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,November 30, 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 ☐ YesNo ☒ 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 April 11, 2022.May 24, 2023. shares of the Registrant’s $0.001 par value common stock outstanding as of
Novo Integrated Sciences, Inc.
Contents
2 |
Item 1. Financial Statements.
NOVO INTEGRATED SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of February 28,November 30, 2022 (unaudited) and August 31, 20212022
February 28, | August 31, | November 30, | August 31, | |||||||||||||
2022 | 2021 | 2022 | 2022 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 15,943,997 | $ | 8,293,162 | $ | 878,700 | $ | 2,178,687 | ||||||||
Accounts receivable, net | 1,251,973 | 1,468,429 | 960,091 | 1,017,405 | ||||||||||||
Inventory | 334,414 | 339,385 | ||||||||||||||
Inventory, net | 1,010,115 | 879,033 | ||||||||||||||
Other receivables, current portion | 981,597 | 814,157 | 1,053,437 | 1,085,335 | ||||||||||||
Prepaid expenses and other current assets | 503,437 | 218,376 | 554,978 | 571,335 | ||||||||||||
Total current assets | 19,015,418 | 11,133,509 | 4,457,321 | 5,731,795 | ||||||||||||
Property and equipment, net | 6,157,621 | 6,070,291 | 5,563,829 | 5,800,648 | ||||||||||||
Intangible assets, net | 33,217,602 | 32,436,468 | 17,708,310 | 18,840,619 | ||||||||||||
Right-of-use assets, net | 2,348,391 | 2,543,396 | 2,423,519 | 2,673,934 | ||||||||||||
Other receivables, net of current portion | 522,062 | 692,738 | ||||||||||||||
Goodwill | 9,058,936 | 9,081,879 | 7,595,844 | 7,825,844 | ||||||||||||
TOTAL ASSETS | $ | 70,320,030 | $ | 61,958,281 | 37,748,823 | $ | 40,872,840 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts payable | $ | 1,105,707 | $ | 1,449,784 | $ | 2,075,124 | $ | 1,800,268 | ||||||||
Accrued expenses | 1,199,274 | 1,129,309 | 1,232,519 | 1,116,125 | ||||||||||||
Accrued interest (including amounts to related parties) | 642,246 | 366,280 | 434,521 | 454,189 | ||||||||||||
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 | - | ||||||||||||||
Convertible notes payable, net of discount of $2,750,917 | 6,422,009 | 9,099,654 | ||||||||||||||
Derivative liability | 1,390,380 | - | ||||||||||||||
Contingent liability | 749,626 | - | 62,855 | 534,595 | ||||||||||||
Due to related parties | 473,367 | �� | 478,920 | 417,718 | 478,897 | |||||||||||
Finance lease liability, current portion | 17,533 | 23,184 | 8,737 | 8,890 | ||||||||||||
Operating lease liability, current portion | 533,535 | 530,797 | 521,358 | 582,088 | ||||||||||||
Total current liabilities | 11,553,785 | 8,463,923 | 12,565,221 | 14,074,706 | ||||||||||||
Debentures, related parties | 979,724 | 982,205 | 918,439 | 946,250 | ||||||||||||
Notes payable, net of current portion | 174,242 | 5,133,604 | ||||||||||||||
Convertible notes payable, net of discount of $6,943,704 | 9,722,962 | - | ||||||||||||||
Government loans and notes payable, net of current portion | 157,900 | 161,460 | ||||||||||||||
Finance lease liability, net of current portion | 10,854 | 16,217 | 9,466 | 12,076 | ||||||||||||
Operating lease liability, net of current portion | 1,866,858 | 2,057,805 | 2,010,041 | 2,185,329 | ||||||||||||
Deferred tax liability | 1,496,581 | 1,500,372 | 1,402,966 | 1,445,448 | ||||||||||||
TOTAL LIABILITIES | 25,805,006 | 18,154,126 | 17,064,033 | 18,825,269 | ||||||||||||
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 | ||||||||||||||
Convertible preferred stock; $ | par value; shares authorized; and shares issued and outstanding at November 30, 2022 and August 31, 2022, respectively- | - | ||||||||||||||
Common stock; $ | par value; shares authorized; and shares issued and outstanding at November 30, 2022 and August 31, 2022, respectively39,891 | 31,181 | ||||||||||||||
Additional paid-in capital | 60,691,723 | 54,579,396 | 69,135,417 | 66,056,824 | ||||||||||||
Common stock to be issued ( and shares at February 28, 2022 and August 31, 2021) | 10,409,457 | 9,236,607 | ||||||||||||||
Common stock to be issued ( | and shares at November 30, 2022 and August 31, 2022)9,382,441 | 9,474,807 | ||||||||||||||
Other comprehensive income | 1,002,282 | 991,077 | 143,828 | 560,836 | ||||||||||||
Accumulated deficit | (27,581,028 | ) | (20,969,274 | ) | (57,753,902 | ) | (53,818,489 | ) | ||||||||
Total Novo Integrated Sciences, Inc. stockholders’ equity | 44,551,319 | 43,864,416 | 20,947,675 | 22,305,159 | ||||||||||||
Noncontrolling interest | (36,295 | ) | (60,261 | ) | (262,885 | ) | (257,588 | ) | ||||||||
Total stockholders’ equity | 44,515,024 | 43,804,155 | 20,684,790 | 22,047,571 | ||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 70,320,030 | $ | 61,958,281 | $ | 37,748,823 | $ | 40,872,840 |
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,November 30, 2022 and 2021 (unaudited)
February 28, | February 28, | February 28, | February 28, | 2022 | 2021 | |||||||||||||||||||
Three Months Ended | Six Months Ended | Three Months Ended | ||||||||||||||||||||||
February 28, | February 28, | February 28, | February 28, | November 30, | November 30, | |||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||
Revenues | $ | 2,869,223 | $ | 2,075,894 | $ | 6,031,150 | $ | 4,231,400 | $ | 3,419,280 | $ | 3,161,927 | ||||||||||||
Cost of revenues | 1,652,869 | 1,324,448 | 3,548,330 | 2,668,504 | 1,679,747 | 1,895,461 | ||||||||||||||||||
Gross profit | 1,216,354 | 751,446 | 2,482,820 | 1,562,896 | 1,739,533 | 1,266,466 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Selling expenses | 26,370 | 602 | 26,538 | 1,845 | 7,332 | 168 | ||||||||||||||||||
General and administrative expenses | 3,310,660 | 2,076,788 | 5,940,617 | 3,644,719 | 3,974,161 | 2,629,957 | ||||||||||||||||||
Total operating expenses | 3,337,030 | 2,077,390 | 5,967,155 | 3,646,564 | 3,981,493 | 2,630,125 | ||||||||||||||||||
Loss from operations | (2,120,676 | ) | (1,325,944 | ) | (3,484,335 | ) | (2,083,668 | ) | (2,241,960 | ) | (1,363,659 | ) | ||||||||||||
Non operating income (expense) | ||||||||||||||||||||||||
Non-operating income (expense) | ||||||||||||||||||||||||
Interest income | 8,490 | 8,301 | 16,878 | 16,863 | 2,281 | 8,388 | ||||||||||||||||||
Interest expense | (1,226,182 | ) | (22,948 | ) | (1,294,912 | ) | (46,889 | ) | (167,243 | ) | (68,730 | ) | ||||||||||||
Amortization of debt discount | (1,463,022 | ) | - | (1,520,862 | ) | - | (1,490,513 | ) | (57,840 | ) | ||||||||||||||
Foreign currency transaction losses | (66,814 | ) | - | (401,368 | ) | - | (39,301 | ) | (334,554 | ) | ||||||||||||||
Total other income (expense) | (2,747,528 | ) | (14,647 | ) | (3,200,264 | ) | (30,026 | ) | (1,694,776 | ) | (452,736 | ) | ||||||||||||
Loss before income taxes | (4,868,204 | ) | (1,340,591 | ) | (6,684,599 | ) | (2,113,694 | ) | (3,936,736 | ) | (1,816,395 | ) | ||||||||||||
Income tax expense | - | - | - | - | - | - | ||||||||||||||||||
Net loss | $ | (4,868,204 | ) | $ | (1,340,591 | ) | $ | (6,684,599 | ) | $ | (2,113,694 | ) | $ | (3,936,736 | ) | $ | (1,816,395 | ) | ||||||
Net loss attributed to noncontrolling interest | (63,037 | ) | (721 | ) | (72,845 | ) | (2,354 | ) | (1,323 | ) | (9,808 | ) | ||||||||||||
Net loss attributed to Novo Integrated Sciences, Inc. | $ | (4,805,167 | ) | $ | (1,339,870 | ) | $ | (6,611,754 | ) | $ | (2,111,340 | ) | $ | (3,935,413 | ) | $ | (1,806,587 | ) | ||||||
Comprehensive loss: | ||||||||||||||||||||||||
Net loss | (4,868,204 | ) | (1,340,591 | ) | (6,684,599 | ) | (2,113,694 | ) | (3,936,736 | ) | (1,816,395 | ) | ||||||||||||
Foreign currency translation gain | 114,738 | 42,232 | 11,205 | 52,828 | ||||||||||||||||||||
Foreign currency translation loss | (420,982 | ) | (104,388 | ) | ||||||||||||||||||||
Comprehensive loss: | $ | (4,753,466 | ) | $ | (1,298,359 | ) | $ | (6,673,394 | ) | $ | (2,060,866 | ) | $ | (4,357,718 | ) | $ | (1,920,783 | ) | ||||||
Weighted average common shares outstanding - basic and diluted | 28,740,700 | 23,754,808 | 27,827,686 | 23,630,900 | 33,855,082 | 26,924,705 | ||||||||||||||||||
Net loss per common share - basic and diluted | $ | (0.17 | ) | $ | (0.06 | ) | $ | (0.24 | ) | $ | (0.09 | ) | $ | (0.12 | ) | $ | (0.07 | ) |
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,November 30, 2022 and 2021 (unaudited)
Shares | Amount | Capital | Be Issued | Income | Deficit | Equity | Interest | Equity | Shares | Amount | Capital | Be Issued | Income | Deficit | Equity | Interest | Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | Additional | Common | Other | Novo | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additional | Common | Other | Novo | Common Stock | Paid-in | Stock To | Comprehensive | Accumulated | Stockholders’ | Noncontrolling | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Stock To | Comprehensive | Accumulated | Stockholders’ | Noncontrolling | Total | Shares | Amount | Capital | Be Issued | Income | Deficit | Equity | Interest | Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, August 31, 2022 | 31,180,603 | $ | 31,181 | $ | 66,056,824 | $ | 9,474,807 | $ | 560,836 | $ | (53,818,489 | ) | $ | 22,305,159 | $ | (257,588 | ) | $ | 22,047,571 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Units issued for cash, net of offering costs | 4,000,000 | 4,000 | 1,791,000 | - | - | - | 1,795,000 | - | 1,795,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock to be issued | 36,222 | 36 | 92,330 | (92,366 | ) | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cashless exercise of warrants | 4,673,986 | 4,674 | 1,134,376 | - | - | - | 1,139,050 | - | 1,139,050 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value of stock options | - | - | 60,887 | - | - | - | 60,887 | - | 60,887 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation loss | - | - | - | - | (417,008 | ) | - | (417,008 | ) | (3,974 | ) | (420,982 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | (3,935,413 | ) | (3,935,413 | ) | (1,323 | ) | (3,936,736 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, November 30, 2022 | 39,890,811 | $ | 39,891 | $ | 69,135,417 | $ | 9,382,441 | $ | 143,828 | $ | (57,753,902 | ) | $ | 20,947,675 | $ | (262,885 | ) | $ | 20,684,790 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | 26,610,144 | $ | 26,610 | $ | 54,579,396 | $ | 9,236,607 | $ | 991,077 | $ | (20,969,274 | ) | $ | 43,864,416 | $ | (60,261 | ) | $ | 43,804,155 | ||||||||||||||||||||||||||||||||||
Balance | 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 | 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 | ) | - | - | - | - | - | - | 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 | - | - | - | 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 | - | - | - | 188,925 | - | - | 188,925 | - | 188,925 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Value of warrants issued with convertible notes | - | - | 295,824 | - | - | - | 295,824 | - | 295,824 | - | - | 295,824 | - | - | - | 295,824 | - | 295,824 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value of stock options | - | - | 154,135 | - | - | - | 154,135 | - | 154,135 | - | - | 154,135 | - | - | - | 154,135 | - | 154,135 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation loss | - | - | - | - | (103,533 | ) | - | (103,533 | ) | (855 | ) | (104,388 | ) | - | - | - | - | (103,533 | ) | - | (103,533 | ) | (855 | ) | (104,388 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | (1,806,587 | ) | (1,806,587 | ) | (9,808 | ) | (1,816,395 | ) | - | - | - | - | - | (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 | 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 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance | 28,645,144 | $ | 28,645 | $ | 55,092,070 | $ | 10,409,457 | $ | 887,544 | $ | (22,775,861 | ) | $ | 43,641,855 | $ | 26,387 | $ | 43,668,242 |
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
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NOVO INTEGRATED SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the SixThree Months Ended February 28,November 30, 2022 and 2021 (unaudited)
February 28, | February 28, | |||||||||||||||
Six Months Ended | 2022 | 2021 | ||||||||||||||
February 28, | February 28, | Three Months Ended | ||||||||||||||
2022 | 2021 | November 30, | November 30, | |||||||||||||
(unaudited) | (unaudited) | 2022 | 2021 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net loss | $ | (6,684,599 | ) | $ | (2,113,694 | ) | $ | (3,936,736 | ) | $ | (1,816,395 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Depreciation and amortization | 1,467,837 | 737,423 | 586,166 | 694,282 | ||||||||||||
Fair value of vested stock options | 198,562 | 22,215 | 60,887 | 154,135 | ||||||||||||
Financing costs for debt extension | 1,139,050 | - | ||||||||||||||
Common stock issued for services | 362,750 | 623,000 | - | 64,750 | ||||||||||||
Operating lease expense | 289,626 | 306,717 | 209,846 | 163,879 | ||||||||||||
Amortization of debt discount | 1,520,862 | - | 1,490,513 | 57,840 | ||||||||||||
Foreign currency transaction losses | 401,368 | - | 39,301 | 334,554 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | 213,125 | 353,649 | 28,174 | (253,079 | ) | |||||||||||
Inventory | 46,135 | - | (157,118 | ) | 12,245 | |||||||||||
Prepaid expenses and other current assets | (285,444 | ) | (216,568 | ) | 1,471 | (47,335 | ) | |||||||||
Accounts payable | (422,847 | ) | (938 | ) | 321,961 | (55,056 | ) | |||||||||
Accrued expenses | (111,479 | ) | 153,807 | 149,945 | 82,933 | |||||||||||
Accrued interest | 277,075 | 5,867 | (9,232 | ) | 9,481 | |||||||||||
Operating lease liability | (282,703 | ) | (301,250 | ) | (202,465 | ) | (161,337 | ) | ||||||||
Net cash used in operating activities | (3,009,732 | ) | (429,772 | ) | (278,237 | ) | (759,103 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Purchase of property and equipment | (192,536 | ) | (618 | ) | - | (120,397 | ) | |||||||||
Cash acquired with acquisition | 29,291 | - | - | 29,291 | ||||||||||||
Net cash used in investing activities | (163,245 | ) | (618 | ) | - | (91,106 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Repayments to related parties | (4,350 | ) | (82,723 | ) | (48,480 | ) | (3,127 | ) | ||||||||
Repayments of finance leases | (10,934 | ) | - | (2,763 | ) | (7,088 | ) | |||||||||
Repayments of notes payable | (4,415,000 | ) | - | |||||||||||||
Proceeds from the sale of common stock, net of offering costs | - | 92,000 | ||||||||||||||
Proceeds from exercise of stock options | - | 12,000 | ||||||||||||||
Repayment of convertible notes | (2,777,778 | ) | - | |||||||||||||
Proceeds from the sale of units, net of offering costs | 1,795,000 | - | ||||||||||||||
Proceeds from issuance of convertible notes, net | 15,270,000 | - | - | 1,410,000 | ||||||||||||
Net cash provided by financing activities | 10,839,716 | 21,277 | ||||||||||||||
Net cash (used in) provided by financing activities | (1,034,021 | ) | 1,399,785 | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (15,904 | ) | 39,832 | 12,271 | (41,984 | ) | ||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 7,650,835 | (369,281 | ) | |||||||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (1,299,987 | ) | 507,592 | |||||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 8,293,162 | 2,067,718 | 2,178,687 | 8,293,162 | ||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 15,943,997 | $ | 1,698,437 | $ | 878,700 | $ | 8,800,754 | ||||||||
CASH PAID FOR: | ||||||||||||||||
Interest | $ | 1,294,912 | $ | 32,936 | $ | 186,911 | $ | 64,522 | ||||||||
Income taxes | $ | - | $ | - | $ | - | $ | - | ||||||||
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||||||
Debt discount recognized on derivative liability | $ | 1,390,380 | $ | - | ||||||||||||
Common stock to be issued for intangible assets | $ | 188,925 | $ | 960,000 | $ | - | $ | 188,925 | ||||||||
Common stock to be issued for acquisition | $ | 983,925 | $ | - | $ | - | $ | 983,925 |
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 SixThree Months Ended February 28,November 30, 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 how it will be delivered 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.
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 shares 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”).
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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.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 oninformation regarding the financial impact of COVID-19 on the Company, see “—“Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financial Impact of COVID-19” of this quarterly report on Form 10-Q.
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, 2021,2022, that the Company filed on December 14, 2021.April 3, 2023. The results of operations for the sixthree months ended February 28,November 30, 2022 are not necessarily indicative of the results for the fiscal year ending August 31, 2022. 2023.
The Company’s Canadian subsidiaries’ functional currency is the Canadian Dollar (“CAD”) and the parent company’s functional currency is the United States Dollar (“$” or “USD”); however, the accompanying unaudited condensed consolidated financial statements were translated and presented in United States Dollars (“$” or “USD”).USD.
Going Concern
The Company evaluated whether there are any conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date the unaudited condensed consolidated financial statements are issued. The Company has incurred recurring losses from operations, has negative cash flows from operating activities, and has an accumulated deficit as at November 30, 2022. The Company believes that its cash and other available resources may not be sufficient to meet its operating needs and the payment of obligations related to various business acquisitions as they come due within one year after the date the unaudited condensed consolidated financial statements are issued.
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To alleviate these conditions, the Company is currently in the process of raising funds through a debt financing and a subsequent public offering in the United States. As the Company’s funding activities are ongoing, there can be no assurances that the Company will be able to secure funding on terms that are acceptable to the Company, or at all. These conditions, along with the matters noted above, raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the unaudited condensed consolidated financial statements are issued. While management has developed and is in process to implement plans that management believes could alleviate in the future the substantial doubt that was raised, management concluded at the date of the issuance of the unaudited condensed consolidated financial statements that substantial doubt exists as those plans are not completely within the control of management. These unaudited condensed consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and consolidated balance sheets classifications that would be necessary if the Company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.
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:
Schedule of Foreign Currency Translation, Exchange Rate Used
February 28, 2022 | February 28, 2021 | August 31, 2021 | November 30, 2022 | November 30, 2021 | August 31, 2022 | |||||||||||||||||||
Period end: CAD to USD exchange rate | $ | 0.7897 | $ | 0.7851 | $ | 0.7917 | $ | 0.7403 | $ | 0.7807 | $ | 0.7627 | ||||||||||||
Average period: CAD to USD exchange rate | $ | 0.7911 | $ | 0.7720 | $ | 0.7885 | $ | 0.7414 | $ | 0.7961 | $ | 0.7864 |
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 going concern assessment, useful lives of non-current assets, impairment of non-current assets, allowance for doubtful receivables, allowance for slow moving and obsolete inventory, valuation of share-based compensation and warrants, 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.
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Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and entities it controls including its wholly owned subsidiaries, NHL, Acenzia Inc. (“Acenzia”), Novomerica Health Group, Inc. (“NHG”), Novo Healthnet Rehab Limited, Novo Assessments Inc., PRO-DIP, LLC (“PRO-DIP”), a 91%91% controlling interest in Terragenx Inc. (“Terragenx”), a 50.1% controlling interest in 12858461 Canada Corp (“1285 Canada”), an 80%80% controlling interest in Novo Healthnet Kemptville Centre, Inc., a Back on Track Physiotherapy and Health Centre clinic operated by NHL, Clinical Consultants International, LLC and a 70%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 OCIother comprehensive income (“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,November 30, 2022 and August 31, 2021,2022, the allowance for uncollectible accounts receivable was $1,054,599957,375 and $1,097,628992,329, 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 revenuerevenues 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,November 30, 2022 and August 31, 2021,2022, the Company’s allowance for slow moving or obsolete inventory was $1,064,025997,467 and $1,066,7211,027,670, respectively.
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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. During the period/year ended November 30, 2022 and August 31, 2022, the Company wrote off $nil and $299,672 (principal amount of $225,924 and accrued interest of $73,748), respectively, of other receivables that were not expected to be collected.
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:
Schedule of Estimated Useful Lives of Assets
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, Leaseswhich 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 useright-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 isvalues are reduced for the cost of disposal. Based on its review at February 28,November 30, 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:
Schedule of Intangible Assets Amortized Estimated Useful Lives
Land use rights | 50 years (the lease period) | |
Intellectual property | 7 years | |
Customer relationships | 5 years | |
Brand names | 7 years | |
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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,November 30, 2022, the Company believes there was no impairment of its intangible assets.
Right-of-use Assets
The Company’s right-of-use assets consist of leased assets recognized in accordance with ASC 842, Leases, whichrequires 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 sheetssheet 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 the 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.
GoodwillGoodwill
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. (“APKA”) during the fiscal year ended August 31, 2017, Executive Fitness Leaders (“EFL”) during the fiscal year ended August 31, 2018, Action Plus Physiotherapy Rockland (“Rockland”) during the fiscal year ended August 31, 2019, and Acenzia Inc. during the fiscal year ended August 31, 2021. Based on its review at February 28, 2022,2021, and 1285 Canada during the Company believes there was no impairment of its goodwill.fiscal year ended August 31, 2022. As of August 31, 2021,2022, the Company performed the required impairment reviews and determined that an impairment charge of $99,5931,357,043 related to the goodwill for Executive Fitness LeadersAcenzia was necessary. The Company determined that the carrying value was in excess of the expected fair value of discounted cash flows based on the current market and business environments, resulting in the need for impairment. 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. Based on its review at November 30, 2022, the Company believes there was no additional impairment of its goodwill.
Summary of changes in goodwill by acquired businesses is as follows:
Schedule of Changes in Goodwill
APKA | EFL | Rockland | Acenzia | 1285 Canada | Total | |||||||||||||||||||
Balance, August 31, 2021 | $ | 197,925 | $ | 129,839 | $ | 229,593 | $ | 8,931,491 | $ | - | $ | 9,488,848 | ||||||||||||
Goodwill acquired with purchase of business | - | - | - | - | 602 | 602 | ||||||||||||||||||
Impairment of goodwill | - | - | - | (1,357,043 | ) | - | (1,357,043 | ) | ||||||||||||||||
Foreign currency translation adjustment | (7,247 | ) | (4,751 | ) | (8,405 | ) | (286,141 | ) | (19 | ) | (306,563 | ) | ||||||||||||
Balance, August 31, 2022 | $ | 190,678 | $ | 125,088 | $ | 221,188 | $ | 7,288,307 | $ | 583 | $ | 7,825,844 | ||||||||||||
Beginning balance | $ | 190,678 | $ | 125,088 | $ | 221,188 | $ | 7,288,307 | $ | 583 | $ | 7,825,844 | ||||||||||||
Foreign currency translation adjustment | (5,600 | ) | (3,673 | ) | (6,507 | ) | (214,203 | ) | (17 | ) | (230,000 | ) | ||||||||||||
Balance, November 30, 2022 | $ | 185,078 | $ | 121,415 | $ | 214,681 | $ | 7,074,104 | $ | 566 | $ | 7,595,844 | ||||||||||||
Ending balance | $ | 185,078 | $ | 121,415 | $ | 214,681 | $ | 7,074,104 | $ | 566 | $ | 7,595,844 |
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Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, other receivables, accounts payable, accrued expenses, current portion of finance and operating lease liability, 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. |
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 ofshort-term notes payable, due to related parties, current portion of convertible notes payableoperating lease liability 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,November 30, 2022 and August 31, 2021,2022, respectively, the Company did not identify any financial assets and liabilities required to be presented on the condensed consolidated balance sheet at fair value.value, except for cash and cash equivalents which are carried at fair value using Level 1 inputs and derivative liability which is carried at fair value using level 3 inputs.
Derivative Financial Instruments
Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments and measurement of their fair value for accounting purposes. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt under ASC 470, the Company will continue its evaluation process of these instruments as derivative financial instruments under ASC 815. The Company applies the guidance in ASC 815-40-35-12 to determine the order in which each convertible instrument would be evaluated for derivative classification.
Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to the fair value of derivatives.
Revenue Recognition
The Company’s revenue recognition reflects the updated accounting policies as per the requirements of ASUFASB 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. |
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 |
13 |
In arrangements where another party is involved in providing specified services to a customer, the Company evaluates whether it is the principal or agent. In this evaluation, the Company considers if the Company obtains control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price. For product sales where the Company is not the principal, the Company recognizes revenue on a net basis. For the periods presented, revenue for arrangements where the Company is the agent was not material.
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,November 30, 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.
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 as of February 28,at November 30, 2022 and 2021, respectively. In addition, at February 28,November 30, 2022, there were outstanding convertible notes that could convert into shares of common stock. stock and there were shares of common stock to be issued. and options/warrants outstanding
Due to the net loss incurred potentially dilutive instruments would be anti-dilutive. Accordingly, diluted loss per share is the same as basic loss per share for all periods presented.
14 |
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.CAD and the functional currency of the parent company is the United States dollar. Translation gainslosses of $1,002,282420,982 and $991,077431,605 at February 28,for the period/year ended November 30, 2022 and August 31, 2021,2022, respectively, are classified as an item of other comprehensive income in the stockholders’ equity section of the condensed consolidated balance sheets.sheet.
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.
Recent Accounting Pronouncements16.
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.Reclassifications
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 intendedCertain prior period amounts were reclassified to simplify accounting for income taxes by removing certain exceptionsconform to the general principlesmanner of presentation 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 current period. These reclassifications had no effect of this ASU on the Company’s condensed consolidated financial statements and related disclosures.net loss or shareholders’ equity.
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’sRecent 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.Pronouncements
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 condensed consolidated 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,November 30, 2022 and August 31, 2021,2022, the amount due to related parties was $473,367417,718 and $478,920478,897, respectively. At February 28,November 30, 2022, $401,681335,710 was non-interest bearing, $22,72521,304 bears interest at 6%6% per annum, and $48,96160,704 bears interest at 13.75%13.75% per annum. At August 31, 2021,2022, $407,052394,405 was non-interest bearing, $22,78321,949 bears interest at 6%6% per annum, and $49,08562,543 bears interest at 13.75%13.75% per annum.
Note 4 – Accounts Receivables, net
Accounts receivables, net at February 28,November 30, 2022 and August 31, 20212022 consisted of the following:
Schedule of Accounts Receivables, Net
February 28, | August 31, | November 30, | August 31, | |||||||||||||
2022 | 2021 | 2022 | 2022 | |||||||||||||
Trade receivables | $ | 2,171,751 | $ | 2,411,499 | $ | 1,828,732 | $ | 1,829,475 | ||||||||
Amounts earned but not billed | 134,821 | 154,558 | 88,734 | 180,259 | ||||||||||||
Accounts receivable gross | 2,306,572 | 2,566,057 | 1,917,466 | 2,009,734 | ||||||||||||
Allowance for doubtful accounts | (1,054,599 | ) | (1,097,628 | ) | (957,375 | ) | (992,329 | ) | ||||||||
Accounts receivable, net | $ | 1,251,973 | $ | 1,468,429 | $ | 960,091 | $ | 1,017,405 |
15 |
Note 5 – Inventory
Inventory at February 28,November 30, 2022 and August 31, 20212022 consisted of the following:
Schedule of Inventory
February 28, | August 31, | November 30, | August 31, | |||||||||||||
2022 | 2021 | 2022 | 2022 | |||||||||||||
Raw materials | $ | 991,497 | $ | 1,017,566 | $ | 1,380,358 | $ | 1,259,954 | ||||||||
Work in process | 144,262 | 144,628 | 135,238 | 139,333 | ||||||||||||
Finished Goods | 262,680 | 243,912 | 491,986 | 507,416 | ||||||||||||
Inventory Gross | 1,398,439 | 1,406,106 | 2,007,582 | 1,906,703 | ||||||||||||
Allowance for slow moving and obsolete inventory | (1,064,025 | ) | (1,066,721 | ) | (997,467 | ) | (1,027,670 | ) | ||||||||
Inventory, net | $ | 334,414 | $ | 339,385 | $ | 1,010,115 | $ | 879,033 |
Note 6 – Other Receivables
Other receivables at February 28,November 30, 2022 and August 31, 20212022 consisted of the following:
Schedule of Other Receivables
February 28, | August 31, | |||||||
2022 | 2021 | |||||||
$ | 296,138 | $ | 296,888 | |||||
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 |
November 30, | August 31, | |||||||
2022 | 2022 | |||||||
- | 74,030 | 76,272 | ||||||
Advance to corporation; accrues interest at 12% per annum; unsecured; due January 31, 2024, as amended | 74,030 | 76,272 | ||||||
Advance to corporation; accrues interest at 12% per annum; secured by property and other assets of debtor; due September 1, 2023, as amended | 535,327 | 551,536 | ||||||
Advance to corporation; accrues interest at 10% per annum; secured by assets of debtor; due September 1, 2023, as amended | 444,080 | 457,527 | ||||||
Total other receivables | 1,053,437 | 1,085,335 | ||||||
Current portion | (1,053,437 | ) | (1,085,335 | ) | ||||
Long-term portion | $ | - | $ | - |
Note 7 – Property and Equipment
Property and equipment at February 28,November 30, 2022 and August 31, 20212022 consisted of the following:
Schedule of Property and Equipment
February 28, | August 31, | November 30, | August 31, | |||||||||||||
2022 | 2021 | 2022 | 2022 | |||||||||||||
Land | $ | 473,821 | $ | 475,020 | $ | 444,181 | $ | 457,631 | ||||||||
Building | 3,553,651 | 3,562,650 | 3,331,359 | 3,432,232 | ||||||||||||
Leasehold improvements | 853,666 | 691,318 | 842,853 | 868,375 | ||||||||||||
Clinical equipment | 1,960,449 | 1,875,537 | 1,870,986 | 1,927,639 | ||||||||||||
Computer equipment | 25,935 | 24,679 | 33,563 | 34,579 | ||||||||||||
Office equipment | 49,787 | 46,510 | 44,552 | 45,406 | ||||||||||||
Furniture and fixtures | 40,915 | 41,019 | 38,356 | 39,518 | ||||||||||||
Property and equipment gross | 6,958,224 | 6,716,733 | 6,605,850 | 6,805,380 | ||||||||||||
Accumulated depreciation | (800,603 | ) | (646,442 | ) | (1,042,021 | ) | (1,004,732 | ) | ||||||||
Total | $ | 6,157,621 | $ | 6,070,291 | $ | 5,563,829 | $ | 5,800,648 |
Depreciation expense for the sixthree months ended February 28,November 30, 2022 and 2021 was $156,06760,043 and $43,93874,606, respectively.
Certain property and equipment have been used to secure notes payable (See Note 10).
16 |
Note 8 – Intangible Assets
Intangible assets at February 28,November 30, 2022 and August 31, 20212022 consisted of the following:
Schedule of Intangible Assets
February 28, | August 31, | November 30, | August 31, | |||||||||||||
2022 | 2021 | 2022 | 2022 | |||||||||||||
Land use rights | $ | 21,600,000 | $ | 21,600,000 | $ | 11,573,321 | $ | 11,573,321 | ||||||||
Software license | 1,144,798 | 1,144,798 | ||||||||||||||
Intellectual property | 11,487,882 | 9,388,065 | 7,503,709 | 8,059,386 | ||||||||||||
Customer relationships | 785,316 | 787,304 | 2,292,655 | 2,320,154 | ||||||||||||
Brand names | 2,060,722 | 2,065,941 | 1,931,818 | 1,990,314 | ||||||||||||
Assembled workforce | 419,940 | 421,003 | ||||||||||||||
37,498,658 | 35,407,111 | |||||||||||||||
Finite lived intangible assets, gross | 23,301,503 | 23,943,175 | ||||||||||||||
Accumulated amortization | (4,281,056 | ) | (2,970,643 | ) | (5,593,193 | ) | (5,102,556 | ) | ||||||||
Total | $ | 33,217,602 | $ | 32,436,468 | $ | 17,708,310 | $ | 18,840,619 |
Amortization expense for the sixthree months ended February 28,November 30, 2022 and 2021 was $1,311,770526,123 and $693,485619,676, respectively.
Expected amortization expense of intangible assets over the next 5 years and thereafter is as follows:
Schedule of Expected Amortization Expense of Intangible Assets
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 |
Twelve Months Ending November 30, | ||||
2023 | $ | 2,002,793 | ||
2024 | 2,002,793 | |||
2025 | 1,819,531 | |||
2026 | 1,457,184 | |||
2027 | 1,206,276 | |||
Thereafter | 9,219,733 | |||
Total | $ | 17,708,310 |
Note 9 – Accrued Expenses
Accrued expenses at February 28,November 30, 2022 and August 31, 20212022 consisted of the following:
Schedule of Accrued Expenses
November 30, | August 31, | |||||||
2022 | 2022 | |||||||
Accrued liabilities | $ | 972,344 | $ | 884,024 | ||||
Accrued payroll | 224,394 | 195,214 | ||||||
Unearned revenue | 35,781 | 36,887 | ||||||
Accrued expenses | $ | 1,232,519 | $ | 1,116,125 |
February 28, | August 31, | |||||||
2022 | 2021 | |||||||
Accrued liabilities | $ | 957,772 | $ | 811,660 | ||||
Accrued payroll | 202,868 | 279,018 | ||||||
Unearned revenue | 38,634 | 38,631 | ||||||
Accrued expenses | $ | 1,199,274 | $ | 1,129,309 |
17 |
Note 10 – Government Loans and Notes Payable
Notes payable at February 28,November 30, 2022 and August 31, 20212022 consisted of the following:
Schedule of Governmental Loans and Note Payable
February 28, | August 31, | November 30, | August 31, | |||||||||||||
2022 | 2021 | 2022 | 2022 | |||||||||||||
Government loans issued under the Government of Canada’s Canada Emergency Business Account (“CEBA”) program (A). | 110,558 | 63,336 | 88,836 | 91,526 | ||||||||||||
Note payable to the Small Business Administration (“SBA”). The note bears interest at 3.75% per annum, requires monthly payments of $190 after 12 months from funding and is due 30 years from the date of issuance, and is secured by certain equipment of PRO-DIP. | 40,320 | 40,320 | ||||||||||||||
Note payable dated December 3, 2019; accrues interest at 3% per annum; secured by land, building and personal property; due June 30, 2022. | 5,252,749 | 5,069,858 | ||||||||||||||
Note payable to the Small Business Administration (“SBA”). The note bears interest at 3.75% per annum, requires monthly payments of $190 and is due 30 years from the date of issuance, and is secured by certain equipment of PRO-DIP. | 40,320 | 40,320 | ||||||||||||||
Note payable dated December 3, 2018; accrues interest at 4.53% per annum; unsecured; annual payments of approximately $4,000; due December 31, 2028 | 30,662 | 30,739 | 28,744 | 29,614 | ||||||||||||
Note payable dated June 24, 2021; accrues interest at 9% per annum; secured by real property of Acenzia; lender at its sole discretion may require monthly principal payments of $950,000 after December 24, 2021; any unpaid principal and interest due on June 24, 2022. This note was repaid during the six months ended February 28, 2022. | - | 4,415,000 | ||||||||||||||
Total government loans and notes payable | 5,434,289 | 9,619,253 | 157,900 | 161,460 | ||||||||||||
Less current portion | (5,260,047 | ) | (4,485,649 | ) | - | - | ||||||||||
Long-term portion | $ | 174,242 | $ | 5,133,604 | $ | 157,900 | $ | 161,460 |
(A) | The Government of Canada launched |
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:
Schedule of Future Maturities Outstanding of Governmental Loans and Note Payable
Twelve Months Ending February 28, | ||||||||
Twelve Months Ending November 30, | ||||||||
2023 | $ | 5,260,047 | $ | 6,242 | ||||
2024 | 115,455 | 95,079 | ||||||
2025 | 5,338 | 6,242 | ||||||
2026 | 5,785 | 6,242 | ||||||
2027 | 6,238 | 6,242 | ||||||
Thereafter | 41,426 | 37,853 | ||||||
Total | $ | 5,434,289 | $ | 157,900 |
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 “$16.66m+ convertible notes”) with each note having a face amount of $8,333,333. The $16.66m+ convertible notes accrue interest at 5% per annum and are due on June 14, 2023. The $16.66m+ convertible notes are secured by all assets of the Company. The $16.66m+ convertible 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 $16.66m+ 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. :assumptions:
● | Expected life of 4.0 | |
● | Volatility of 275%; | |
● | Dividend yield of 0%; and | |
● | Risk free interest rate of 1.23% |
The face amount of the $16.66m+ convertible notes payable of $16,666,666was proportionately allocated to the $16.66m+ convertible notes payable and the warrantwarrants in the amount of $11,409,200and $5,257,466, respectively. The amount allocated to the warrants of $5,257,466was recorded as a discount to the convertible note and as additional paid in capital. The $16.66m+ convertible notes payable contained an original issue discount totaling $1,666,666and the Company also incurred $1,140,000in loan fees in connection with thisthe $16.66m+ convertible notes. The combined total discount is $8,064,132and will be amortized over the life of the $16.66m+ convertible notes.
18 |
On November 14, 2022, the $16.66m+ convertible notes were amended to provide the holders with conversion rights consisting of a conversion price to the first $1,000,000 of principal amount of each of the notes by the lower of (i) the conversion price in effect at such time and (ii) 82.0% of the lowest VWAP during the five (5) trading days immediately prior to a conversion date. The Company determined that the conversion features of these notes represented embedded derivatives since the notes are convertible into a variable number of shares upon conversion. As at November 30, 2022, the Company recorded a derivative liability of $1,390,380 (August 31, 2022 - $nil). The fair value of the derivative liability was calculated using the Black-Scholes pricing model with the following assumptions:
● | Expected life of 0.58 years; | |
● | Volatility of 148.20%; | |
● | Dividend yield of 0%; and | |
● | Risk free interest rate of 4.55% |
The derivative was recorded as a discount on the convertible notes, but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the convertible notes.
During the sixthree months ended February 28,November 30, 2022, the Company amortized $1,120,4281,490,513 of the debt discount and as February 28,November 30, 2022, the unamortized debt discount was $6,943,7042,750,917.
During the three month period ended November 30, 2022, the Company made cash payments in the aggregate amount of $2,936,019 for the monthly Amortization Payment, $2,777,778 in principal and $158,241 in interest, pursuant to the terms and conditions of the $16.66m+ convertible notes.
During the three months ended November 30, 2022, an aggregate of $nil in principal and an aggregate of $nil in accrued interest were converted into shares of common stock issued to the $16.66m+ convertible note holders.
In connection with the $16.66m+ convertible notes, the Company is subject to certain financial covenants which the Company was not in compliance with as of November 30, 2022. This provided the lender the right to increase the interest rate to 15% per annum and rights to first ranking over all other notes held by the Company. However, subsequent to the year end, (see Note 17) the $16.66m+ convertible notes were settled without any additional charges or penalty due to non-compliance with the $16.66m+ convertible notes financial covenants.
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 “$1.875m convertible notes”) with each note having a face amount of $937,500. The $1.875m convertible notes accrue interest at 1% per annum and arewere due on May 17, 2022. On June 1, 2022, the Company made an aggregated payment in full of $948,874 to Platinum Point Capital LLC, (the “Platinum Note”) including all principal and interest owed, on one of the two convertible notes payable. As previously disclosed, on June 1, 2022, the Company and Jefferson Street Capital (“Jefferson”) agreed to extend the maturity date of one of the two convertible notes (the “Jefferson Note”), to November 29, 2022 with a principal amount face value of $946,875 and interest rate that shall accrue at a rate equal to 1% per annum.
The $1.875m convertible notes are secured by all assets of the Company. The $1.875m convertible notes are convertible at the option of the note holders to convert into shares of the Company’s common stock at $3.35 per share.
In connection with the $1.875m 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. :assumptions:
● | Expected life of 3.0 | |
● | Volatility of 300%; | |
● | Dividend yield of 0%; and | |
● | Risk free interest rate of 0.85% |
The face amount of the $1.875m convertible notes payable of $1,875,000 was proportionately allocated to the $1.875m convertible notes payable and the warrantwarrants 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 $1.875m convertible notenotes and as additional paid in capital. The $1.875m convertible notes payable contained an original issue discount totaling $375,000 and the Company also incurred $90,000 in loan fees in connection with thisthese $1.875m convertible notes. The combined total discount is $760,824 and will be amortized over the life of the $1.875m convertible notes. DuringThe debt discount was fully amortized during the six monthsyear ended February 28,August 31, 2022.
On December 2, 2022, the Company amortizedmade a partial payment of $400,434200,000 to Jefferson toward principal and interest owed on the Jefferson Note, leaving a balance of $746,875. On December 13, 2022, the Company, Terra and Jefferson entered into a letter agreement. Pursuant to the terms of the debt discountletter agreement, Jefferson agreed to forbear from entering an event of default under the terms of the Jefferson Note and asrelated transaction documents until December 29, 2022. Effective February 28, 2022,16, 2023, the unamortized debt discount was $302,550.Jefferson Note has been paid in full.
19 |
Note 12 – Debentures, Related Parties
On September 30, 2013, the Company issued five debentures totaling CAD$6,402,5126,402,512 (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, 2021.2021. 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 priceprice..
On July 21, 2020, the Company made a partial repayment of a debenture due to a related party of $267,768.
At February 28,November 30, 2022 and August 31, 2021,2022, the amount of debentures outstanding was $979,724918,439 and $982,205946,250, respectively.
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,November 30, 2022 and August 31, 2021:2022:
Schedule of Lease Related Assets and Liabilities
February 28, | August 31, | November 30, | August 31, | ||||||||||||||||
2022 | 2021 | 2022 | 2022 | ||||||||||||||||
Classification on Balance Sheet | Classification on Balance Sheet | ||||||||||||||||||
Assets | |||||||||||||||||||
Operating lease assets | Operating lease right of use assets | $ | 2,348,391 | $ | 2,543,396 | Operating lease right of use assets | $ | 2,423,519 | $ | 2,673,934 | |||||||||
Total lease assets | $ | 2,348,391 | $ | 2,543,396 | $ | 2,423,519 | $ | 2,673,934 | |||||||||||
Liabilities | |||||||||||||||||||
Current liabilities | |||||||||||||||||||
Operating lease liability | Current operating lease liability | $ | 533,535 | $ | 530,797 | Current operating lease liability | $ | 521,358 | $ | 582,088 | |||||||||
Noncurrent liabilities | |||||||||||||||||||
Operating lease liability | Long-term operating lease liability | 1,866,858 | 2,057,805 | Long-term operating lease liability | 2,010,041 | 2,185,329 | |||||||||||||
Total lease liability | $ | 2,400,393 | $ | 2,588,602 | $ | 2,531,399 | $ | 2,767,417 |
20 |
Future minimum operating lease payments are as follows:
Schedule of Lease Obligations
Twelve Months Ending February 28, | ||||||||
2022 | $ | 706,646 | ||||||
Twelve Months Ending November 30, | ||||||||
2023 | 546,138 | $ | 715,223 | |||||
2024 | 429,308 | 571,627 | ||||||
2025 | 371,390 | 496,959 | ||||||
2026 | 383,475 | 512,890 | ||||||
2027 | 422,053 | |||||||
Thereafter | 558,151 | 480,427 | ||||||
Total payments | 2,995,108 | 3,199,179 | ||||||
Amount representing interest | (594,715 | ) | (667,780 | ) | ||||
Lease obligation, net | 2,400,393 | 2,531,399 | ||||||
Less lease obligation, current portion | (533,535 | ) | (521,358 | ) | ||||
Lease obligation, long-term portion | $ | 1,866,858 | $ | 2,010,041 |
During the sixthree months ended February 28,November 30, 2022, the Company entereddid not enter into any new lease obligation of $101,348.obligation.
The lease expense for the sixthree months ended February 28,November 30, 2022 and 2021 was $392,160209,846 and $415,643216,905, respectively. The cash paid under operating leases for the sixthree months ended February 28,November 30, 2022 and 2021 was $381,533202,465 and $410,175207,683, respectively. At February 28,November 30, 2022, the weighted average remaining lease terms were 5.713.95 years and the weighted average discount rate was 8%.
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,November 30, 2022 and August 31, 20212022 is as follows:
Schedule of Finance Leases
February 28, | August 31, | |||||||||||||||
2022 | 2021 | November 30, | August 31, | |||||||||||||
2022 | 2022 | |||||||||||||||
Cost | $ | 209,457 | $ | 209,457 | $ | 209,457 | $ | 209,457 | ||||||||
Accumulated amortization | (164,419 | ) | (136,491 | ) | (206,311 | ) | (192,347 | ) | ||||||||
Net book value | $ | 45,038 | $ | 72,966 | $ | 3,146 | $ | 17,110 |
Future minimum finance lease payments are as follows:
Schedule of Future Minimum Lease Payments
Twelve Months Ending February 28, | ||||||||
Twelve Months Ending November 30, | ||||||||
2023 | $ | 18,328 | $ | 16,301 | ||||
2024 | 9,694 | 2,272 | ||||||
2025 | 808 | |||||||
Total payments | 28,830 | 18,573 | ||||||
Amount representing interest | (443 | ) | (370 | ) | ||||
Lease obligation, net | 28,387 | 18,203 | ||||||
Less lease obligation, current portion | (17,533 | ) | (8,737 | ) | ||||
Lease obligation, long-term portion | $ | 10,854 | $ | 9,466 |
21 |
Note 14 – Stockholders’ Equity
Convertible Preferred Stock
The Company has authorized February 28,November 30, 2022 and August 31, 2021,2022, there were and convertible preferred shares issued and outstanding, respectively. shares of $ par value convertible preferred stock. At
Common Stock
The Company has authorized 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.share. At February 28,November 30, 2022 and August 31, 20212022, there were and common shares issued and outstanding, respectively. shares of $ par value common stock. On February 1, 2021,
During the sixthree months ended February 28,November 30, 2022, the Company issued:
● | The Company sold an aggregate of 2,000,000, consisting of common stock, warrants with a three-year term to purchase shares of common stock at an exercise price of $0.50 per share, and warrants with a five-year term to purchase shares of common stock at an exercise price of $ per share. The Company paid a cash fee of $ units for aggregate gross proceeds of $140,000 equal to 7.0% of the gross proceeds of the offering as well as reimbursed the agent for its accountable expenses, resulting in net proceeds to the Company of $1,795,000. shares of common stock offered by the prospectus contained in the Registration Statement on Form S-1 (File No. 333-267401) declared effective by the Securities and Exchange Commission on October 13, 2022, for an agreed upon purchase price of $ per unit. The shares were issued on October 18, 2022. The total fair value of the warrants granted was estimated on the date of the grant to be $ . The fair value was determined using the Black- Scholes pricing model with the following assumptions: expected volatility of % to %; expected dividend yield of %; risk-free interest rate of % to %; stock price of $ ; and expected life of to years. | |
● |
● |
● |
Common Stock to be Issued
As of November 30, 2022, in connection with the acquisition of Acenzia, Terragenx, 1285 Canada, and Poling Taddeo Hovius Physiotherapy Professional Corp, the Company has allotted and is obligated to issue shares of the Company’s common stock.
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 authorizesauthorized 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 underAs of November 30, 2022, the 2015 Plan. ThePlan had shares available for award; however, 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, February 28,November 30, 2022, the 2018 Plan hashad shares available for award; however, the Company does not intend to issue any additional grants 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
22 |
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 .Directors. The Company chose not to cumulatively increase the shares authorized for issuance under the 2021 Plan effective January 1, 2023. As of February 28,November 30, 2022, the 2021 Plan hashad shares available for award.award. 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,
Schedule of Stock Option Activity
Weighted | Weighted | |||||||||||||||||||||||||||||||
Weighted | Average | Weighted | Average | |||||||||||||||||||||||||||||
Average | Remaining | Aggregate | Average | Remaining | Aggregate | |||||||||||||||||||||||||||
Options | Exercise | Contractual | Intrinsic | Options | Exercise | Contractual | Intrinsic | |||||||||||||||||||||||||
Outstanding | Price | Life | Value | Outstanding | Price | Life | Value | |||||||||||||||||||||||||
Outstanding, August 31, 2021 | 1,849,600 | 2.29 | $ | 218,240 | ||||||||||||||||||||||||||||
Outstanding, August 31, 2022 | 2,164,235 | 2.15 | $ | 140,577 | ||||||||||||||||||||||||||||
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, November 30, 2022 | 2,164,235 | 2.17 | $ | - | ||||||||||||||||||||||||||||
Exercisable, November 30, 2022 | 2,070,240 | $ | 2.21 | $ | - |
Schedule of Options Outstanding
Outstanding | Outstanding | Exercisable | Outstanding | Exercisable | ||||||||||||||||||||||||
Number of | Number of | Exercise | Number of | Exercise | Number of | Exercise | Number of | Exercise | ||||||||||||||||||||
Options | Options | Price | Options | Price | Options | Price | Options | Price | ||||||||||||||||||||
281,985 | $ | 1.33 | - | $ | 1.33 | 227,155 | $ | 1.33 | 133,160 | $ | 1.33 | |||||||||||||||||
997,000 | 1.60 | 997,000 | 1.60 | 992,000 | 1.60 | 992,000 | 1.60 | |||||||||||||||||||||
48,000 | 1.87 | 48,000 | 1.87 | 48,000 | 1.87 | 48,000 | 1.87 | |||||||||||||||||||||
775,000 | 3.00 | 775,000 | 3.00 | 775,000 | 3.00 | 775,000 | 3.00 | |||||||||||||||||||||
72,600 | 3.80 | 72,600 | 3.80 | 72,600 | 3.80 | 72,600 | 3.80 | |||||||||||||||||||||
5,000 | 5.00 | 5,000 | 5.00 | 10,000 | 5.00 | 10,000 | 5.00 | |||||||||||||||||||||
2,179,585 | 1,897,600 | 39,480 | 1.90 | 39,480 | 1.90 | |||||||||||||||||||||||
2,164,235 | 2,070,240 |
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 sixthree 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.November 30, 2022.
For options granted during the sixthree months ended February 28,November 30, 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 sixthree months ended February 28,November 30, 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 $sixthree months ended February 28,November 30, 2022 and 2021, respectively. At February 28,November 30, 2022, the unamortized stock option expense was $ , which will be amortized into expense through February 2023. and $ during the
Schedule of Fair Value of Options Granted by Using Valuation Assumptions
2022 | 2021 | |||||||
Risk-free interest rate | to | % | % | |||||
Expected life of the options | years | years | ||||||
Expected volatility | 281 | % | 268 | % | ||||
Expected dividend yield | % | % |
2022 | 2021 | |||||||
Risk-free interest rate | to | % | 0.93 | % | ||||
Expected life of the options | years | years | ||||||
Expected volatility | 281 | % | 282 | % | ||||
Expected dividend yield | 0 | % | 0 | % |
Warrants
The following is a summary of warrant activity:
Schedule of Warrant Activity
Weighted | Weighted | |||||||||||||||||||||||||||||||
Weighted | Average | Weighted | Average | |||||||||||||||||||||||||||||
Average | Remaining | Aggregate | Average | Remaining | Aggregate | |||||||||||||||||||||||||||
Warrants | Exercise | Contractual | Intrinsic | Warrants | Exercise | Contractual | Intrinsic | |||||||||||||||||||||||||
Outstanding | Price | Life | Value | Outstanding | Price | Life | Value | |||||||||||||||||||||||||
Outstanding, August 31, 2021 | 2,388,050 | 3.35 | $ | - | ||||||||||||||||||||||||||||
Outstanding, August 31, 2022 | 8,445,264 | 2.42 | $ | - | ||||||||||||||||||||||||||||
Granted | 6,057,214 | 2.05 | 8,000,000 | 0.10 | ||||||||||||||||||||||||||||
Forfeited | - | - | ||||||||||||||||||||||||||||||
Exercised | - | (4,673,986 | ) | |||||||||||||||||||||||||||||
Outstanding, February 28, 2022 | 8,445,264 | 2.42 | $ | - | ||||||||||||||||||||||||||||
Exercisable, February 28, 2022 | 8,445,264 | $ | 2.42 | $ | - | |||||||||||||||||||||||||||
Outstanding, November 30, 2022 | 11,771,278 | 0.81 | $ | 1,483,425 | ||||||||||||||||||||||||||||
Exercisable, November 30, 2022 | 11,771,278 | $ | 0.81 | $ | 1,483,425 |
Schedule of Exercise Price of Warrants Outstanding
Outstanding and Exercisable | Outstanding and Exercisable | Outstanding and Exercisable | ||||||||
Number of | Exercise | Number of | Exercise | |||||||
Warrants | Price | Warrants | Price | |||||||
$ | ||||||||||
1,159,348 | $ | 0.00 | ||||||||
2,611,930 | 3.35 | |||||||||
8,000,000 | 0.10 | |||||||||
11,771,278 |
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 unaudited condensed consolidated financial position as of February 28,November 30, 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 $.
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.
Summary of Purchase Price Allocation at Fair Value
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:
Summary of Purchase Price
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.
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:
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 1716 – 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 companyCompany for making operating decisions and assessing performance. The Company has 2two reportable segments: healthcare services and product manufacturing and development.sales.
The following tables summarize the Company’s segment information for the three and six months ended February 28,November 30, 2022 and 2021:
Schedule of Segment Reporting Information
2022 | 2021 | |||||||||||||||||||||||
Three Months Ended February 28, | Six Months Ended February 28, | Three Months Ended November 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Sales | ||||||||||||||||||||||||
Healthcare services | $ | 1,873,577 | $ | 2,075,894 | $ | 4,053,200 | $ | 4,231,400 | $ | 2,021,213 | $ | 2,179,623 | ||||||||||||
Product manufacturing and development | 995,646 | - | 1,977,950 | - | 790,478 | 982,304 | ||||||||||||||||||
Corporate | - | - | - | - | 607,589 | - | ||||||||||||||||||
$ | 2,869,223 | $ | 2,075,894 | $ | 6,031,150 | $ | 4,231,400 | |||||||||||||||||
Sales | $ | 3,419,280 | $ | 3,161,927 | ||||||||||||||||||||
Gross profit | ||||||||||||||||||||||||
Healthcare services | $ | 760,424 | $ | 751,446 | $ | 1,560,066 | $ | 1,562,896 | $ | 784,031 | $ | 799,642 | ||||||||||||
Product manufacturing and development | 455,930 | - | 922,754 | - | 347,914 | 466,824 | ||||||||||||||||||
Corporate | - | - | - | - | 607,588 | - | ||||||||||||||||||
Gross profit | $ | 1,739,533 | $ | 1,266,466 | ||||||||||||||||||||
$ | 1,216,354 | $ | 751,446 | $ | 2,482,820 | $ | 1,562,896 | |||||||||||||||||
Loss from operations | ||||||||||||||||||||||||
Income (Loss) from operations | ||||||||||||||||||||||||
Healthcare services | $ | (265,217 | ) | $ | (319,686 | ) | $ | (376,322 | ) | $ | (354,583 | ) | $ | (151,691 | ) | $ | (111,105 | ) | ||||||
Product manufacturing and development | (504,145 | ) | - | (845,690 | ) | - | (554,842 | ) | (341,545 | ) | ||||||||||||||
Corporate | (1,351,314 | ) | (1,006,258 | ) | (2,262,323 | ) | (1,729,085 | ) | (1,535,427 | ) | (911,009 | ) | ||||||||||||
$ | (2,120,676 | ) | $ | (1,325,944 | ) | $ | (3,484,335 | ) | $ | (2,083,668 | ) | |||||||||||||
Loss from operations | $ | (2,241,960 | ) | $ | (1,363,659 | ) | ||||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||||||
Healthcare services | $ | 71,505 | $ | 22,328 | $ | 146,111 | $ | 43,938 | $ | 28,968 | $ | 74,606 | ||||||||||||
Product manufacturing and development | 334,450 | - | 586,526 | - | 309,042 | 252,076 | ||||||||||||||||||
Corporate | 367,600 | 357,171 | 735,200 | 693,485 | 248,156 | 367,600 | ||||||||||||||||||
$ | 773,555 | $ | 379,499 | $ | 1,467,837 | $ | 737,423 | |||||||||||||||||
Depreciation and amortization | $ | 586,166 | $ | 694,282 | ||||||||||||||||||||
Capital expenditures | ||||||||||||||||||||||||
Healthcare services | $ | 72,139 | $ | 618 | $ | 176,981 | $ | 618 | $ | - | $ | 104,842 | ||||||||||||
Product manufacturing and development | - | - | 15,555 | - | - | 15,555 | ||||||||||||||||||
Corporate | - | - | - | - | - | - | ||||||||||||||||||
$ | 72,139 | $ | 618 | $ | 192,536 | $ | 618 | |||||||||||||||||
Capital expenditures | $ | - | $ | 120,397 | ||||||||||||||||||||
Interest expenses | ||||||||||||||||||||||||
Healthcare services | $ | 20,027 | $ | 22,948 | $ | 40,154 | $ | 46,889 | $ | 36,303 | $ | 20,127 | ||||||||||||
Product manufacturing and development | 923,843 | - | 972,446 | - | 2,464 | 48,603 | ||||||||||||||||||
Corporate | 282,312 | - | 282,312 | - | 128,476 | - | ||||||||||||||||||
$ | 1,226,182 | $ | 22,948 | $ | 1,294,912 | $ | 46,889 | |||||||||||||||||
Interest expenses | $ | 167,243 | $ | 68,730 | ||||||||||||||||||||
Net loss | ||||||||||||||||||||||||
Healthcare services | $ | (282,717 | ) | $ | (340,259 | ) | $ | (411,524 | ) | $ | (396,359 | ) | $ | (185,713 | ) | $ | (128,807 | ) | ||||||
Product manufacturing and development | (1,837,396 | ) | - | (2,619,938 | ) | - | (578,576 | ) | (782,542 | ) | ||||||||||||||
Corporate | (2,748,091 | ) | (1,000,332 | ) | (3,653,137 | ) | (1,717,335 | ) | (3,172,447 | ) | (905,046 | ) | ||||||||||||
$ | (4,868,204 | ) | $ | (1,340,591 | ) | $ | (6,684,599 | ) | $ | (2,113,694 | ) | |||||||||||||
Net loss | $ | (3,936,736 | ) | $ | (1,816,395 | ) |
As of | As of | As of | As of | |||||||||||||
February 28, | August 31, | November 30, | August 31, | |||||||||||||
2022 | 2021 | 2022 | 2022 | |||||||||||||
Total assets | ||||||||||||||||
Healthcare services | $ | 6,448,799 | $ | 7,318,888 | $ | 5,662,841 | $ | 5,917,403 | ||||||||
Product manufacturing and development | 24,161,243 | 21,427,285 | ||||||||||||||
Product sales | 18,483,229 | 19,595,269 | ||||||||||||||
Corporate | 39,709,988 | 33,212,108 | 13,602,753 | 15,360,168 | ||||||||||||
$ | 70,320,030 | $ | 61,958,281 | |||||||||||||
$ | 37,748,823 | $ | 40,872,840 | |||||||||||||
Accounts receivable | ||||||||||||||||
Healthcare services | $ | 763,682 | $ | 953,919 | $ | 637,434 | $ | 585,492 | ||||||||
Product manufacturing and development | 488,291 | 514,510 | ||||||||||||||
Product sales | 322,657 | 419,417 | ||||||||||||||
Corporate | - | - | - | 12,496 | ||||||||||||
$ | 1,251,973 | $ | 1,468,429 | $ | 960,091 | $ | 1,017,405 | |||||||||
Intangible assets | ||||||||||||||||
Healthcare services | $ | - | $ | - | $ | 146,169 | $ | 159,453 | ||||||||
Product manufacturing and development | 7,882,039 | 6,365,705 | ||||||||||||||
Product sales | 4,443,751 | 5,283,333 | ||||||||||||||
Corporate | 25,335,563 | 26,070,763 | 13,118,390 | 13,397,832 | ||||||||||||
$ | 33,217,602 | $ | 32,436,468 | |||||||||||||
$ | 17,708,310 | $ | 18,840,619 | |||||||||||||
Goodwill | ||||||||||||||||
Healthcare services | $ | 555,949 | $ | 557,357 | $ | 521,740 | $ | 537,537 | ||||||||
Product manufacturing and development | 8,502,987 | 8,524,522 | ||||||||||||||
Product sales | 7,074,104 | 7,288,307 | ||||||||||||||
Corporate | - | - | - | - | ||||||||||||
$ | 9,058,936 | $ | 9,081,879 | $ | 7,595,844 | $ | 7,825,844 |
Note 1817 – Subsequent Events
Share Issuances in Connection with Warrant Exercises
Subsequent to the period ended November 30, 2022, the Company issued an aggregate of AgreementCommission on October 13, 2022. shares of common stock to certain warrant holders upon exercise of their warrants related to the Company’s Registration Statement on Form S-1 (File No. 333-267401) declared effective by the Securities and Exchange
Share Issuances in Connection with Note Conversions
Subsequent to Acquirethe period ended November 30, 2022, the Company issued an aggregate of % shares of 12858461 Canada Corp.common stock to certain note holders upon conversion of their notes. As of May [*], 2023, (i) the principal balance owed by the Company to Hudson Bay pursuant to the senior secured convertible note, dated as of December 14, 2021, as amended, issued by the Company to Hudson Bay is $0, (ii) the principal balance owed by the Company to CVI pursuant to the senior secured convertible note, dated as of December 14, 2021, as amended, issued by the Company to CVI is $0; and (iii) the principal balance owed by the Company to Jefferson pursuant to the secured convertible note, dated as of November 17, 2021, as amended, issued by the Company to Jefferson is $0.
Share Issuance in Exchange for Certain NHL Non-Voting Special Shares
Subsequent to the period ended November 30, 2022, the Company issued shares of common stock in exchange for certain non-voting special shares of NHL, previously issued in connection with NHL’s acquisition of Acenzia that closed on June 24, 2021.
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Nasdaq Notification—Minimum Bid Price Requirement
On MarchNovember 21, 2022, the Company received a notification letter (the “November Notification Letter”) from The Nasdaq Stock Market, LLC (“Nasdaq”) that it is not in compliance with the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on The Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $ per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. Based on the closing bid price of the Company’s common stock between October 10, 2022 and November 11, 2022, the Company no longer meets the minimum bid price requirement. The November Notification Letter has no immediate effect on the listing or trading of the Company’s common stock on The Nasdaq Capital Market and, at this time, the common stock will continue to trade on The Nasdaq Capital Market under the symbol “NVOS.”
The November Notification Letter provides that the Company has 180 calendar days, or until May 22, 2023, to regain compliance with Nasdaq Listing Rule 5550(a)(2). To regain compliance, the bid price of the Company’s common stock must have a closing bid price of at least $ per share for a minimum of 10 consecutive business days. If the Company does not regain compliance by May 22, 2023, an additional 180 days may be granted to regain compliance, so long as the Company meets The Nasdaq Capital Market continued listing requirements (except for the bid price requirement) and notifies Nasdaq in writing of its intention to cure the deficiency during the second compliance period. If the Company does not qualify for the second compliance period or fails to regain compliance during the second 180-day period, then Nasdaq will notify the Company of its determination to delist the Company’s common stock, at which point the Company will have an opportunity to appeal the delisting determination to a hearings panel.
The Company intends to monitor the closing bid price of its common stock and will consider implementing available options to regain compliance with the minimum bid price requirement under the Nasdaq Listing Rules.
Information Statement on Schedule 14C
On January 4, 2023, the Company filed with the SEC a definitive information statement on Schedule 14C (the “14C”). The 14C relates to the notice to stockholders concerning the approval by written consent of stockholders holding a majority of the Company’s issued and outstanding voting securities (the “Majority Stockholders”) of the effectuation of the transactions provided for in each exchange offer and amendment entered into on November 14, 2022 by the Company (the “Exchange Offers and Amendments”) with CVI and Hudson Bay, including but not limited to the following amendments to the senior secured convertible notes, dated as of December 14, 2021, issued by the Company to CVI and Hudson (the “Notes”):
(i) the definition of Conversion Price (as defined in the Notes) (the “Conversion Price”) shall be amended such that, as to the first $1,000,000 of principal amount of each of the Notes converted after the date that shareholder approval is obtained, the Conversion Price shall be the lower of (i) the Conversion Price in effect at such time and (ii) 82.0% of the lowest VWAP (as defined in Notes) during the five trading days immediately prior to the applicable conversion date (the “Adjusted Conversion Price”), provided, however, that the portion of the first $1,000,000 of principal amount of each of the Notes that is converted pursuant to a voluntary conversion by the holders of each of the Notes shall reduce each of the remaining Amortization Redemption Amounts proportionately on a pro rata basis;
(ii) Each of the holders of the Notes may accelerate up to four Amortization Redemption Amounts (as defined in the Notes) provided that such holder agrees to accept shares of Common Stock instead of cash for such payments at a price per share equal to the Adjusted Conversion Price as calculated on the immediately preceding Amortization Date (as defined in the Notes)); and
(iii) upon mutual consent by the Company and each of the holders of the Notes, such holder may elect to utilize the Adjusted Conversion Price for the balance of the Notes.
Accordingly, the Majority Stockholders approved, by written consent, the issuance of the total number of shares of Company common stock of the Company necessary to effectuate the Exchange Offers and Amendments, which is currently an indeterminate number due to the methodology of the conversion pricing as described herein and in the Exchange Offers and Amendments.
Stockholder approval of the Exchange Offers and Amendments was required by Rule 5635(d) of The Nasdaq Stock Market, which requires stockholder approval prior to a 20% issuance of securities at a price that is less than the Minimum Price (as defined in the information statement) in a transaction other than a public offering. A 20% issuance is a transaction, other than a public offering, involving the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable for common stock), which alone or together with sales by officers, directors or substantial stockholders of the company, equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance.
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Such approval and consent by the Majority Stockholders constitute the approval and consent of a majority of the total number of shares of the Company’s outstanding voting stock and is sufficient under the Nevada Revised Statutes, the Company’s Amended and Restated Articles of Incorporation, as amended, and the Company’s Bylaws to approve the Exchange Offers and Amendments. Accordingly, the actions will not be submitted to the other stockholders of the Company for a vote, and the information statement has been furnished to such other stockholders to provide them with certain information concerning the actions in accordance with the requirements of the Exchange Act, and the regulations promulgated under the Exchange Act, including Regulation 14C.
As of May 24, 2023, (i) the principal balance owed by the Company to Hudson Bay pursuant to the senior secured convertible note, dated as of December 14, 2021, as amended, issued by the Company to Hudson Bay is $0, and (ii) the principal balance owed by the Company to CVI pursuant to the senior secured convertible note, dated as of December 14, 2021, as amended, issued by the Company to CVI is $0. See “—Share Issuances in Connection with Note Conversions.”
Jefferson Street Letter Agreement
As previously disclosed, on June 1, 2022, the Company and NHL completedJefferson agreed to extend the maturity date of the Jefferson Note to November 29, 2022 with a principal amount face value of $946,875 and interest rate that shall accrue at a rate equal to 1% per annum. On December 2, 2022, the Company made a partial payment of $200,000 toward principal and interest owed on the Jefferson Note, leaving a balance of $746,875. On December 13, 2022, the Company, Terra and Jefferson entered into a letter agreement. Pursuant to the terms of the letter agreement, Jefferson agreed to forbear from entering an event of default under the terms of the Jefferson Note and related transaction documents until December 29, 2022. In addition, the parties agreed to release the Collateral Shares to Jefferson. Effective February 16, 2023, the Jefferson Note has been paid in full.
Nasdaq Notification—Delinquent Form 10-K and Form 10-Q Filings
On December 15, 2022, the Company received a notification letter (the “December Notification Letter”) from Nasdaq that it was not in compliance with Nasdaq’s continued listing rules due to its failure to timely file its Annual Report on Form 10-K for the fiscal year ended August 31, 2022 (the “2022 10-K”). On January 25, 2023, the Company received a notification letter (the “January Notification Letter”) from Nasdaq advising the Company that it was not in compliance with Nasdaq’s continued listing requirements as a result of its failure to timely file the 2022 10-K and its Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2022 (the “Form 10-Q”). On February 13, 2023, the Company submitted a plan to regain compliance with Nasdaq’s continued listing rules with respect to the 2022 10-K and the Form 10-Q. If Nasdaq accepted the Company’s plan, then Nasdaq could grant an exception of up to 180 calendar days from the due date of the 2022 10-K to regain compliance. On February 17, 2023 and March 22, 2023, based on Nasdaq’s further review, Nasdaq granted an exception to enable the Company to regain compliance with the Nasdaq’s continued listing rules. The terms of the exception are as follows: on or before May 29, 2023, the Company must file the 2022 10-K, the Form 10-Q, and any other filings required by Nasdaq Listing Rule 5250(c)(1). The Company filed the 2022 10-K on April 3, 2023.
SwagCheck Agreement
On December 23, 2022, the Company, SwagCheck Inc. (“SWAG”), and all SWAG shareholders (collectively, the “SWAG Shareholders”) entered into that certain Share ExchangePurchase Agreement (the “1285 SEA”“SWAG Agreement”). Pursuant to the terms of the SWAG Agreement, the Company agreed to purchase, and the SWAG Shareholders agreed to sell to the Company, 100% of the outstanding shares of SWAG in exchange for $ (the “SWAG Purchase”). SWAG holds a specific right of purchase of a precious gem collection (the “Gems”) as provided for in an agreement between SWAG and a Court-appointed Successor Receiver for the United States District Court for the Central District of California (the “Receiver”).
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The parties have made customary representations, warranties and covenants in the SWAG Agreement. In addition to certain customary closing conditions, the obligations of SWAG and the SWAG Shareholders to consummate the closing of the SWAG Purchase are subject to the satisfaction (or waiver by any of SWAG or the SWAG Shareholders), at or before the closing date, of certain conditions, including that (i) the Company will have received a financing commitment of at least $90 million by December 27, 2022, with a closing date no later than December 30, 2022, (ii) $60 million will be distributed directly to a Receiver for the purchase of the Gems by SWAG, and (iii) $ million is a Mark-up to be distributed for the benefit of the outgoing SWAG Shareholders.
In addition to certain customary closing conditions in the SWAG Agreement, the obligations of SWAG and the SWAG Shareholders to consummate the closing of the SWAG Purchase were subject to the satisfaction (or waiver by any of SWAG or the SWAG Shareholders), at or before the closing date, of certain conditions, including that (i) the Company will have provided SWAG with a binding letter of intent (a “LOI”) by a competent financing party for financing in the amount of at least $90 million by December 27, 2022 with a closing date no later than December 30, 2022, (ii) $60 million will be distributed directly to the Receiver for the purchase of the Gems by SWAG, and (iii) $ million is a mark-up to be distributed for the benefit of the outgoing SWAG Shareholders.
On December 30, 2022, the Company, SWAG and the SWAG Shareholders entered into Amendment No. 1 to the SWAG Agreement (the “SWAG Amendment”). Pursuant to the terms of the SWAG Amendment, the parties agreed as follows:
● | The closing of the SWAG Purchase will occur no later than January 10, 2023, with all contemplated extensions being subject to the Receiver’s stipulations, conditions, and limitations. | |
● | The condition for the Company to provide SWAG with a binding LOI has been deleted. | |
● | A total of $92 million will be distributed as follows: (i) $60 million will be distributed to the Receiver for the purchase of the Gems by SWAG, and (ii) a $ million mark-up will be distributed directly for the benefit of the outgoing SWAG Shareholders. |
Although the SWAG Agreement has not yet closed, the parties continue to work together with the intention of closing the transaction. Following the closing of SWAG Purchase, SWAG will be a wholly owned subsidiary of the Company and will own title to the Gems, which the Company intends to either collateralize or sell to raise capital.
Mast Hill Securities Purchase Agreement & Note
On February 23, 2023, the Company entered into a securities purchase agreement (the “Mast Hill SPA”) with 12858461 Canada Corp.Mast Hill Fund, L.P. (“1285”Mast Hill”), pursuant to which the Company issued an 12% unsecured promissory note (the “Mast Hill Note”) with a Canada federal corporationmaturity date of February 23, 2024 (the “Mast Hill Maturity Date”), 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 priceprincipal sum of $68,000573,000 (the “1285 Purchase Price”“Mast Hill Principal Sum”) paid with. In addition, the issuance, by NHL to the 1285 Shareholder, of certain non-voting NHL Exchangeable Special Shares which can only be utilizedCompany issued a common stock purchase warrant for the purposepurchase of exchange into an allotment ofup to 17,0001,000,000 restricted shares of the Company’s common stock (the “Parent 1285 SEA Shares”“Mast Hill Warrant”) to Mast Hill pursuant to the Mast Hill SPA. Pursuant to the terms of the Mast Hill Note, the Company agreed to pay the Mast Hill Principal Sum to Mast Hill and to pay interest on the principal balance at the determinationrate of 12% per annum. The Mast Hill Note carries an OID of $57,300. Accordingly, on 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,closing date, Mast Hill paid the purchase price isof $627,000515,700 (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 utilizedin exchange for the purpose of exchangeMast Hill Note and the Mast Hill Warrant. Mast Hill may convert the Mast Hill Note 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 byany time at a conversion price equal to $4.000.175 per share.share, subject to adjustment as provided in the Mast Hill Note (including but not limited to certain price protection provisions in case of future dilutive offerings, subject to certain customary exempt transactions) as well as certain beneficial ownership limitations.
Pursuant to the terms of the Mast Hill Note, the Company agreed to pay accrued interest monthly as well as the Mast Hill Principal Sum as follows: (i) $57,300 on August 23, 2023, (ii) 57,300 on September 23, 2023, (iii) $57,300 on October 23, 2023, (iv) $100,000 on November 23, 2023, (v) $100,000 on December 23, 2023, (vi) $100,000 on January 23, 2023, and (vii) all remaining amounts owed under the Mast Hill Note on the Mast Hill Maturity Date (each of the aforementioned payments are an “Amortization Payment”). If the Company fails to make any Amortization Payment, then Mast Hill shall have the right to convert the amount of such respective Amortization Payment into shares of common stock as provided in the Mast Hill Note at the lesser of (i) the then applicable conversion price under the Mast Hill Note, or (ii) 85% of the lowest VWAP of the Company’s common stock on any trading day during the five trading days prior to the respective conversion date.
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The Company may prepay the Mast Hill Note at any time prior to the date that an Event of Default (as defined in the Mast Hill Note) occurs at an amount equal to the Mast Hill Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium) plus $750 for administrative fees. The Mast Hill Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Mast Hill Note, Mast Hill Warrant, or Mast Hill SPA.
Upon the occurrence of any Event of Default, the Mast Hill Note shall become immediately due and payable and the Company shall pay to Mast Hill, in full satisfaction of its obligations hereunder, an amount equal to the Mast Hill Principal Sum then outstanding plus accrued interest multiplied by 125%. Upon the occurrence of an Event of Default, additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 16% per annum or the highest rate permitted by law.
The Mast Hill Warrant is exercisable for five years from February 23, 2023, at an exercise price of $0.25 per share, subject to adjustment as provided in the Mast Hill Warrant. The Mast Hill Warrant also contains certain cashless exercise provisions as well as price protection provisions providing for adjustment of the number of shares of the Company’s common stock issuable upon exercise of the Mast Hill Warrant and the exercise price in case of future dilutive offerings, subject to certain customary exempt transactions.
As additional consideration for the purchase of the Mast Hill Note and pursuant to the terms of the Mast Hill SPA, on February 24, 2023, the Company issued 19.99% of the issued and outstanding common stock on the closing date (equal to 27,720,448 shares) as further described in the Mast Hill SPA, unless shareholder approval to exceed such limitation is obtained by the Company. restricted shares of common stock (the “Commitment Shares”) to Mast Hill at closing. The Mast Hill SPA contains customary representations, warranties, and covenants of the Company, including, among other things and subject to certain exceptions, piggy-back registration rights with respect to the Commitment Shares as well as the shares of common stock underlying the Mast Hill Note and the Mast Hill Warrant. In addition to the beneficial ownership limitations provided in the Mast Hill Note and the Mast Hill Warrant, the sum of the number of shares of common stock that may be issued under the Mast Hill SPA (including the Commitment Shares), the Mast Hill Note, and the Mast Hill Warrant shall be limited to
On March 23, 2023, the Company made a monthly interest-only payment to Mast Hill in the amount of $5,086. On April 24, 2023, the company made a monthly interest-only payment to Mast Hill in the amount of $5,840.
Membership InterestMarch 2023 FirstFire Securities Purchase Agreement, with Clinical Consultants International LLCNote & Warrant
On March 17, 2022,21, 2023, the Company entered into a Membership Interest Purchase Agreementsecurities purchase agreement (the “CCI Agreement”“SPA”) by and amongwith FirstFire, pursuant to which the Company Clinical Consultants International LLC (“CCI”issued an 12% unsecured promissory note (the “2023 FirstFire Note”) with a maturity date of March 21, 2024, eachin the principal sum of $573,000 (the “Principal Sum”). In addition, the Company issued a common stock purchase warrant for the purchase of up to 1,000,000 shares of the members of CCICompany’s common stock (the “Members”“2023 FirstFire Warrant”), and Dr. Joseph Chalil as to FirstFire pursuant to the representativeSPA. Pursuant to the terms of the Members.2023 FirstFire Note, the Company agreed to pay the Principal Sum to FirstFire and to pay interest on the principal balance at the rate of 12% per annum. The 2023 FirstFire Note carries an OID of $57,300. Accordingly, on the closing date, FirstFire paid the purchase price of $515,700 in exchange for the 2023 FirstFire Note and the 2023 FirstFire Warrant. FirstFire may convert the 2023 FirstFire Note into the Company’s common stock at any time at a conversion price equal to $0.175 per share, subject to adjustment as provided in the 2023 FirstFire Note (including but not limited to certain price protection provisions in case of future dilutive offerings, subject to certain customary exempt transactions) as well as certain beneficial ownership limitations.
Pursuant to the terms of the CCI Agreement,2023 FirstFire Note, the partiesCompany agreed to enter into a business combination transaction (the “CCI Acquisition”), pursuant to which, among other things,pay accrued interest monthly as well as the Members will sellPrincipal Sum as follows: (i) $57,300 on September 21, 2023, (ii) 57,300 on October 21, 2023, (iii) $57,300 on November 21, 2023, (iv) $100,000 on December 21, 2023, (v) $100,000 on January 21, 2024, (vi) $100,000 on February 21, 2024, and assign to(vii) all remaining amounts owed under the 2023 FirstFire Note on the maturity date (each of the aforementioned payments are an “Amortization Payment”). If the Company allfails to make any Amortization Payment, then FirstFire shall have the right to convert the amount of their membership interestssuch respective Amortization Payment into shares of CCI,common stock as provided in exchange for a totalthe 2023 FirstFire Note at the lesser of (i) the then applicable conversion price under the 2023 FirstFire Note or (ii) 800,00085 restricted shares% of the lowest VWAP of the Company’s common stock (the “Exchange Shares”). The Exchange Shares will be apportioned amongon any trading day during the Members pro rata based on theirfive trading days prior to the 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.conversion date.
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 increasesThe Company may prepay the 2023 FirstFire Note at any time prior to the date that an event of default (as provided in the Company’s market cap valuation (“MCV”2023 FirstFire Note) occurs at an amount equal to the Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium) plus $750 for administrative fees. The 2023 FirstFire Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the 2023 FirstFire Note, the 2023 FirstFire Warrant, or SPA.
Upon the occurrence of any event of default, the 2023 FirstFire Note shall become immediately due and payable and the Company shall pay to FirstFire, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then outstanding plus accrued interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Event of Default, additional interest will accrue from the date of the Chalil Agreement, withEvent of Default at the following milestone bonus parameters:
The Company may also issuerate equal to Dr. Chalil equity awards as determinedthe lower of 16% per annum or the highest rate permitted by the Board of Directors.law.
The term2023 FirstFire Warrant is exercisable for five years from March 21, 2023, at an exercise price of $0.25 per share, subject to adjustment as provided in the 2023 FirstFire Warrant. The 2023 FirstFire Warrant also contains certain cashless exercise provisions as well as price protection provisions providing for adjustment of the Chalil Agreement ends on the earliernumber of (i) April 5, 2025, and (ii) the timeshares of common stock issuable upon exercise of the termination2023 FirstFire Warrants and the exercise price in case of Dr. Chalil’s employmentfuture dilutive offerings, subject to certain customary exempt transactions.
As additional consideration for the purchase of the 2023 FirstFire Note and pursuant to the terms of the Chalil Agreement. The termSPA, on March 22, 2023, the Company issued restricted shares of the Chalil Agreement will be automatically extended for one or more additional termsCompany’s common stock (the “Commitment Shares”) to FirstFire at closing. The SPA contains customary representations, warranties, and covenants of one year each unless either party provided noticethe Company, including, among other things and subject to certain exceptions, piggy-back registration rights with respect to the other partyCommitment Shares as well as the shares of their desirecommon stock underlying the 2023 FirstFire Note and the 2023 FirstFire Warrant. In addition to not renew at least 30 days prior to expirationthe beneficial ownership limitations provided in the 2023 FirstFire Note and the 2023 FirstFire Warrant, the sum of the then-current term.number of shares of common stock that may be issued under the SPA (including the Commitment Shares), the 2023 FirstFire Note, and 2023 FirstFire Warrant shall be limited to 10,000,000 shares as further described in the SPA, unless shareholder approval to exceed such limitation is obtained by the Company.
The Company may terminateOn April 21, 2023, the Chalil Agreement at any time for Cause (as definedcompany made a monthly interest-only payment to FirstFire 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.$5,730.
PromissoryRC Consulting Group SPA & Unsecured $70 Million Note Conversions
On December 14, 2021,April 26, 2023, the Company entered into a securities purchase agreement (the “RC SPA”), dated as of April 26, 2023, with RC Consulting Group LLC in favor of SCP Tourbillion Monaco or registered assigns (the “RC Noteholder”), pursuant to which the Company issued an unsecured 15-year promissory note to certain accredited institutional investors senior secured convertible notes,the RC Noteholder (the “RC Note”) with a maturity date of April 26, 2038, in the principal sum of $70,000,000, which notes are convertible into sharesamount represents the $57,000,000 purchase price plus a yield (non-compounding) of 1.52% (zero coupon) per annum from April 26, 2023 until the same becomes due and payable as provided in the RC Note. The RC Note may be prepaid as set forth in the RC Note and ranks pari passu with all unsecured indebtedness 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.Company.
Pursuant to the terms of the RC Note, at the RC Noteholder’s option, the sale, conveyance or disposition of all or substantially all of the Company’s assets, or the consolidation, merger or other business combination of the Company with or into any other person(s) when the Company is not the survivor will either: (i) be deemed to be an Event of Default (as defined in the RC Note) pursuant to which the Company will be required to pay to the RC Noteholder upon the consummation of and as a condition to such transaction an amount equal to the Default Amount (as hereinafter defined), or (ii) be treated pursuant to Section 1.6(b) of the RC Note.
The RC Note contains customary covenants for a transaction of this type. Among other things, so long as the RC Note is outstanding, the Company will not enter into any transaction or arrangement structured in accordance with, based upon, or related or pursuant to, in whole or in part, Section 3(a)(10) of the Securities Act of 1933, as amended (a “3(a)(10) Transaction”). In the event that the Company does enter into, or makes any issuance of common stock related to a 3(a)(10) Transaction while the RC Note is outstanding, a liquidated damages charge of 25% of the outstanding principal balance of the RC Note, but not less than $1,000,000, will be assessed and will become immediately due and payable to the RC Noteholder at its election in the form of a cash payment or added to the balance of the RC Note (under the RC Noteholder’s and the Company’s expectation that this amount will tack back to the date of issuance of the RC Note).
The RC Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the RC SPA or the RC Note.
Upon the occurrence of any Event of Default (as defined in the RC Note), the RC Note will become immediately due and payable, and the Company will pay to the RC Noteholder, in full satisfaction of its obligations thereunder, an amount equal to the principal amount then outstanding plus accrued interest (including any default interest) through the date of full repayment multiplied by 125% (collectively, the “Default Amount”), as well as all costs, including, without limitation, legal fees and expenses, of collection, all without demand, presentment or notice.
The RC SPA contains customary covenants, representations and warranties for a transaction of this type.
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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, 2021,2022, 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.
Novo Integrated Sciences, Inc. (“Novo Integrated” or the “Company”) 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 deliver,provide, or intend to deliver,provide, essential and differentiated solutions to the delivery of multidisciplinary primary health care and related services andwellness products through the integration of medical technology, interconnectivity, advanced therapeutics, diagnostic solutions, unique personalized product offerings, and rehabilitative science.
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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 how it will be delivered 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 | |
● | Second | |
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Innovation through science, combined with the integration of sophisticated, secure technology, assures Novo Integrated of continued cutting edge advancement in patient first platforms.
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.
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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.
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.
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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.PRO-DIP and PRO-DIP, LLCTerragenx support this Third Pillar. In December 2021, we wereOn March 15, 2022, PRO-DIP was issued U.S. Patent No. 11,273,965 by the U.S. Patent and Trademark Office on March 15, 2022. The ‘965 patent relates to PRO-DIP’s novel technology for manufacturing its oral supplement pouches. On April 4, 2022, NHL was granted a Natural Product Number (NPN) by Health Canada for IoNovo GO Iodine which is the Company’s forth iodine related product to recently be granted a proprietaryNPN by Health Canada following IoNovo Pure Iodine, IoNovo Iodide, and IoNovo for Kids pure aqueous iodine micronutrient delivered in an oral or nasal spray format for maximum impact and bioavailability.spray.
We have two reportable segments: healthcare services and product manufacturing and development.sales. During the quarter ended February 28,November 30, 2022, revenues from healthcare services and product manufacturingsales were 59% and development represented 65.3% and 34.7%23%, respectively, of the Company’s total revenues for the quarter. We expect the percentage of revenues generated from the product manufacturing and developmentsales segment to increase atcontinue as a greater rate thanpercentage compared to 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.
December 2021 Registered Direct OfferingRegistration Statement on Form S-1
On December 14, 2021,September 13, 2022, the Company entered intofiled a Securities Purchase Agreementregistration statement on Form S-1 (File No. 333-267401) (as amended, the “Registration Statement”). The Registration Statement relates to the Company’s proposed offer of up to 19,138,756 units (“Units”), with each Unit consisting of (i) one share of common stock, (ii) one warrant with a three-year term to purchase one share of common stock at an accredited institutional investor (the “Purchaser”exercise price of $1.045 per share (100% of the offering price per Unit) (“Three-Year Warrant”), and (iii) one warrant with a five-year term to purchase one share of common stock at an exercise price of $1.045 per share (100% of the offering price per Unit) (“Five-Year Warrant”) pursuant to whichon a best-efforts basis. The assumed public offering price is $1.045 per Unit. Each Three-Year Warrant and Five-Year Warrant will be immediately exercisable for one share of common stock at an assumed exercise price of $1.045 per share (not less than 100% of the public offering price of each Unit sold in the offering). The actual public offering price per Unit will be determined between the Company, agreed to issueMaxim Group LLC and the investors in the offering, and may be at a discount 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 sharescurrent market price of the Company’s common stock, under certain conditions (the “Notes”); and (ii) warrantsstock.
As indicated in the Registration Statement, the Company also proposes to purchase upoffer to 5,833,334 shareseach purchaser of Units that would otherwise result in the purchaser’s beneficial ownership exceeding 4.99% of the Company’s outstanding common stock (the “Warrants”immediately following the consummation of the offering, the opportunity to purchase Units consisting of one pre-funded warrant to purchase one share of common stock (“Pre-Funded Warrant”). The securities, including (in lieu of one share of common stock), one Three-Year Warrant and one Five-Year Warrant. Subject to limited exceptions, a holder of Pre-Funded Warrants will not have the right to exercise any portion of its Pre-Funded Warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% (or, at the election of the holder, such limit may be increased to up to 68,557,2489.99%) of the number of shares of common stock issuable upon conversion underoutstanding immediately after giving effect to such exercise. Each Pre-Funded Warrant will be exercisable for one share of common stock. The purchase price of each Unit including a Pre-Funded Warrant will be equal to the Notes and up to 5,833,334 sharesprice per Unit including one share of common stock, minus $0.01, and the remaining exercise price of each Pre-Funded Warrant will equal $0.01 per share. The Pre-Funded Warrants will be immediately exercisable (subject to the beneficial ownership cap) and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full. For each Unit including a Pre-Funded Warrant sold (without regard to any limitation on exercise set forth therein), the number of Units including a share of common stock offered will be decreased on a one-for-one basis. The common stock and Pre-Funded Warrants, if any, can each be purchased in the offering only with the accompanying Three-Year Warrant and Five-Year Warrant as part of a Unit, but the components of the Units will immediately separate upon issuance. The Company also proposes to register the common stock issuable from time to time upon exercise of the Pre-Funded Warrants, are being offered byThree-Year Warrants and Five-Year Warrants included in the Company pursuantUnits.
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There is no minimum number of Units or minimum aggregate amount of proceeds for the offering 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.close.
The Notes have an original issue discount of 10%, resulting in gross proceedsCompany expects to commence 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 rightsale of the Purchaser to extendsecurities as of the date under certain circumstances. The Companyon which the Registration Statement is declared effective by the SEC. No sales will make monthly payments on the first business day of each month commencing on the calendar month immediately following the sixth month anniversarybe made prior to effectiveness 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,Registration Statement. There can be no assurance that the Notes have a maximum 9.99% equity blocker. If an event of default occurs,Registration Statement will be declared effective by 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.SEC.
LA Fitness Canada AmendedCVI Investments, Inc. Waiver and Restated License Agreement & Amended and Restated GuarantyAmendment
On December 15, 2021, NHLOctober 13, 2022, the Company entered into an Amendeda Waiver and Restated Master Facility License AgreementAmendment (the “Amended“CVI Waiver and Restated Canada License Agreement”Amendment”) with LAF CanadaCVI Investments, Inc. (“CVI”). Pursuant to the terms of the CVI Waiver and Amendment, (i) the Company (“LA Fitness Canada”). The Amended and Restated Canada License Agreement had the effect of (i) removing NHL’s obligation to develop and openobtained a certain number of facilities within certain designated time periods; and (ii) revising the default provisions such that certain defaults will result only in terminationlimited waiver from CVI with respect to certain provisions of a specific facility, rather thanWarrant to Purchase Common Stock, dated as of December 14, 2021, issued by the Company to CVI (the “CVI Warrant”); (ii) the Company and CVI amended certain provisions of the license itself. AsCVI Warrant; (iii) the Company obtained a resultlimited waiver from CVI with respect to certain provisions of a Senior Secured Convertible Note, dated as of December 14, 2021, issued by the Company to CVI (the “CVI Note”); and (iv) the Company and CVI amended certain provisions of the AmendedCVI Note, all as more fully described below and Restated Canada License Agreement, NHL may continue to developas set forth in the CVI Warrant and open additional facilities for business.the CVI Note, as applicable.
Pursuant to the terms of the AmendedCVI Waiver and Restated Canada License Agreement,Amendment, the Company entered intoobtained a limited waiver from CVI with respect to the provisions of the CVI Warrant that certain Guaranty Agreement (the “Canada Guaranty”) dated December 15, 2021would have reduced the exercise price of the CVI Warrant upon the closing of the sale of the Company’s common stock by and between the Company Fitness International, LLC(the “Offering”) to be conducted as set forth in and LA Fitness Canada, pursuant to the prospectus contained in the Registration Statement on Form S-1 (File No. 333-267401) filed by the Company on September 13, 2022, as subsequently amended and as declared effective on October 13, 2022. In addition, the Company and CVI agreed to amend the CVI Warrant to provide that the exercise price of the CVI Warrant shall be the price at which the Company’s common stock is offered for sale in the Offering.
Also pursuant to the terms of the CVI Waiver and Amendment, the Company irrevocably guaranteedobtained a limited waiver from CVI with respect to the full, unconditional,provisions of the CVI Note that would have reduced the conversion price of the CVI Note upon the closing of the Offering. CVI also agreed to extend the date on which the Amortization Redemption Amount (as defined in the CVI Note) may be paid from October 14, 2022 to October 19, 2022. In addition, the Company and prompt payment and performance of all of NHL’s obligations and liabilities underCVI agreed to amend the Amended and Restated Canada License Agreement.CVI Note to provide that the conversion price set forth in the CVI Note shall be the price at which the Company’s common stock is being offered for sale in the Offering.
Stock Option Grant to Independent DirectorsHudson Bay Master Fund Ltd. Waiver and Amendment
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, beginningAlso 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.
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,October 13, 2022, the Company entered into a Membership Interest Purchase AgreementWaiver and Amendment (the “CCI Agreement”“Hudson Bay Waiver and Amendment”) bywith Hudson Bay Master Fund Ltd. (“Hudson Bay”). Pursuant to the terms of the Hudson Bay Waiver and amongAmendment, (i) the Company Clinical Consultants International LLC (“CCI”obtained a limited waiver from Hudson Bay with respect to certain provisions of a Warrant to Purchase Common Stock, dated as of December 14, 2021, issued by the Company to Hudson Bay (the “Hudson Bay Warrant”), each; (ii) the Company and Hudson Bay amended certain provisions of the membersHudson Bay Warrant; (iii) the Company obtained a limited waiver from Hudson Bay with respect to certain provisions of CCIa Senior Secured Convertible Note, dated as of December 14, 2021, issued by the Company to Hudson Bay (the “Members”“Hudson Bay Note”),; and Dr. Joseph Chalil as(iv) the representativeCompany and Hudson Bay amended certain provisions of the Members.Hudson Bay Note, all as more fully described below and as set forth in the Hudson Bay Warrant and the Hudson Bay Note, as applicable.
Pursuant to the terms of the CCI Agreement,Hudson Bay Waiver and Amendment, the partiesCompany obtained a limited waiver from Hudson Bay with respect to the provisions of the Hudson Bay Warrant that would have reduced the exercise price of the Hudson Bay Warrant upon the closing of the Offering. In addition, the Company and Hudson Bay agreed to enter into a business combination transaction (the “CCI Acquisition”), pursuantamend the Hudson Bay Warrant to which, among other things,provide that the Members will sell and assign toexercise price of the Company all of their membership interests of CCI, in exchange for a total of 800,000 restricted shares ofHudson Bay Warrant shall be the price at which the Company’s common stock (the “Exchange Shares”). The Exchange Shares will be apportioned amongis offered for sale in 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.Offering.
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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Also pursuant to the terms of the Hudson Bay Waiver and Amendment, the Company obtained a limited waiver from Hudson Bay with respect to the provisions of the Hudson Bay Note that would have reduced the conversion price of the Hudson Bay Note upon the closing of the Offering. Hudson Bay also agreed to extend the date on which the Amortization Redemption Amount (as defined in the Hudson Bay Note) may be paid from October 14, 2022 to October 19, 2022. In addition, the Company and Hudson Bay agreed to amend the Hudson Bay Note to provide that the conversion price set forth in the Hudson Bay Note shall be the price at which the Company’s common stock is being offered for sale in the Offering.
Restricted Stock Issuance for 2-year Independent Contractor AgreementsUnit Offering
On MarchOctober 18, 2022 (the “Closing Date”), the Company issued 50,000 restrictedsold an aggregate of 4,000,000 units (the “Units”) for an aggregate of $2,000,000, at a purchase price $0.50 per Unit (the “Offering”), consisting of (i) 4,000,000 shares (the “Shares”) of the Company’s common stock, (ii) warrants with a three-year term to purchase 4,000,000 shares of common stock as consideration forat an Independent Contractor Agreement.exercise price of $0.50 per share (the “Three Year Warrants”), and (iii) warrants with a five-year term to purchase 4,000,000 shares of common stock at an exercise price of $0.50 per share (the “Five Year Warrants” and together with the Three Year Warrants, the “Warrants”).
On March 18,October 13, 2022, the Company issued 25,000 restricted sharesentered into a Placement Agency Agreement (the “Placement Agency Agreement”) with Maxim Group LLC, as exclusive placement agent thereunder (the “Placement Agent”), pursuant to which the Placement Agent agreed to act as the Company’s exclusive placement agent to solicit offers to purchase the Units, and the Common Stock and Warrants forming part of common stock as considerationthe Units, offered by the prospectus (“Prospectus”) contained in the Registration Statement on Form S-1 (File No. 333-267401) declared effective by the Securities and Exchange Commission on October 13, 2022 (the “Registration Statement”). The Placement Agent did not purchase or sell any securities, nor was it required to arrange for an Independent Contractor Agreement.the purchase and sale of any specific number or dollar amount of securities, other than to use its “reasonable best efforts” to arrange for the sale of the securities by the Company. Accordingly, there was no minimum amount of proceeds that was a condition to closing of the Offering.
Closing of CCI Acquisition
On April 5, 2022, the CCI Acquisition closed. As a result, immediately after the Closing on April 5, 2022,The Offering resulted in gross proceeds to the Company owned 100%of approximately $2,000,000 before deducting the Placement Agent fees and related offering expenses, and excluding proceeds to the Company, if any, that may result from the future exercise of Warrants issued in the Offering which formed part 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”).Units. Pursuant to the terms of the CCIPlacement Agency Agreement, the Company expectspaid the Placement Agent a cash fee of $140,000 equal to appoint Dr. Chalil as a member7.0% of the Company’s Boardgross proceeds of Directorsthe Offering as well as reimbursed the Placement Agent for its accountable expenses, resulting in net proceeds to the near future.Company of $1,795,000.
Chalil Employment Agreement
In connection with Dr. Chalil’s appointment asUnder 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 ChalilPlacement Agency Agreement, the Company agreed to pay Dr. Chalil an annual base salarycertain restrictions on future stock offerings, including that during the 90-day period following the Closing Date, the Company will not issue (or enter into any agreement to issue) any shares of $400,000.common stock or common stock equivalents, subject to certain exceptions, and will not file any registration statements. In addition, during the 180-day period following the Closing Date and subject to certain exceptions, the Company is prohibited from entering into (i) a transaction that would result in the Company issuing common stock that has a variable conversion price, exercise price, or exchange rate, or such a price that would reset upon the occurrence of specified or contingent events; or (ii) a transaction in which the Company agrees to issue securities at a future determined price. Each of the Company’s officers, directors, and any holder of 10% or more of the outstanding common stock has agreed to pay Dr. Chalil an amount equala three-month “lock-up” with respect to 10%their shares of common stock, including securities that are convertible into, or exchangeable or exercisable for, shares of common stock. Subject to certain exceptions, during such lock-up period these holders may not offer, sell, pledge or otherwise dispose of these securities, without the prior written consent of the net incomePlacement Agent. The Placement Agency Agreement provides that the Placement Agent’s obligations were subject to conditions contained in the Placement Agency Agreement.
Each Warrant had an exercise price of CCI in excess of $450,000 for each calendar year during the term$0.50 per share and is exercisable upon issuance. As a result of the Chalil Agreement (the “Revenue Share Payment”).Company’s entry, on November 14, 2022, into the CVI Exchange Offer and Amendment (as hereinafter defined) and the Hudson Bay Exchange Offer and Amendment (as hereinafter defined), the exercise price of each Warrant was reduced to $0.10 per share. The Three Year Warrants and the Five Year Warrants will expire three years and five years from the date of issuance, respectively.
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:
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Each Warrant is exercisable for one share of common stock, subject to adjustment in the event of stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting the common stock as described in the Prospectus. Subject to certain exemptions outlined in the Three Year Warrants and Five Year Warrants, if the Company sells, enters into an agreement to sell, or grants any option to purchase, or sell, enters into an agreement to sell, or grants any right to reprice, or otherwise disposes of or issues (or announces any offer, sale, grant or any option to purchase or other disposition) any shares of common stock or Common Stock Equivalents (as defined in the Three Year Warrants and Five Year Warrants), at an effective price per share less than the exercise price of the Three Year Warrants or Five Year Warrants then in effect, the exercise price of the Three Year Warrants and Five Year Warrants will be reduced to equal the effective price per share in such dilutive issuance; provided, however, in no event will the exercise price of the Three Year Warrants and Five Year Warrants be reduced to an exercise price lower than $0.10. Additionally, on the date that is 60 calendar days immediately following the initial issuance date of the Three Year Warrants and Five Year Warrants, the exercise price will be reduced to the Reset Price (as hereinafter defined), provided that the Reset Price is less than the exercise price in effect on that date. The Company may also issue“Reset Price” is equal to Dr. Chalil equity awards as determinedthe greater of (a) 50% of the initial exercise price or (b) 100% of the lowest daily volume weighted average price per share of common stock (“VWAP”) occurring during the 60 calendar days following the issuance date of the Three Year Warrants and Five Year Warrants.
On October 13, 2022, the (i) conversion price of the Senior Secured Convertible Notes, and the (ii) exercise price per share of common stock under the warrants to purchase common stock, issued by the BoardCompany and held by CVI Investments, Inc. and Hudson Bay Master Fund Ltd. (the “Holders”) was reduced to $0.50 per share of Directors.common stock based on the offering price of each Unit in the Offering and in accordance with waivers by the Holders, as further described in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 14, 2022.
The termterms of the ChalilThree Year Warrants and Five Year Warrants are governed by a Warrant Agency Agreement ends on(the “Warrant Agency Agreement”), dated as of the earlierClosing Date, by and between the Company and Pacific Stock Transfer Company (the “Warrant Agent”). Pursuant to the terms of the Warrant Agency Agreement, the Company agreed to indemnify the Warrant Agent in its roles as transfer agent and warrant agent, its agents and each of its stockholders, directors, officers and employees against all liabilities, including judgments, costs and reasonable counsel fees that may arise out of acts performed or omitted for its activities in that capacity, except for any liability due to any gross negligence, willful misconduct or bad faith of the indemnified person or entity.
CVI Investments, Inc. Exchange Offer and Amendment
On November 14, 2022, the Company entered into an exchange offer and amendment (the “CVI Exchange Offer and Amendment”) with CVI. Pursuant to the terms of the CVI Exchange Offer and Amendment, (i) April 5, 2025,the Company exchanged one share of the Company’s common stock, for each share of common stock (the “CVI Warrant Exchange”) underlying the warrant to purchase common stock, dated as of December 14, 2021, issued by the Company to CVI (the “CVI Warrant”); and (ii) the timeCompany and CVI amended certain provisions of the terminationsenior secured convertible note, dated as of Dr. Chalil’s employmentDecember 14, 2021, issued by the Company to CVI (the “CVI Note”), all as more fully described below and as set forth in the CVI Warrant and the CVI Note, as applicable. On November 15, 2022 and January 5, 2023, 1,757,319 and 1,159,348 shares of common stock were issued under the terms and conditions of the CVI Warrant Exchange.
Pursuant to the terms of the CVI Exchange Offer and Amendment, the Company and CVI agreed to amend the CVI Note such that (i) the Company shall pay the interest originally payable in November 2022 and December 2022 upon execution of the CVI Exchange Offer and Amendment, (ii) the Company shall pay a $50,000 extension fee to CVI ($10,000 on January 15, 2023, $10,000 on February 14, 2023, $10,000 on March 14, 2023, $10,000 on April 14, 2023, and $10,000 on May 15, 2023), (iii) the payment dates for the principal originally payable in November 2022 and December 2022 shall be extended such that 1/5 of such respective principal amount shall instead be paid on each Amortization Date (as defined in the CVI Note) during January 2023, February 2023, March 2023, April 2023, and May 2023, in addition to the Amortization Redemption Amounts (as defined in the CVI Note) (the “Amortization Redemption Amounts”) due on the aforementioned dates in 2023.
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Also, pursuant to the terms of the Chalil Agreement. The termCVI Exchange Offer and Amendment, the Company agreed to hold an annual or special meeting of stockholders on or prior to the date that is 90 calendar days after November 14, 2022, for the purpose of obtaining shareholder approval (“Shareholder Approval”) to amend the CVI Note as follows:
(i) the definition of Conversion Price (as defined in the CVI Note) (the “Conversion Price”) shall be amended such that, as to the first $1,000,000 of principal amount of the Chalil AgreementCVI Note converted after the date that the Shareholder Approval is obtained, the Conversion Price shall be the lower of (i) the Conversion Price in effect at such time and (ii) 82.0% of the lowest VWAP (as defined in the CVI Note) during the five trading days immediately prior to the applicable conversion date (the “Adjusted Conversion Price”), provided, however, that the portion of the first $1,000,000 of principal amount of the CVI Note that is converted pursuant to a voluntary conversion by CVI shall reduce each of the remaining Amortization Redemption Amounts proportionately on a pro rata basis;
(ii) CVI may accelerate up to four Amortization Redemption Amounts (as defined in the Notes) provided that CVI agrees to accept shares of Common Stock instead of cash for such payments at a price per share equal to the Adjusted Conversion Price as calculated on the immediately preceding Amortization Date (as defined in the CVI Note)); and
(iii) upon mutual consent by the Company and CVI, CVI may elect to utilize the Adjusted Conversion Price for the balance of the Notes.
The CVI Exchange Offer and Amendment further provides that from November 14, 2022 until 30 days following November 14, 2022, neither the Company nor any of its subsidiaries shall (i) issue, enter into any agreement to issue or announce the issuance or proposed issuance of any Common Stock or any securities convertible or exchangeable into Common Stock, or (ii) enter into any agreement to amend, exchange or otherwise provide any incentive to exercise any of the warrants originally issued together with the Exchange Warrants or any other warrants of the Company that are outstanding on November 14, 2022, in each such case except with respect to certain exempt issuances.
Hudson Bay Master Fund Ltd. Exchange Offer and Amendment
Also, on November 14, 2022, the Company entered into an exchange offer and amendment (the “Hudson Bay Exchange Offer and Amendment”) with Hudson Bay. Pursuant to the terms of the Hudson Bay Exchange Offer and Amendment, (i) the Company exchanged one share of the Company’s common stock, for each share of common stock (the “Hudson Bay Warrant Exchange”) underlying the warrant to purchase common stock, dated as of December 14, 2021, issued by the Company to Hudson Bay (the “Hudson Bay Warrant”); and (ii) the Company and Hudson Bay amended certain provisions of the senior secured convertible note, dated as of December 14, 2021, issued by the Company to Hudson Bay (the “Hudson Bay Note”), all as more fully described below and as set forth in the Hudson Bay Warrant and the Hudson Bay Note, as applicable. On November 15, 2022, 2,916,667 shares of common stock were issued under the terms and conditions of the Hudson Bay Warrant Exchange.
Pursuant to the terms of the Hudson Bay Exchange Offer and Amendment, the Company and Hudson Bay agreed to amend the Hudson Bay Note such that (i) the Company shall pay the interest originally payable in November 2022 and December 2022 upon execution of the Hudson Bay Exchange Offer and Amendment, (ii) the Company shall pay a $50,000 extension fee to Hudson Bay ($10,000 on January 15, 2023, $10,000 on February 14, 2023, $10,000 on March 14, 2023, $10,000 on April 14, 2023, and $10,000 on May 15, 2023), (iii) the payment dates for the principal originally payable in November 2022 and December 2022 shall be extended such that 1/5 of such respective principal amount shall instead be paid on each Amortization Date (as defined in the Hudson Bay Note) during January 2023, February 2023, March 2023, April 2023, and May 2023, in addition to the Amortization Redemption Amounts (as defined in the Hudson Bay Note) (the “Amortization Redemption Amounts”) due on the aforementioned dates in 2023.
Also, pursuant to the terms of the Hudson Bay Exchange Offer and Amendment, the Company agreed to hold an annual or special meeting of stockholders on or prior to the date that is 90 calendar days after November 14, 2022, for the purpose of obtaining shareholder approval (“Shareholder Approval”) to amend the Hudson Bay Note as follows:
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(i) the definition of Conversion Price (as defined in the Hudson Bay Note) (the “Conversion Price”) shall be amended such that, as to the first $1,000,000 of principal amount of the Hudson Bay Note converted after the date that the Shareholder Approval is obtained, the Conversion Price shall be the lower of (i) the Conversion Price in effect at such time and (ii) 82.0% of the lowest VWAP (as defined in the Hudson Bay Note) during the five trading days immediately prior to the applicable conversion date (the “Adjusted Conversion Price”), provided, however, that the portion of the first $1,000,000 of principal amount of the Hudson Bay Note that is converted pursuant to a voluntary conversion by Hudson Bay shall reduce each of the remaining Amortization Redemption Amounts proportionately on a pro rata basis;
(ii) Hudson Bay may accelerate up to four Amortization Redemption Amounts (as defined in the Notes) provided that Hudson Bay agrees to accept shares of Common Stock instead of cash for such payments at a price per share equal to the Adjusted Conversion Price as calculated on the immediately preceding Amortization Date (as defined in the Hudson Bay Note)); and
(iii) upon mutual consent by the Company and Hudson Bay, Hudson Bay may elect to utilize the Adjusted Conversion Price for the balance of the Notes.
The Hudson Bay Exchange Offer and Amendment further provides that from November 14, 2022 until 30 days following November 14, 2022, neither the Company nor any of its subsidiaries shall (i) issue, enter into any agreement to issue or announce the issuance or proposed issuance of any Common Stock or any securities convertible or exchangeable into Common Stock, or (ii) enter into any agreement to amend, exchange or otherwise provide any incentive to exercise any of the warrants originally issued together with the Exchange Warrants or any other warrants of the Company that are outstanding on November 14, 2022, in each such case except with respect to certain exempt issuances.
Promissory Note Amortization and Extension Fee Payments
On November 14, 2022, as provided in the CVI Exchange Offer and Amendment, the Company made a cash payment, in the amount of $37,384, for the monthly interest owed on the CVI Note outstanding principal balance. On November 14, 2022, as provided in the Hudson Bay Exchange Offer and Amendment, the Company made a cash payment, in the amount of $33,056, for the monthly interest owed on the Hudson Bay Note outstanding principal balance.
On January 17, 2023, March 2, 2023, and March 14, 2023, the Company made an interest payment on the Hudson Bay Note, to Hudson Bay, in the amount of $8,333, $625, and $208, respectively. On January 17, 2023, March 2, 2023, and March 14, 2023, pursuant to the terms of the Hudson Bay Exchange Offer and Amendment, the Company paid, to Hudson Bay, extension fees in the amount of $10,000, $10,000, and $10,000, respectively. On March 24, 2023, the Company paid to Hudson Bay an aggregate of $70,069, representing the remaining principal balance on the Hudson Bay Note ($50,000), interest on the Hudson Bay Note ($69), and extension fees ($20,000). As of March 24, 2023, the Hudson Bay Note was paid in full and no amounts remain due and outstanding in respect of the Hudson Bay Note.
On March 14, 2023, the Company made a principal payment on the CVI Note, to CVI, in the amount of $6,111 and an interest payment on the CVI Note, to CVI, in the amount of $77. Also on March 14, 2023, pursuant to the terms of the CVI Exchange Offer and Amendment, the Company paid, to CVI, an extension fee in the amount of $30,000. On March 24, 2023, the Company paid to CVI an extension fee in the amount of $20,000. As of March 24, 2023, the CVI Note was paid in full and no amounts remain due and outstanding in respect of the CVI Note.
Share Issuances in Connection with Warrant Exercises
Subsequent to the three month period ended November 30, 2022, the Company issued an aggregate of 4,510,000 shares of common stock to certain warrant holders upon exercise of their warrants related to the Company’s Registration Statement on Form S-1 (File No. 333-267401) declared effective by the Securities and Exchange Commission on October 13, 2022.
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Share Issuances in Connection with Note Conversions
Subsequent to the three month period ended November 30, 2022, the Company issued an aggregate of 94,185,340 shares of common stock to certain note holders upon conversion of their notes. As of March 31, 2023, (i) the principal balance owed by the Company to Hudson Bay pursuant to the senior secured convertible note, dated as of December 14, 2021, as amended, issued by the Company to Hudson Bay is $0, (ii) the principal balance owed by the Company to CVI pursuant to the senior secured convertible note, dated as of December 14, 2021, as amended, issued by the Company to CVI is $0; and (iii) the principal balance owed by the Company to Jefferson pursuant to the secured convertible note, dated as of November 17, 2021, as amended, issued by the Company to Jefferson is $0.
Share Issuance in Exchange for Certain NHL Non-Voting Special Shares
Subsequent to the three month period ended November 30, 2022, the Company issued 3,202,019 shares of common stock in exchange for certain non-voting special shares of NHL, previously issued in connection with NHL’s acquisition of Acenzia that closed on June 24, 2021.
Nasdaq Notification—Minimum Bid Price Requirement
On November 21, 2022, the Company received a notification letter (the “November Notification Letter”) from The Nasdaq Stock Market, LLC (“Nasdaq”) that it is not in compliance with the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on The Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. Based on the closing bid price of the Company’s common stock between October 10, 2022 and November 11, 2022, the Company no longer meets the minimum bid price requirement. The November Notification Letter has no immediate effect on the listing or trading of the Company’s common stock on The Nasdaq Capital Market and, at this time, the common stock will continue to trade on The Nasdaq Capital Market under the symbol “NVOS.”
The November Notification Letter provides that the Company has 180 calendar days, or until May 22, 2023, to regain compliance with Nasdaq Listing Rule 5550(a)(2). To regain compliance, the bid price of the Company’s common stock must have a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days. If the Company does not regain compliance by May 22, 2023, an additional 180 days may be automatically extendedgranted to regain compliance, so long as the Company meets The Nasdaq Capital Market continued listing requirements (except for onethe bid price requirement) and notifies Nasdaq in writing of its intention to cure the deficiency during the second compliance period. If the Company does not qualify for the second compliance period or fails to regain compliance during the second 180-day period, then Nasdaq will notify the Company of its determination to delist the Company’s common stock, at which point the Company will have an opportunity to appeal the delisting determination to a hearings panel.
The Company intends to monitor the closing bid price of its common stock and will consider implementing available options to regain compliance with the minimum bid price requirement under the Nasdaq Listing Rules.
Information Statement on Schedule 14C
On January 4, 2023, the Company filed with the SEC a definitive information statement on Schedule 14C (the “14C”). The 14C relates to the notice to stockholders concerning the approval by written consent of stockholders holding a majority of the Company’s issued and outstanding voting securities (the “Majority Stockholders”) of the effectuation of the transactions provided for in each exchange offer and amendment entered into on November 14, 2022 by the Company (the “Exchange Offers and Amendments”) with CVI and Hudson Bay, including but not limited to the following amendments to the senior secured convertible notes, dated as of December 14, 2021, issued by the Company to CVI and Hudson (the “Notes”):
(i) the definition of Conversion Price (as defined in the Notes) (the “Conversion Price”) shall be amended such that, as to the first $1,000,000 of principal amount of each of the Notes converted after the date that shareholder approval is obtained, the Conversion Price shall be the lower of (i) the Conversion Price in effect at such time and (ii) 82.0% of the lowest VWAP (as defined in Notes) during the five trading days immediately prior to the applicable conversion date (the “Adjusted Conversion Price”), provided, however, that the portion of the first $1,000,000 of principal amount of each of the Notes that is converted pursuant to a voluntary conversion by the holders of each of the Notes shall reduce each of the remaining Amortization Redemption Amounts proportionately on a pro rata basis;
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(ii) Each of the holders of the Notes may accelerate up to four Amortization Redemption Amounts (as defined in the Notes) provided that such holder agrees to accept shares of Common Stock instead of cash for such payments at a price per share equal to the Adjusted Conversion Price as calculated on the immediately preceding Amortization Date (as defined in the Notes)); and
(iii) upon mutual consent by the Company and each of the holders of the Notes, such holder may elect to utilize the Adjusted Conversion Price for the balance of the Notes.
Accordingly, the Majority Stockholders approved, by written consent, the issuance of the total number of shares of Company common stock of the Company necessary to effectuate the Exchange Offers and Amendments, which is currently an indeterminate number due to the methodology of the conversion pricing as described herein and in the Exchange Offers and Amendments.
Stockholder approval of the Exchange Offers and Amendments was required by Rule 5635(d) of The Nasdaq Stock Market, which requires stockholder approval prior to a 20% issuance of securities at a price that is less than the Minimum Price (as defined in the information statement) in a transaction other than a public offering. A 20% issuance is a transaction, other than a public offering, involving the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable for common stock), which alone or together with sales by officers, directors or substantial stockholders of the company, equals 20% or more additional terms of one year each unless either party provided noticethe common stock or 20% or more of the voting power outstanding before the issuance.
Such approval and consent by the Majority Stockholders constitute the approval and consent of a majority of the total number of shares of the Company’s outstanding voting stock and is sufficient under the Nevada Revised Statutes, the Company’s Amended and Restated Articles of Incorporation, as amended, and the Company’s Bylaws to approve the Exchange Offers and Amendments. Accordingly, the actions will not be submitted to the other partystockholders of their desirethe Company for a vote, and the information statement has been furnished to such other stockholders to provide them with certain information concerning the actions in accordance with the requirements of the Exchange Act, and the regulations promulgated under the Exchange Act, including Regulation 14C.
As of May 18, 2023, (i) the principal balance owed by the Company to Hudson Bay pursuant to the senior secured convertible note, dated as of December 14, 2021, as amended, issued by the Company to Hudson Bay is $0, and (ii) the principal balance owed by the Company to CVI pursuant to the senior secured convertible note, dated as of December 14, 2021, as amended, issued by the Company to CVI is $0. See “—Share Issuances in Connection with Note Conversions.”
Jefferson Street Letter Agreement
As previously disclosed, on June 1, 2022, the Company and Jefferson agreed to extend the maturity date of the Jefferson Note to November 29, 2022 with a principal amount face value of $946,875 and interest rate that shall accrue at a rate equal to 1% per annum. On December 2, 2022, the Company made a partial payment of $200,000 toward principal and interest owed on the Jefferson Note, leaving a balance of $746,875. On December 13, 2022, the Company, Terra and Jefferson entered into a letter agreement. Pursuant to the terms of the letter agreement, Jefferson agreed to forbear from entering an event of default under the terms of the Jefferson Note and related transaction documents until December 29, 2022. In addition, the parties agreed to release the Collateral Shares to Jefferson. Effective February 16, 2023, the Jefferson Note has been paid in full.
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Nasdaq Notification—Delinquent Form 10-K and Form 10-Q Filings
On December 15, 2022, the Company received a notification letter (the “December Notification Letter”) from Nasdaq that it was not renewin compliance with Nasdaq’s continued listing rules due to its failure to timely file its Annual Report on Form 10-K for the fiscal year ended August 31, 2022 (the “2022 10-K”). On January 25, 2023, the Company received a notification letter (the “January Notification Letter”) from Nasdaq advising the Company that it was not in compliance with Nasdaq’s continued listing requirements as a result of its failure to timely file the 2022 10-K and its Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2022 (the “Form 10-Q”). On February 13, 2023, the Company submitted a plan to regain compliance with Nasdaq’s continued listing rules with respect to the 2022 10-K and the Form 10-Q. If Nasdaq accepted the Company’s plan, then Nasdaq could grant an exception of up to 180 calendar days from the due date of the 2022 10-K to regain compliance. On February 17, 2023 and March 22, 2023, based on Nasdaq’s further review, Nasdaq granted an exception to enable the Company to regain compliance with Nasdaq’s continued listing rules. The terms of the exception are as follows: on or before May 29, 2023, the Company must file the 2022 10-K, the Form 10-Q, and any other filings required by Nasdaq Listing Rule 5250(c)(1). The Company filed the 2022 10-K on April 3, 2023.
SwagCheck Agreement
On December 23, 2022, the Company, SwagCheck Inc. (“SWAG”), and all SWAG shareholders (collectively, the “SWAG Shareholders”) entered into that certain Share Purchase Agreement (the “SWAG Agreement”). Pursuant to the terms of the SWAG Agreement, the Company agreed to purchase, and the SWAG Shareholders agreed to sell to the Company, 100% of the outstanding shares of SWAG in exchange for $1.00 (the “SWAG Purchase”). SWAG holds a specific right of purchase of a precious gem collection (the “Gems”) as provided for in an agreement between SWAG and a Court-appointed Successor Receiver for the United States District Court for the Central District of California (the “Receiver”).
The parties have made customary representations, warranties and covenants in the SWAG Agreement. In addition to certain customary closing conditions, the obligations of SWAG and the SWAG Shareholders to consummate the closing of the SWAG Purchase are subject to the satisfaction (or waiver by any of SWAG or the SWAG Shareholders), at or before the closing date, of certain conditions, including that (i) the Company will have received a financing commitment of at least $90 million by December 27, 2022, with a closing date no later than December 30, 2022, (ii) $60 million will be distributed directly to a Receiver for the purchase of the Gems by SWAG, and (iii) $30 million is a Mark-up to be distributed for the benefit of the outgoing SWAG Shareholders.
In addition to certain customary closing conditions in the SWAG Agreement, the obligations of SWAG and the SWAG Shareholders to consummate the closing of the SWAG Purchase were subject to the satisfaction (or waiver by any of SWAG or the SWAG Shareholders), at or before the closing date, of certain conditions, including that (i) the Company will have provided SWAG with a binding letter of intent (a “LOI”) by a competent financing party for financing in the amount of at least $90 million by December 27, 2022 with a closing date no later than December 30, 2022, (ii) $60 million will be distributed directly to the Receiver for the purchase of the Gems by SWAG, and (iii) $30 million is a mark-up to be distributed for the benefit of the outgoing SWAG Shareholders.
On December 30, 2022, the Company, SWAG and the SWAG Shareholders entered into Amendment No. 1 to the SWAG Agreement (the “SWAG Amendment”). Pursuant to the terms of the SWAG Amendment, the parties agreed as follows:
● | The closing of the SWAG Purchase will occur no later than January 10, 2023, with all contemplated extensions being subject to the Receiver’s stipulations, conditions, and limitations. | |
● | The condition for the Company to provide SWAG with a binding LOI has been deleted. | |
● | A total of $92 million will be distributed as follows: (i) $60 million will be distributed to the Receiver for the purchase of the Gems by SWAG, and (ii) a $32 million mark-up will be distributed directly for the benefit of the outgoing SWAG Shareholders. |
Although the SWAG Agreement has not yet closed, the parties continue to work together with the intention of closing the transaction. Following the closing of SWAG Purchase, SWAG will be a wholly owned subsidiary of the Company and will own title to the Gems, which the Company intends to either collateralize or sell to raise capital.
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Mast Hill Securities Purchase Agreement & Note
On February 23, 2023, the Company entered into a securities purchase agreement (the “Mast Hill SPA”) with Mast Hill Fund, L.P. (“Mast Hill”), pursuant to which the Company issued an 12% unsecured promissory note (the “Mast Hill Note”) with a maturity date of February 23, 2024 (the “Mast Hill Maturity Date”), in the principal sum of $573,000 (the “Mast Hill Principal Sum”). In addition, the Company issued a common stock purchase warrant for the purchase of up to 1,000,000 shares of the Company’s common stock (the “Mast Hill Warrant”) to Mast Hill pursuant to the Mast Hill SPA. Pursuant to the terms of the Mast Hill Note, the Company agreed to pay the Mast Hill Principal Sum to Mast Hill and to pay interest on the principal balance at the rate of 12% per annum. The Mast Hill Note carries an OID of $57,300. Accordingly, on the closing date, Mast Hill paid the purchase price of $515,700 in exchange for the Mast Hill Note and the Mast Hill Warrant. Mast Hill may convert the Mast Hill Note into shares of the Company’s common stock at any time at a conversion price equal to $0.175 per share, subject to adjustment as provided in the Mast Hill Note (including but not limited to certain price protection provisions in case of future dilutive offerings, subject to certain customary exempt transactions) as well as certain beneficial ownership limitations.
Pursuant to the terms of the Mast Hill Note, the Company agreed to pay accrued interest monthly as well as the Mast Hill Principal Sum as follows: (i) $57,300 on August 23, 2023, (ii) 57,300 on September 23, 2023, (iii) $57,300 on October 23, 2023, (iv) $100,000 on November 23, 2023, (v) $100,000 on December 23, 2023, (vi) $100,000 on January 23, 2023, and (vii) all remaining amounts owed under the Mast Hill Note on the Mast Hill Maturity Date (each of the aforementioned payments are an “Amortization Payment”). If the Company fails to make any Amortization Payment, then Mast Hill shall have the right to convert the amount of such respective Amortization Payment into shares of common stock as provided in the Mast Hill Note at the lesser of (i) the then applicable conversion price under the Mast Hill Note, or (ii) 85% of the lowest VWAP of the Company’s common stock on any trading day during the five trading days prior to expiration of the then-current term.respective conversion date.
The Company may terminateprepay the Chalil AgreementMast Hill Note at any time for Causeprior to the date that an Event of Default (as defined in the Chalil Agreement) or without Cause, and Dr. Chalil may terminate the Chalil AgreementMast Hill Note) occurs 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 greaterMast Hill Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium) plus $750 for administrative fees. The Mast Hill Note contains customary events of (1) the base salary that would have been paiddefault relating to, Dr. Chalil for the remainderamong other things, payment defaults, breach of representations and warranties, and breach of provisions 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.Mast Hill Note, Mast Hill Warrant, or Mast Hill SPA.
PromissoryUpon the occurrence of any Event of Default, the Mast Hill Note Conversionsshall become immediately due and payable and the Company shall pay to Mast Hill, in full satisfaction of its obligations hereunder, an amount equal to the Mast Hill Principal Sum then outstanding plus accrued interest multiplied by 125%. Upon the occurrence of an Event of Default, additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 16% per annum or the highest rate permitted by law.
The Mast Hill Warrant is exercisable for five years from February 23, 2023, at an exercise price of $0.25 per share, subject to adjustment as provided in the Mast Hill Warrant. The Mast Hill Warrant also contains certain cashless exercise provisions as well as price protection provisions providing for adjustment of the number of shares of the Company’s common stock issuable upon exercise of the Mast Hill Warrant and the exercise price in case of future dilutive offerings, subject to certain customary exempt transactions.
As additional consideration for the purchase of the Mast Hill Note and pursuant to the terms of the Mast Hill SPA, on February 24, 2023, the Company issued 955,000 restricted shares of common stock (the “Commitment Shares”) to Mast Hill at closing. The Mast Hill SPA contains customary representations, warranties, and covenants of the Company, including, among other things and subject to certain exceptions, piggy-back registration rights with respect to the Commitment Shares as well as the shares of common stock underlying the Mast Hill Note and the Mast Hill Warrant. In addition to the beneficial ownership limitations provided in the Mast Hill Note and the Mast Hill Warrant, the sum of the number of shares of common stock that may be issued under the Mast Hill SPA (including the Commitment Shares), the Mast Hill Note, and the Mast Hill Warrant shall be limited to 19.99% of the issued and outstanding common stock on the closing date (equal to 27,720,448 shares) as further described in the Mast Hill SPA, unless shareholder approval to exceed such limitation is obtained by the Company.
On March 23, 2023, the Company made a monthly interest-only payment to Mast Hill in the amount of $5,086. On April 24, 2023, the Company made a monthly interest-only payment to Mast Hill in the amount of $5,840.
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March 2023 FirstFire Securities Purchase Agreement, Note & Warrant
On December 14, 2021,March 21, 2023, the Company entered into a securities purchase agreement (the “SPA”) with FirstFire, pursuant to which the Company issued an 12% unsecured promissory note (the “2023 FirstFire Note”) with a maturity date of March 21, 2024, in the principal sum of $573,000 (the “Principal Sum”). In addition, the Company issued a common stock purchase warrant for the purchase of up to certain accredited institutional investors senior secured convertible notes, which notes are convertible into1,000,000 shares of the Company’s common stock under certain conditions. Between March 1, 2022(the “2023 FirstFire Warrant”) to FirstFire pursuant to the SPA. Pursuant to the terms of the 2023 FirstFire Note, the Company agreed to pay the Principal Sum to FirstFire and April 11, 2022 of this Quarterly Report on Form 10-Q, an aggregate of $305,000 in principal of these notes and $889 into pay interest on these notes was converted, resultingthe principal balance at the rate of 12% per annum. The 2023 FirstFire Note carries an OID of $57,300. Accordingly, on the closing date, FirstFire paid the purchase price of $515,700 in exchange for the 2023 FirstFire Note and the 2023 FirstFire Warrant. FirstFire may convert the 2023 FirstFire Note into the Company’s common stock at any time at a conversion price equal to $0.175 per share, subject to adjustment as provided in the issuance by2023 FirstFire Note (including but not limited to certain price protection provisions in case of future dilutive offerings, subject to certain customary exempt transactions) as well as certain beneficial ownership limitations.
Pursuant to the terms of the 2023 FirstFire Note, the Company agreed to pay accrued interest monthly as well as the Principal Sum as follows: (i) $57,300 on September 21, 2023, (ii) 57,300 on October 21, 2023, (iii) $57,300 on November 21, 2023, (iv) $100,000 on December 21, 2023, (v) $100,000 on January 21, 2024, (vi) $100,000 on February 21, 2024, and (vii) all remaining amounts owed under the 2023 FirstFire Note on the maturity date (each of the aforementioned payments are an aggregate“Amortization Payment”). If the Company fails to make any Amortization Payment, then FirstFire shall have the right to convert the amount of 152,948such respective Amortization Payment into shares of common stock upon such conversions.as provided in the 2023 FirstFire Note at the lesser of (i) the then applicable conversion price under the 2023 FirstFire Note or (ii) 85% of the lowest VWAP of the Company’s common stock on any trading day during the five trading days prior to the respective conversion date.
The Company may prepay the 2023 FirstFire Note at any time prior to the date that an event of default (as provided in the 2023 FirstFire Note) occurs at an amount equal to the Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium) plus $750 for administrative fees. The 2023 FirstFire Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the 2023 FirstFire Note, the 2023 FirstFire Warrant, or SPA.
Upon the occurrence of any event of default, the 2023 FirstFire Note shall become immediately due and payable and the Company shall pay to FirstFire, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then outstanding plus accrued interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Event of Default, additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 16% per annum or the highest rate permitted by law.
The 2023 FirstFire Warrant is exercisable for five years from March 21, 2023, at an exercise price of $0.25 per share, subject to adjustment as provided in the 2023 FirstFire Warrant. The 2023 FirstFire Warrant also contains certain cashless exercise provisions as well as price protection provisions providing for adjustment of the number of shares of common stock issuable upon exercise of the 2023 FirstFire Warrants and the exercise price in case of future dilutive offerings, subject to certain customary exempt transactions.
As additional consideration for the purchase of the 2023 FirstFire Note and pursuant to the terms of the SPA, on March 22, 2023, the Company issued 955,000 restricted shares of the Company’s common stock (the “Commitment Shares”) to FirstFire at closing. The SPA contains customary representations, warranties, and covenants of the Company, including, among other things and subject to certain exceptions, piggy-back registration rights with respect to the Commitment Shares as well as the shares of common stock underlying the 2023 FirstFire Note and the 2023 FirstFire Warrant. In addition to the beneficial ownership limitations provided in the 2023 FirstFire Note and the 2023 FirstFire Warrant, the sum of the number of shares of common stock that may be issued under the SPA (including the Commitment Shares), the 2023 FirstFire Note, and 2023 FirstFire Warrant shall be limited to 10,000,000 shares as further described in the SPA, unless shareholder approval to exceed such limitation is obtained by the Company.
On April 21, 2023, the Company made a monthly interest-only payment to FirstFire in the amount of $5,730.
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RC Consulting Group SPA & Unsecured $70 Million Note
On April 26, 2023, the Company entered into a securities purchase agreement (the “RC SPA”), dated as of April 26, 2023, with RC Consulting Group LLC in favor of SCP Tourbillion Monaco or registered assigns (the “RC Noteholder”), pursuant to which the Company issued an unsecured 15-year promissory note to the RC Noteholder (the “RC Note”) with a maturity date of April 26, 2038, in the principal sum of $70,000,000, which amount represents the $57,000,000 purchase price plus a yield (non-compounding) of 1.52% (zero coupon) per annum from April 26, 2023 until the same becomes due and payable as provided in the RC Note. The RC Note may be prepaid as set forth in the RC Note and ranks pari passu with all unsecured indebtedness of the Company.
Pursuant to the terms of the RC Note, at the RC Noteholder’s option, the sale, conveyance or disposition of all or substantially all of the Company’s assets, or the consolidation, merger or other business combination of the Company with or into any other person(s) when the Company is not the survivor will either: (i) be deemed to be an Event of Default (as defined in the RC Note) pursuant to which the Company will be required to pay to the RC Noteholder upon the consummation of and as a condition to such transaction an amount equal to the Default Amount (as hereinafter defined), or (ii) be treated pursuant to Section 1.6(b) of the RC Note.
The RC Note contains customary covenants for a transaction of this type. Among other things, so long as the RC Note is outstanding, the Company will not enter into any transaction or arrangement structured in accordance with, based upon, or related or pursuant to, in whole or in part, Section 3(a)(10) of the Securities Act of 1933, as amended (a “3(a)(10) Transaction”). In the event that the Company does enter into, or makes any issuance of common stock related to a 3(a)(10) Transaction while the RC Note is outstanding, a liquidated damages charge of 25% of the outstanding principal balance of the RC Note, but not less than $1,000,000, will be assessed and will become immediately due and payable to the RC Noteholder at its election in the form of a cash payment or added to the balance of the RC Note (under the RC Noteholder’s and the Company’s expectation that this amount will tack back to the date of issuance of the RC Note).
The RC Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the RC SPA or the RC Note.
Upon the occurrence of any Event of Default (as defined in the RC Note), the RC Note will become immediately due and payable, and the Company will pay to the RC Noteholder, in full satisfaction of its obligations thereunder, an amount equal to the principal amount then outstanding plus accrued interest (including any default interest) through the date of full repayment multiplied by 125% (collectively, the “Default Amount”), as well as all costs, including, without limitation, legal fees and expenses, of collection, all without demand, presentment or notice.
The RC SPA contains customary covenants, representations and warranties for a transaction of this type.
For the three months ended February 28,November 30, 2022 compared to the three months ended February 28,November 30, 2021
Revenues for the three months ended February 28,November 30, 2022 were $2,869,223,$3,419,280, representing an increase of $793,329,$257,353, or 38.2%8.1%, from $2,075,894$3,161,927 for the same period in 2021. The increase in revenue is principally due to the acquisitionan increase in outsourced product sales which resulted in an increase in revenue of Acenzia, Inc. in June 2021 and Terragenx in November 2021.$607,589. Acenzia’s and Terragenx’Terragenx’s revenue for the three months ended February 28,November 30, 2022 was $749,345$777,229 and $245,658,$9,157 , respectively. Revenue from our healthcare services decreased by 9.7%7.3% when comparing the revenue for the three months ended February 28,November 30, 2022 to the same period in 2021 primarily due to a COVID-19 surge in Ontario province Canada and COVID-19 staffing related shortages limiting clinic and eldercare patient-practitioner direct personal interaction.
Cost of revenues for the three months ended February 28,November 30, 2022 were $1,652,869,$1,679,747, representing an increasea decrease of $328,421$215,714 or 24.8%11.4%, from $1,324,448$1,895,461 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 for our healthcare and product sales segments was 57.6%61.2% and 56.0%, respectively, for the three months ended February 28, 2022 and 63.8%November 30, 2022. The cost of revenue for our healthcare segment was 63.3% for same period in 2021. The decrease in cost of revenues as a percentage of revenue for our healthcare segment is principally due to revenue generated by Acenzia and Terragenx that had a cost of revenue of approximately 46%.the decrease in related revenues.
Operating costs for the three months ended February 28,November 30, 2022 were $3,337,030,$3,981,493, representing an increase of $1,259,640,$1,351,368, or 60.6%51.4%, from $2,077,390$2,630,125 for the same period in 2021. The increase in operating costs is principally due to the increase in overhead expenses associated with the acquisitionsoperations of Acenzia, PRO-DIP, and Terragenx which was approximately $1,133,000$902,756 for the three months ended February 28,November 30, 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. AnAlso, an increase in legal and professional fees also contributed to the increase in operating expenses.
Interest expense for the three months ended February 28,November 30, 2022 was $1,226,182,$167,243, representing an increase of $1,203,234,$98,513, or 5,243%143.3%, from $22,948$68,730 for the same period in 2021. The increase is due to issuance ofissued and unpaid convertible notes for $1,875,000 inas of 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 $4,415,000.30, 2022.
Amortization of debt discount for the three months ended February 28,November 30, 2022 was $1,463,022,$1,490,513, representing an increase of $1,463,022$1,432,673 from $0$57,840 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,November 30, 2022 was $66,814$39,301 compared to $0$334,554 for the same period in 2021. Acenzia and Terragenx both havePrior period balance related to the 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,November 30, 2022 was $4,805,167,$3,935,413, representing an increase of $3,465,297,$2,128,826, or 258.6%117.8%, from $1,339,870$1,806,587 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 acquisitionsoperations of Acenzia, PRO-DIP, and Terragenx which was approximately $1,133,000$902,756 for the three months ended February 28,November 30, 2022, (iii)(ii) an increase in interest expense, and (iv) in(iii) an 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.
Liquidity and Capital Resources
As shown in the accompanying unaudited condensed consolidated financial statements, for the sixthree months ended February 28,November 30, 2022, the Company had a net loss of $6,684,599.$3,936,736.
During the sixthree months ended February 28,November 30, 2022, the Company used cash in operating activities of $3,009,732$278,237 compared to $429,772$759,103 of cash used in operating activities for the same period in 2021. The principal reason for the increasedecrease 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 sixthree months ended February 28,November 30, 2022, the Company used cash from investing activities of $163,245$nil 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 used from the acquisition of Terragenx.
During the six months ended February 28, 2022, the Company provided cash from financinginvesting activities of $10,839,716 compared to $21,277$91,106 for the same period in 2021. The principal reason for the increasechange is due to the no property and equipment purchases in the three months ended November 30, 2022 compared to the same period in 2021.
During the three months ended November 30, 2022, the Company used cash in financing activities of $1,034,021 compared to $1,399,785 of cash provided by financing activities for the same period in 2021. The principal reason for the decrease in cash provided by financing activities was the repayment of related party payables of $48,480, repayment of finance leases of $2,763, and repayment of convertible notes of $2,777,778, offset by proceeds received from the sale of units, net of issuance costs of $1,795,000. In 2021, the Company received $1,410,000 from the issuance of convertible notes payable in November 2021 and December 2021 for net proceeds of $15,270,000.notes.
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,November 30, 2022, all corporate clinics were open and fully operational, with staffing shortages in some facilities due to ongoing COVID-19 residual impact, 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, PRO-DIP, and PRO-DIP, LLC (“PRO-DIP”)CCI are open and fully operational, with staffing shortages due to ongoing COVID-19 residual impact, while following all local, state, provincial, and national guidelines and protocols related to minimizing the spread of the COVID-19 pandemic.
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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,November 30, 2022. Accordingly, the Company has decided to delay commencing the projects until the 20222023 grow season. These joint ventures relate to the development, management, and arrangement of medicinal farming projects involving industrial hemp for medicinal Cannabidiolcannabidiol (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 quarterthree month period ended February 28,November 30, 2022, the Company’s total revenue from all clinic and eldercare related contracted services was $1,873,677,$2,021,213, representing a 7.3% decrease of $202,317$158,410 compared to $2,075,894$2,179,623 during the same period in 20212021. This decrease is primarily due to a 2022 COVID-19 surge in Ontario province Canada and COVID-19 staffing related shortages limiting clinic and eldercare patient-practitioner direct personal interaction.
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 condensed consolidated 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 going concern assessment, 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.
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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,$170,396, 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.$113,597.
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) |
Intellectual property | 7 years |
Customer relationships | 5 years |
Brand names | 7 |
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,$502,022, 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.$334,681.
Long-Lived Assets
The Company applies the provisions of the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”)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 condensed 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.
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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. (“APKA”) during the fiscal year ended August 31, 2017, Executive Fitness Leaders (“EFL”) during the fiscal year ended August 31, 2018, Action Plus Physiotherapy Rockland (“Rockland”) during the fiscal year ended August 31, 2019, and Acenzia, Inc. (“Acenzia”) during fiscal year ended August 31, 2021.2021, and 1285 Canada, and Fairway Physiotherapy and Sports Injury Clinic (“Fairway”) during fiscal year ended August 31, 2022. As of August 31, 2022, the Company performed the required impairment reviews and determined that an impairment charge of $1,357,043 related to the goodwill for Acenzia was necessary. The Company determined that the carrying value was in excess of the expected fair value of discounted cash flows based on the current market and business environments, resulting in the need for impairment. The impairment was determined based on the discounted cash flow valuation model and the projected future cash flows of the underlying business. Based on its review at November 30, 2022, the Company believes there was no additional impairment of its goodwill.
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 condensed consolidated 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.
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Revenue Recognition
The Company’s revenue recognition reflects the updated accounting policies as per the requirements of the FASB’s Accounting Standards Update (“ASU”)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 | |
● | Product sales |
In arrangements where another party is involved in providing specified services to a customer, the Company evaluates whether it is the principal or agent. In this evaluation, the Company considers if the Company obtains control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price. For product sales where the Company is not the principal, the Company recognizes revenue on a net basis. For the periods presented, revenue for arrangements where the Company is the agent was not material.
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.
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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 and the functional currency of the Parent is the United States. dollar. Translation gains (losses) are classified as an item of other comprehensive income in the stockholders’ equity section of the condensed consolidated balance sheets.sheet.
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.
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,November 30, 2022. Based upon such evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that, as of February 28,November 30, 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 quarterperiod ended February 28,November 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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,October 26, 2022, the Company issued 50,00036,222 restricted shares of common stock as considerationissued for NHL Exchangeable Shares under the terms and conditions of a ConsultingShare Exchange Agreement dated December 20,which closed on June 24, 2021.
On January 24,November 15, 2022, the Company issued 25,000 restricted4,673,986 shares of common stock as considerationpursuant to exchange 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.underlying certain warrants.
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.
ITEM 6. EXHIBITS
* Filed herewith.
** Furnished herewith
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: | By: | /s/ Robert Mattacchione |
Robert Mattacchione | ||
Chief Executive Officer (principal executive officer) | ||
Dated: May 24, 2023 | By: | /s/ James Zsebok |
James Zsebok | ||
Principal Financial Officer (principal financial officer and principal accounting officer) |