The accompanying footnotes are an integral part of these
unaudited condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Three Months Ended November 30, 2018 and 2017 (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.
Through
Novo Healthnet Limited (“NHL”), our wholly owned Canadian subsidiary, we deliver multi-disciplinary primary healthcare
to over 400,000 patients annually through our 16 corporate-owned clinics and a contracted network of 92 affiliate clinics and
223 eldercare centric homes located across Canada. Our team of practitioners and staff are trained for assessment, diagnosis,
treatment, pain management, rehabilitation and primary prevention. Our specialized services and products include physiotherapy,
chiropractic care, occupational therapy, eldercare, laser therapeutics, massage therapy, acupuncture, chiropody, neurological
functions, kinesiology, concussion management and baseline testing, women’s pelvic health, sports medicine therapy, assistive
devices and private personal training. We do not provide primary care medical services, none of our employees practices primary
care medicine, and our services do not require a medical or nursing license.
Since
inception and through May 9, 2017, our activities and business operations were limited to raising capital, organizational matters
and the implementation of our business plan related to research, development, testing and commercialization of various alternative
energy technologies.
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 $6,904.
The
unaudited consolidated financial statements are prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”). The information furnished herein reflects all adjustments, consisting only of normal
recurring adjustments, which in the opinion of management, are necessary to fairly state the Company’s financial position,
the results of its operations, and cash flows for the periods presented. Certain information and footnote disclosures normally
present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States
of America (“U.S. GAAP”) were omitted pursuant to such rules and regulations. The results of operations for the three
months ended November 30, 2018 are not necessarily indicative of the results for the year ending August 31, 2019.
Basis
of Presentation
The
accompanying consolidated financial statements were prepared in conformity with U.S. GAAP. The Company’s Canadian subsidiaries’
functional currency is the Canadian Dollar (“CAD”); however, the accompanying consolidated financial statements were
translated and presented in United States Dollars (“$” or “USD”).
Foreign
Currency Translation
The
accounts of the Company’s Canadian subsidiaries are maintained in CAD. The accounts of these subsidiaries are translated
into USD in accordance with Accounting Standards Codification (“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:
|
|
November 30, 2018
|
|
|
November 30, 2017
|
|
|
August 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Period end: CAD to USD exchange rate
|
|
$
|
0.7527
|
|
|
$
|
0.7761
|
|
|
$
|
0.7647
|
|
Average period: CAD to USD exchange rate
|
|
$
|
0.7647
|
|
|
$
|
0.7973
|
|
|
|
|
|
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
Healthnet Rehab Limited, Novo Assessments Inc., and an 80% interest in Novo Healthnet Kemptville Centre, Inc., a Back on Track
Physiotherapy and Health Centre clinic operated by NHL. 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”) 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 November 30, 2018 and August 31, 2018, the allowance for uncollectible accounts receivable
was $457,209 and $464,527, respectively.
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 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. Based on its review at November 30, 2018 and
August 31, 2018, 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. At November 30, 2018, the Company
recorded goodwill of $376,350 and $218,283, respectively, related to its acquisition of Apka Health, Inc. during the fiscal year
ended August 31, 2017 and Executive Fitness Leaders during the fiscal year ended August 31, 2018. As of August 31, 2018, the Company
performed the required impairment review. Based on its review, 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 $1,094,947 and $1,112,404 at November 30, 2018 and August 31, 2018, respectively.
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:
|
●
|
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
.
As
of November 30, 2018 and August 31, 2018, respectively, the Company did not identify any assets and liabilities required to be
presented on the balance sheet at fair value.
Revenue
Recognition
Accounting
Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
(“Topic 606”), became
effective for the Company on March 1, 2018. The Company’s revenue recognition disclosure reflects its updated accounting
policies that are affected by this new standard. The Company applied the “modified retrospective” transition method
for open contracts for the implementation of Topic 606
.
As sales are and have been primarily from providing healthcare
services, and the Company has no significant post-delivery obligations, this new standard did not result in a material recognition
of revenue on the Company’s accompanying consolidated financial statements for the cumulative impact of applying this new
standard. The Company made no adjustments to its previously-reported total revenues, as those periods continue to be presented
in accordance with its historical accounting practices under Topic 605,
Revenue Recognition
.
Revenue
from providing healthcare services are recognized under Topic 606 in a manner that reasonably reflects the delivery of its 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 healthcare services, the Company’s sole revenue category, is summarized below:
|
●
|
Healthcare
services - gross service revenue is recorded in the accounting records at the time the services is provided on an accrual
basis at the provider’s established rates, regardless of whether the provider expects to collect that amount. 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.
|
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.
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 statement of operations
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. There were 10,105,000 options/warrants outstanding as of November
30, 2018. Due to the net loss incurred, potentially dilutive instruments would be anti-dilutive. Accordingly, diluted loss per
share is the same as basic loss for all periods presented.
Foreign
Currency Transactions and Comprehensive Income
U.S.
GAAP generally requires recognized revenue, expenses, gains and losses be included in net income. Certain statements, however,
require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as
a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive
income. The functional currency of the Company’s Canadian subsidiaries is the CAD. Translation gains of $1,138,030 and $1,139,815
at November 30, 2018 and August 31, 2018, respectively, are classified as an item of other comprehensive income in the stockholders’
equity section of the balance 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 statements of cash flows will not necessarily agree with
changes in the corresponding balances on the balance sheets.
Recent
Accounting Pronouncements
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 ASU on its 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 ASU on its financial statements.
In
May 2014, the FASB issued 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 adopted this ASU beginning on March
1, 2018 and used the modified retrospective method of adoption. The adoption of this ASU did not have a material impact 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 are non-interest bearing and payable upon demand. At November
30, 2018 and August 31, 2018, the amount due to related parties was $1,064,733 and $1,116,261, respectively.
On
January 31, 2018, a related party converted $813,125 of outstanding principal and accrued interest into 1,976,483 shares of the
Company’s common stock. The per share price used for the conversion of this loan was $0.4114 which was determined based
on the average price of the five (5) trading days immediately preceding the date of conversion with a 10% premium added to the
calculated per share price.
Note
4 – Accounts Receivables, net
Accounts
receivables, net at November 30, 2018 and August 31, 2018 consisted of the following:
|
|
November 30, 2018
|
|
|
August 31, 2018
|
|
Trade receivables
|
|
$
|
1,630,249
|
|
|
$
|
1,564,180
|
|
Amounts earned but not billed
|
|
|
232,249
|
|
|
|
237,892
|
|
|
|
|
1,862,498
|
|
|
|
1,802,072
|
|
Allowance for doubtful accounts
|
|
|
(457,209
|
)
|
|
|
(464,527
|
)
|
Accounts receivable, net
|
|
$
|
1,405,289
|
|
|
$
|
1,337,545
|
|
Note
5 – Other Receivables
Other
receivables at November 30, 2018 and August 31, 2018 consisted of the following:
|
|
November 30, 2018
|
|
|
August 31, 2018
|
|
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
|
|
$
|
282,262
|
|
|
$
|
286,763
|
|
|
|
|
|
|
|
|
|
|
Advance to corporation; non-interest bearing; unsecured; due no later than November 18, 2020
|
|
|
30,108
|
|
|
|
30,588
|
|
|
|
|
|
|
|
|
|
|
Advance to corporation; accrues interest at 12% per annum; unsecured; due September 2019
|
|
|
75,270
|
|
|
|
76,470
|
|
|
|
|
|
|
|
|
|
|
Advance to corporation; accrues interest at 10% per annum; unsecured; due May 1, 2022
|
|
|
56,453
|
|
|
|
57,352
|
|
Total other receivables
|
|
|
444,093
|
|
|
|
451,173
|
|
Current portion
|
|
|
(357,532
|
)
|
|
|
(393,821
|
)
|
Long-term portion
|
|
$
|
86,561
|
|
|
$
|
57,352
|
|
Note
6 – Property and Equipment
Property
and equipment at November 30, 2018 and August 31, 2018 consisted of the following:
|
|
November 30, 2018
|
|
|
August 31, 2018
|
|
Leasehold Improvements
|
|
$
|
427,620
|
|
|
$
|
372,010
|
|
Clinical equipment
|
|
|
274,438
|
|
|
|
269,741
|
|
Computer equipment
|
|
|
22,281
|
|
|
|
22,636
|
|
Office equipment
|
|
|
27,134
|
|
|
|
24,658
|
|
Furniture and fixtures
|
|
|
38,998
|
|
|
|
39,620
|
|
|
|
|
790,471
|
|
|
|
728,665
|
|
Accumulated depreciation
|
|
|
(345,439
|
)
|
|
|
(328,344
|
)
|
Total
|
|
$
|
445,032
|
|
|
$
|
400,321
|
|
Depreciation
expense for the three months ended November 30, 2018 and 2017 was $22,601 and $14,998, respectively.
Note
7 – Accrued Expenses
Accrued
expenses at November 30, 2018 and August 31, 2018 consisted of the following:
|
|
November 30, 2018
|
|
|
August 31, 2018
|
|
Accrued liabilities
|
|
$
|
233,933
|
|
|
$
|
266,123
|
|
Accrued payroll
|
|
|
97,871
|
|
|
|
106,761
|
|
Other
|
|
|
30,958
|
|
|
|
11,114
|
|
|
|
$
|
362,762
|
|
|
$
|
383,998
|
|
Note
8 – Notes Payable
Notes
payable at November 30, 2018 and August 31, 2018 consisted of the following:
|
|
November 30, 2018
|
|
|
August 31, 2018
|
|
Notes payable issued in connection with purchase of assets; accrues interest at 0% per annum; due on March 27, 2019.
|
|
$
|
376,350
|
|
|
$
|
382,350
|
|
|
|
|
376,350
|
|
|
|
382,350
|
|
Current portion
|
|
|
(376,350
|
)
|
|
|
(382,350
|
)
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
Note
9 – Debentures, related parties
On
September 30, 2013, the Company issued five debentures totaling CAD$6,402,512 ($4,968,990 at November 30, 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
January 31, 2018, the debenture holders converted 75% of the debenture value of $3,894,809 plus accrued interest of $414,965 into
10,475,872 shares of the Company’s common stock. The per share price used for the conversion of each debenture was $0.4114
which was determined based on the average price of the five (5) trading days immediately preceding the date of conversion with
a 10% premium added to the calculated per share price. At November 30, 2018, the amount of debentures outstanding was $1,204,793.
Note
10 – Stockholders’ Deficit
Convertible
preferred stock
The
Company has authorized 1,000,000 shares of $0.001 par value convertible preferred stock. At November 30, 2018 and August 31, 2018
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. At November 30, 2018 and August 31, 2018 there were
208,444,965 and 207,881,743 common shares issued and outstanding, respectively.
During
the period ended November 30, 2018, the Company issued 563,222 shares of common stock for cash proceeds of $531,929.
Stock
options/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.
As of November 30, 2018, 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.
On
January 16, 2018, the Company adopted the Novo Integrated Sciences, Inc. 2018 Incentive Plan (the “2018 Plan”). Under
the 2018 Plan, 10,000,000 shares of common stock are authorized for issuance to employees, non-employees, directors and key consultants
to the Company or its subsidiaries. The 2018 Plan authorizes equity-based and cash-based incentives for participants. There were
9,875,000 shares available for award at November 30, 2018 under the 2018 Plan.
The
following is a summary of stock option/warrant activity:
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Weighted
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Weighted
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Average
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Options/
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Average
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Remaining
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Aggregate
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Warrants
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Exercise
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Contractual
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Intrinsic
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Outstanding
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Price
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Life
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Value
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Outstanding, August 31, 2018
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10,030,000
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0.30
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4.56
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$
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7,045,500
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Granted
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75,000
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0.95
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Forfeited
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-
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Exercised
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-
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Outstanding, November 30, 2018
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10,105,000
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0.30
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4.33
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$
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19,165,250
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Exercisable, November 30, 2018
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10,105,000
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$
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0.30
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4.33
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$
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19,165,250
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The
exercise price for options/warrants outstanding at November 30, 2018:
Outstanding and Exercisable
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Number of
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Options/
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Exercise
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Warrants
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Price
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5,500,000
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$
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0.16
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1,000,000
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0.32
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50,000
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0.33
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120,000
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0.40
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2,000,000
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0.42
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100,000
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0.50
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1,000,000
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0.62
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250,000
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0.80
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75,000
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0.95
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10,000
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2.00
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10,105,000
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For
options granted during the fiscal year ending August 31, 2019 where the exercise price equaled the stock price at the date of
the grant, the weighted-average fair value of such options was $0.94 and the weighted-average exercise price of such options/warrants
was $0.95. No options were granted during the fiscal year ending August 31, 2019 where the exercise price was less than the stock
price at the date of grant or the exercise price was greater than the stock price at the date of grant.
For
options granted during the fiscal year ended August 31, 2018 where the exercise price equaled the stock price at the date of the
grant, the weighted-average fair value of such options was $0.39 and the weighted-average exercise price of such options/warrants
was $0.40. No options were granted during the fiscal year ended August 31, 2018 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 $70,846 and $142,665 during the three months ended November 30, 2018 and 2017, respectively. At November 30,
2018, the unamortized stock option expense was $0.
The
assumptions used in calculating the fair value of options granted during the current fiscal year ending August 31, 2019 using
the Black-Scholes option-pricing model for options granted, through November 30, 2018, are as follows:
Risk-free interest rate
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2.78
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%
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Expected life of the options
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3.5 years
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Expected volatility
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294
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%
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Expected dividend yield
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0
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%
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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 November 30, 2018, 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 $242,472 and $191,940 for the three months ended November 30, 2018 and 2017, respectively.
Note
12 – Subsequent Events
CannaPiece
Share Exchange Agreement, as Amended
On
December 18, 2018, the Company and NHL entered into a Share Exchange Agreement (the “SEA”) with CannaPiece Group Inc.
(“CannaPiece”).
Pursuant
to the terms of the SEA, CannaPiece agreed that it would issue to NHL shares representing 25% of CannaPiece’s outstanding
shares, which shares are valued at CAD $25,000,000 ($18,672,500) in the aggregate, based on an agreed pre-revenue, post-licensing
valuation of CannaPiece in the amount of CAD $100,000,000 ($74,690,000). The CannaPiece shares will be shares of a new class (the
“New Class”) to be created by CannaPiece following execution of the SEA. The New Class will be convertible into common
shares on a basis that ensures that the aggregate number of common shares in the capital of CannaPiece into which the CannaPiece
shares are convertible will be equal to 25% of all issued and outstanding CannaPiece stock. The New Class will otherwise have
rights equivalent to the common shares of CannaPiece.
In
exchange for the issuance of the CannaPiece shares to NHL, the Company agreed to issue to CannaPiece CAD $25,000,000 ($18,672,500)
worth of Company restricted common stock. The number of shares of Company common stock to be issued will be based on a per share
price of $0.92, as determined by establishing the 30-trading day closing average ($1.15 per share) on October 10, 2018, the execution
date of the binding letter of intent between the parties, with a 20% discount to the determined average.
In
addition, CannaPiece agreed to execute one or more subscription agreements for Company common stock with an aggregate value of
CAD $5,000,000 (approximately $3,734,500) (the “Investment”) no later than January 7, 2019. CannaPiece’s obligation
is independent of the closing of the exchange. The parties agreed that the per share price for the subscription agreements will
be $0.92 per share, determined by establishing the 30-trading day closing average ($1.15 per share) on October 10, 2018, the execution
date of the binding letter of intent among the parties, with a 20% discount to the determined average. Of this aggregate subscription
amount, $501,929 was paid prior to execution of the SEA. In addition, on December 18, 2018, the Company accepted a $1,867,250
subscription agreement from CannaPiece for 2,029,620 shares of the Company’s restricted common stock, resulting in an effective
price per share of $0.92.
The
Company and NHL together have the right to appoint one board member, with voting rights, to CannaPiece’s board of directors,
and CannaPiece has the right to appoint one board member, with voting rights, to the Company’s Board of Directors. As of
the closing, the Company and CannaPiece will take such actions as required to expand the size of each board of directors such
that the Company and CannaPiece can each appoint one member to the other party’s board of directors.
The
obligation of the parties to close the exchange is subject to customary closing conditions. The parties also agreed that the Company’s
shares issued to CannaPiece and the CannaPiece shares issued to NHL pursuant to the terms of the SEA will be held in escrow until
the earlier of the termination date (June 1, 2019, as the same may be amended by the parties) or the date on which CannaPiece
receives approved Licensed Producer Status under the Cannabis Act (Canada) and its associated regulations.
The
SEA may be terminated in certain circumstances including, among others, by the mutual written consent of the Company, NHL and
CannaPiece; and by the Company and NHL, or by CannaPiece, if certain closing conditions have not been met by June 1, 2019.
On
January 7, 2019, the Company, NHL and CannaPiece entered into Amendment No. 1 to the SEA pursuant to which the parties agreed
to extend the delivery date of the Investment from January 7, 2019 to January 31, 2019.
Letter
Agreement Amending Activa LOI
On
November 23, 2018, the Company and NHL executed a Binding Letter of Intent (the “Activa LOI”) with Activa Clinics
(“Activa”). Pursuant to the terms of the Activa LOI, the parties agreed to negotiate and enter into a definitive agreement
pursuant to which NHL will acquire all of the issued and outstanding shares of Activa in exchange for shares of the Company (the
“Proposed Transaction”). Pursuant to the terms of the Activa LOI, if the parties do not execute a definitive agreement
on or before December 31, 2018 (or such other date agreed to by the parties), the Activa LOI will terminate. On January 7, 2019,
the Company and Activa entered into a letter agreement that extends the termination date of the Activa LOI from December 31, 2018
to February 28, 2019.
Assignment
of Joint Venture Agreement
On
January 7, 2019, 2478659 Ontario Ltd. (“247”) and Kainai Cooperative (“Kainai”) entered into a Joint Venture
Agreement (the “Joint Venture Agreement”) for the purpose of developing, managing and arranging for financing of greenhouse
and farming projects involving hemp and cannabis cash crops on Kainai related lands, and developing additional infrastructure
projects creating jobs and food supply to local communities. On January 8, 2019, 247 and the Company entered into an Agreement
of Transfer and Assignment, pursuant to which 247 agreed to sell, assign and transfer to the Company all rights, contracts, contacts
and any and all other assets related in any way to the Joint Venture Agreement. Pursuant to the terms of the Joint Venture Agreement,
as assigned to the Company, the parties will work in a joint venture relationship with the Company providing the finance, development
and operation of the project, including sales and Kainai providing the land and approvals for the development of the projects.
The
joint venture will distribute to the Company and Kainai all net proceeds after debt and principal servicing and repayment allocation,
as well as operating capital allotment on a ratio equal to 80% to the Company and 20% to Kainai.
Among
other things, the Company is responsible for maintaining all financial records of the joint venture and providing quarterly and
annual reporting to all joint venture stakeholders, assigning and directing operational staff, remunerating Kainai on the basis
of 20% of net joint venture income on an annual basis commencing 12 months after the first full 12-month revenue period.
The
Joint Venture Agreement has an initial term of 50 years and Kainai may renew the Joint Venture Agreement within five years of
the expiry of the initial term upon mutual agreement.