respectively, as well as reviews of our interim financial statements, services provided in connection with our statutory and regulatory filings or engagements, and any other fees billed for services rendered by our auditors during these periods.
| Year Ended August 31, 2019 ($) | Year Ended August 31, 2018 ($) | |||||||
| Audit fees | 40,000 | 43,100 | ||||||
| Audit-related fees | - | - | ||||||
| Tax fees | - | 1,300 | ||||||
| All other fees | - | - | ||||||
| Total | 40,000 | 44,400 | ||||||
In the above table, “audit fees” are fees billed by our auditors for services provided in auditing our annual financial statements, reviewing our quarterly financial statements or services that are normally provided in connection with statutory and regulatory filings or engagements. “Audit-related fees” are fees not included in audit fees that are billed by our auditors for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements. “Tax fees” are fees billed by our auditors for professional services rendered for tax compliance, advice and planning. “All other fees” are fees billed by our auditors for products and services not included in the foregoing categories.
Policy on Pre-Approval
Our Board of Directors pre-approves all services provided by our auditors. All of the above services and fees were reviewed and approved by the Board either before or after the respective services were rendered.
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The following documents are filed as a part of this Report.
| (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 November 26, 2018. |
| (5) | Incorporated by reference from our annual report on Form 10-K, filed with the SEC on December 14, 2018. |
| (6) | Incorporated by reference from our current report on Form 8-K, filed with the SEC on July 3, 2013. |
| (7) | Incorporated by reference from our current report on Form 8-K, filed with the SEC on February 19, 2015. |
| (8) | Incorporated by reference from our current report on Form 8-K, filed with the SEC on June 13, 2016. |
| (9) | Incorporated by reference from our quarterly report on Form 10-Q, filed with the SEC on January 19, 2017. |
Not required.
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Pursuant to the requirements of Section 13 or 15(d) 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: November 29, 2019 | NOTOX TECHNOLOGIES CORP. | |
| By: | /s/ John Marmora | |
| John Marmora | ||
| President, Chief Financial Officer, Principal Accounting Officer, Secretary, Treasurer, Director | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| SIGNATURE | TITLE | DATE | ||
| /s/ John Marmora | President, Chief Financial Officer, Principal Accounting Officer, Secretary, Treasurer, Director | November 29, 2019 | ||
| John Marmora | ||||
| /s/ Zoran Konević | Chief Executive Officer, Director | November 29, 2019 | ||
| Zoran Konević |
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