NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
For the Years Ended August 31,
2017 and 2016
Note
1 - Organization and Basis of Presentation
Organization
and Line of Business
Novo
Integrated Sciences, Inc. 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 Sciences, Inc. and its consolidated subsidiaries.
We
provide specialized physiotherapy, chiropractic care, occupational therapy, eldercare, laser therapeutics, massage therapy, acupuncture,
chiropodist, neurological functions, kinesiology and dental services to our clients. Our multi-disciplinary primary healthcare
services and protocols are directed at assessment, treatment, management, rehabilitation and prevention through our 14 corporate
owned clinics, 150 affiliate clinics, retirement homes, long-term care facilities and institutional locations throughout Canada.
Directly and indirectly through our contractual relationships, we provide our specialized services to over 300,000 patients annually.
No employee of the Company or any of its subsidiaries practices primary care medicine and the Company’s services do not
require a medical or nursing license.
On
April 25, 2017 (the “Effective Date”), the Company entered into a Share Exchange Agreement (the “Share Exchange
Agreement”) by and between (i) the Company; (ii) 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, the Company 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 the Company to the NHL Shareholders
of shares of the Company’s common stock, such that following the closing of the Share Exchange Agreement, the NHL Shareholders
would own 167,797,406 restricted shares of Company common stock, representing 85% of the issued and outstanding Company common
stock, calculated including all granted and issued options or warrants to acquire the Company common stock as of the Effective
Date, but to exclude shares of Company common stock that are subject to a then-current Regulation S offering that was undertaking
by the Company (the “Exchange”).
On
May 9, 2017, the Exchange closed and, as a result, NHL became a wholly owned subsidiary of Novo Integrated Sciences, Inc.
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 $6,904.
On
May 9, 2017, our Board of Directors determined, in connection with the closing of the Exchange, to change our fiscal year end
from December 31 to August 31, but did not memorialize such determination in writing. On July 17, 2017, the Board ratified and
memorialized in writing its May 9, 2017 determination regarding the change in fiscal year end.
Basis
of Presentation
The
accompanying consolidated financial statements were prepared in conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”). The Company’s functional currency is the Canadian Dollar (“CAD”);
however, the accompanying consolidated financial statements were translated and presented in United States Dollars (“$”
or “USD”).
NOVO INTEGRATED SCIENCES, INC.
(formerly Turbine Truck Engines,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
For the Years Ended August 31,
2017 and 2016
Foreign
Currency Translation
The
accounts of the Company are maintained in CAD. The accounts of the Company are translated into USD in accordance with ASC Topic
830
Foreign Currency Transaction
, with the CAD as the functional currency. According to 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 statement of operations and
comprehensive income. The following table details the exchange rates used for the respective periods:
|
|
August
31, 2017
|
|
|
August
31, 2016
|
|
|
|
|
|
|
|
|
Period
end: CAD to USD exchange rate
|
|
$
|
0.7988
|
|
|
$
|
0.7620
|
|
Average
period: CAD to USD exchange rate
|
|
$
|
0.7573
|
|
|
$
|
0.7543
|
|
Note
2 – Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of 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 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. 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.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, NHL, Novo
Peak Health Inc., Novo Healthnet Rehab Limited, Novo Assessments Inc., an 80% interest in Novo Healthnet Kemptville Centre, Inc.,
a Back on Track Physiotherapy and Health Centre clinic operated by NHL, and a fifty percent stake in a joint venture with the
Sophie Freeman Dental Hygiene Professional Corporation operated as Novo Dental. All of the Company’s subsidiaries are incorporated
under the laws of the Province of Ontario, Canada. All intercompany transactions have been eliminated.
Noncontrolling
Interest
The
Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 consolidated statements of operations and
other comprehensive income (loss).
Cash
Equivalents
For
the purpose of the statement 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 August 31, 2017 and 2016, the allowance for uncollectible accounts receivable was $507,636
and $508,161 respectively.
NOVO INTEGRATED SCIENCES, INC.
(formerly Turbine Truck Engines,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
For the Years Ended August 31,
2017 and 2016
Property
and Equipment
Property
and equipment are stated at cost. 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:
Leasehold
improvements
|
5
years
|
Clinical
equipment
|
5
years
|
Computer
equipment
|
3
years
|
Office
equipment
|
5
years
|
Furniture
and fixtures
|
5
years
|
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 used in operations when indicators of impairment are present and the discounted 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. Based on its review at August 31, 2017 and
2016, the Company believes there was no impairment of its long-lived assets.
Goodwill
Goodwill
represents the excess of purchase price over the underlying net assets of businesses acquired. Under accounting requirements,
goodwill is not amortized but is subject to annual impairment tests. The Company recorded goodwill of $399,400 related to its
acquisition of Apka Health, Inc. during fiscal year ended August 31, 2017. As of August 31, 2017, the Company performed the required
impairment review. Based on its review at August 31, 2017, the Company believes there was no impairment of its goodwill.
Acquisition
Deposits
The
Company has signed letters of understanding with two potential acquisition candidates which includes refundable acquisition deposits
totaling $1,162,009.
Fair
Value of Financial Instruments
For
certain of the Company’s financial instruments, including cash and equivalents, restricted cash, accounts receivable, advances
to suppliers, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due
to their short 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 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 and their current market rate of interest. The three levels of valuation hierarchy are defined
as follows:
NOVO INTEGRATED SCIENCES, INC.
(formerly Turbine Truck Engines,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
For the Years Ended August 31,
2017 and 2016
|
●
|
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 us 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
.
As
of August 31, 2017 and 2016, respectively, the Company did not identify any assets and liabilities required to be presented on
the balance sheet at fair value.
Revenue
Recognition
Revenue
related to healthcare services provided is recognized at the time services have been performed. Gross service revenue is recorded
in the accounting records on an accrual basis at the provider’s established rates, regardless of whether the health care
entity expects to collect that amount. The Company will reserve a provision for contractual adjustment and discounts and deduct
from gross service revenue. The Company believes that recognizing revenue at the time the services have been performed is appropriate
because the Company’s revenue policies meet the following four criteria in accordance with FASB ASC 605,
Revenue Recognition
:
(i) persuasive evidence that arrangement exists, (ii) services has occurred, (iii) the price is fixed and determinable and (iv)
collectability is reasonably assured. The Company reports revenues net of any sales, use and value added taxes.
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.
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 is based on the assumption 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 7,860,000 options/warrants outstanding
as of August 31, 2017. Due to the net loss incurred potentially dilutive instruments would be anti-dilutive. Accordingly, diluted
loss per share is the same as basic loss for all periods presented.
Foreign
Currency Transactions and Comprehensive Income
U.S.
GAAP generally requires recognized revenue, expenses, gains and losses be included in net income. Certain statements, however,
require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as
a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive
income. The functional currency of the Company’s Canadian subsidiaries is the Canadian dollar. Translation gains of $1,240,844
and $1,277,449 for the years ended August 31, 2017 and 2016, respectively, are classified as an item of other comprehensive income
in the stockholders’ equity section of the balance sheet.
NOVO INTEGRATED SCIENCES, INC.
(formerly Turbine Truck Engines,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
For the Years Ended August 31,
2017 and 2016
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 statements of cash flows will not necessarily agree with
changes in the corresponding balances on the balance sheets.
Recent
Accounting Pronouncements
In
January 2017, the FASB issued an Accounting Standards Update (“ASU”) 2017-01,
Business Combinations (Topic 805)
Clarifying the Definition of a Business
. The amendments in this update clarify the definition of a business with the objective
of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals
of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill,
and consolidation. The guidance is effective for interim and annual periods beginning after December 15, 2017 and should be applied
prospectively on or after the effective date. The Company is in the process of evaluating the impact of this accounting standard
update.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash,
which requires restricted
cash to be presented with cash and cash equivalents on the statement of cash flows and disclosure of how the statement of cash
flows reconciles to the balance sheet if restricted cash is shown separately from cash and cash equivalents on the balance sheet.
ASU 2016-18 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The
Company is in the process of evaluating the impact of this accounting standard update on its financial statements.
In
October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory
,
which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when
the transfer occurs. ASU 2016-16 is effective for interim and annual periods beginning after December 15, 2018, with early adoption
permitted. The Company is in the process of evaluating the impact of this accounting standard update on its financial statements.
In
August 2016, the FASB issued ASU 2016-15
, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and
Cash Payments
. ASU 2016-15 provides guidance for targeted changes with respect to how cash receipts and cash payments are
classified in the statements of cash flows, with the objective of reducing diversity in practice. ASU 2016-15 is effective for
interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company is in the process of
evaluating the impact of this accounting standard update on its statements of cash flows.
In
March 2016, the FASB issued ASU 2016-09,
Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting
.
ASU 2016-09, which amends several aspects of accounting for employee share-based payment transactions including the accounting
for income taxes, forfeitures, and statutory tax withholding requirements, and classification in the statement of cash flows.
ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 and interim periods within annual periods beginning
after December 15, 2016, with early adoption permitted. The adoption of this ASU did not have an impact on the Company’s
financial statements.
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 requires lessees to recognize lease assets
and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective
for fiscal years beginning after December 15, 2018 and interim periods in fiscal years beginning after December 15, 2018, with
early adoption permitted. The Company is in the process of evaluating the impact of this accounting standard update on its financial
statements.
In
August 2014, the FASB issued Accounting Standards Update No. 2014-15,
Disclosure of Uncertainties about an Entity’s Ability
to Continue as a Going Concern
, which provides guidance on determining when and how to disclose going-concern uncertainties
in the financial statements. ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability
to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain
disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. ASU
2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter. Early adoption is permitted.
The adoption of this ASU did not have an impact on the Company’s financial statements.
NOVO INTEGRATED SCIENCES, INC.
(formerly Turbine Truck Engines,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
For the Years Ended August 31,
2017 and 2016
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from
Contracts with Customers
. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing
revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition.
ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in
the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and
cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from
costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December
15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods
therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of
the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements
and disclosures.
Management
does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying
financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.
Note
3 – Related Party Transactions
Due
to related parties
Amounts
loaned to the Company by stockholders and officers of the Company that are non-interest bearing and payable upon demand.
Note
4 – Other Receivables
Other
receivables at August 31, 2017 and 2016 consisted of the following:
|
|
2017
|
|
|
2016
|
|
Notes
receivable dated November 15, 2014; accrues interest at 8% per annum; secured by assets; was due on November 15, 2016.
|
|
$
|
39,940
|
|
|
$
|
38,099
|
|
|
|
|
|
|
|
|
|
|
Notes
receivable dated April 1, 2015 and amended on May 23, 2017; accrues interest at 12% per annum; secured by certain assets;
due May 23, 2018.
|
|
|
299,550
|
|
|
|
285,750
|
|
|
|
|
|
|
|
|
|
|
Advance
to corporation; non-interest bearing; unsecured; payable upon demand
|
|
|
-
|
|
|
|
381,000
|
|
|
|
|
|
|
|
|
|
|
Advance
to corporation; non-interest bearing; unsecured; payable upon demand
|
|
|
32,534
|
|
|
|
30,481
|
|
Total
other receivables
|
|
$
|
372,024
|
|
|
$
|
735,330
|
|
NOVO INTEGRATED SCIENCES, INC.
(formerly Turbine Truck Engines,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
For the Years Ended August 31,
2017 and 2016
Note
5 – Property and Equipment
Property
and equipment at August 31, 2017 and 2016 consisted of the following:
|
|
2017
|
|
|
2016
|
|
Leasehold
Improvements
|
|
$
|
329,985
|
|
|
$
|
310,111
|
|
Clinical
equipment
|
|
|
177,514
|
|
|
|
147,429
|
|
Computer
equipment
|
|
|
21,020
|
|
|
|
8,575
|
|
Office
equipment
|
|
|
24,319
|
|
|
|
22,780
|
|
Furniture
and fixtures
|
|
|
18,218
|
|
|
|
17,379
|
|
|
|
|
571,056
|
|
|
|
506,274
|
|
Accumulated
depreciation
|
|
|
(268,105
|
)
|
|
|
(187,556
|
)
|
Total
|
|
$
|
302,951
|
|
|
$
|
318,718
|
|
Depreciation
expense for the years ended August 31, 2017 and 2016 was $67,776 and $72,586, respectively.
Note
6 – Notes Payable
Notes
payable at August 31, 2017 and 2016 consisted of the following:
|
|
2017
|
|
|
2016
|
|
Notes
payable to five individuals; accrues interest at 12% per annum; secured by assets of the Company; due May 29, 2016. These
notes were fully repaid.
|
|
$
|
-
|
|
|
$
|
91,439
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to financial institution; accrues interest at 7.2% per annum; monthly principal and interest payment of $3,567;
unsecured; due October 2017.
|
|
|
7,134
|
|
|
|
47,636
|
|
|
|
|
|
|
|
|
|
|
Notes
payable issued in connection with purchase of assets; accrues interest at 0% per annum; due on March 21, 2019.
|
|
|
399,400
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to financial institution; accrues interest at 6% per annum; monthly principal and interest payment of $608; unsecured;
due April 8, 2019.
|
|
|
20,988
|
|
|
|
20,022
|
|
|
|
|
427,522
|
|
|
|
159,097
|
|
Current
portion
|
|
|
(13,171
|
)
|
|
|
(147,517
|
)
|
Long-term
portion
|
|
$
|
414,351
|
|
|
$
|
11,580
|
|
Aggregate
future maturities of notes payable as of August 31, 2017 are as follows:
Years
ending August 31:
|
|
|
|
2018
|
|
$
|
13,171
|
|
2019
|
|
|
414,351
|
|
|
|
$
|
427,522
|
|
Note
7 – Debentures, related parties
On
September 30, 2013, the Company issued five debentures totaling $5,114,327 (CAD$6,402,512) at August 31, 2017 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
December 5, 2017, the debenture holders and the Company signed a binding Letter of Intent to convert no less than seventy-five
percent (75%) of the debenture value plus any interest or fees owed to the Company’s common stock. The per share price to
be used for the conversion of each debenture will be the average price of the five (5) trading days immediately preceding the
date of conversion with a ten (10) percent premium added to the calculated per share price.
NOVO INTEGRATED SCIENCES, INC.
(formerly Turbine Truck Engines,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
For the Years Ended August 31,
2017 and 2016
Note
8 – Stockholders’ Deficit
Convertible
preferred stock
The
Company has authorized 1,000,000 shares of $0.001 par value convertible preferred stock. As of August 31, 2017 and 2016 there
were 0 and 0 convertible preferred shares issued and outstanding, respectively.
Common
stock
The
Company has authorized 499,000,000 shares of $0.001 par value common stock. As of August 31, 2017 and 2016 there were 201,837,254
and 167,797,406 common shares issued and outstanding, respectively.
During
the year ended August 31, 2017 the Company issued:
|
●
|
22,751,307
shares of common stock in connection with the reverse merger transaction; and
|
|
|
|
|
●
|
11,288,541
shares of common stock for cash proceeds of $3,386,560.
|
Stock
Options and Warrants
On
September 8, 2015, the Company adopted the 2015 Incentive Compensation Plan (the “2015 Plan”), which authorizes the
issuance of up to 5,000,000 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 2017 and 2016, the Company did not grant any awards under the 2015 Plan. As of August 31, 2017, 4,987,500 shares were available
under the 2015 Plan for future grants, awards, options or share issuances. However, because the shares issuable under the 2015
Plan or issuable upon conversion of awards granted under the Plan are no longer registered under the Securities Exchange Act of
1934, as amended, the Company does not intend to issue any additional grants under the 2015 Plan.
The
following is a summary of stock option/warrant activity:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Options/
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life
|
|
|
Value
|
|
Outstanding,
August 31, 2016
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
from reverse merger transactions
|
|
|
6,610,000
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,250,000
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
August 31, 2017
|
|
|
7,860,000
|
|
|
$
|
0.266
|
|
|
|
3.53
|
|
|
$
|
660,000
|
|
Exercisable,
August 31, 2017
|
|
|
6,860,000
|
|
|
$
|
0.258
|
|
|
|
3.34
|
|
|
$
|
660,000
|
|
NOVO INTEGRATED SCIENCES, INC.
(formerly Turbine Truck Engines,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
For the Years Ended August 31,
2017 and 2016
The
exercise price for options/warrants outstanding at August 31, 2017:
Outstanding
|
|
|
Exercisable
|
|
Number
of
|
|
|
|
|
|
Number
of
|
|
|
|
|
Options/
|
|
|
Exercise
|
|
|
Options/
|
|
|
Exercise
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
5,500,000
|
|
|
$
|
0.16
|
|
|
|
5,500,000
|
|
|
$
|
0.16
|
|
|
1,000,000
|
|
|
|
0.32
|
|
|
|
-
|
|
|
|
0.32
|
|
|
100,000
|
|
|
|
0.50
|
|
|
|
100,000
|
|
|
|
0.50
|
|
|
1,000,000
|
|
|
|
0.62
|
|
|
|
1,000,000
|
|
|
|
0.62
|
|
|
250,000
|
|
|
|
0.80
|
|
|
|
250,000
|
|
|
|
0.80
|
|
|
10,000
|
|
|
|
2.00
|
|
|
|
10,000
|
|
|
|
2.00
|
|
|
7,860,000
|
|
|
|
|
|
|
|
6,860,000
|
|
|
|
|
|
For
options granted during fiscal year 2017 where the exercise price equaled the stock price at the date of the grant, the weighted-average
fair value of such options was $0.58 and the weighted-average exercise price of such options/warrants was $0.42. No options were
granted during fiscal 2017 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 $252,428 during the year ended August 31, 2017. At August 31, 2017, the unamortized stock option expense was
$381,585.
The
assumptions used in calculating the fair value of options granted using the Black-Scholes option- pricing model for options granted
are as follows:
Risk-free
interest rate
|
|
1.5%
|
Expected
life of the options
|
|
2.5
years
|
Expected
volatility
|
|
323%
|
Expected
dividend yield
|
|
0%
|
Note
9 – Income Taxes
The
Company’s Canadian subsidiaries are subject to the income tax laws of the Province of Ontario and the country of Canada.
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A full valuation allowance is established against all net deferred
tax assets as of August 31, 2017 and 2016 based on estimates of recoverability. While the Company has optimistic plans for its
business strategy, it determined that such a valuation allowance was necessary given the current and expected near term losses
and the uncertainty with respect to its ability to generate sufficient profits from its business model.
Income
tax expense for the years ended August 31, 2017 and 2016 is a follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Current
taxes:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
111,702
|
|
|
|
-
|
|
|
|
|
111,702
|
|
|
|
-
|
|
Deferred
taxes:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
income tax expense
|
|
$
|
111,702
|
|
|
$
|
-
|
|
NOVO INTEGRATED SCIENCES, INC.
(formerly Turbine Truck Engines,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
For the Years Ended August 31,
2017 and 2016
A
reconciliation of the differences between the effective and statutory income tax rates are as follows:
Year
Ended August 31, 2017
|
|
Canada
|
|
|
United
States
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
statutory tax rate
|
|
|
|
|
|
|
39.0
|
%
|
|
|
|
|
|
|
40.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
loss
|
|
$
|
(257,900
|
)
|
|
|
|
|
|
$
|
(375,662
|
)
|
|
|
|
|
|
$
|
(699,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
income tax expense (benefit)
|
|
|
(100,581
|
)
|
|
|
-39.0
|
%
|
|
|
(150,265
|
)
|
|
|
-40.0
|
%
|
|
|
(276,582
|
)
|
|
|
|
|
Income
tax from subsidiaries not part of consolidated return
|
|
|
111,702
|
|
|
|
43.3
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
111,702
|
|
|
|
|
|
Stock
based compensation
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
100,971
|
|
|
|
26.9
|
%
|
|
|
100,971
|
|
|
|
|
|
Change
in valuation allowance
|
|
|
100,581
|
|
|
|
39.0
|
%
|
|
|
49,294
|
|
|
|
13.1
|
%
|
|
|
175,611
|
|
|
|
|
|
|
|
$
|
111,702
|
|
|
|
43.3
|
%
|
|
$
|
-
|
|
|
|
0.0
|
%
|
|
$
|
111,702
|
|
|
|
17.6
|
%
|
Year
Ended August 31, 2016
|
|
Canada
|
|
|
United
States
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
statutory tax rate
|
|
|
|
|
|
|
39.0
|
%
|
|
|
|
|
|
|
40.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
loss
|
|
$
|
(346,178
|
)
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
(346,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
income tax expense (benefit)
|
|
|
(135,009
|
)
|
|
|
-39.0
|
%
|
|
|
|
|
|
|
|
|
|
|
(135,009
|
)
|
|
|
|
|
Change
in valuation allowance
|
|
|
135,009
|
|
|
|
39.0
|
%
|
|
|
|
|
|
|
|
|
|
|
135,009
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
0.0
|
%
|
|
$
|
-
|
|
|
|
0.0
|
%
|
|
$
|
-
|
|
|
|
0.0
|
%
|
At
August 31, 2017 and 2016, the significant components of the deferred tax assets are summarized below:
|
|
2017
|
|
|
2016
|
|
Deferred
income tax asset
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
1,856,218
|
|
|
$
|
1,391,467
|
|
Total
deferred income tax asset
|
|
|
1,856,218
|
|
|
|
1,391,467
|
|
Less:
valuation allowance
|
|
|
(1,856,218
|
)
|
|
|
(1,391,467
|
)
|
Total
deferred income tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
valuation allowance for the years ended August 31, 2017 and 2016 increased by $464,751 and $132,876, respectively, as a result
of the Company generating additional net operating losses and additional net operating losses resulting from the merger transaction.
The
Company has recorded as of August 31, 2017 a valuation allowance of $1,856,218, as it believes that it is more likely than not
that the deferred tax assets will not be realized in future years. Management has based its assessment on the Company’s
lack of profitable operating history.
The
Company conducts an analysis of its tax positions and has concluded that it has no uncertain tax positions as of August 31, 2017
and 2016.
NOVO INTEGRATED SCIENCES, INC.
(formerly Turbine Truck Engines,
Inc.)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
For the Years Ended August 31,
2017 and 2016
The
Company has net operating loss carry-forwards of approximately $738,000 and $3,887,000 in the United States and Canada, respectively.
The use of the net operating losses in the United States may be significantly limited due to Internal Revenue Code section 382.
The 2017, 2016 and 2015 tax years are still subject to audit.
Note
10 – Acquisition of Assets
During
the year ended August 31, 2017, the Company acquired certain assets in exchange for a note payable of $399,400 (CAD$500,000)
at April 1, 2017. The purchase of these assets was not considered significant for accounting purposes; therefore, pro
forma financial statements are not presented.
Note
11 – 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 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 consolidated financial position as of August 31, 2017, results of operations, cash flows or liquidity of the Company.
Leases
The
Company leases its office space and certain facilities under long-term operating leases expiring through fiscal year 2023. Rent
expense under these leases was $796,745 and $763,339 for the years ended August 31, 2017 and 2016, respectively.
Future
minimum annual payments under operating lease agreements for fiscal years ending August 31 are as follows:
Years
ending August 31:
|
|
|
|
2018
|
|
$
|
377,830
|
|
2019
|
|
|
292,778
|
|
2020
|
|
|
187,985
|
|
2021
|
|
|
169,376
|
|
2022
|
|
|
108,793
|
|
Thereafter
|
|
|
54,902
|
|
|
|
$
|
1,191,664
|
|
Note
12 – Subsequent Events
On
September 18, 2017, an independent consultant was granted 120,000 stock options of the Company’s common stock with an exercise
price of $0.40. Of these, 60,000 options vest on September 18, 2017 and 60,000 options vest on March 18, 2018.
On
December 1, 2017, the Company and Executive Fitness Leaders
, located in Ottawa Ontario Canada,
entered into an Asset Purchase Agreement, pursuant to which the Company acquired substantially all of the assets of Executive
Fitness Leaders in exchange for the issuance, by the Company, of 384,110 restricted shares of its common stock valued at approximately
$233,155. The transaction closed on December 1, 2017. The purchase of these assets was not considered significant for
accounting purposes; therefore, pro forma financial statements are not presented.
On
December 2, 2017, the Company and certain related party debenture holders of five debentures totaling $5,114,327 (CAD$6,402,512)
dated September 30, 2013 with an original due date of September 30, 2016 (see financial note 7 for further details) agreed to
extend the due date of the debentures to September 30, 2019.
On
December 5, 2017, the related party debenture holders and the Company signed a binding Letter of Intent to convert no less than
seventy-five percent (75%) of the debenture value, plus any interest or fees owed, to the Company’s common stock. The per
share price to be used for the conversion of each debenture will be the average price of the five (5) trading days immediately
preceding the date of conversion with a ten (10) percent premium added to the calculated per share price.