NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Nine Months Ended May 31, 2020 and May 31, 2019 (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 delivers multi-disciplinary primary healthcare through our 16 corporate-owned clinics and a contracted network of 103
affiliate clinics and 220 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
practice 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”), we entered into a Share Exchange Agreement (the “Share Exchange Agreement”)
by and between (i) Novo Integrated; (ii) Novo Healthnet Limited (“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 167,797,406 restricted shares Novo Integrated common stock, representing 85% of the issued and
outstanding Novo Integrated common stock, calculated including all granted and issued options or warrants to acquire Novo Integrated
common stock as of the Effective Date, but to exclude shares of Novo Integrated common stock that are subject to a then-current
Regulation S offering that was undertaken by Novo Integrated (the “Exchange”).
On
May 9, 2017, the Exchange closed and, as a result, NHL became a wholly owned subsidiary of Novo Integrated.
The
Exchange was accounted for as a reverse acquisition under the purchase method of accounting since NHL obtained control of Novo
Integrated Sciences, Inc. Accordingly, the Exchange was recorded as a recapitalization of NHL, with NHL being treated as the continuing
entity. The historical financial statements presented are the financial statements of NHL. The Share Exchange Agreement was treated
as a recapitalization and not as a business combination; therefore, no pro forma information is disclosed. At the closing date
of the Exchange, the net assets of the legal acquirer, Novo Integrated Sciences, Inc., were $6,904.
The
unaudited condensed consolidated financial statements are prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”). The information furnished herein reflects all adjustments, consisting
only of normal recurring adjustments, which in the opinion of management, are necessary to fairly state the Company’s financial
position, the results of its operations, and cash flows for the periods presented. Certain information and footnote disclosures
normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) were omitted pursuant to such rules and regulations. The results of operations for
the nine months ended May 31, 2020 are not necessarily indicative of the results for the year ending August 31, 2020.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements were prepared in conformity with U.S. GAAP for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information
and notes required by U.S. GAAP for complete financial statements. The financial information contained in this report should be
read in conjunction with our Annual Report on Form 10-K for the fiscal year ended August 31, 2019, that we filed on November 20,
2019. The Company’s Canadian subsidiaries’ functional currency is the Canadian Dollar (“CAD”); however,
the accompanying unaudited condensed consolidated financial statements were translated and presented in United States Dollars
(“$” or “USD”).
Foreign
Currency Translation
The
accounts of the Company’s Canadian subsidiaries are maintained in CAD. The accounts of these subsidiaries are translated
into USD in accordance with 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 condensed consolidated statements of operations and comprehensive
loss. The following table details the exchange rates used for the respective periods:
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
|
August 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Period end: CAD to USD exchange rate
|
|
$
|
0.7263
|
|
|
$
|
0.7395
|
|
|
$
|
0.7507
|
|
Average period: CAD to USD exchange rate
|
|
$
|
0.7435
|
|
|
$
|
0.7540
|
|
|
|
|
|
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. 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 condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries,
NHL, 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 70% interest in Novo Earth Therapeutics Inc. (currently inactive),
a joint venture with Harvest Gold Farms Inc. All of the Company’s subsidiaries are incorporated under the laws of the Province
of Ontario or New Brunswick, 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 condensed consolidated statements of operations
and comprehensive 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 May 31, 2020, and August 31, 2019, the allowance for uncollectible
accounts receivable was $470,751 and $471,566, 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 May 31, 2020 and August
31, 2019, the Company believes there was no impairment of its long-lived assets.
Intangible
Assets
The
Company’s intangible assets consist of land use rights, a software license and intellectual property which will be amortized
over 50, 7 and 7 years, respectively. Amortization will begin when the assets are fully placed in service. The Company performs
a test for impairment annually. The land use rights, the software license and intellectual property intangible assets were acquired
in January 2019, February 2019, and December 2019, respectively. Based on its reviews at August 31, 2019, 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, 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 statement of operations. The Company determines the lease term by agreement with lessor. As majority
of the Company’s leases does not provide an implicit interest rate, the Company uses the Company’s incremental borrowing
rate based on the information available at commencement date in determining the present value of future payments.
Goodwill
Goodwill
represents the excess of purchase price over the underlying net assets of businesses acquired. Under U.S. GAAP, goodwill is not
amortized but is subject to annual impairment tests. At May 31, 2020, the Company recorded goodwill of $181,575, $210,627 and
$210,627, respectively, related to its acquisition of APKA Health, Inc. during the fiscal year ended August 31, 2017, Executive
Fitness Leaders during the fiscal year ended August 31, 2018 and Action Plus Physiotherapy Rockland during the fiscal year ended
August 31, 2019.
Summary
of changes in goodwill by acquired businesses is as follows:
|
|
APKA
|
|
|
EFL
|
|
|
Rockland
|
|
|
Total
|
|
Balance, August 31, 2019
|
|
$
|
187,675
|
|
|
$
|
217,703
|
|
|
$
|
217,703
|
|
|
$
|
623,081
|
|
Foreign currency translation adjustment
|
|
|
(6,100
|
)
|
|
|
(7,076
|
)
|
|
|
(7,076
|
)
|
|
|
(20,252
|
)
|
Balance, May 31, 2020
|
|
$
|
181,575
|
|
|
$
|
210,627
|
|
|
$
|
210,627
|
|
|
$
|
602,829
|
|
Acquisition
Deposits
The
Company has signed letters of understanding with two potential acquisition candidates which includes refundable acquisition deposits
totaling $627,335 and $716,688 at May 31, 2020 and August 31, 2019, respectively. During the nine months ended May 31, 2020, the
Company wrote off an acquisition deposit of $344,521 which is considered impaired since the acquiree has been dissolved and is
no longer in business. See Financial Note 14 Subsequent Events for an acquisition deposit return note.
Fair
Value of Financial Instruments
For
certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, notes receivables,
accounts payable, accrued expenses and due to related parties, 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 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 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 May 31, 2020, and August 31, 2019, respectively, the Company did not identify any assets and liabilities required to be presented
on the balance sheet at fair value.
Fair
Value Measurement on a Non-Recurring Basis
The
Company measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually or when events or changes
in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include goodwill and intangible
assets.
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 condensed 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 and healthcare related 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
of 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 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.
|
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 10,095,000 options/warrants outstanding as of May 31, 2020.
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 $1,077,221 and $1,138,919
at May 31, 2020 and August 31, 2019, 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
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. ASU 2016-02 and additional ASUs are now codified as ASC 842 - Leases (“ASC 842”).
ASC 842 supersedes the lease accounting guidance in ASC 840 Leases and requires lessees to recognize a lease liability
and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements.
The Company adopted ASC 842 on March 1, 2019 and used the modified retrospective transition approach and did not restate its comparative
periods. As of the date of implementation on March 1, 2019, the impact of the adoption of ASC 842 resulted in the recognition
of a right of use asset and lease payable obligation on the Company’s condensed consolidated balance sheets of $2,360,787.
As the right of use asset and the lease payable obligation were the same upon adoption of ASC 842, there was no cumulative effect
impact on the Company’s accumulated deficit.
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
June 2018, the Financial Accounting Standards Board (the “FASB”), issued an accounting pronouncement (FASB ASU 2018-07)
to expand the scope of ASC Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for
acquiring goods and services from nonemployees. The pronouncement is effective for fiscal years and interim periods within those
fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company adopted this pronouncement and such
adoption did not have a significant impact on the unaudited condensed consolidated financial statements.
Management
does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying
financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.
Note
3 – Related Party Transactions
Due
to related parties
Amounts
loaned to the Company by stockholders and officers of the Company are payable upon demand. At May 31, 2020 and August 31, 2019,
the amount due to related parties was $742,816 and $920,083, respectively.
The
Company leases office space from a related party on a month-to-month basis with monthly lease payments of $1,641.
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 May 31, 2020 and August 31, 2019 consisted of the following:
|
|
May 31, 2020
|
|
|
August 31, 2019
|
|
Trade receivables
|
|
$
|
1,438,892
|
|
|
$
|
1,631,036
|
|
Amounts earned but not billed
|
|
|
148,931
|
|
|
|
304,059
|
|
|
|
|
1,587,823
|
|
|
|
1,935,095
|
|
Allowance for doubtful accounts
|
|
|
(470,751
|
)
|
|
|
(471,566
|
)
|
Accounts receivable, net
|
|
$
|
1,117,072
|
|
|
$
|
1,463,529
|
|
Note
5 – Other Receivables
Other
receivables at May 31, 2020 and August 31, 2019 consisted of the following:
|
|
May 31, 2020
|
|
|
August 31, 2019
|
|
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)
|
|
$
|
272,363
|
|
|
$
|
281,513
|
|
|
|
|
|
|
|
|
|
|
Advance to corporation; non-interest bearing; unsecured; due not later than November 18,
2020
|
|
|
29,052
|
|
|
|
30,028
|
|
|
|
|
|
|
|
|
|
|
Advance to corporation; accrues interest at 12% per annum; unsecured; due December 31, 2020
|
|
|
72,630
|
|
|
|
75,070
|
|
|
|
|
|
|
|
|
|
|
Advance to corporation; accrues interest at 10% per annum after the first 60 days; unsecured; due February 7, 2021
|
|
|
225,924
|
|
|
|
225,924
|
|
|
|
|
|
|
|
|
|
|
Advance to corporation; accrues interest at 10% per annum; secured by property and other assets; due December 31, 2020
|
|
|
726,300
|
|
|
|
750,700
|
|
|
|
|
|
|
|
|
|
|
Total other receivables
|
|
|
1,326,269
|
|
|
|
1,363,235
|
|
Current portion
|
|
|
(1,053,906
|
)
|
|
|
(300,994
|
)
|
Long-term portion
|
|
$
|
272,363
|
|
|
$
|
1,062,241
|
|
Note
6 – Property and Equipment
Property
and equipment at May 31, 2020 and August 31, 2019 consisted of the following:
|
|
May 31, 2020
|
|
|
August 31, 2019
|
|
Leasehold Improvements
|
|
$
|
440,905
|
|
|
$
|
453,233
|
|
Clinical equipment
|
|
|
277,176
|
|
|
|
285,307
|
|
Computer equipment
|
|
|
22,640
|
|
|
|
23,133
|
|
Office equipment
|
|
|
27,664
|
|
|
|
28,593
|
|
Furniture and fixtures
|
|
|
37,631
|
|
|
|
38,895
|
|
|
|
|
806,016
|
|
|
|
829,161
|
|
Accumulated depreciation
|
|
|
(458,773
|
)
|
|
|
(418,973
|
)
|
Total
|
|
$
|
347,243
|
|
|
$
|
410,188
|
|
Depreciation
expense for the nine months ended May 31, 2020 and May 31, 2019 was $54,681 and $71,256, respectively.
Note
7 – Intangible Assets
Intangible
assets at May 31, 2020 and August 31, 2019 consisted of the following:
|
|
May 31, 2020
|
|
|
August 31, 2019
|
|
Land use rights
|
|
$
|
21,600,000
|
|
|
$
|
21,600,000
|
|
Software license
|
|
|
1,144,798
|
|
|
|
758,567
|
|
Intellectual property
|
|
|
5,248,000
|
|
|
|
-
|
|
|
|
|
27,992,798
|
|
|
|
22,358,567
|
|
Accumulated amortization
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
27,992,798
|
|
|
$
|
22,358,567
|
|
On
December 17, 2019, the Company entered into that certain Intellectual Property Asset Purchase Agreement (the “APA”)
by and between the Company and 2731861 Ontario Corp. (the “Seller”), pursuant to which the Company agreed to purchase,
and Seller agreed to sell (the “Acquisition”), proprietary designs for an innovative cannabis dosing device, in addition
to designs, plans, procedures, and all other material pertaining to the application, construction, operation, and marketing of
a cannabis business under the regulations of Health Canada (the “Intellectual Property”). Pursuant to the terms of
the APA, the purchase price of the Intellectual Property is 8,000,000 shares of restricted common stock of the Company valued
at $5,248,000.
On
February 26, 2019, the Company and NHL entered into a Software License Agreement (the “Cloud DX License”) with Cloud
DX Inc. (“Cloud DX”), pursuant to which Cloud DX agreed to sell, and NHL agreed to purchase, a fully paid up, perpetual
license, with 5-year conditional exclusivity, for the Cloud DX Bundled Pulsewave PAD-1A USB Blood Pressure Device, up-to-date
product releases and Licensed Software Products (the “Licensed Software”). Pursuant to the terms of the Cloud DX License,
Cloud DX also agreed to sell, and NHL agreed to purchase, 4,000 fully functional Pulsewave PAD 1A USB blood pressure monitor devices
bundled with the perpetual license discussed above (the “Bundled Devices”).
The
Cloud DX License granted to NHL and its majority-owned subsidiaries, holding companies, divisions and affiliates, other than physiotherapy
clinics owned and operated by Closing The Gap Healthcare Inc., the right to use and sub-license the Licensed Software and re-sell
the Bundled Devices pursuant to the terms of the Cloud DX License in the physical therapy clinic marketplace in North America
in exchange for the purchase price as set forth below:
|
●
|
Upon
the closing, the Company issued 458,349 restricted shares of its common stock having a value (as calculated as set forth in
the Cloud DX License) of CAD$1,000,000 (approximately $758,567 as of February 26, 2019), and
|
|
|
|
|
●
|
Cloud
DX agreed to invoice CAD$250,000 (approximately $189,642 as of February 26, 2019) to NHL based on the following deliverables,
and paid on the following schedule:
|
|
Cloud
DX deliverable
|
|
Novo
payment (terms: Net 15)
|
|
Heart
Friendly Program launches in Clinic #1
|
|
CAD$50,000
(approximately $37,929 as of February 26, 2019)
|
|
Novo-branded
Android app delivered as APK file
|
|
CAD$35,000
(approximately $26,550 as of February 26, 2019)
|
|
Novo-branded
Clinical portal website delivered
|
|
CAD$35,000
(approximately $26,550 as of February 26, 2019)
|
|
Pulsewave
PAD-1A devices – 1st delivery
|
|
CAD$20,000
(approximately $15,171 as of February 26, 2019)
|
|
Marketing
services / materials delivered
|
|
CAD$25,000
(approximately $18,964 as of February 26, 2019)
|
|
Cloud
DX hires dedicated Novo support FTE
|
|
CAD$85,000
(approximately $64,478 as of February 26, 2019)
|
On
March 9, 2020, the Company and NHL entered into that certain First Amendment to Cloud DX Perpetual Software License Agreement
(the “Cloud DX Amendment”) with Cloud DX, effective March 6, 2020, pursuant to which the parties thereto agreed that
the CAD$250,000 (approximately $186,231 as of March 6, 2020) that was to be paid by NHL based on the above deliverables would
be paid as a one-time payment of 465,578 restricted shares of Company common stock. In addition, pursuant to the terms of the
Cloud DX Amendment, the parties agreed to settle a $200,000 fee owed by NHL to Cloud DX through payment of 500,000 restricted
shares of Company common stock.
Except
as set forth in the Cloud DX Amendment, the remaining terms and conditions of the Cloud DX License remain in full force and effect.
There
was no amortization expense during the nine months ended May 31, 2020 and May 31, 2019 as the listed intangible assets have not
been placed in service.
Note
8 – Accrued Expenses
Accrued
expenses at May 31, 2020 and August 31, 2019 consisted of the following:
|
|
May 31, 2020
|
|
|
August 31, 2019
|
|
Accrued liabilities
|
|
$
|
57,737
|
|
|
$
|
59,661
|
|
Accrued payroll
|
|
|
60,852
|
|
|
|
115,912
|
|
Other
|
|
|
37,676
|
|
|
|
30,211
|
|
|
|
$
|
156,265
|
|
|
$
|
205,784
|
|
Note
9 – Government Loans and Note Payable
Notes
payable at May 31, 2020 consisted of the following:
|
|
May 31, 2020
|
|
Note payable issued under the Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The loan has terms of 24 months and accrues interest at 1% per annum. The Company expects some or all of this loan to be forgiven as provided by in the CARES Act.
|
|
$
|
21,900
|
|
Government loans issued under the Government of Canada’s Canada Emergency Business Account (“CEBA”) program. 25% of the balance will be forgiven if paid on or before December 31, 2022.
|
|
|
58,104
|
|
|
|
$
|
80,004
|
|
During
the three months ended May 31, 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 three months ended May 31, 2020, recorded a total
of approximately $203,000 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.
Note
10 – 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
September 27, 2019, the debenture holders agreed to extend the due date to September 30, 2021.
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 May 31, 2020, the amount of debentures outstanding was $1,162,536.
Note
11 – 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 must discount 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. Effective March 1, 2019, the Company adopted the provision of ASC 842 Leases.
The
table below presents the lease related assets and liabilities recorded on the Company’s condensed consolidated balance sheets
as of May 31, 2020:
|
|
Classification on Balance Sheet
|
|
May 31, 2020
|
|
Assets
|
|
|
|
|
|
|
Operating lease assets
|
|
Operating lease right of use assets
|
|
$
|
2,800,130
|
|
Total lease assets
|
|
|
|
$
|
2,800,130
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Operating lease liability
|
|
Current operating lease liability
|
|
$
|
535,358
|
|
Noncurrent liabilities
|
|
|
|
|
|
|
Operating lease liability
|
|
Long-term operating lease liability
|
|
|
2,281,174
|
|
Total lease liability
|
|
|
|
$
|
2,816,532
|
|
Lease
obligations at May 31, 2020 consisted of the following:
Twelve Months Ending May 31,
|
|
|
|
2021
|
|
$
|
768,822
|
|
2022
|
|
|
655,428
|
|
2023
|
|
|
594,278
|
|
2024
|
|
|
395,078
|
|
2025
|
|
|
315,992
|
|
2026
|
|
|
281,961
|
|
Thereafter
|
|
|
553,545
|
|
Total payments
|
|
|
3,565,104
|
|
Amount representing interest
|
|
|
(748,572
|
)
|
Lease obligation, net
|
|
|
2,816,532
|
|
Less lease obligation, current portion
|
|
|
(535,358
|
)
|
Lease obligation, long-term portion
|
|
$
|
2,281,174
|
|
The
lease expense for the nine months ended May 31, 2020 was $576,528. The cash paid under operating leases during the nine months
ended May 31, 2020 was $563,989. At May 31, 2020, the weighted average remaining lease terms were 6.14 years and the weighted
average discount rate was 8%.
Note
12 – Stockholders’ Deficit
Convertible
preferred stock
The
Company has authorized 1,000,000 shares of $0.001 par value convertible preferred stock. At May 31, 2020 and August 31, 2019 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 May 31, 2020 and August 31, 2019 there were 233,011,454
and 223,691,507 common shares issued and outstanding, respectively.
During
the nine months ended May 31, 2020, the Company issued:
|
●
|
354,369
restricted shares of common stock for cash proceeds of $113,399;
|
|
|
|
|
●
|
8,000,000
restricted shares of common stock as consideration for the Intellectual Property Asset Purchase Agreement with a value
of $5,248,000 based on the closing share price of $0.656 on the execution date of the Agreement; and
|
|
●
|
965,578
restricted shares of common stock as consideration for the License Agreement Amendment No. 1 with a value of $386,231 based
on the closing share price of $0.40 on the execution date of the Agreement Amendment No.1.
|
During
the nine months ended May 31, 2019, the Company issued:
|
●
|
3,245,444
restricted shares of common stock for cash proceeds of $3,228,098;
|
|
|
|
|
●
|
12,000,000
restricted shares of common stock as consideration for the Assignment, to the Company, of a Joint Venture Agreement with a
value of $21,600,000 based on the closing share price of $1.80 on the execution date of the Closing Certificate, and
|
|
|
|
|
●
|
458,349
restricted shares of common stock as consideration for a Licensing Agreement based on a per share price of $1.655 with a value
of $758,567.
|
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 May 31, 2020, 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 2015 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 May 31, 2020 under the 2018 Plan.
The
following is a summary of stock option/warrant activity:
|
|
Options/
Warrants
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, August 31, 2019
|
|
|
10,095,000
|
|
|
|
0.30
|
|
|
|
3.58
|
|
|
$
|
1,141,500
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, May 31, 2020
|
|
|
10,095,000
|
|
|
|
0.16
|
|
|
|
3.69
|
|
|
$
|
-
|
|
Exercisable, May 31, 2020
|
|
|
10,095,000
|
|
|
$
|
0.16
|
|
|
|
3.69
|
|
|
$
|
-
|
|
The
exercise price for options/warrants outstanding at May 31, 2020:
Outstanding and Exercisable
|
|
Number of
Options/
Warrants
|
|
|
Exercise
Price
|
|
|
9,995,000
|
|
|
$
|
0.16
|
|
|
100,000
|
|
|
|
0.50
|
|
|
10,095,000
|
|
|
|
|
|
For
options granted during the fiscal year ended 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 ended 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.
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 $0 and $70,846 during the three months ended May 31, 2020 and 2019, respectively. At May 31, 2020, the unamortized
stock option expense was $0.
The
assumptions used in calculating the fair value of options granted during the fiscal year ended August 31, 2019 using the Black-Scholes
option-pricing model for options granted are as follows:
Risk-free interest rate
|
|
|
2.78
|
%
|
Expected life of the options
|
|
|
3.5 years
|
|
Expected volatility
|
|
|
294
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
During
the nine months ended May 31, 2020, the Company re-priced the exercise price of 4,495,000 options to $0.16 and extended the expiration
date of 4,370,000 options by two years. The change in fair value between the options using the original terms and the options
using the new expiration dates and exercise prices was $62,823 which has been recorded as expense in the accompanying condensed
consolidated statements of operations and comprehensive loss.
Note
13 – Commitments and Contingencies
Litigation
The
Company is party to certain legal proceedings from time to time incidental to the conduct of its business. These proceedings could
result in fines, penalties, compensatory or treble damages or non-monetary relief. The nature of legal proceedings is such that
the Company cannot assure the outcome of any particular matter, and an unfavorable ruling or development could have a materially
adverse effect on our condensed consolidated financial position, results of operations and cash flows in the period in which a
ruling or settlement occurs. However, based on information available to the Company’s management to date, the Company’s
management does not expect that the outcome of any matter pending against the Company is likely to have a materially adverse effect
on the Company’s condensed consolidated financial position as of May 31, 2020, results of operations, cash flows or liquidity
of the Company.
Note
14 – Subsequent Events
The
Company’s management has evaluated subsequent events up to the date the interim condensed consolidated financial statements
were issued, pursuant to the requirements of ASC 855 and has determined the following to be material subsequent events:
Return
of Acquisition Deposit
On
June 26, 2020, an acquisition deposit of $254,205 (CAD$350,000) was returned to the Company.
Impact
of COVID-19
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries
and infections have been reported globally.
On
March 17, 2020, as a result of COVID-19 infections 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. On March 20, 2020, the Company announced the
precautionary measures taken as well as announcing the business impact related to the coronavirus (COVID-19) pandemic.
Operating
under COVID-19 related authorized governmental proclamations and directives, between March 17, 2020 and June 1, 2020, the Company
provided in-clinic multi-disciplinary primary healthcare services and products solely to patients with emergency and essential
need while also providing certain virtual based services related to physiotherapy. In light of most eldercare related services
being deemed essential by national, provincial and local governmental authorities in Canada, NHL’s contracted eldercare
services have been nominally impacted during the fiscal third quarter and we project the same for the fiscal fourth quarter.
On
May 26, 2020, the Ontario Ministry of Health announced updated guidance and directives stating that physiotherapists, chiropractors
and other regulated health professionals, including all services and products provided by the Company, can gradually and carefully
begin providing all services, including non-essential services, once the clinician and provider are satisfied all necessary precautions
and protocols are in place to protect the patients, the clinician and the clinic staff. With all corporate clinics closed due
to the COVID-19 pandemic, with the exception of providing certain limited essential and emergency services, the Company had furloughed
48 full-time employees and 35 part-time employees from its pre-closure levels of 81 full-time employees and 53 part-time employees.
On
June 2, 2020, the Company commenced opening its corporate clinics and providing non-essential services. As of June 9, 2020, the
Company had opened all corporate clinics 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. Certain of these guidelines and protocols include both active and passive screening for staff and clients, enhanced
cleaning measures using only Health Canada approved disinfectants and sanitizers, personal protective equipment usage, appropriate
signage and markers throughout the clinics, and layout changes to the clinics to reflect proper physical distancing measures.
Additional, more restrictive proclamations and/or directives may be issued in the future. As of July 10, 2020, the Company
had increased staffing to 51 full-time employees and 24 part-time employees.
Now
that our corporate clinics are re-opened under mandated guidelines and protocols, in-clinic patient flow for the month of June
2020 has met and exceeded our projection of 40% of pre-shutdown levels. The Company projects a steady week-over-week increase
as (i) recommended guidelines for patient-clinician on-site interaction are eased, and (ii) more overall movement restrictions
are reduced and people are more comfortable in public spaces.
The
ultimate 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. The full long-term financial impact cannot be reasonably estimated at this time but is anticipated
to have a material adverse impact on our business, financial condition, and results of operations.
The
measures taken to date will impact the Company’s business for the fiscal third quarter and potentially beyond. Management
expects that all of its business segments, across all of its geographies, will be impacted to some degree, but the significance
of the full impact of the COVID-19 outbreak on the Company’s business and the duration for which it may have an impact cannot
be determined at this time.
For
more on the financial impact of COVID-19 on the Company’s fiscal third quarter, see “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.
Regulation
A+ Offering
Beginning
on June 29, 2020, in a “Tier 2 Offering,” pursuant to an Offering Circular on Form 1-A, as amended, pursuant to Regulation
A, the Company offered, on a self-underwritten “best efforts” basis, up to 20,000,000 shares of its common stock,
with an aggregate amount of $30,000,000. The initial public offering price per share of the Company’s common stock is $1.50
per share pursuant to the offering. There is no minimum number of shares that needs to be sold in order for funds to be released
to the Company and for the Offering to close. The minimum investment amount per investor is $1,050 (700 shares of common stock),
subject to waiver by the Company.