UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended February 28, 2022
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______, 20___, to _____, 20___.
Commission File Number 001-40089
Novo Integrated Sciences, Inc.
(Exact Name of Registrant as Specified in its Charter)
| Nevada | 59-3691650 | |
| (State
or Other Jurisdiction of Incorporation or Organization) |
(I.R.S.
Employer Identification Number) |
| 11120
NE 2nd Street, Suite 100 Bellevue, Washington |
98004 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(206) 617-9797
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each Exchange on which Registered | ||
| Common Stock | NVOS | The Nasdaq Stock Market LLC |
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 ☒ 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 | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were shares of the Registrant’s $0.001 par value common stock outstanding as of April 11, 2022.
Novo Integrated Sciences, Inc.
Contents
| PART I – FINANCIAL INFORMATION | 3 | |
| Item 1. | Financial Statements | 3 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 31 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 44 |
| Item 4. | Controls and Procedures | 44 |
| PART II – OTHER INFORMATION | 45 | |
| Item 1. | Legal Proceedings | 45 |
| Item 1A. | Risk Factors | 45 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 45 |
| Item 3. | Defaults Upon Senior Securities | 45 |
| Item 4. | Mine Safety Disclosures | 45 |
| Item 5. | Other Information | 45 |
| Item 6. | Exhibits | 46 |
| Signatures | 47 | |
| 2 |
Item 1. Financial Statements.
NOVO INTEGRATED SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of February 28, 2022 (unaudited) and August 31, 2021
| February 28, | August 31, | |||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 15,943,997 | $ | 8,293,162 | ||||
| Accounts receivable, net | 1,251,973 | 1,468,429 | ||||||
| Inventory | 334,414 | 339,385 | ||||||
| Other receivables, current portion | 981,597 | 814,157 | ||||||
| Prepaid expenses and other current assets | 503,437 | 218,376 | ||||||
| Total current assets | 19,015,418 | 11,133,509 | ||||||
| Property and equipment, net | 6,157,621 | 6,070,291 | ||||||
| Intangible assets, net | 33,217,602 | 32,436,468 | ||||||
| Right-of-use assets, net | 2,348,391 | 2,543,396 | ||||||
| Other receivables, net of current portion | 522,062 | 692,738 | ||||||
| Goodwill | 9,058,936 | 9,081,879 | ||||||
| TOTAL ASSETS | $ | 70,320,030 | $ | 61,958,281 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 1,105,707 | $ | 1,449,784 | ||||
| Accrued expenses | 1,199,274 | 1,129,309 | ||||||
| Accrued interest (including amounts to related parties) | 642,246 | 366,280 | ||||||
| Government loans and notes payable, current portion | 5,260,047 | 4,485,649 | ||||||
| Convertible notes payable, net of discount of $302,550 | 1,572,450 | - | ||||||
| Contingent liability | 749,626 | - | ||||||
| Due to related parties | 473,367 | 478,920 | ||||||
| Finance lease liability, current portion | 17,533 | 23,184 | ||||||
| Operating lease liability, current portion | 533,535 | 530,797 | ||||||
| Total current liabilities | 11,553,785 | 8,463,923 | ||||||
| Debentures, related parties | 979,724 | 982,205 | ||||||
| Notes payable, net of current portion | 174,242 | 5,133,604 | ||||||
| Convertible notes payable, net of discount of $6,943,704 | 9,722,962 | - | ||||||
| Finance lease liability, net of current portion | 10,854 | 16,217 | ||||||
| Operating lease liability, net of current portion | 1,866,858 | 2,057,805 | ||||||
| Deferred tax liability | 1,496,581 | 1,500,372 | ||||||
| TOTAL LIABILITIES | 25,805,006 | 18,154,126 | ||||||
| Commitments and contingencies | - | - | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Novo Integrated Sciences, Inc. | ||||||||
| Convertible preferred stock; $ par value; shares authorized; and shares issued and outstanding at February 28, 2022 and August 31, 2021, respectively | ||||||||
| Common stock; $par value; shares authorized; and shares issued and outstanding at February 28, 2022 and August 31, 2021, respectively | 28,885 | 26,610 | ||||||
| Additional paid-in capital | 60,691,723 | 54,579,396 | ||||||
| Common stock to be issued ( and shares at February 28, 2022 and August 31, 2021) | 10,409,457 | 9,236,607 | ||||||
| Other comprehensive income | 1,002,282 | 991,077 | ||||||
| Accumulated deficit | (27,581,028 | ) | (20,969,274 | ) | ||||
| Total Novo Integrated Sciences, Inc. stockholders’ equity | 44,551,319 | 43,864,416 | ||||||
| Noncontrolling interest | (36,295 | ) | (60,261 | ) | ||||
| Total stockholders’ equity | 44,515,024 | 43,804,155 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 70,320,030 | $ | 61,958,281 | ||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
NOVO INTEGRATED SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Three and Six Months Ended February 28, 2022 and 2021 (unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| February 28, | February 28, | February 28, | February 28, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Revenues | $ | 2,869,223 | $ | 2,075,894 | $ | 6,031,150 | $ | 4,231,400 | ||||||||
| Cost of revenues | 1,652,869 | 1,324,448 | 3,548,330 | 2,668,504 | ||||||||||||
| Gross profit | 1,216,354 | 751,446 | 2,482,820 | 1,562,896 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling expenses | 26,370 | 602 | 26,538 | 1,845 | ||||||||||||
| General and administrative expenses | 3,310,660 | 2,076,788 | 5,940,617 | 3,644,719 | ||||||||||||
| Total operating expenses | 3,337,030 | 2,077,390 | 5,967,155 | 3,646,564 | ||||||||||||
| Loss from operations | (2,120,676 | ) | (1,325,944 | ) | (3,484,335 | ) | (2,083,668 | ) | ||||||||
| Non operating income (expense) | ||||||||||||||||
| Interest income | 8,490 | 8,301 | 16,878 | 16,863 | ||||||||||||
| Interest expense | (1,226,182 | ) | (22,948 | ) | (1,294,912 | ) | (46,889 | ) | ||||||||
| Amortization of debt discount | (1,463,022 | ) | - | (1,520,862 | ) | - | ||||||||||
| Foreign currency transaction losses | (66,814 | ) | - | (401,368 | ) | - | ||||||||||
| Total other income (expense) | (2,747,528 | ) | (14,647 | ) | (3,200,264 | ) | (30,026 | ) | ||||||||
| Loss before income taxes | (4,868,204 | ) | (1,340,591 | ) | (6,684,599 | ) | (2,113,694 | ) | ||||||||
| Income tax expense | - | - | - | - | ||||||||||||
| Net loss | $ | (4,868,204 | ) | $ | (1,340,591 | ) | $ | (6,684,599 | ) | $ | (2,113,694 | ) | ||||
| Net loss attributed to noncontrolling interest | (63,037 | ) | (721 | ) | (72,845 | ) | (2,354 | ) | ||||||||
| Net loss attributed to Novo Integrated Sciences, Inc. | $ | (4,805,167 | ) | $ | (1,339,870 | ) | $ | (6,611,754 | ) | $ | (2,111,340 | ) | ||||
| Comprehensive loss: | ||||||||||||||||
| Net loss | (4,868,204 | ) | (1,340,591 | ) | (6,684,599 | ) | (2,113,694 | ) | ||||||||
| Foreign currency translation gain | 114,738 | 42,232 | 11,205 | 52,828 | ||||||||||||
| Comprehensive loss: | $ | (4,753,466 | ) | $ | (1,298,359 | ) | $ | (6,673,394 | ) | $ | (2,060,866 | ) | ||||
| Weighted average common shares outstanding - basic and diluted | 28,740,700 | 23,754,808 | 27,827,686 | 23,630,900 | ||||||||||||
| Net loss per common share - basic and diluted | $ | (0.17 | ) | $ | (0.06 | ) | $ | (0.24 | ) | $ | (0.09 | ) | ||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
NOVO INTEGRATED SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three and Six Months Ended February 28, 2022 and 2021 (unaudited)
| Total | ||||||||||||||||||||||||||||||||||||
| Additional | Common | Other | Novo | |||||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Stock To | Comprehensive | Accumulated | Stockholders’ | Noncontrolling | Total | |||||||||||||||||||||||||||||
| Shares | Amount | Capital | Be Issued | Income | Deficit | Equity | Interest | Equity | ||||||||||||||||||||||||||||
| Balance, August 31, 2021 | 26,610,144 | $ | 26,610 | $ | 54,579,396 | $ | 9,236,607 | $ | 991,077 | $ | (20,969,274 | ) | $ | 43,864,416 | $ | (60,261 | ) | $ | 43,804,155 | |||||||||||||||||
| Common stock for services | 35,000 | 35 | 64,715 | - | - | - | 64,750 | - | 64,750 | |||||||||||||||||||||||||||
| Common stock issued as collateral and held in escrow | 2,000,000 | 2,000 | (2,000 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Common stock to be issued for purchase of Terragenx | - | - | - | 983,925 | - | - | 983,925 | 97,311 | 1,081,236 | |||||||||||||||||||||||||||
| Common stock to be issued for purchase of Mullin assets | - | - | - | 188,925 | - | - | 188,925 | - | 188,925 | |||||||||||||||||||||||||||
| Value of warrants issued with convertible notes | - | - | 295,824 | - | - | - | 295,824 | - | 295,824 | |||||||||||||||||||||||||||
| Fair value of stock options | - | - | 154,135 | - | - | - | 154,135 | - | 154,135 | |||||||||||||||||||||||||||
| Foreign currency translation loss | - | - | - | - | (103,533 | ) | - | (103,533 | ) | (855 | ) | (104,388 | ) | |||||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,806,587 | ) | (1,806,587 | ) | (9,808 | ) | (1,816,395 | ) | |||||||||||||||||||||||
| Balance, November 30, 2021 | 28,645,144 | 28,645 | 55,092,070 | 10,409,457 | 887,544 | (22,775,861 | ) | 43,641,855 | 26,387 | 43,668,242 | ||||||||||||||||||||||||||
| Common stock for services | 240,000 | 240 | 297,760 | - | - | - | 298,000 | - | 298,000 | |||||||||||||||||||||||||||
| Value of warrants issued with convertible notes | - | - | 5,257,466 | - | - | - | 5,257,466 | - | 5,257,466 | |||||||||||||||||||||||||||
| Fair value of stock options | - | - | 44,427 | - | - | - | 44,427 | - | 44,427 | |||||||||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - | 114,738 | - | 114,738 | 355 | 115,093 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (4,805,167 | ) | (4,805,167 | ) | (63,037 | ) | (4,868,204 | ) | |||||||||||||||||||||||
| Balance, February 28, 2022 | 28,885,144 | $ | 28,885 | $ | 60,691,723 | $ | 10,409,457 | $ | 1,002,282 | $ | (27,581,028 | ) | $ | 44,551,319 | $ | (36,295 | ) | $ | 44,515,024 | |||||||||||||||||
| Balance, August 31, 2020 | 23,466,236 | $ | 23,466 | $ | 44,905,454 | $ | $ | 1,199,696 | $ | (16,507,127 | ) | $ | 29,621,489 | $ | (49,859 | ) | $ | 29,571,630 | ||||||||||||||||||
| Common stock issued for cash | 21,905 | 22 | 91,978 | - | - | - | 92,000 | - | 92,000 | |||||||||||||||||||||||||||
| Common stock issued for services | 65,000 | 65 | 247,935 | - | - | - | 248,000 | - | 248,000 | |||||||||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - | 10,596 | - | 10,596 | (225 | ) | 10,371 | ||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (771,470 | ) | (771,470 | ) | (1,633 | ) | (773,103 | ) | |||||||||||||||||||||||
| Balance, November 30, 2020 | 23,553,141 | 23,553 | 45,245,367 | - | 1,210,292 | (17,278,597 | ) | 29,200,615 | (51,717 | ) | 29,148,898 | |||||||||||||||||||||||||
| Exercise of stock options | 7,500 | 8 | 11,992 | - | - | - | 12,000 | - | 12,000 | |||||||||||||||||||||||||||
| Common stock issued for intellectual property | 240,000 | 240 | 875,760 | - | - | - | 876,000 | - | 876,000 | |||||||||||||||||||||||||||
| Common stock to be issued for services rendered | - | - | - | 375,000 | - | - | 375,000 | - | 375,000 | |||||||||||||||||||||||||||
| Rounding due to stock split | 957 | 1 | (1 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Fair value of vested stock options | - | - | 22,215 | - | - | - | 22,215 | - | 22,215 | |||||||||||||||||||||||||||
| Foreign currency translation loss | - | - | - | - | 42,232 | - | 42,232 | (965 | ) | 41,267 | ||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,339,870 | ) | (1,339,870 | ) | (721 | ) | (1,340,591 | ) | |||||||||||||||||||||||
| Balance, February 28, 2021 | 23,801,598 | $ | 23,802 | $ | 46,155,333 | $ | 375,000 | $ | 1,252,524 | $ | (18,618,467 | ) | $ | 29,188,192 | $ | (53,403 | ) | $ | 29,134,789 | |||||||||||||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
NOVO INTEGRATED SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended February 28, 2022 and 2021 (unaudited)
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
NOVO INTEGRATED SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended February 28, 2022 and 2021 (unaudited)
Note 1 - Organization and Basis of Presentation
Organization and Line of Business
Novo Integrated Sciences, Inc. (“Novo Integrated”) was incorporated in Delaware on November 27, 2000, under the name Turbine Truck Engines, Inc. On February 20, 2008, the Company was re-domiciled to the State of Nevada. Effective July 12, 2017, the Company’s name was changed to Novo Integrated Sciences, Inc. When used herein, the terms the “Company,” “we,” “us” and “our” refer to Novo Integrated and its consolidated subsidiaries.
The Company owns Canadian and U.S. subsidiaries which provide, or intend to provide, essential and differentiated solutions to the delivery of multidisciplinary primary care and related wellness products through the integration of medical technology, interconnectivity, advanced therapeutics, diagnostic solutions, unique personalized product offerings, and rehabilitative science.
We believe that “decentralizing” healthcare, through the integration of medical technology and interconnectivity, is an essential solution to the rapidly evolving fundamental transformation of how non-catastrophic healthcare is delivered both now and in the future. Specific to non-critical care, ongoing advancements in both medical technology and inter-connectivity are allowing for a shift of the patient/practitioner relationship to the patient’s home and away from on-site visits to primary medical centers with mass-services. This acceleration of “ease-of-access” in the patient/practitioner interaction for non-critical care diagnosis and subsequent treatment minimizes the degradation of non-critical health conditions to critical conditions as well as allowing for more cost-effective and efficient healthcare distribution.
The Company’s decentralized healthcare business model is centered on three primary pillars to best support the transformation of non-catastrophic healthcare delivery to patients and consumers:
| ● | First Pillar – Service Networks: Deliver multidisciplinary primary care services through (i) an affiliate network of clinic facilities, (ii) small and micro footprint sized clinic facilities primarily located within the footprint of box-store commercial enterprises, (iii) clinic facilities operated through a franchise relationship with the Company, and (iv) corporate operated clinic facilities. | |
| ● | Second Pillar – Technology: Develop, deploy, and integrate sophisticated interconnected technology, interfacing the patient to the healthcare practitioner thus expanding the reach and availability of the Company’s services, beyond the traditional clinic location, to geographic areas not readily providing advanced, peripheral based healthcare services, including the patient’s home. | |
| ● | Third Pillar – Products: Develop and distribute effective, personalized health and wellness product solutions allowing for the customization of patient preventative care remedies and ultimately a healthier population. The Company’s science-first approach to product innovation further emphasizes our mandate to create and provide over-the-counter preventative and maintenance care solutions. |
Innovation through science, combined with the integration of sophisticated, secure technology, assures Novo Integrated of continued cutting edge advancement in patient first platforms.
| 7 |
On April 25, 2017 (the “Effective Date”), we entered into a Share Exchange Agreement (the “Share Exchange Agreement”) by and between (i) Novo Integrated; (ii) Novo Healthnet Limited, a wholly owned subsidiary of the Company (“NHL”), (iii) ALMC-ASAP Holdings Inc. (“ALMC”); (iv) Michael Gaynor Family Trust (the “MGFT”); (v) 1218814 Ontario Inc. (“1218814”) and (vi) Michael Gaynor Physiotherapy Professional Corp. (“MGPP,” and together with ALMC, MGFT and 1218814, the “NHL Shareholders”). Pursuant to the terms of the Share Exchange Agreement, Novo Integrated agreed to acquire, from the NHL Shareholders, all of the shares of both common and preferred stock of NHL held by the NHL Shareholders in exchange for the issuance, by Novo Integrated to the NHL Shareholders, of Novo Integrated common stock such that following the closing of the Share Exchange Agreement, the NHL Shareholders would own restricted shares of Novo Integrated common stock, representing of the issued and outstanding Novo Integrated common stock, calculated including all granted and issued options or warrants to acquire Novo Integrated common stock as of the Effective Date, but to exclude shares of Novo Integrated common stock that are subject to a then-current Regulation S offering that was undertaken by Novo Integrated (the “Exchange”).
On May 9, 2017, the Exchange closed and, as a result, NHL became a wholly owned subsidiary of Novo Integrated. The Exchange was accounted for as a reverse acquisition under the purchase method of accounting since NHL obtained control of Novo Integrated Sciences, Inc. Accordingly, the Exchange was recorded as a recapitalization of NHL, with NHL being treated as the continuing entity. The historical financial statements presented are the financial statements of NHL. The Share Exchange Agreement was treated as a recapitalization and not as a business combination; therefore, no pro forma information is disclosed. At the closing date of the Exchange, the net assets of the legal acquirer, Novo Integrated Sciences, Inc., were $6,904.
Reverse Stock Split
On February 1, 2021, the Company effected a 1-for-10 reverse stock split of our common stock. As a result of the reverse stock split, every 10 shares of issued and outstanding common stock were exchanged for one share of common stock, with any fractional shares being rounded up to the next higher whole share. Unless otherwise noted, the share and per share information in this report have been retroactively adjusted to give effect to the 1-for-10 reverse stock split.
Impact of COVID-19
In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. On March 17, 2020, as a result of COVID-19 pandemic having been reported throughout both Canada and the United States, certain national, provincial, state and local governmental authorities issued proclamations and/or directives aimed at minimizing the spread of COVID-19. Accordingly, on March 17, 2020, the Company closed all corporate clinics for all in-clinic non-essential services to protect the health and safety of its employees, partners, and patients. Commencing in May 2020, the Company was able to begin providing some services, and was fully operational again in June 2020. As of February 28, 2022, all corporate clinics were open and operational while following all mandated guidelines and protocols from Health Canada, the Ontario Ministry of Health, and the respective disciplines’ regulatory Colleges to ensure a safe treatment environment for our staff and clients, and our eldercare operations are fully operational. In addition, Acenzia Inc.(“Acenzia”), Terragenx Inc. (“Terragenx”) and PRO-DIP, LLC (“PRO-DIP”) are open and fully operational while following all local, state, provincial, and national guidelines and protocols related to minimizing the spread of the COVID-19 pandemic.
Canadian federal and provincial COVID-19 governmental proclamations and directives, including interprovincial travel restrictions, have presented unprecedented challenges to launching our Harvest Gold Farms and Kainai Cooperative joint ventures during the period ended February 28, 2022. Accordingly, the Company has decided to delay commencing the projects until the 2022 grow season. These joint ventures relate to the development, management, and arrangement of medicinal farming projects involving industrial hemp for medicinal Cannabidiol (CBD) applications.
While all of the Company’s business units are operational at the time of this filing, any future impact of the COVID-19 pandemic on the Company’s operations remains unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including, but not limited to, (i) the duration of the COVID-19 outbreak and additional variants that may be identified, (ii) new information which may emerge concerning the severity of the COVID-19 pandemic, and (iii) any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced patient traffic, and reduced operations.
For more on the financial impact of COVID-19 on the Company, see “—Liquidity and Capital Resources—Financial Impact of COVID-19” of this quarterly report on Form 10-Q.
| 8 |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements were prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The information furnished herein reflects all adjustments, consisting only of normal recurring adjustments, which in the opinion of management, are necessary to fairly state the Company’s financial position, the results of its operations, and cash flows for the periods presented. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with U.S. GAAP were omitted pursuant to such rules and regulations.
The financial information contained in this report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended August 31, 2021, that the Company filed on December 14, 2021. The results of operations for the six months ended February 28, 2022 are not necessarily indicative of the results for the fiscal year ending August 31, 2022. The Company’s Canadian subsidiaries’ functional currency is the Canadian Dollar (“CAD”); however, the accompanying condensed consolidated financial statements were translated and presented in United States Dollars (“$” or “USD”).
Foreign Currency Translation
The accounts of the Company’s Canadian subsidiaries are maintained in CAD. The accounts of these subsidiaries are translated into USD in accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 830, Foreign Currency Transaction, with the CAD as the functional currency. According to ASC Topic 830, all assets and liabilities are translated at the exchange rate on the balance sheet date, stockholders’ equity is translated at historical rates and statement of operations items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, Comprehensive Income. Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the condensed consolidated statement of operations and comprehensive loss. The following table details the exchange rates used for the respective periods:
| February 28, 2022 | February 28, 2021 | August 31, 2021 | ||||||||||
| Period end: CAD to USD exchange rate | $ | 0.7897 | $ | 0.7851 | $ | 0.7917 | ||||||
| Average period: CAD to USD exchange rate | $ | 0.7911 | $ | 0.7720 | $ | 0.7885 | ||||||
Note 2 – Summary of Significant Accounting Policies
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. This applies in particular to useful lives of non-current assets, impairment of non-current assets, allowance for doubtful receivables, allowance for slow moving and obsolete inventory, and valuation allowance for deferred tax assets. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
| 9 |
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and entities it controls including its wholly owned subsidiaries, NHL, Acenzia, Novomerica Health Group, Novo Healthnet Rehab Limited, Novo Assessments Inc., PRO-DIP, LLC, a 91% controlling interest in Terragenx, Inc., an 80% controlling interest in Novo Healthnet Kemptville Centre, Inc., a Back on Track Physiotherapy and Health Centre clinic operated by NHL, and a 70% controlling interest in Novo Earth Therapeutics Inc. (currently inactive). Novomerica Health Group, Inc. is a Nevada corporation, PRO-DIP is a New York state LLC while all other Company subsidiaries are incorporated under Canada federal laws, the laws of the Province of Ontario, Canada, or New Brunswick, Canada. All intercompany transactions have been eliminated.
An entity is controlled when the Company has the ability to direct the relevant activities of the entity, has exposure or rights to variable returns from its involvement with the entity, and is able to use its power over the entity to affect its returns from the entity.
Income or loss and each component of OCI are attributed to the shareholders of the Company and to the noncontrolling interests. Total comprehensive loss is attributed to the shareholders of the Company and to the noncontrolling interests even if this results in the non-controlling interests having a deficit balance on consolidation.
Noncontrolling Interest
The Company follows FASB ASC Topic 810, Consolidation, which governs the accounting for and reporting of non-controlling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance.
The net income (loss) attributed to the NCI is separately designated in the accompanying condensed consolidated statements of operations and comprehensive loss.
Cash Equivalents
For the purpose of the condensed consolidated statements of cash flows, cash equivalents include time deposits, certificate of deposits, and all highly liquid debt instruments with original maturities of three months or less.
Accounts Receivable
Accounts receivable are recorded, net of allowance for doubtful accounts and sales returns. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentration, customer credit worthiness, current economic trends, and changes in customer payment patterns to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Delinquent account balances are written-off after management has determined that the likelihood of collection is not probable and known bad debts are written off against the allowance for doubtful accounts when identified. As of February 28, 2022, and August 31, 2021, the allowance for uncollectible accounts receivable was $1,054,599 and $1,097,628, respectively.
Inventory
Inventories are valued at the lower of cost (determined by the first in, first out method) and net realizable value. Management compares the cost of inventories with the net realizable value and allowance is made for writing down their inventories to net realizable value, if lower. Inventory is segregated into three areas: raw materials, work-in-process and finished goods. The Company periodically assessed its inventory for slow moving and/or obsolete items and any change in the allowance is recorded in cost of revenue in the accompanying condensed consolidated statements of operations and comprehensive loss. If any are identified an appropriate allowance for those items is made and/or the items are deemed to be impaired. As of February 28, 2022 and August 31, 2021, the Company’s allowance for slow moving or obsolete inventory was $1,064,025 and $1,066,721, respectively.
| 10 |
Other Receivables
Other receivables are recorded at cost and presented as current or long-term based on the terms of the agreements. Management reviews the collectability of other receivables and writes off the portion that is deemed to be uncollectible.
Property and Equipment
Property and equipment are stated at cost less depreciation and impairment. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the declining balance method for substantially all assets with estimated lives as follows:
| Building | 30 years | |
| Leasehold improvements | 5 years | |
| Clinical equipment | 5 years | |
| Computer equipment | 3 years | |
| Office equipment | 5 years | |
| Furniture and fixtures | 5 years |
Leases
The Company applies the provisions of ASC Topic 842, Leases which requires lessees to recognize lease assets and lease liabilities on the balance sheet. The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company must discount lease payments based on an estimate of its incremental borrowing rate.
Long-Lived Assets
The Company applies the provisions of ASC Topic 360, Property, Plant, and Equipment, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. ASC 360 requires impairment losses to be recorded on long-lived assets, including right of use assets, used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair value is reduced for the cost of disposal. Based on its review at February 28, 2022, the Company believes there was no impairment of its long-lived assets.
Intangible Assets
The Company’s intangible assets are being amortized over their estimated useful lives as follows:
| Land use rights | 50 years (the lease period) | |
| Software license | 7 years | |
| Intellectual property | 7 years | |
| Customer relationships | 5 years | |
| Brand names | 7 years | |
| Workforce | 5 years |
The intangible assets with finite useful lives are reviewed for impairment when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Based on its reviews at February 28, 2022, the Company believes there was no impairment of its intangible assets.
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Right-of-use Assets
The Company’s right-of-use assets consist of leased assets recognized in accordance with ASC 842, Leases, which requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liability represents the Company’s obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception are not recorded on the condensed consolidated balance sheets and are expensed on a straight-line basis over the lease term in the condensed consolidated statements of operations and comprehensive loss. The Company determines the lease term by agreement with lessor. In cases where the lease does not provide an implicit interest rate, the Company uses the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.
Goodwill
Goodwill represents the excess of purchase price over the underlying net assets of businesses acquired. Under U.S. GAAP, goodwill is not amortized but is subject to annual impairment tests. The Company recorded goodwill related to its acquisition of APKA Health, Inc. during the fiscal year ended August 31, 2017, Executive Fitness Leaders during the fiscal year ended August 31, 2018, Action Plus Physiotherapy Rockland during the fiscal year ended August 31, 2019 and Acenzia, Inc. during fiscal year ended August 31, 2021. Based on its review at February 28, 2022, the Company believes there was no impairment of its goodwill. As of August 31, 2021, the Company performed the required impairment reviews and determined that an impairment charge of $99,593 related to the goodwill for Executive Fitness Leaders was necessary. The impairment was determined based on the fair value of the acquired business, which was estimated based on a discounted cash flow valuation model and the projected future cash flows of the underlying business.
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including cash and equivalents, accounts receivable, other receivables, accounts payable and due to related parties, the carrying amounts approximate their fair values due to their short-term maturities.
FASB ASC Topic 820, Fair Value Measurements and Disclosures, requires disclosure of the fair value of financial instruments held by the Company. FASB ASC Topic 825, Financial Instruments, defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the condensed consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization, low risk of counterparty default and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
| ● | Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. | |
| ● | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | |
| ● | Level 3 inputs to the valuation methodology use one or more unobservable inputs which are significant to the fair value measurement. |
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The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic 480, Distinguishing Liabilities from Equity, and FASB ASC Topic 815, Derivatives and Hedging.
For certain financial instruments, the carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, current portion of other receivables, and current liabilities, including accounts payable, current portion of notes payable, due to related parties, current portion of convertible notes payable and current portion of finance lease liability, each qualify as a financial instrument, and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The carrying value of notes payable approximates their fair values due to current market rate on such debt.
As of February 28, 2022 and August 31, 2021, respectively, the Company did not identify any financial assets and liabilities required to be presented on the balance sheet at fair value.
Revenue Recognition
The Company’s revenue recognition reflects the updated accounting policies as per the requirements of ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”). As sales are and have been primarily from providing healthcare services the Company has no significant post-delivery obligations.
Revenue from providing healthcare and healthcare related services and product sales are recognized under Topic 606 in a manner that reasonably reflects the delivery of its products and services to customers in return for expected consideration and includes the following elements:
| ● | executed contracts with the Company’s customers that it believes are legally enforceable; | |
| ● | identification of performance obligations in the respective contract; | |
| ● | determination of the transaction price for each performance obligation in the respective contract; | |
| ● | allocation the transaction price to each performance obligation; and | |
| ● | recognition of revenue only when the Company satisfies each performance obligation. |
These five elements, as applied to the Company’s revenue category, are summarized below:
| ● | Healthcare and healthcare related services – gross service revenue is recorded in the accounting records at the time the services are provided (point-in-time) on an accrual basis at the provider’s established rates. The Company reserves a provision for contractual adjustment and discounts that are deducted from gross service revenue. The Company reports revenues net of any sales, use and value added taxes. | |
| ● | Product sales – revenue is recorded at the point of time of delivery |
Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. Unearned revenue is included with accrued expenses in the accompanying condensed consolidated balance sheets.
Sales returns and allowances were insignificant for the periods ended February 28, 2022 and 2021. The Company does not provide unconditional right of return, price protection or any other concessions to its customers.
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company has no material uncertain tax positions for any of the reporting periods presented.
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The Company records stock-based compensation in accordance with FASB ASC Topic 718, Compensation – Stock Compensation. FASB ASC Topic 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the requisite service period. The Company recognizes in the condensed consolidated statements of operations and comprehensive loss the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.
Earnings per share is calculated in accordance with ASC Topic 260, Earnings Per Share. The calculations reflect the effects of the 1-for-10 reverse stock split that took place on February 1, 2021. Basic earnings per share (“EPS”) is based on the weighted average number of common shares outstanding. Diluted EPS assumes that all dilutive securities are converted. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. There were and options/warrants outstanding as of February 28, 2022 and 2021, respectively. In addition, at February 28, 2022, there were outstanding convertible notes that could convert into shares of common stock. Due to the net loss incurred potentially dilutive instruments would be anti-dilutive. Accordingly, diluted loss per share is the same as basic loss for all periods presented.
Foreign Currency Transactions and Comprehensive Income
U.S. GAAP generally requires recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The functional currency of the Company’s Canadian subsidiaries is the CAD. Translation gains of $1,002,282 and $991,077 at February 28, 2022 and August 31, 2021, respectively, are classified as an item of other comprehensive income in the stockholders’ equity section of the condensed consolidated balance sheets.
Statement of Cash Flows
Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rates. As a result, amounts related to assets and liabilities reported on the condensed consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the condensed consolidated balance sheets.
Segment Reporting
ASC Topic 280, Segment Reporting, requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company determined it has two reportable segments. See Note 17.
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Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 was issued to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope. The new standard represents significant changes to accounting for credit losses. Full lifetime expected credit losses will be recognized upon initial recognition of an asset in scope. The current incurred loss impairment model that recognizes losses when a probable threshold is met will be replaced with the expected credit loss impairment method without recognition threshold. The expected credit losses estimate will be based upon historical information, current conditions, and reasonable and supportable forecasts. This ASU as amended by ASU 2019-10, is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the effect of this ASU on the Company’s condensed consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes which amends ASC 740 Income Taxes (ASC 740). This update is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and amending existing guidance to improve consistent application of ASC 740. This update is effective for fiscal years beginning after December 15, 2021. The guidance in this update has various elements, some of which are applied on a prospective basis and others on a retrospective basis with earlier application permitted. The Company is currently evaluating the effect of this ASU on the Company’s condensed consolidated financial statements and related disclosures.
In May, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This update provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. This update is effective for fiscal years beginning after December 15, 2021. The Company is currently evaluating the effect of this ASU on the Company’s condensed consolidated financial statements and related disclosures.
In August 2020, the FASB issued guidance that simplifies the accounting for debt with conversion options, revises the criteria for applying the derivative scope exception for contracts in an entity’s own equity, and improves the consistency for the calculation of earnings per share. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2021.
In March 2020, the FASB issued guidance providing optional expedients and exceptions to account for the effects of reference rate reform to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The optional guidance, which became effective on March 12, 2020 and can be applied through December 21, 2022, has not impacted our condensed consolidated financial statements. The Company has various contracts that reference LIBOR and is assessing how this standard may be applied to specific contract modifications through December 31, 2022.
Management does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.
Note 3 – Related Party Transactions
Due to related parties
Amounts loaned to the Company by stockholders and officers of the Company are payable upon demand and unsecured. At February 28, 2022 and August 31, 2021, the amount due to related parties was $473,367 and $478,920, respectively. At February 28, 2022, $401,681 was non-interest bearing, $22,725 bears interest at 6% per annum, and $48,961 bears interest at 13.75% per annum. At August 31, 2021, $407,052 was non-interest bearing, $22,783 bears interest at 6% per annum, and $49,085 bears interest at 13.75% per annum.
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Note 4 – Accounts Receivables, net
Accounts receivables, net at February 28, 2022 and August 31, 2021 consisted of the following:
| February 28, | August 31, | |||||||
| 2022 | 2021 | |||||||
| Trade receivables | $ | 2,171,751 | $ | 2,411,499 | ||||
| Amounts earned but not billed | 134,821 | 154,558 | ||||||
| 2,306,572 | 2,566,057 | |||||||
| Allowance for doubtful accounts | (1,054,599 | ) | (1,097,628 | ) | ||||
| Accounts receivable, net | $ | 1,251,973 | $ | 1,468,429 | ||||
Note 5 – Inventory
Inventory at February 28, 2022 and August 31, 2021 consisted of the following:
| February 28, | August 31, | |||||||
| 2022 | 2021 | |||||||
| Raw materials | $ | 991,497 | $ | 1,017,566 | ||||
| Work in process | 144,262 | 144,628 | ||||||
| Finished Goods | 262,680 | 243,912 | ||||||
| 1,398,439 | 1,406,106 | |||||||
| Allowance for slow moving and obsolete inventory | (1,064,025 | ) | (1,066,721 | ) | ||||
| Inventory, net | $ | 334,414 | $ | 339,385 | ||||
Note 6 – Other Receivables
Other receivables at February 28, 2022 and August 31, 2021 consisted of the following:
| February 28, | August 31, | |||||||
| 2022 | 2021 | |||||||
| Notes receivable dated April 1, 2015 and amended on May 23, 2017; accrued interest at 8% per annum; secured by certain assets; due March 1, 2019. (currently in default; if the receivable is not repaid, the Company plans to foreclose on the clinic that secures this receivable) | $ | 296,138 | $ | 296,888 | ||||
| Advance to corporation; accrues interest at 12% per annum; unsecured; due January 31, 2023, as amended | 78,970 | 79,170 | ||||||
| Advance to corporation; accrues interest at 10% per annum after the first 60 days; unsecured; due May 1, 2023, as amended | 225,924 | 225,924 | ||||||
| Advance to corporation; accrues interest at 12% per annum; secured by property and other assets of debtor; due August 1, 2022, as amended | 507,777 | 509,063 | ||||||
| Advance to corporation; accrues interest at 10% per annum; secured by assets of debtor; due September 1, 2022, as amended | 394,850 | 395,850 | ||||||
| Total other receivables | 1,503,659 | 1,506,895 | ||||||
| Current portion | (981,597 | ) | (814,157 | ) | ||||
| Long-term portion | $ | 522,062 | $ | 692,738 | ||||
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Note 7 – Property and Equipment
Property and equipment at February 28, 2022 and August 31, 2021 consisted of the following:
| February 28, | August 31, | |||||||
| 2022 | 2021 | |||||||
| Land | $ | 473,821 | $ | 475,020 | ||||
| Building | 3,553,651 | 3,562,650 | ||||||
| Leasehold improvements | 853,666 | 691,318 | ||||||
| Clinical equipment | 1,960,449 | 1,875,537 | ||||||
| Computer equipment | 25,935 | 24,679 | ||||||
| Office equipment | 49,787 | 46,510 | ||||||
| Furniture and fixtures | 40,915 | 41,019 | ||||||
| 6,958,224 | 6,716,733 | |||||||
| Accumulated depreciation | (800,603 | ) | (646,442 | ) | ||||
| Total | $ | 6,157,621 | $ | 6,070,291 | ||||
Depreciation expense for the six months ended February 28, 2022 and 2021 was $156,067 and $43,938, respectively.
Certain property and equipment have been used to secure notes payable (See Note 10).
Note 8 – Intangible Assets
Intangible assets at February 28, 2022 and August 31, 2021 consisted of the following:
| February 28, | August 31, | |||||||
| 2022 | 2021 | |||||||
| Land use rights | $ | 21,600,000 | $ | 21,600,000 | ||||
| Software license | 1,144,798 | 1,144,798 | ||||||
| Intellectual property | 11,487,882 | 9,388,065 | ||||||
| Customer relationships | 785,316 | 787,304 | ||||||
| Brand names | 2,060,722 | 2,065,941 | ||||||
| Assembled workforce | 419,940 | 421,003 | ||||||
| 37,498,658 | 35,407,111 | |||||||
| Accumulated amortization | (4,281,056 | ) | (2,970,643 | ) | ||||
| Total | $ | 33,217,602 | $ | 32,436,468 | ||||
Amortization expense for the six months ended February 28, 2022 and 2021 was $1,311,770 and $693,485, respectively.
Expected amortization expense of intangible assets over the next 5 years and thereafter is as follows:
| Twelve Months Ending February 28, | ||||
| 2023 | $ | 2,772,108 | ||
| 2024 | 2,772,108 | |||
| 2025 | 2,772,108 | |||
| 2026 | 2,772,108 | |||
| 2027 | 2,378,089 | |||
| Thereafter | 19,751,081 | |||
| Total | $ | 33,217,602 | ||
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Note 9 – Accrued Expenses
Accrued expenses at February 28, 2022 and August 31, 2021 consisted of the following:
| February 28, | August 31, | |||||||
| 2022 | 2021 | |||||||
| Accrued liabilities | $ | 957,772 | $ | 811,660 | ||||
| Accrued payroll | 202,868 | 279,018 | ||||||
| Unearned revenue | 38,634 | 38,631 | ||||||
| $ | 1,199,274 | $ | 1,129,309 | |||||
Note 10 – Government Loans and Notes Payable
Notes payable at February 28, 2022 and August 31, 2021 consisted of the following:
| (A) | The Government of Canada launched the Canada Emergency Business Account loan to ensure that small businesses have access to the capital that they need during the current challenges faced due to the COVID-19 virus. The Company obtained CAD$80,000 loan (US$63,176 at February 28, 2022), which is unsecured, non-interest bearing and due on or before December 31, 2023. If the loan amount is paid on or before December 31, 2023, 25% of the loan will be forgiven (“Early Payment Credit”). In the event that the Company does not repay 75% of such term debt on or before December 31, 2023, the Early Payment Credit will not apply. In addition, with acquisition of Terragenx, the Company acquired a CEBA loan in the amount of CAD$60,000 (US$47,382 at February 28, 2022) under the same terms. |
| 18 |
Government Subsidy
In 2020, the Government of Canada announced the Canada Emergency Wage Subsidy (“CEWS”) for Canadian employers whose businesses were affected by the COVID-19 pandemic. The CEWS provides a subsidy of up to 75% of eligible employees’ employment insurable remuneration, subject to certain criteria. Accordingly, the Company applied for the CEWS to the extent it met the requirements to receive the subsidy and during the six months ended February 28, 2021, recorded a total of approximately $101,800 in government subsidies as a reduction to the associated wage costs recorded in cost of revenues and general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss. During the six months ended February 28, 2022, the Company did not receive any wage subsidies.
Future scheduled maturities of outstanding government loans and notes payable are as follows:
| Twelve Months Ending February 28, | ||||
| 2023 | $ | 5,260,047 | ||
| 2024 | 115,455 | |||
| 2025 | 5,338 | |||
| 2026 | 5,785 | |||
| 2027 | 6,238 | |||
| Thereafter | 41,426 | |||
| Total | $ | 5,434,289 | ||
Note 11 – Convertible Notes Payable
Novo Integrated
On December 14, 2021, Novo Integrated, issued two convertible notes payable for a total of $16,666,666. The notes accrue interest at 5% per annum and are due on June 14, 2023. The notes are secured by all assets of the Company. The notes are convertible at the option of the note holders to convert into shares of the Company’s common stock at $ per share.
In connection with the convertible notes payable, the Company issued the note holders warrants to purchase a total of 5,833,334 shares of the Company’s common stock at a price of $ per share. :
| ● | Expected life of 4.0 year | |
| ● | Volatility of 275%; | |
| ● | Dividend yield of 0%; | |
| ● | Risk free interest rate of % |
The face amount of the convertible notes payable of $16,666,666 was proportionately allocated to the convertible notes payable and the warrant in the amount of $11,409,200 and $5,257,466, respectively. The amount allocated to the warrants of $5,257,466 was recorded as a discount to the convertible note and as additional paid in capital. The convertible notes payable contained an original issue discount totaling $1,666,666 and the Company also incurred $1,140,000 in loan fees in connection with this convertible notes. The combined total discount is $8,064,132 and will be amortized over the life of the convertible notes. During the six months ended February 28, 2022, the Company amortized $1,120,428 of the debt discount and as February 28, 2022, the unamortized debt discount was $6,943,704.
| 19 |
Terragenx
On November 17, 2021, Terragenx, a 91% owned subsidiary of the Company, issued two convertible notes payable for a total of $1,875,000. The notes accrue interest at 1% per annum and are due on May 17, 2022. The notes are secured by all assets of the Company. The notes are convertible at the option of the note holders to convert into shares of the Company’s common stock at $ per share.
In connection with the convertible notes payable, the Company issued the note holders warrants to purchase a total of 223,880 shares of the Company’s common stock at a price of $ per share. :
| ● | Expected life of 3.0 year | |
| ● | Volatility of 300%; | |
| ● | Dividend yield of 0%; | |
| ● | Risk free interest rate of 0.85% |
The face amount of the convertible notes payable of $1,875,000 was proportionately allocated to the convertible notes payable and the warrant in the amount of $1,579,176 and $295,824, respectively. The amount allocated to the warrants of $295,824 was recorded as a discount to the convertible note and as additional paid in capital. The convertible notes payable contained an original issue discount totaling $375,000 and the Company also incurred $90,000 in loan fees in connection with this convertible notes. The combined total discount is $760,824 and will be amortized over the life of the convertible notes. During the six months ended February 28, 2022, the Company amortized $400,434 of the debt discount and as February 28, 2022, the unamortized debt discount was $302,550.
Note 12 – Debentures, Related Parties
On September 30, 2013, the Company issued five debentures totaling CAD$6,402,512 (approximately $6,225,163 on September 30, 2013) in connection with the acquisition of certain business assets. The holders of the debentures are current stockholders, officers and/or affiliates of the Company. The debentures are secured by all the assets of the Company, accrue interest at 8% per annum and were originally due on September 30, 2016. On December 2, 2017, the debenture holders agreed to extend the due date to September 30, 2019. On September 27, 2019, the debenture holders agreed to extend the due date to September 30, 2021. On November 2, 2021, the debenture holders agreed to extend the due date to December 1, 2023.
On January 31, 2018, the debenture holders converted 75% of the debenture value of $3,894,809 plus accrued interest of $414,965 into shares of the Company’s common stock. The per share price used for the conversion of each debenture was $4.11 which was determined as the average price of the five (5) trading days immediately preceding the date of conversion with a 10% premium added to the calculated per share price.
On July 21, 2020, the Company made a partial repayment of a debenture due to a related party of $267,768.
At February 28, 2022 and August 31, 2021, the amount of debentures outstanding was $979,724 and $982,205, respectively.
| 20 |
Note 13 – Leases
Operating leases
The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company discounts lease payments based on an estimate of its incremental borrowing rate.
The Company leases its corporate office space and certain facilities under long-term operating leases expiring through fiscal year 2028.
The table below presents the lease related assets and liabilities recorded on the Company’s condensed consolidated balance sheets as of February 28, 2022 and August 31, 2021:
| February 28, | August 31, | ||||||||
| 2022 | 2021 | ||||||||
| Classification on Balance Sheet | |||||||||
| Assets | |||||||||
| Operating lease assets | Operating lease right of use assets | $ | 2,348,391 | $ | 2,543,396 | ||||
| Total lease assets | $ | 2,348,391 | $ | 2,543,396 | |||||
| Liabilities | |||||||||
| Current liabilities | |||||||||
| Operating lease liability | Current operating lease liability | $ | 533,535 | $ | 530,797 | ||||
| Noncurrent liabilities | |||||||||
| Operating lease liability | Long-term operating lease liability | 1,866,858 | 2,057,805 | ||||||
| Total lease liability | $ | 2,400,393 | $ | 2,588,602 | |||||
Future minimum operating lease payments are as follows:
| Twelve Months Ending February 28, | ||||
| 2022 | $ | 706,646 | ||
| 2023 | 546,138 | |||
| 2024 | 429,308 | |||
| 2025 | 371,390 | |||
| 2026 | 383,475 | |||
| Thereafter | 558,151 | |||
| Total payments | 2,995,108 | |||
| Amount representing interest | (594,715 | ) | ||
| Lease obligation, net | 2,400,393 | |||
| Less lease obligation, current portion | (533,535 | ) | ||
| Lease obligation, long-term portion | $ | 1,866,858 | ||
During the six months ended February 28, 2022, the Company entered into new lease obligation of $101,348.
The lease expense for the six months ended February 28, 2022 and 2021 was $392,160 and $415,643, respectively. The cash paid under operating leases for the six months ended February 28, 2022 and 2021 was $381,533 and $410,175, respectively. At February 28, 2022, the weighted average remaining lease terms were 5.71 years and the weighted average discount rate was 8%.
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Finance Leases
The Company leases certain equipment under lease contracts that are accounted for as finance leases. If the contracts meet the criteria for a finance lease, the related equipment underlying the lease contract is capitalized and amortized over its estimated useful life. If the cost of the equipment is not available, the Company calculates the cost by taking the present value of the lease payments using an implicit borrowing rate of 5%.
The net book value of equipment under finance leases included in property and equipment on the accompanying condensed consolidated balance sheets at February 28, 2022 and August 31, 2021 is as follows:
| February 28, | August 31, | |||||||
| 2022 | 2021 | |||||||
| Cost | $ | 209,457 | $ | 209,457 | ||||
| Accumulated amortization | (164,419 | ) | (136,491 | ) | ||||
| Net book value | $ | 45,038 | $ | 72,966 | ||||
Future minimum finance lease payments are as follows:
| Twelve Months Ending February 28, | ||||
| 2023 | $ | 18,328 | ||
| 2024 | 9,694 | |||
| 2025 | 808 | |||
| Total payments | 28,830 | |||
| Amount representing interest | (443 | ) | ||
| Lease obligation, net | 28,387 | |||
| Less lease obligation, current portion | (17,533 | ) | ||
| Lease obligation, long-term portion | $ | 10,854 | ||
Note 14 – Stockholders’ Equity
Convertible Preferred Stock
The Company has authorized shares of $ par value convertible preferred stock. At February 28, 2022 and August 31, 2021, there were and convertible preferred shares issued and outstanding, respectively.
Common Stock
The Company has authorized shares of $ par value common stock. On February 1, 2021, the Company effected a 1-for-10 reverse stock split of our common stock. As a result of the reverse stock split, every 10 shares of issued and outstanding common stock were exchanged for one share of common stock, with any fractional shares being rounded up to the next higher whole share. At February 28, 2022 and August 31, 2021 there were and common shares issued and outstanding, respectively.
During the six months ended February 28, 2022, the Company issued:
| ● | restricted shares of common stock as consideration for a Consulting and Services Agreement valued at $64,750. The fair value was determined based on the market price of the Company’s common stock on the date of grant. The shares were issued on . |
| ● | restricted shares of common stock as collateral to be held in escrow pursuant to the terms and conditions provided for in a certain Securities Purchase Agreement, Pledge and Security Agreement, Secured Convertible Promissory Note, and Escrow Agreement, all dated November 17, 2021 to which the Company is a guarantor for that certain senior secured convertible promissory note in the principal amount of up to $1,875,000. The shares were issued on . The Company value these shares at $ since they are being held in escrow and will only be released to the convertible note holders upon certain conditions, including default on the notes. |
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| ● | restricted shares of common stock as consideration for a Consulting Agreement valued at $65,500. The fair value was determined based on the market price of the Company’s common stock on the date of grant. The shares were issued on . |
| ● | restricted shares of common stock as consideration for an Independent Contractor Agreement valued at $30,000. The fair value was determined based on the market price of the Company’s common stock on the date of grant. The shares were issued on . |
| ● | restricted shares of common stock as consideration for an Independent Contractor Agreement valued at $78,000. The fair value was determined based on the market price of the Company’s common stock on the date of grant. The shares were issued on . |
| ● | restricted shares of common stock as consideration for a Consulting Agreement valued at $60,000. The fair value was determined based on the market price of the Company’s common stock on the date of grant. The shares were issued on . |
| ● | restricted shares of common stock as consideration for a Consulting Agreement valued at $64,500. The fair value was determined based on the market price of the Company’s common stock on the date of grant. The shares were issued on . |
Stock Options
On September 8, 2015, the Company’s Board of Directors and stockholders, holding a majority of the Company’s outstanding common stock, approved the Novo Integrated Sciences, Inc. 2015 Incentive Compensation Plan (the “2015 Plan”), which authorizes the issuance of up to shares of common stock to employees, officers, directors or independent consultants of the Company, provided that no person can be granted shares under the 2015 Plan for services related to raising capital or promotional activities. During fiscal years 2020 and 2019, the Company did not grant any awards under the 2015 Plan. The Company does not intend to issue any additional grants under the 2015 Plan.
On January 16, 2018, the Company’s Board of Directors and stockholders, holding a majority of the Company’s outstanding common stock, approved the Novo Integrated Sciences, Inc. 2018 Incentive Compensation Plan (the “2018 Plan”). Under the 2018 Plan, shares of common stock are authorized for the grant of stock options and the issuance of restricted stock, stock appreciation rights, phantom stock and performance awards to officers, directors, employees and eligible consultants to the Company or its subsidiaries. As of February 28, 2022, the 2018 Plan has shares available for award; however, the Company does not intend to issue any additional grants under the 2018 Plan.
On February 9, 2021, the Company’s Board of Directors and stockholders, holding a majority of the Company’s outstanding common stock, approved the Novo Integrated Sciences, Inc. 2021 Equity Incentive Plan (the “2021 Plan”). Under the 2021 Plan, a total of shares of common stock are authorized for issuance pursuant to the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares or other cash- or stock-based awards to officers, directors, employees and eligible consultants to the Company or its subsidiaries. Subject to adjustment as provided in the 2021 Plan, . As of February 28, 2022, the 2021 Plan has shares available for award.
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| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Options | Exercise | Contractual | Intrinsic | |||||||||||||
| Outstanding | Price | Life | Value | |||||||||||||
| Outstanding, August 31, 2021 | 1,849,600 | 2.29 | $ | 218,240 | ||||||||||||
| Granted | 329,985 | 1.41 | ||||||||||||||
| Forfeited | ||||||||||||||||
| Exercised | ||||||||||||||||
| Outstanding, February 28, 2022 | 2,179,585 | 2.16 | $ | 16,919 | ||||||||||||
| Exercisable, February 28, 2022 | 1,897,600 | $ | 2.28 | $ | ||||||||||||
| Outstanding | Exercisable | |||||||||||||
| Number of | Exercise | Number of | Exercise | |||||||||||
| Options | Price | Options | Price | |||||||||||
| 281,985 | $ | 1.33 | $ | 1.33 | ||||||||||
| 997,000 | 1.60 | 997,000 | 1.60 | |||||||||||
| 48,000 | 1.87 | 48,000 | 1.87 | |||||||||||
| 775,000 | 3.00 | 775,000 | 3.00 | |||||||||||
| 72,600 | 3.80 | 72,600 | 3.80 | |||||||||||
| 5,000 | 5.00 | 5,000 | 5.00 | |||||||||||
| 2,179,585 | 1,897,600 | |||||||||||||
For options granted during the six months ended February 28, 2022 where the exercise price equaled the stock price at the date of the grant, the weighted-average fair value of such options was $, and the weighted-average exercise price of such options was $. No options were granted during the six months ended February 28, 2022 where the exercise price was less than the stock price at the date of grant or the exercise price was greater than the stock price at the date of grant.
For options granted during the six months ended February 28, 2021 where the exercise price equaled the stock price at the date of the grant, the weighted-average fair value of such options was $, and the weighted-average exercise price of such options was $. No options were granted during the six months ended February 28, 2021 where the exercise price was less than the stock price at the date of grant or the exercise price was greater than the stock price at the date of grant.
The fair value of the stock options is being amortized to stock option expense over the vesting period. The Company recorded stock option expense of $ and $ during the six months ended February 28, 2022 and 2021, respectively. At February 28, 2022, the unamortized stock option expense was $, which will be amortized into expense through February 2023.
| 2022 | 2021 | |||||||
| Risk-free interest rate | to | % | % | |||||
| Expected life of the options | years | years | ||||||
| Expected volatility | 281 | % | 268 | % | ||||
| Expected dividend yield | % | % | ||||||
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Warrants
The following is a summary of warrant activity:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Warrants | Exercise | Contractual | Intrinsic | |||||||||||||
| Outstanding | Price | Life | Value | |||||||||||||
| Outstanding, August 31, 2021 | 2,388,050 | 3.35 | $ | |||||||||||||
| Granted | 6,057,214 | 2.05 | ||||||||||||||
| Forfeited | ||||||||||||||||
| Exercised | ||||||||||||||||
| Outstanding, February 28, 2022 | 8,445,264 | 2.42 | $ | |||||||||||||
| Exercisable, February 28, 2022 | 8,445,264 | $ | 2.42 | $ | ||||||||||||
| Outstanding and Exercisable | ||||
| Number of | Exercise | |||
| Warrants | Price | |||
| $ | ||||
Note 15 – Commitments and Contingencies
Litigation
The Company is party to certain legal proceedings from time-to-time incidental to the conduct of its business. These proceedings could result in fines, penalties, compensatory or treble damages or non-monetary relief. The nature of legal proceedings is such that the Company cannot assure the outcome of any particular matter, and an unfavorable ruling or development could have a materially adverse effect on our condensed consolidated financial position, results of operations and cash flows in the period in which a ruling or settlement occurs. However, based on information available to the Company’s management to date, the Company’s management does not expect that the outcome of any matter pending against the Company is likely to have a materially adverse effect on the Company’s condensed consolidated financial position as of February 28, 2022, results of operations, cash flows or liquidity of the Company.
Note 16 – Acquisitions
Terragenx
On November 17, 2021, the Company and NHL, a wholly owned subsidiary of the Company, entered into that certain Share Exchange Agreement (the “Terra SEA”), dated as of November 17, 2021, by and among the Company, NHL, Terragenx Inc. (“Terra”), TMS Inc. (“TMS”), Shawn Mullins, Claude Fournier, and The Coles Optimum Health and Vitality Trust (“COHV” and collectively with TMS, Mr. Mullins and Mr. Fournier, the “Terra Shareholders”). Collectively, the Terra Shareholders owned % of the outstanding shares of Terra (the “Terra Purchased Shares”).
Pursuant to the terms of the Terra SEA, NHL agreed to purchase from the Terra Shareholders, and the Terra Shareholders agreed to sell to NHL, the Terra Purchased Shares on the closing date, in exchange for payment by NHL of the purchase price (the “Purchase Price”) of CAD$ (approximately $) (the “Exchange”). The Purchase Price was to be paid with the issuance, by NHL to the Terra Shareholders, of certain non-voting NHL special shares exchangeable into restricted shares of the Company’s common stock (the “NHL Exchangeable Shares”). The total shares of Company common stock allotted in favor of the Terra Shareholders was calculated at a per share price of $.
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The Exchange closed on November 17, 2021. .
In addition, the Company will issue shares of the Company’s common stock to Terry Mullins as part of an employment agreement that is considered part of the purchase price. The price of the Company’s common stock on the closing date was $; therefore the purchase price for accounting purposes was $. The Company acquired Terragenx to complement several of the Company’s growth initiatives including (i) to build a health science related IP portfolio, and (ii) through either acquisition, internal development, or third-party licensing distribute effective, personalized health and wellness product solutions allowing for the customization of patient preventative care remedies and over-the-counter preventative and maintenance care solutions. This acquisition was considered an acquisition of a business under ASC 805. From the date of acquisition until February 28, 2022, Terragenx had revenues of $ and a net loss of $.
The business combination accounting is not yet complete and the amounts assigned to assets acquired and liabilities assumed are provisional. Therefore, this may result in future adjustments to the provisional amounts as information is obtained about facts and circumstances that existed at the acquisition date. A summary of the preliminary purchase price allocation at fair value is below.
| Cash and cash equivalents | $ | 29,291 | ||
| Inventory | 42,273 | |||
| Prepaid expenses and other current assets | 398 | |||
| Property and equipment | 66,759 | |||
| Intangible assets | 1,179,361 | |||
| Accounts payable and accrued expenses | (189,080 | ) | ||
| CEBA loan | (47,766 | ) | ||
| Minority interest | (97,311 | ) | ||
| Purchase price | $ | 983,925 |
The purchase price was paid as follows:
| Cash | $ | |||
| Common stock to be issued | 983,925 | |||
| $ | 983,925 |
The purchase of Terragenx was not considered significant for accounting purposes; therefore, pro forma financial statements are not presented.
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Mullins Asset Purchase Agreement
On November 17, 2021, the Company entered into that certain Asset Purchase Agreement (the “Mullins APA”), dated as of November 17, 2021, by and between the Company and Terence Mullins. Pursuant to the terms of the Mullins APA, Mr. Mullins agreed to sell, and the Company agreed to purchase, all of Mr. Mullins’ right, title and interest in and to certain assets (the “Mullins IP Assets”), in exchange for a purchase price of CAD$2,500,000 (approximately $1,990,250) which is to be paid as follows:
| (a) | CAD$2,000,000 (approximately $1,592,200) is to be issued or allotted to Mr. Mullins only after patent-pending status, in the U.S. or internationally, is designated for all Mullins IP Assets (the “Mullins IP Assets CAD$2m Shares”), as either restricted shares of Company common stock or NHL Exchangeable Shares, as determined by Mr. Mullins. Once issued or allotted, the Mullins IP Assets CAD $2m Shares will be held in escrow pending registration and approval for all Mullins IP Assets, and | |
| (b) | CAD$500,000 (approximately $398,050) is to be issued in the form of restricted shares of Company common stock, free and clear of all liens, pledges, encumbrances, charges, or known claims of any kind, nature, or description, upon closing of the Mullins APA |
All shares issued or allotted under the terms and conditions of the Mullins APA are calculated at a value of $ per share. The price of the Company’s common stock on the closing date was $; therefore the purchase price for assets acquired (Intellectual property) by the payment of item (a) above was $755,701 and item (b) above was $188,925. The purchase price for item (a) above has been recorded as a contingent liability at fair value in the accompanying unaudited condensed consolidated balance sheets since the conditions for payment have not been met as of February 28, 2022. The amounts assigned to assets acquired are provisional. Therefore, this may result in future adjustments to the provisional amounts as information is obtained about facts and circumstances that existed at the acquisition date.
In addition, the Company will pay a royalty equal to 10% of net revenue (net profit) of all iodine related sales reported through the Company or any of its wholly owned subsidiaries for a period equal to the commercial validity of the intellectual property.
MiTelemed+
On October 8, 2021, the Company and NHL completed a Joint Venture Agreement (the “MiTelemed+ JV”) with EK-Tech Solutions Inc. (“EK-Tech”) to establish the joint venture company MiTelemed+ Inc., an Ontario province Canada corporation (“MiTelemed+”), to operate, support, and expand access and functionality of EK-Tech’s enhanced proprietary Telehealth platform. At closing, EK-Tech contributed all intellectual property, source code, and core data of the iTelemed platform, valued at CAD$1,500,000, and NHL issued to EK-Tech, non-voting NHL Exchangeable Special Shares, free and clear of all liens and encumbrances, which are issued solely for the purpose of EK-Tech to exchange, for restricted shares of Company’s common stock solely upon EK-Tech meeting terms and conditions for exchange of the NHL Exchangeable Special Shares as defined in the MiTelemed+ JV. The net profits and net losses of the JV will be split 50/50 between NHL and EK-Tech. As of February 28, 2022, the terms and conditions for the exchange of the NHL Exchangeable Special Shares had not been met.
Note 17 – Segment Reporting
ASC Topic 280, Segment Reporting, requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company has two reportable segments: healthcare services and product manufacturing and development.
The following tables summarize the Company’s segment information for the three and six months ended February 28, 2022 and 2021:
| Three Months Ended February 28, | Six Months Ended February 28, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Sales | ||||||||||||||||
| Healthcare services | $ | 1,873,577 | $ | 2,075,894 | $ | 4,053,200 | $ | 4,231,400 | ||||||||
| Product manufacturing and development | 995,646 | 1,977,950 | ||||||||||||||
| Corporate | ||||||||||||||||
| $ | 2,869,223 | $ | 2,075,894 | $ | 6,031,150 | $ | 4,231,400 | |||||||||
| Gross profit | ||||||||||||||||
| Healthcare services | $ | 760,424 | $ | 751,446 | $ | 1,560,066 | $ | 1,562,896 | ||||||||
| Product manufacturing and development | 455,930 | 922,754 | ||||||||||||||
| Corporate | ||||||||||||||||
| $ | 1,216,354 | $ | 751,446 | $ | 2,482,820 | $ | 1,562,896 | |||||||||
| Loss from operations | ||||||||||||||||
| Healthcare services | $ | (265,217 | ) | $ | (319,686 | ) | $ | (376,322 | ) | $ | (354,583 | ) | ||||
| Product manufacturing and development | (504,145 | ) | (845,690 | ) | ||||||||||||
| Corporate | (1,351,314 | ) | (1,006,258 | ) | (2,262,323 | ) | (1,729,085 | ) | ||||||||
| $ | (2,120,676 | ) | $ | (1,325,944 | ) | $ | (3,484,335 | ) | $ | (2,083,668 | ) | |||||
| Depreciation and amortization | ||||||||||||||||
| Healthcare services | $ | 71,505 | $ | 22,328 | $ | 146,111 | $ | 43,938 | ||||||||
| Product manufacturing and development | 334,450 | 586,526 | ||||||||||||||
| Corporate | 367,600 | 357,171 | 735,200 | 693,485 | ||||||||||||
| $ | 773,555 | $ | 379,499 | $ | 1,467,837 | $ | 737,423 | |||||||||
| Capital expenditures | ||||||||||||||||
| Healthcare services | $ | 72,139 | $ | 618 | $ | 176,981 | $ | 618 | ||||||||
| Product manufacturing and development | 15,555 | |||||||||||||||
| Corporate | ||||||||||||||||
| $ | 72,139 | $ | 618 | $ | 192,536 | $ | 618 | |||||||||
| Interest expenses | ||||||||||||||||
| Healthcare services | $ | 20,027 | $ | 22,948 | $ | 40,154 | $ | 46,889 | ||||||||
| Product manufacturing and development | 923,843 | 972,446 | ||||||||||||||
| Corporate | 282,312 | 282,312 | ||||||||||||||
| $ | 1,226,182 | $ | 22,948 | $ | 1,294,912 | $ | 46,889 | |||||||||
| Net loss | ||||||||||||||||
| Healthcare services | $ | (282,717 | ) | $ | (340,259 | ) | $ | (411,524 | ) | $ | (396,359 | ) | ||||
| Product manufacturing and development | (1,837,396 | ) | (2,619,938 | ) | ||||||||||||
| Corporate | (2,748,091 | ) | (1,000,332 | ) | (3,653,137 | ) | (1,717,335 | ) | ||||||||
| $ | (4,868,204 | ) | $ | (1,340,591 | ) | $ | (6,684,599 | ) | $ | (2,113,694 | ) | |||||
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| As of | As of | |||||||
| February 28, | August 31, | |||||||
| 2022 | 2021 | |||||||
| Total assets | ||||||||
| Healthcare services | $ | 6,448,799 | $ | 7,318,888 | ||||
| Product manufacturing and development | 24,161,243 | 21,427,285 | ||||||
| Corporate | 39,709,988 | 33,212,108 | ||||||
| $ | 70,320,030 | $ | 61,958,281 | |||||
| Accounts receivable | ||||||||
| Healthcare services | $ | 763,682 | $ | 953,919 | ||||
| Product manufacturing and development | 488,291 | 514,510 | ||||||
| Corporate | ||||||||
| $ | 1,251,973 | $ | 1,468,429 | |||||
| Intangible assets | ||||||||
| Healthcare services | $ | $ | ||||||
| Product manufacturing and development | 7,882,039 | 6,365,705 | ||||||
| Corporate | 25,335,563 | 26,070,763 | ||||||
| $ | 33,217,602 | $ | 32,436,468 | |||||
| Goodwill | ||||||||
| Healthcare services | $ | 555,949 | $ | 557,357 | ||||
| Product manufacturing and development | 8,502,987 | 8,524,522 | ||||||
| Corporate | ||||||||
| $ | 9,058,936 | $ | 9,081,879 | |||||
Note 18 – Subsequent Events
Share Exchange Agreement to Acquire 50.1% of 12858461 Canada Corp.
On March 1, 2022, the Company and NHL completed a Share Exchange Agreement (the “1285 SEA”) with 12858461 Canada Corp. (“1285”), a Canada federal corporation in the business of providing clinic-based physiotherapy and related ancillary services and products, and Prashant A. Jani, a Canadian citizen and sole shareholder of 1285 (the “1285 Shareholder”) to acquire 50.1% ownership of 1285 for a purchase price of $68,000 (the “1285 Purchase Price”) paid with the issuance, by NHL to the 1285 Shareholder, of certain non-voting NHL Exchangeable Special Shares which can only be utilized for the purpose of exchange into an allotment of restricted shares of the Company’s common stock (the “Parent 1285 SEA Shares”) at the determination of the 1285 Shareholder. The number of Parent 1285 SEA Shares was calculated by dividing the 1285 Purchase Price by $ per share.
Asset Purchase Agreement with Poling Taddeo Hovius Physiotherapy Professional Corp., operating as Fairway Physiotherapy and Sports Injury Clinic
On March 1, 2022, the Company and NHL completed an Asset Purchase Agreement (the “PTHPC APA”) with Poling Taddeo Hovius Physiotherapy Professional Corp. (“PTHPC”), operating a clinic-based physiotherapy, rehabilitative, and related ancillary services and products business known as Fairway Physiotherapy and Sports Injury Clinic (“FAIR”), and Jason Taddeo, a Canadian citizen and the sole shareholder of PTHPC (the “PTHPC Shareholder”), Under the terms and conditions of the PTHPC APA, PTHPC agreed to sell, assign and transfer to NHL, free and clear of all encumbrances, other than permitted encumbrances, and NHL agreed to purchase from PTHPC all of PTHPC’s right, title and interest in and to all of its assets related to FAIR and the FAIR Business, with the exception of certain limited exclusions, and the rights, privileges, claims and properties of any kind whatsoever that are related thereto, whether owned or leased, real or personal, tangible or intangible, of every kind and description and wheresoever situated. Under the terms and conditions of the PTHPC APA, the purchase price is $627,000 (the “FAIR Purchase Price”) paid with the issuance, by NHL to the PTHPC Shareholder, of certain non-voting NHL Exchangeable Special Shares which can only be utilized for the purpose of exchange into an allotment of restricted shares of the Company’s common stock (the “Parent PTHPC APA Shares”) at the determination of the PTHPC Shareholder. The number of Parent PTHPC APA Shares was calculated by dividing the FAIR Purchase Price by $ per share.
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Membership Interest Purchase Agreement with Clinical Consultants International LLC
On March 17, 2022, the Company entered into a Membership Interest Purchase Agreement (the “CCI Agreement”) by and among the Company, Clinical Consultants International LLC (“CCI”), each of the members of CCI (the “Members”), and Dr. Joseph Chalil as the representative of the Members.
Pursuant to the terms of the CCI Agreement, the parties agreed to enter into a business combination transaction (the “CCI Acquisition”), pursuant to which, among other things, the Members will sell and assign to the Company all of their membership interests of CCI, in exchange for a total of restricted shares of the Company’s common stock (the “Exchange Shares”). The Exchange Shares will be apportioned among the Members pro rata based on their respective membership interest ownership percentage of CCI. Following the closing of the CCI Acquisition (the “Closing”), the Company will own 100% of the issued and outstanding membership interests of CCI, and the Members or their designees will collectively own restricted shares of the Company’s common stock.
Pursuant to the terms of the Agreement, the Company agreed to (i) name, at the Closing, Dr. Chalil as the Chief Medical Officer of the Company and the President of Novomerica Healthcare Group, Inc., which is a wholly owned subsidiary of the Company, (ii) enter into an employment agreement with Dr. Chalil, and (iii) name Dr. Chalil to the Company’s Board of Directors.
The Agreement may be terminated under certain customary and limited circumstances prior to the Closing, including by either party if the conditions to Closing of an opposing party have not been satisfied or waived by the applicable party on or prior to April 15, 2022. The CCI Acquisition closed on April 5, 2022. See “—Closing of CCI Acquisition” below.
Restricted Stock Issuance for 2-year Independent Contractor Agreements
On March 18, 2022, the Company issued restricted shares of common stock as consideration for an Independent Contractor Agreement.
On March 18, 2022, the Company issued restricted shares of common stock as consideration for an Independent Contractor Agreement.
Closing of CCI Acquisition
On April 5, 2022, the CCI Acquisition closed. As a result, immediately after the Closing on April 5, 2022, the Company owned 100% of the issued and outstanding membership interests of CCI. On April 7, 2022, the Company issued an aggregate of restricted shares of the Company’s common stock to the Members in connection with the CCI Acquisition and pursuant to the terms of the CCI Agreement.
Appointment of Dr. Chalil as the Company’s Chief Medical Officer and President of Novomerica Healthcare Group, Inc.
In connection with the closing of the CCI Acquisition and pursuant to the terms of the CCI Agreement, on April 5, 2022, the Company named Dr. Chalil as the Company’s Chief Medical Officer, and the President of Novomerica Healthcare Group, Inc., a wholly owned subsidiary of the Company formed for expansion of certain medically related business in the U.S. (“NHG”). Pursuant to the terms of the CCI Agreement, the Company expects to appoint Dr. Chalil as a member of the Company’s Board of Directors in the near future.
Chalil Employment Agreement
In connection with Dr. Chalil’s appointment as the Company’s Chief Medical Officer and NHG’s President, the Company entered into an executive agreement (the “Chalil Agreement”) with Dr. Chalil on April 5, 2022. Pursuant to the terms of the Chalil Agreement, the Company agreed to pay Dr. Chalil an annual base salary of $400,000. In addition, the Company agreed to pay Dr. Chalil an amount equal to 10% of the net income of CCI in excess of $450,000 for each calendar year during the term of the Chalil Agreement (the “Revenue Share Payment”).
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Dr. Chalil will also receive bonuses based on increases in the Company’s market cap valuation (“MCV”) from the date of the Chalil Agreement, with the following milestone bonus parameters:
| (a) | For each and every $50 million Company MCV increase sustained for a period of not less than 30 days (the “50M Bonus Event”), Dr. Chalil will receive $250,000, or % of $50 million, in Company common stock. . This bonus will be capped at a Company MCV of $ billion. The 50M Bonus Event stock will be issued as (i) 50% restricted shares within 30 days of the respective 50M Bonus Event or at a later date as requested by Dr. Chalil, and held as an allocation to Dr. Chalil, until the requisition date as provided in writing, by Dr. Chalil, to the Company, and (ii) 50% registered shares from the Company’s current active incentive plan within 30 days of the respective 50M Bonus Event. |
| (b) | Upon the Company sustaining a MCV of $2 billion for no less than 30 days (the “2B Bonus Event”), Dr. Chalil will receive $20 million, or of $1 billion, in restricted shares of Company common stock. The 2B Bonus Event stock will be issued within 30 days of the 2B Bonus Event or at a later date as requested by Dr. Chalil, and held as an allocation to Dr. Chalil, until Dr. Chalil provides the Company with written instructions requesting the specific stock issuance date. |
| (c) | For each additional $1 billion MCV, beyond the 2B Bonus Event and commencing when the Company MCV reaches $3 billion sustained for no less than 30 days, Dr. Chalil will receive $10 million, or 1% of $1 billion, in restricted shares of the Company’s common stock. Dr. Chalil may choose to have this stock issued within 30 days of each additional $ billion MCV event or at a later date as requested by Dr. Chalil, and held as an allocation to Dr. Chalil, until Dr. Chalil provides the Company with written instructions requesting the specific stock issuance date. |
The Company may also issue to Dr. Chalil equity awards as determined by the Board of Directors.
The term of the Chalil Agreement ends on the earlier of (i) April 5, 2025, and (ii) the time of the termination of Dr. Chalil’s employment pursuant to the terms of the Chalil Agreement. The term of the Chalil Agreement will be automatically extended for one or more additional terms of one year each unless either party provided notice to the other party of their desire to not renew at least 30 days prior to expiration of the then-current term.
The Company may terminate the Chalil Agreement at any time for Cause (as defined in the Chalil Agreement) or without Cause, and Dr. Chalil may terminate the Chalil Agreement at any time with or without Good Reason (as defined in the Chalil Agreement. If the Company terminates the Chalil Agreement without Cause or Dr. Chalil terminates the Chalil Agreement with Good Reason, (i) the Company will pay to Dr. Chalil any base salary, bonuses, and benefits then owed or accrued, and any unreimbursed expenses incurred by Dr. Chalil in each case through the termination date; (ii) the Company will pay to Dr. Chalil, in one lump sum, an amount equal to the greater of (1) the base salary that would have been paid to Dr. Chalil for the remainder of the then-current term, and (2) the total base salary that would have been paid to Dr. Chalil for a one year period based on the base salary as of the date of termination, and the Revenue Share Payment for the calendar year in which such termination occurs; and (iii) any equity grant already made to Dr. Chalil will, to the extent not already vested, be deemed automatically vested.
Promissory Note Conversions
On December 14, 2021, the Company issued to certain accredited institutional investors senior secured convertible notes, which notes are convertible into shares of the Company’s common stock, under certain conditions. Between March 1, 2022 and April 11, 2022 of this Quarterly Report on Form 10-Q, an aggregate of $305,000 in principal of these notes and $889 in interest on these notes was converted, resulting in the issuance by the Company of an aggregate of 152,948 shares of common stock upon such conversions.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and its representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission (“SEC”) and in our reports and presentations to stockholders or potential stockholders. In some cases, forward-looking statements can be identified by words such as “believe,” “expect,” “anticipate,” “plan,” “potential,” “continue” or similar expressions. Such forward-looking statements include risks and uncertainties and there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors, risks and uncertainties can be found in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2021, as the same may be updated from time to time, including in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q.
Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to foresee or identify all factors that could have a material effect on the future financial performance of the Company. The forward-looking statements in this report are made on the basis of management’s assumptions and analyses, as of the time the statements are made, in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate under the circumstances.
Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q and the information incorporated by reference in this report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.
Overview of the Company
When used herein, the terms the “Company,” “we,” “us” and “our” refer to Novo Integrated Sciences, Inc. and its consolidated subsidiaries.
The Company owns Canadian and U.S. subsidiaries which deliver, or intend to deliver, multidisciplinary primary health care related services and products through the integration of medical technology, advanced therapeutics and rehabilitative science.
We believe that “decentralizing” healthcare, through the integration of medical technology and interconnectivity, is an essential solution to the rapidly evolving fundamental transformation of how non-catastrophic healthcare is delivered both now and in the future. Specific to non-critical care, ongoing advancements in both medical technology and inter-connectivity are allowing for a shift of the patient/practitioner relationship to the patient’s home and away from on-site visits to primary medical centers with mass-services. This acceleration of “ease-of-access” in the patient/practitioner interaction for non-critical care diagnosis and subsequent treatment minimizes the degradation of non-critical health conditions to critical conditions as well as allowing for more cost-effective healthcare distribution.
The Company’s decentralized healthcare business model is centered on three primary pillars to best support the transformation of non-catastrophic healthcare delivery to patients and consumers:
| ● | First Pillar: Service Networks. Deliver multidisciplinary primary care services through (i) an affiliate network of clinic facilities, (ii) small and micro footprint sized clinic facilities primarily located within the footprint of box-store commercial enterprises, (iii) clinic facilities operated through a franchise relationship with the Company, and (iv) corporate operated clinic facilities. | |
| ● | Second Pillar: Technology. Develop, deploy, and integrate sophisticated interconnected technology, interfacing the patient to the healthcare practitioner thus expanding the reach and availability of the Company’s services, beyond the traditional clinic location, to geographic areas not readily providing advanced, peripheral based healthcare services, including the patient’s home. | |
| ● | Third Pillar: Products. Develop and distribute effective, personalized health and wellness product solutions allowing for the customization of patient preventative care remedies and ultimately a healthier population. The Company’s science-first approach to product innovation further emphasizes our mandate to create and provide over-the-counter preventative and maintenance care solutions. |
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First Pillar – Service Networks for Hands-on Patient Care
Innovation through science combined with the integration of sophisticated, secure technology assures us of continued cutting edge advancement in patient first platforms.
Our clinicians and practitioners provide certain multidisciplinary primary health care services, and related products, beyond the medical doctor first level contact identified as primary care. Our clinicians and practitioners are not licensed medical doctors, physicians, specialist, nurses or nurse practitioners. Our clinicians and practitioners are not authorized to practice primary care medicine and they are not medically licensed to prescribe pharmaceutical based product solutions.
Our team of multidisciplinary primary health care clinicians and practitioners provide assessment, diagnosis, treatment, pain management, rehabilitation, education and primary prevention for a wide array of orthopedic, musculoskeletal, sports injury, and neurological conditions across various demographics including pediatric, adult, and geriatric populations through our 16 corporate-owned clinics, a contracted network of affiliate clinics, and eldercare related long-term care homes, retirement homes, and community-based locations in Canada.
Our specialized multidisciplinary primary health care services include physiotherapy, chiropractic care, manual/manipulative therapy, occupational therapy, eldercare, massage therapy (including pre- and post-partum), acupuncture and functional dry needling, chiropody, stroke and traumatic brain injury/neurological rehabilitation, kinesiology, vestibular therapy, concussion management and baseline testing, trauma sensitive yoga and meditation for concussion-acquired brain injury and occupational stress-PTSD, women’s pelvic health programs, sports medicine therapy, assistive devices, dietitian, holistic nutrition, fall prevention education, sports team conditioning programs including event and game coverage, and private personal training.
Additionally, we continue to expand our patient care philosophy of maintaining an on-going continuous connection with our current and future patient community, beyond the traditional confines of brick-and-mortar facilities, by extending oversight of patient diagnosis, care and monitoring, directly through various Medical Technology Platforms either in-use or under development.
The occupational therapists, physiotherapists, chiropractors, massage therapists, chiropodists and kinesiologists contracted, by NHL, to provide occupational therapy, physical therapy and fall prevention assessment services are registered with the College of Occupational Therapists of Ontario, the College of Physiotherapists of Ontario, College of Chiropractors of Ontario, College of Massage Therapists of Ontario, College of Chiropodists of Ontario, and the College of Kinesiologists of Ontario regulatory authorities.
Our strict adherence to public regulatory standards, as well as self-imposed standards of excellence and regulation, have allowed us to navigate with ease through the industry’s licensing and regulatory framework. Compliant treatment, data and administrative protocols are managed through a team of highly trained, certified health care and administrative professionals. We and our affiliates provide service to the Canadian property and casualty insurance industry, resulting in a regulated framework governed by the Financial Services Commission of Ontario.
Second Pillar – Interconnected Technology for Virtual Ecosystem of Services, Products and Digital Health Offerings
Decentralization through the integration of interconnected technology platforms has been adopted and is thriving in a variety of sectors and industries such as transportation (Uber, Lyft), real estate (Zillow, Redfin, Airbnb, VRBO), used car sales (Carvana, Vroom), stock and financial markets (Robinhood, Acorns, Webull) and so many other sectors. Yet decentralization of the non-critical primary care and wellness sector of healthcare is lagging significantly in capability and benefit for patient access and delivery of services and products. The COVID-19 pandemic has taught both patients and healthcare providers the viability, importance, and benefits of decentralized access to primary care simply through the rapid adoption of telehealth/telemedicine.
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The Company’s focus on a holistic approach to patient-first health and wellness, through innovation and decentralization, includes maintaining an on-going continuous connection with our current and future patient community, beyond the traditional confines of brick-and-mortar facilities, by extending oversight of patient evaluation, diagnosis, treatment solutions, and monitoring, directly through various Medical Technology Platforms and periphery tools either in-use or under development. Through the integration and deployment of sophisticated and secure technology and periphery diagnostic tools, the Company is working to expand the reach of our non-critical primary care services and product offerings, beyond the traditional clinic locations, to geographic areas not readily providing advanced primary care service to date, including the patient’s home.
NovoConnect, the Company’s proprietary mobile application with a fully securitized tech stock, telemedicine/telehealth and remote patient monitoring fall under this Second Pillar. In October 2021, we announced the launch of MiTelemed+, Inc. (“MiTelemed”), a joint venture with EK-Tech Solutions Inc. (“EK-Tech”). MiTelemed will operate, support and expand access and functionality of iTelemed, EK-Tech’s enhanced proprietary telehealth platform. MiTelemed+, through the iTelemed platform, will allow us to offer the patient and the practitioner a sophisticated and enhanced telehealth interaction. Through the interface of sophisticated peripheral based diagnostic tools operated by skilled support workers in the patient’s remote location, we believe that the practitioner’s ability and comfort to provide a uniquely comprehensive evaluation, diagnosis, and treatment solution will be dramatically elevated.
Third Pillar – Health and Wellness Products
We believe our science first approach to product offerings further emphasizes the Company’s strategic vision to innovate, evolve, and deliver over-the-counter preventative and maintenance care solutions as well as therapeutics and personalized diagnostics that enable individualized health optimization.
As the Company’s patient base grows through the expansion of its corporate owned clinics, its affiliate network, its micro-clinic facility openings, its interconnected technology platforms, and other growth initiatives, the development and distribution of high-quality wellness product solutions is integral to (i) offering effective product solutions allowing for the customization of patient preventative care remedies and ultimately a healthier population, and (ii) maintaining an on-going relationship with our patients through the customization of patient preventative and maintenance care solutions.
The Company’s product offering ecosystem is being built through strategic acquisitions and engaging in licensing agreements with partners that share our vision to provide a portfolio of products that offer an essential and differentiated solution to health and wellness globally. Our 2021 acquisitions of Acenzia Inc. and PRO-DIP, LLC support this Third Pillar. In December 2021, we were granted a Natural Product Number (NPN) by Health Canada for IoNovo Iodine, a proprietary pure aqueous iodine micronutrient delivered in an oral or nasal spray format for maximum impact and bioavailability.
We have two reportable segments: healthcare services and product manufacturing and development. During the quarter ended February 28, 2022, revenues from healthcare services and product manufacturing and development represented 65.3% and 34.7%, respectively, of the Company’s total revenues for the quarter. We expect the percentage of revenues generated from the product manufacturing and development segment to increase at a greater rate than the revenue generated from healthcare services over the coming quarters.
Recent Developments
Coronavirus (COVID-19)
While all of the Company’s business units are operational at the time of this filing, any future impact of the COVID-19 pandemic on the Company’s operations remains unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced patient traffic and reduced operations. For more information regarding the impact of COVID-19 on the Company, see “—Liquidity and Capital Resources—Financial Impact of COVID-19” of this quarterly report on Form 10-Q.
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December 2021 Registered Direct Offering
On December 14, 2021, the Company entered into a Securities Purchase Agreement with an accredited institutional investor (the “Purchaser”) pursuant to which the Company agreed to issue to the Purchaser and the Purchaser agreed to purchase (the “Purchase”), in a registered direct offering, (i) $16,666,666 aggregate principal amount of the Company’s senior secured convertible notes, which notes are convertible into shares of the Company’s common stock, under certain conditions (the “Notes”); and (ii) warrants to purchase up to 5,833,334 shares of the Company’s common stock (the “Warrants”). The securities, including up to 68,557,248 shares of common stock issuable upon conversion under the Notes and up to 5,833,334 shares of common stock issuable upon exercise of the Warrants, are being offered by the Company pursuant to an effective shelf registration statement on Form S-3 (File No. 333-254278), which was declared effective by the SEC on March 22, 2021. The Purchase closed on December 14, 2021.
The Notes have an original issue discount of 10%, resulting in gross proceeds to the Company of $15,000,000. The Notes bear interest of 5% per annum and mature on June 14, 2023, unless earlier converted or redeemed, subject to the right of the Purchaser to extend the date under certain circumstances. The Company will make monthly payments on the first business day of each month commencing on the calendar month immediately following the sixth month anniversary of the issuance of the Notes through June 14, 2023, the maturity date, consisting of an amortizing portion of the principal of each Note equal to $1,388,888 and accrued and unpaid interest and late charges on the Notes. All amounts due under the Notes are convertible at any time, in whole or in part, at the holder’s option, into common stock at the initial conversion price of $2.00, which conversion price is subject to certain adjustments; provided, however, that the Notes have a maximum 9.99% equity blocker. If an event of default occurs, the holder may convert all, or any part, of the principal amount of a Note and all accrued and unpaid interest and late charge at an alternate conversion price, as described in the Notes. Subject to certain conditions, the Company has the right to redeem all, but not less than all, of the remaining principal amount of the Notes and all accrued and unpaid interest and late charges in cash at a price equal to 135% of the amount being redeemed.
The Warrants are exercisable at an exercise price of $2.00 per share and expire on the fourth-year anniversary of December 14, 2021, the initial issuance date of the Warrants.
LA Fitness Canada Amended and Restated License Agreement & Amended and Restated Guaranty
On December 15, 2021, NHL entered into an Amended and Restated Master Facility License Agreement (the “Amended and Restated Canada License Agreement”) with LAF Canada Company (“LA Fitness Canada”). The Amended and Restated Canada License Agreement had the effect of (i) removing NHL’s obligation to develop and open a certain number of facilities within certain designated time periods; and (ii) revising the default provisions such that certain defaults will result only in termination with respect to a specific facility, rather than of the license itself. As a result of the Amended and Restated Canada License Agreement, NHL may continue to develop and open additional facilities for business.
Pursuant to the terms of the Amended and Restated Canada License Agreement, the Company entered into that certain Guaranty Agreement (the “Canada Guaranty”) dated December 15, 2021 by and between the Company, Fitness International, LLC and LA Fitness Canada, pursuant to which the Company irrevocably guaranteed the full, unconditional, and prompt payment and performance of all of NHL’s obligations and liabilities under the Amended and Restated Canada License Agreement.
Stock Option Grant to Independent Directors
On February 23, 2022, the Company granted, pursuant to the Company’s 2021 Equity Incentive Plan, a stock option to purchase 93,955 shares of common stock at an exercise price of $1.33 to each of the Company’s independent directors, Alex Flesias, Robert Oliva and Michael Pope. Each stock option vests, and becomes exercisable, (i) with respect to 7,833 shares each month, beginning on the date of grant, until December 23, 2022, and (ii) with respect 7,832 shares on January 23, 2023. Each stock option expires on February 23, 2027. The stock option grants were previously approved by the Company’s Board of Directors on January 26, 2021 and are consistent with the letter agreements dated January 26, 2021, between the Company and Messrs. Flesias, Oliva and Pope.
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Share Exchange Agreement to Acquire 50.1% of 12858461 Canada Corp.
On March 1, 2022, the Company and NHL completed a Share Exchange Agreement (the “1285 SEA”) with 12858461 Canada Corp. (“1285”), a Canada federal corporation in the business of providing clinic-based physiotherapy and related ancillary services and products, and Prashant A. Jani, a Canadian citizen and sole shareholder of 1285 (the “1285 Shareholder”) to acquire 50.1% ownership of 1285 for a purchase price of $68,000 (the “1285 Purchase Price”) paid with the issuance, by NHL to the 1285 Shareholder, of certain non-voting NHL Exchangeable Special Shares which can only be utilized for the purpose of exchange into an allotment of 17,000 restricted shares of the Company’s common stock (the “Parent 1285 SEA Shares”) at the determination of the 1285 Shareholder. The number of Parent 1285 SEA Shares was calculated by dividing the 1285 Purchase Price by $4.00 per share.
Asset Purchase Agreement with Poling Taddeo Hovius Physiotherapy Professional Corp., operating as Fairway Physiotherapy and Sports Injury Clinic
On March 1, 2022, the Company and NHL completed an Asset Purchase Agreement (the “PTHPC APA”) with Poling Taddeo Hovius Physiotherapy Professional Corp. (“PTHPC”), operating a clinic-based physiotherapy, rehabilitative, and related ancillary services and products business known as Fairway Physiotherapy and Sports Injury Clinic (“FAIR”), and Jason Taddeo, a Canadian citizen and the sole shareholder of PTHPC (the “PTHPC Shareholder”), Under the terms and conditions of the PTHPC APA, PTHPC agreed to sell, assign and transfer to NHL, free and clear of all encumbrances, other than permitted encumbrances, and NHL agreed to purchase from PTHPC all of PTHPC’s right, title and interest in and to all of its assets related to FAIR and the FAIR Business, with the exception of certain limited exclusions, and the rights, privileges, claims and properties of any kind whatsoever that are related thereto, whether owned or leased, real or personal, tangible or intangible, of every kind and description and wheresoever situated. Under the terms and conditions of the PTHPC APA, the purchase price is $627,000 (the “FAIR Purchase Price”) paid with the issuance, by NHL to the PTHPC Shareholder, of certain non-voting NHL Exchangeable Special Shares which can only be utilized for the purpose of exchange into an allotment of 156,750 restricted shares of the Company’s common stock (the “Parent PTHPC APA Shares”) at the determination of the PTHPC Shareholder. The number of Parent PTHPC APA Shares was calculated by dividing the FAIR Purchase Price by $4.00 per share.
Membership Interest Purchase Agreement with Clinical Consultants International LLC
On March 17, 2022, the Company entered into a Membership Interest Purchase Agreement (the “CCI Agreement”) by and among the Company, Clinical Consultants International LLC (“CCI”), each of the members of CCI (the “Members”), and Dr. Joseph Chalil as the representative of the Members.
Pursuant to the terms of the CCI Agreement, the parties agreed to enter into a business combination transaction (the “CCI Acquisition”), pursuant to which, among other things, the Members will sell and assign to the Company all of their membership interests of CCI, in exchange for a total of 800,000 restricted shares of the Company’s common stock (the “Exchange Shares”). The Exchange Shares will be apportioned among the Members pro rata based on their respective membership interest ownership percentage of CCI. Following the closing of the CCI Acquisition (the “Closing”), the Company will own 100% of the issued and outstanding membership interests of CCI, and the Members or their designees will collectively own 800,000 restricted shares of the Company’s common stock.
Pursuant to the terms of the CCI Agreement, the Company agreed to (i) name, at the Closing, Dr. Chalil as the Chief Medical Officer of the Company and the President of Novomerica Healthcare Group, Inc., which is a wholly owned subsidiary of the Company, (ii) enter into an employment agreement with Dr. Chalil, and (iii) name Dr. Chalil to the Company’s Board of Directors.
The CCI Agreement may be terminated under certain customary and limited circumstances prior to the Closing, including by either party if the conditions to Closing of an opposing party have not been satisfied or waived by the applicable party on or prior to April 15, 2022. The CCI Acquisition closed on April 5, 2022. See “—Closing of CCI Acquisition” below.
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Restricted Stock Issuance for 2-year Independent Contractor Agreements
On March 18, 2022, the Company issued 50,000 restricted shares of common stock as consideration for an Independent Contractor Agreement.
On March 18, 2022, the Company issued 25,000 restricted shares of common stock as consideration for an Independent Contractor Agreement.
Closing of CCI Acquisition
On April 5, 2022, the CCI Acquisition closed. As a result, immediately after the Closing on April 5, 2022, the Company owned 100% of the issued and outstanding membership interests of CCI. On April 7, 2022, the Company issued an aggregate of 800,000 restricted shares of the Company’s common stock to the Members in connection with the CCI Acquisition and pursuant to the terms of the CCI Agreement.
Appointment of Dr. Chalil as the Company’s Chief Medical Officer and President of Novomerica Healthcare Group, Inc.
In connection with the closing of the CCI Acquisition and pursuant to the terms of the CCI Agreement, on April 5, 2022, the Company named Dr. Chalil as the Company’s Chief Medical Officer, and the President of Novomerica Healthcare Group, Inc., a wholly owned subsidiary of the Company formed for expansion of certain medically related business in the U.S. (“NHG”). Pursuant to the terms of the CCI Agreement, the Company expects to appoint Dr. Chalil as a member of the Company’s Board of Directors in the near future.
Chalil Employment Agreement
In connection with Dr. Chalil’s appointment as the Company’s Chief Medical Officer and NHG’s President, the Company entered into an executive agreement (the “Chalil Agreement”) with Dr. Chalil on April 5, 2022. Pursuant to the terms of the Chalil Agreement, the Company agreed to pay Dr. Chalil an annual base salary of $400,000. In addition, the Company agreed to pay Dr. Chalil an amount equal to 10% of the net income of CCI in excess of $450,000 for each calendar year during the term of the Chalil Agreement (the “Revenue Share Payment”).
Dr. Chalil will also receive bonuses based on increases in the Company’s market cap valuation (“MCV”) from the date of the Chalil Agreement, with the following milestone bonus parameters:
| (a) | For each and every $50 million Company MCV increase sustained for a period of not less than 30 days (the “50M Bonus Event”), Dr. Chalil will receive $250,000, or 0.5% of $50 million, in Company common stock. For the sake of clarity, Dr. Chalil will only be issued compensation based on $50 million MCV increments; there will be no compensation issued for anything above $50 million until the subsequent $50 million MCV milestone is achieved. This bonus will be capped at a Company MCV of $1 billion. The 50M Bonus Event stock will be issued as (i) 50% restricted shares within 30 days of the respective 50M Bonus Event or at a later date as requested by Dr. Chalil, and held as an allocation to Dr. Chalil, until the requisition date as provided in writing, by Dr. Chalil, to the Company, and (ii) 50% registered shares from the Company’s current active incentive plan within 30 days of the respective 50M Bonus Event. |
| (b) | Upon the Company sustaining a MCV of $2 billion for no less than 30 days (the “2B Bonus Event”), Dr. Chalil will receive $20 million, or 1% of $1 billion, in restricted shares of Company common stock. The 2B Bonus Event stock will be issued within 30 days of the 2B Bonus Event or at a later date as requested by Dr. Chalil, and held as an allocation to Dr. Chalil, until Dr. Chalil provides the Company with written instructions requesting the specific stock issuance date. |
| (c) | For each additional $1 billion MCV, beyond the 2B Bonus Event and commencing when the Company MCV reaches $3 billion sustained for no less than 30 days, Dr. Chalil will receive $10 million, or 1% of $1 billion, in restricted shares of the Company’s common stock. Dr. Chalil may choose to have this stock issued within 30 days of each additional $1 billion MCV event or at a later date as requested by Dr. Chalil, and held as an allocation to Dr. Chalil, until Dr. Chalil provides the Company with written instructions requesting the specific stock issuance date. |
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The Company may also issue to Dr. Chalil equity awards as determined by the Board of Directors.
The term of the Chalil Agreement ends on the earlier of (i) April 5, 2025, and (ii) the time of the termination of Dr. Chalil’s employment pursuant to the terms of the Chalil Agreement. The term of the Chalil Agreement will be automatically extended for one or more additional terms of one year each unless either party provided notice to the other party of their desire to not renew at least 30 days prior to expiration of the then-current term.
The Company may terminate the Chalil Agreement at any time for Cause (as defined in the Chalil Agreement) or without Cause, and Dr. Chalil may terminate the Chalil Agreement at any time with or without Good Reason (as defined in the Chalil Agreement. If the Company terminates the Chalil Agreement without Cause or Dr. Chalil terminates the Chalil Agreement with Good Reason, (i) the Company will pay to Dr. Chalil any base salary, bonuses, and benefits then owed or accrued, and any unreimbursed expenses incurred by Dr. Chalil in each case through the termination date; (ii) the Company will pay to Dr. Chalil, in one lump sum, an amount equal to the greater of (1) the base salary that would have been paid to Dr. Chalil for the remainder of the then-current term, and (2) the total base salary that would have been paid to Dr. Chalil for a one year period based on the base salary as of the date of termination, and the Revenue Share Payment for the calendar year in which such termination occurs; and (iii) any equity grant already made to Dr. Chalil will, to the extent not already vested, be deemed automatically vested.
Promissory Note Conversions
On December 14, 2021, the Company issued to certain accredited institutional investors senior secured convertible notes, which notes are convertible into shares of the Company’s common stock, under certain conditions. Between March 1, 2022 and April 11, 2022 of this Quarterly Report on Form 10-Q, an aggregate of $305,000 in principal of these notes and $889 in interest on these notes was converted, resulting in the issuance by the Company of an aggregate of 152,948 shares of common stock upon such conversions.
For the three months ended February 28, 2022 compared to the three months ended February 28, 2021
Revenues for the three months ended February 28, 2022 were $2,869,223, representing an increase of $793,329, or 38.2%, from $2,075,894 for the same period in 2021. The increase in revenue is principally due to the acquisition of Acenzia, Inc. in June 2021 and Terragenx in November 2021. Acenzia’s and Terragenx’ revenue for the three months ended February 28, 2022 was $749,345 and $245,658, respectively. Revenue from our healthcare services decreased by 9.7% when comparing the revenue for the three months ended February 28, 2022 to the same period in 2021 primarily due to a COVID-19 surge in Ontario province Canada limiting clinic and eldercare patient-practitioner direct personal interaction.
Cost of revenues for the three months ended February 28, 2022 were $1,652,869, representing an increase of $328,421 or 24.8%, from $1,324,448 for the same period in 2021. The increase in cost of revenues is principally due the increase in revenue as described above. Cost of revenues as a percentage of revenue was 57.6% for the three months ended February 28, 2022 and 63.8% for same period in 2021. The decrease in cost of revenues as a percentage of revenue is principally due to revenue generated by Acenzia and Terragenx that had a cost of revenue of approximately 46%.
Operating costs for the three months ended February 28, 2022 were $3,337,030, representing an increase of $1,259,640, or 60.6%, from $2,077,390 for the same period in 2021. The increase in operating costs is principally due to the increase in overhead expenses associated with the acquisitions of Acenzia, PRO-DIP, and Terragenx which was approximately $1,133,000 for the three months ended February 28, 2022. In subsequent quarters, this increase in overhead expenses associated with Acenzia, PRO-DIP, and Terragenx is projected to decrease as the Company integrates and consolidates operations. An increase in legal and professional fees also contributed to the increase in operating expenses.
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Interest expense for the three months ended February 28, 2022 was $1,226,182, representing an increase of $1,203,234, or 5,243%, from $22,948 for the same period in 2021. The increase is due to issuance of convertible notes for $1,875,000 in November 2021 and $16,666,666 in December 2021, plus penalty interest paid in connection with the early repayment of a note payable of approximately $4,415,000.
Amortization of debt discount for the three months ended February 28, 2022 was $1,463,022, representing an increase of $1,463,022 from $0 for the same period in 2021. The increase is due to amortization of the debt discounts associated with the convertible notes issued in November 2021 and December 2021.
Foreign currency transaction losses for the three months ended February 28, 2022 was $66,814 compared to $0 for the same period in 2021. Acenzia and Terragenx both have outstanding debt recorded on their books that is payable in US Dollars. The exchange rate between the Canadian Dollar and the US Dollar decreased during the second fiscal quarter of 2022; therefore creating a foreign currency transaction loss as it will require more Canadian Dollars to repay the debt.
Net loss attributed to Novo Integrated Sciences, Inc. for the three months ended February 28, 2022 was $4,805,167, representing an increase of $3,465,297, or 258.6%, from $1,339,870 for the same period in 2021. The increase in net loss is principally due to (i) an increase in foreign currency transaction losses, (ii) an increase in overhead expenses associated with the acquisitions of Acenzia, PRO-DIP, and Terragenx which was approximately $1,133,000 for the three months ended February 28, 2022, (iii) an increase in interest expense and (iv) in increase in amortization of debt discounts.
For the six months ended February 28, 2022 compared to the six months ended February 28, 2021
Revenues for the six months ended February 28, 2022 were $6,031,150, representing an increase of $1,799,750, or 42.5%, from $4,231,400 for the same period in 2021. The increase in revenue is principally due to the acquisition of Acenzia, Inc. in June 2021 and Terragenx in November 2021. Acenzia’s and Terragenx’ revenue for the six months ended February 28, 2022 was $1,731,197 and $245,658, respectively. Revenue from our healthcare services decreased by 4.2% when comparing the revenue for the six months ended February 28, 2022 to the same period in 2021.
Cost of revenues for the six months ended February 28, 2022 were $3,548,330, representing an increase of $879,826 or 33.0%, from $2,668,504 for the same period in 2021. The increase in cost of revenues is principally due the increase in revenue as described above. Cost of revenues as a percentage of revenue was 58.8% for the six months ended February 28, 2022 and 63.1% for same period in 2021. The decrease in cost of revenues as a percentage of revenue is principally due to revenue generated by Acenzia and Terragenx that had a cost of revenue of approximately 47%.
Operating costs for the six months ended February 28, 2022 were $5,967,155, representing an increase of $2,320,591, or 63.6%, from $3,646,564 for the same period in 2021. The increase in operating costs is principally due to the increase in overhead expenses associated with the acquisitions of Acenzia, PRO-DIP, and Terragenx which was approximately $1,941,000 for the six months ended February 28, 2022. In subsequent quarters, this increase in overhead expenses associated with Acenzia, PRO-DIP, and Terragenx is projected to decrease as the Company integrates and consolidates operations. An increase in legal and professional fees also contributed to the increase in operating expenses for the six months ended February 28, 2022.
Interest expense for the six months ended February 28, 2022 was $1,294,912, representing an increase of $1,248,023, or 2,662%, from $46,889 for the same period in 2021. The increase is due to issuance of convertible notes for $1,875,000 in November 2021 and $16,666,666 in December 2021, plus penalty interest paid in connection with the early repayment of a note payable of approximately $4,415,000.
Amortization of debt discount for the six months ended February 28, 2022 was $1,520,862, representing an increase of $1,520,862 from $0 for the same period in 2021. The increase is due to amortization of the debt discounts associated with the convertible notes issued in November 2021 and December 2021.
Foreign currency transaction losses for the six months ended February 28, 2022 was $401,368 compared to $0 for the same period in 2021. Acenzia and Terragenx both have outstanding debt recorded on their books that is payable in US Dollars. The exchange rate between the Canadian Dollar and the US Dollar has decreased since August 31, 2021; therefore creating a foreign currency transaction loss as it will require more Canadian Dollars to repay the debt.
Net loss attributed to Novo Integrated Sciences, Inc. for the six months ended February 28, 2022 was $6,611,754, representing an increase of $4,500,414, or 213.2%, from $2,111,340 for the same period in 2021. The increase in net loss is principally due (i) an increase in foreign currency transaction losses, (ii) an increase in overhead expenses associated with the acquisitions of Acenzia, PRO-DIP, and Terragenx which was approximately $1,941,000 for the six months ended February 28, 2022, (iii) an increase in interest expense and (iv) in increase in amortization of debt discounts.
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Liquidity and Capital Resources
As shown in the accompanying unaudited condensed consolidated financial statements, for the six months ended February 28, 2022, the Company had a net loss of $6,684,599.
During the six months ended February 28, 2022, the Company used cash in operating activities of $3,009,732 compared to $429,772 for the same period in 2021. The principal reason for the increase in cash used in operating activities is the net loss incurred and the changes in noncash expenses and changes in operating asset and liability accounts.
During the six months ended February 28, 2022, the Company used cash from investing activities of $163,245 compared to $618 for the same period in 2021. During the period in 2022 the Company purchased property and equipment of $192,536 and acquired $29,291 in cash from the acquisition of Terragenx.
During the six months ended February 28, 2022, the Company provided cash from financing activities of $10,839,716 compared to $21,277 for the same period in 2021. The principal reason for the increase in cash provided by financing activities was the issuance of convertible notes payable in November 2021 and December 2021 for net proceeds of $15,270,000.
Financial Impact of COVID-19
In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. On March 17, 2020, as a result of COVID-19 pandemic having been reported throughout both Canada and the United States, certain national, provincial, state and local governmental authorities issued proclamations and/or directives aimed at minimizing the spread of COVID-19. Accordingly, on March 17, 2020, the Company closed all corporate clinics for all in-clinic non-essential services to protect the health and safety of its employees, partners, and patients. Commencing in May 2020, the Company was able to begin providing some services, and was fully operational again in June 2020. As of February 28, 2022, all corporate clinics were open and operational while following all mandated guidelines and protocols from Health Canada, the Ontario Ministry of Health, and the respective disciplines’ regulatory Colleges to ensure a safe treatment environment for our staff and clients, and our eldercare operations are fully operational. In addition, Acenzia, Terragenx and PRO-DIP, LLC (“PRO-DIP”) are open and fully operational while following all local, state, provincial, and national guidelines and protocols related to minimizing the spread of the COVID-19 pandemic.
Canadian federal and provincial COVID-19 governmental proclamations and directives, including interprovincial travel restrictions, have presented unprecedented challenges to launching our Harvest Gold Farms and Kainai Cooperative joint ventures during the period ended February 28, 2022. Accordingly, the Company has decided to delay commencing the projects until the 2022 grow season. These joint ventures relate to the development, management, and arrangement of medicinal farming projects involving industrial hemp for medicinal Cannabidiol (CBD) applications.
Specific to Acenzia, Terragenx, and PRO-DIP, each company is open and fully operational while following all local, state, provincial, and national guidelines and protocols related to minimizing the spread of the COVID-19 pandemic.
For the quarter ended February 28, 2022, the Company’s total revenue from all clinic and eldercare related contracted services was $1,873,677, representing a decrease of $202,317 compared to $2,075,894 during the same period in 2021 primarily due to a COVID-19 surge in Ontario province Canada limiting clinic and eldercare patient-practitioner direct personal interaction.
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While all of the Company’s business units are operational at the time of this filing, any future impact of the COVID-19 pandemic on the Company’s operations remains unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including, but not limited to, (i) the duration of the COVID-19 outbreak and additional variants that may be identified, (ii) new information which may emerge concerning the severity of the COVID-19 pandemic, and (iii) any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced patient traffic, and reduced operations.
Our capital requirements going forward will consist of financing our operations until we are able to reach a level of revenues and gross margins adequate to equal or exceed our ongoing operating expenses. We do not have any credit agreement or source of liquidity immediately available to us.
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.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
We believe that the following critical policies affect our more significant judgments and estimates used in preparation of our financial statements.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. This applies in particular to useful lives of non-current assets, impairment of non-current assets, allowance for doubtful accounts, allowance for slow moving and obsolete inventory, and valuation allowance for deferred tax assets. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Property and Equipment
Property and equipment are stated at cost less depreciation and impairment. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the declining balance method for substantially all assets with estimated lives as follows:
| Building | 30 years |
| Leasehold improvements | 5 years |
| Clinical equipment | 5 years |
| Computer equipment | 3 years |
| Office equipment | 5 years |
| Furniture and fixtures | 5 years |
The Company has not changed its estimate for the useful lives of its property and equipment, but would expect that a decrease in the estimated useful lives of property and equipment of 20% would result in an annual increase to depreciation expense of approximately $147,000, and an increase in the estimated useful lives of property and equipment of 20% would result in an annual decrease to depreciation expense of approximately $98,000.
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Intangible Assets
The Company’s intangible assets are being amortized over their estimated useful lives as follows:
| Land use rights | 50 years (the lease period) |
| Software license | 7 years |
| Intellectual property | 7 years |
| Customer relationships | 5 years |
| Brand names | 7 years |
| Workforce | 5 years |
The intangible assets with finite useful lives are reviewed for impairment when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. The Company has not changed its estimate for the useful lives of its intangible assets but would expect that a decrease in the estimated useful lives of intangible assets of 20% would result in an annual increase to amortization expense of approximately $693,000, and an increase in the estimated useful lives of intangible assets of 20% would result in an annual decrease to amortization expense of approximately $462,000.
Long-Lived Assets
The Company applies the provisions of the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) Topic 360, Property, Plant, and Equipment, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. ASC 360 requires impairment losses to be recorded on long-lived assets, including right-of-use assets, used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal.
Right-of-use Assets
The Company’s right-of-use assets consist of leased assets recognized in accordance with ASC 842, Leases, which requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liability represents the Company’s obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception are not recorded on the consolidated balance sheet and are expensed on a straight-line basis over the lease term in the condensed consolidated statements of operations and comprehensive loss. The Company determines the lease term by agreement with lessor. In cases where the lease does not provide an implicit interest rate, the Company uses the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.
Goodwill
Goodwill represents the excess of purchase price over the underlying net assets of businesses acquired. Under U.S. GAAP, goodwill is not amortized but is subject to annual impairment tests. The Company recorded goodwill related to its acquisition of APKA Health, Inc. during the fiscal year ended August 31, 2017, Executive Fitness Leaders during the fiscal year ended August 31, 2018, Action Plus Physiotherapy Rockland during the fiscal year ended August 31, 2019 and Acenzia, Inc. during fiscal year ended August 31, 2021.
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Accounts Receivable
Accounts Receivable are recorded, net of allowance for doubtful accounts and sales returns. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentration, customer credit worthiness, current economic trends, and changes in customer payment patterns to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Delinquent account balances are written-off after management has determined that the likelihood of collection is not probable and known bad debts are written off against the allowance for doubtful accounts when identified. The Company has not changed its methodology for estimating allowance for doubtful accounts and historically the change in estimate has not been significant to the Company’s financial statements. If there is a deterioration of the Company’s customers’ ability to pay or if future write-offs of receivables differ from those currently anticipated, the Company may have to adjust its allowance for doubtful accounts, which would affect earnings in the period the adjustments are made.
Inventory
Inventories are valued at the lower of cost (determined by the first in, first out method) and net realizable value. Management compares the cost of inventories with the net realizable value and allowance is made for writing down their inventories to net realizable value, if lower. Inventory is segregated into three areas: raw materials, work-in-process and finished goods. The Company periodically assessed its inventory for slow moving and/or obsolete items and any change in the allowance is recorded in cost of revenue in the accompanying condensed consolidated statements of operations and comprehensive loss. If any are identified an appropriate allowance for those items is made and/or the items are deemed to be impaired.
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company has not changed it methodology for estimating the valuation allowance. A change in valuation allowance affect earnings in the period the adjustments are made and could be significant due to the large valuation allowance currently established.
Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company has no material uncertain tax positions for any of the reporting periods presented.
Revenue Recognition
The Company’s revenue recognition reflects the updated accounting policies as per the requirements of the FASB’s Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“Topic 606”). As sales are and have been primarily from providing healthcare services the Company has no significant post-delivery obligations.
Revenue from providing healthcare and healthcare related services and product sales are recognized under Topic 606 in a manner that reasonably reflects the delivery of its products and services to customers in return for expected consideration and includes the following elements:
| ● | executed contracts with the Company’s customers that it believes are legally enforceable; | |
| ● | identification of performance obligations in the respective contract; | |
| ● | determination of the transaction price for each performance obligation in the respective contract; | |
| ● | allocation the transaction price to each performance obligation; and | |
| ● | recognition of revenue only when the Company satisfies each performance obligation. |
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These five elements, as applied to the Company’s revenue category, are summarized below:
| ● | Healthcare and healthcare related services – gross service revenue is recorded in the accounting records at the time the services are provided (point-in-time) on an accrual basis at the provider’s established rates. The Company reserves a provision for contractual adjustment and discounts that are deducted from gross service revenue. The Company reports revenues net of any sales, use and value added taxes. | |
| ● | Product sales – revenue is recorded at the point of time of delivery |
Stock-Based Compensation
The Company records stock-based compensation in accordance with FASB ASC Topic 718, Compensation – Stock Compensation. FASB ASC Topic 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the requisite service period. The Company recognizes in the condensed consolidated statements of operations and comprehensive loss the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.
Basic and Diluted Earnings Per Share
Earnings per share is calculated in accordance with ASC Topic 260, Earnings Per Share. Basic earnings per share (“EPS”) is based on the weighted average number of common shares outstanding. Diluted EPS assumes that all dilutive securities are converted. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
Foreign Currency Transactions and Comprehensive Income
U.S. GAAP generally requires recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The functional currency of the Company’s Canadian subsidiaries is the Canadian dollar. Translation gains (losses) are classified as an item of other comprehensive income in the stockholders’ equity section of the condensed consolidated balance sheets.
New Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 was issued to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope. The new standard represents significant changes to accounting for credit losses. Full lifetime expected credit losses will be recognized upon initial recognition of an asset in scope. The current incurred loss impairment model that recognizes losses when a probable threshold is met will be replaced with the expected credit loss impairment method without recognition threshold. The expected credit losses estimate will be based upon historical information, current conditions, and reasonable and supportable forecasts. This ASU as amended by ASU 2019-10, is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the effect of this ASU on the Company’s condensed consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes which amends ASC 740 Income Taxes (ASC 740). This update is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and amending existing guidance to improve consistent application of ASC 740. This update is effective for fiscal years beginning after December 15, 2021. The guidance in this update has various elements, some of which are applied on a prospective basis and others on a retrospective basis with earlier application permitted. The Company is currently evaluating the effect of this ASU on the Company’s condensed consolidated financial statements and related disclosures.
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In May, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This update provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. This update is effective for fiscal years beginning after December 15, 2021. The Company is currently evaluating the effect of this ASU on the Company’s condensed consolidated financial statements and related disclosures.
In August 2020, the FASB issued guidance that simplifies the accounting for debt with conversion options, revises the criteria for applying the derivative scope exception for contracts in an entity’s own equity, and improves the consistency for the calculation of earnings per share. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2021, our fiscal 2023.
In March 2020, the FASB issued guidance providing optional expedients and exceptions to account for the effects of reference rate reform to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The optional guidance, which became effective on March 12, 2020 and can be applied through December 21, 2022, has not impacted our condensed consolidated financial statements. The Company has various contracts that reference LIBOR and is assessing how this standard may be applied to specific contract modifications through December 31, 2022.
Management does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying condensed consolidated financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.
Recent accounting pronouncements issued by the FASB, the American Institute of Certified Public Accountants and the SEC did not or are not believed by management to have a material effect on the Company’s financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s Chief Executive Officer and Principal Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of February 28, 2022. Based upon such evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that, as of February 28, 2022, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the fiscal quarter ended February 28, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as set forth herein, as of the date of this Quarterly Report on Form 10-Q, there are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or which our property is the subject. In addition, none of our officers, directors, affiliates or 5% stockholders (or any associates thereof) is a party adverse to us, or has a material interest adverse to us, in any material proceeding.
ITEM 1A. RISK FACTORS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On December 20, 2021, the Company issued 50,000 restricted shares of common stock as consideration for a Consulting Agreement, dated December 20, 2021.
On January 24, 2022, the Company issued 25,000 restricted shares of common stock as consideration for an Independent Contractor Agreement, dated November 16, 2020.
On January 24, 2022, the Company issued 65,000 restricted shares of common stock as consideration for an Independent Contractor Agreement, dated November 13, 2020.
On January 24, 2022, the Company issued 50,000 restricted shares of common stock as consideration for a Consulting Agreement, dated December 20, 2021.
On February 24, 2022, the Company issued 50,000 restricted shares of common stock as consideration for a Consulting Agreement, dated December 20, 2021.
The above sales were made pursuant to an exemption from registration as set forth in Regulation S under the Securities Act, Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There have been no defaults in any material payments during the covered period.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a) None.
(b) There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors since the Company last provided disclosure in response to the requirements of Item 407(c)(3) of Regulation S-K.
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ITEM 6. EXHIBITS
* Filed herewith.
** Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
| NOVO INTEGRATED SCIENCES, INC. | ||
| Dated: April 13, 2022 | By: | /s/ Robert Mattacchione |
| Robert Mattacchione | ||
| Chief Executive Officer (principal executive officer) | ||
| By: | /s/ James Zsebok | |
| James Zsebok | ||
| Principal Financial Officer (principal financial officer and principal accounting officer) | ||
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EXHIBIT 31.1
CERTIFICATIONS
I, Robert Mattacchione, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the quarter ended February 28, 2022 of Novo Integrated Sciences, Inc.; and |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; and |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: April 13, 2022 | By: | /s/ Robert Mattacchione |
| Robert Mattacchione | ||
| Chief Executive Officer (principal executive officer) |
EXHIBIT 31.2
CERTIFICATIONS
I, James Zsebok, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the quarter ended February 28, 2022 of Novo Integrated Sciences, Inc.; and |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; and |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: April 13, 2022 | By: | /s/ James Zsebok |
| James Zsebok | ||
| Principal Financial Officer |
EXHIBIT 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Novo Integrated Sciences, Inc. (the “Company”) on Form 10-Q for the quarter ended February 28, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert Mattacchione, Chief Executive Officer of the Company, and I, James Zsebok, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
| Date: April 13, 2022 | /s/ Robert Mattacchione |
Robert Mattacchione, Chief Executive Officer (principal executive officer) | |
| /s/ James Zsebok | |
James Zsebok, Principal Financial Officer (principal financial officer) |
This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.