Annual Statements Open main menu

Novo Integrated Sciences, Inc. - Quarter Report: 2019 November (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended November 30, 2019

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______, 20___, to _____, 20___.

 

Commission File Number 333-109118

 

Novo Integrated Sciences, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Nevada   59-3691650
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification Number)

 

11120 NE 2nd Street, Suite 200

Bellevue, Washington

  98004
(Address of Principal Executive Offices)   (Zip Code)

 

(206) 617-9797

(Registrant’s Telephone Number, Including Area Code)

 

N/A

(Former name or former address, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each Exchange on which Registered
N/A   N/A   N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer,” “large accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company [X]
Emerging growth company [  ]    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

There were 232,045,876 shares of the Registrant’s $0.001 par value common stock outstanding as of January 9, 2020.

 

 

 

   
   

 

Novo Integrated Sciences, Inc.

 

Contents

 

PART I – FINANCIAL INFORMATION 3
     
Item 1. Financial Statements 3
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation 19
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
     
Item 4. Controls and Procedures 26
     
PART II – OTHER INFORMATION 26
     
Item 1. Legal Proceedings 26
     
Item 1A. Risk Factors 26
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
     
Item 3. Defaults Upon Senior Securities 27
     
Item 4. Mine Safety Disclosures 27
     
Item 5. Other Information 27
     
Item 6. Exhibits 28
     
Signatures 29

 

2
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

NOVO INTEGRATED SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of November 30, 2019 (unaudited) and August 31, 2019

 

   November 30, 2019   August 31, 2019 
    (unaudited)      
ASSETS          
Current Assets:          
Cash and cash equivalents  $1,931,702   $2,083,666 
Accounts receivable, net   1,632,937    1,463,529 
Other receivables, current portion   301,234    300,994 
Prepaid expenses and other current assets   302,251    250,398 
Total current assets   4,168,124    4,098,587 
           
Property and equipment, net   391,668    410,188 
Intangible assets   22,358,567    22,358,567 
Right-of-use assets   2,888,608    3,004,017 
Other receivables, net of current portion   1,065,637    1,062,241 
Acquisition deposits   606,614    716,688 
Goodwill   625,073    623,081 
TOTAL ASSETS  $32,104,291   $32,273,369 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current Liabilities:          
Accounts payable  $1,077,867   $1,144,812 
Accrued expenses   184,239    205,784 
Accrued interest (principally to related parties)   326,940    248,582 
Due to related parties   840,136    920,083 
Note payable, current portion   -    - 
Operating lease liability, current portion   519,229    508,305 
Total current liabilities   2,948,411    3,027,566 
           
Debentures, related parties   1,205,433    1,201,591 
Operating lease liability, net of current portion   2,376,722    2,500,004 
TOTAL LIABILITIES   6,530,566    6,729,161 
           
Commitments and contingencies   -    - 
           
STOCKHOLDERS’ EQUITY          
Novo Integrated Sciences, Inc.          
Convertible preferred stock; $0.001 par value; 1,000,000 shares authorized; 0 and 0 shares issued and outstanding at November 30, 2019 and August 31, 2019          
Common stock; $0.001 par value; 499,000,000 shares authorized; 224,045,876 and 223,691,507 shares issued and outstanding at November 30, 2019 and August 31, 2019   224,046    223,691 
Additional paid-in capital   35,926,247    35,813,203 
Other comprehensive income   1,144,119    1,138,919 
Accumulated deficit   (11,680,093)   (11,591,973)
Total Novo Integrated Sciences, Inc. stockholders’ equity   25,614,319    25,583,840 
Noncontrolling interest   (40,594)   (39,632)
Total stockholders’ equity   25,573,725    25,544,208 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $32,104,291   $32,273,369 

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

 

3
 

 

NOVO INTEGRATED SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

For the Three Months Ended November 30, 2019 and 2018 (unaudited) 

     
   Three Months Ended 
   November 30, 2019   November 30, 2018 
   (unaudited)   (unaudited) 
         
Revenues  $2,548,610   $2,311,622 
           
Cost of revenues   1,632,941    1,428,083 
           
Gross profit   915,669    883,539 
           
Operating expenses:          
Selling expenses   1,222    25,223 
General and administrative expenses   991,272    1,073,668 
Total operating expenses   992,494    1,098,891 
           
Loss from operations   (76,825)   (215,352)
           
Non operating income (expense)          
Interest income   28,195    5,089 
Interest expense   (40,329)   (46,321)
Total other income (expense)   (12,134)   (41,232)
           
Loss before income taxes   (88,959)   (256,584)
           
Income tax expense   -    - 
           
Net loss  $(88,959)  $(256,584)
           
Net loss attributed to noncontrolling interest   (839)   (5,168)
           
Net loss attributed to Novo Integrated Sciences, Inc.  $(88,120)  $(251,416)
           
Comprehensive loss:          
Net loss   (88,959)   (256,584)
Foreign currency translation gain (loss)   5,200    (1,785)
Comprehensive loss:  $(83,759)  $(258,369)
           
Weighted average common shares outstanding - basic and diluted   223,873,170    207,943,636 
           
Net loss per common share - basic and diluted  $(0.00)  $(0.00)

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

 

4
 

 

NOVO INTEGRATED SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months Ended November 30, 2019 and 2018 (unaudited)

 

           Additional   Other       Total Novo         
   Common Stock   Paid-in   Comprehensive   Accumulated   Stockholders’   Noncontrolling   Total 
   Shares   Amount   Capital   Income   Deficit   Equity   Interest   Equity 
Balance, August 31, 2019   223,691,507   $223,691   $35,813,203   $1,138,919   $(11,591,973)  $25,583,840   $(39,632)  $25,544,208 
                                         
Common stock issued for cash   354,369    355    113,044    -    -    113,399    -    113,399 
Foreign currency translation loss   -    -    -    5,200         5,200    (123)   5,077 
Net loss   -    -    -    -    (88,120)   (88,120)   (839)   (88,959)
                                         
Balance, November 30, 2019   224,045,876   $224,046   $35,926,247   $1,144,119   $(11,680,093)  $25,614,319   $(40,594)  $25,573,725 
                                         
Balance, August 31, 2018   207,881,743   $207,882   $10,053,683   $1,139,815   $(11,199,989)  $201,391   $(28,621)  $172,770 
                                         
Common stock issued for cash   563,222    563    531,366    -    -    531,929    -    531,929 
Fair value of vested stock options   -    -    70,846    -    -    70,846    -    70,846 
Foreign currency translation loss   -    -    -    (1,785)        (1,785)   530    (1,255)
Net loss   -    -    -    -    (251,416)   (251,416)   (5,168)   (256,584)
                                         
Balance, November 30, 2018   208,444,965   $208,445   $10,655,895   $1,138,030   $(11,451,405)  $550,965   $(33,259)  $517,706 

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

 

5
 

 

NOVO INTEGRATED SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended November 30, 2019 and 2018 (unaudited)

 

   Three Months Ended 
   November 30, 2019   November 30, 2018 
   (unaudited)   (unaudited) 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(88,959)  $(256,584)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   19,918    22,601 
Fair value of vested stock options   -    70,846 
Operating lease expense   125,561    - 
Changes in operating assets and liabilities:          
Accounts receivable   (165,451)   (90,148)
Prepaid expenses and other current assets   (51,300)   10,350 
Accounts payable   (71,066)   81,218 
Accrued expenses   (21,959)   (15,453)
Accrued interest   77,903    14,213 
Operating lease liability   (122,510)   - 
Net cash used in operating activities   (297,863)   (162,957)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of furniture and equipment   -    (74,408)
Payment for acquisition deposit   (264,185)   - 
Return of acquisition deposit   378,200    - 
Net cash provided by (used in) investing activities   114,015    (74,408)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Repayments to related parties   (83,252)   (34,554)
Proceeds from the sale of common stock   113,399    531,929 
Net cash provided by financing activities   30,147    497,375 
           
Effect of exchange rate changes on cash and cash equivalents   1,737    (6,577)
           
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS   (151,964)   253,433 
           
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   2,083,666    675,705 
           
CASH AND CASH EQUIVALENTS, END OF PERIOD  $1,931,702   $929,138 
           
CASH PAID FOR:          
Interest  $25,608   $34,780 
Income taxes  $-   $- 

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

 

6
 

 

NOVO INTEGRATED SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended November 30, 2019 and 2018 (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 to over 400,000 patients annually through our 16 corporate-owned clinics and a contracted network of 99 affiliate clinics and 222 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, Inc. (“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 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, 2019 are not necessarily indicative of the results for the year ending August 31, 2020.

 

7
 

 

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, 2019   November 30, 2018   August 31, 2019 
             
Period end: CAD to USD exchange rate  $0.7531   $0.7761   $0.7647 
Average period: CAD to USD exchange rate  $0.7564   $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.

 

8
 

 

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, 2019 and August 31, 2019, the allowance for uncollectible accounts receivable was $482,405 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 November 30, 2019 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 and a software license which will be amortized over 50 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 and the software license intangible assets were acquired in January and February 2019, respectively. Based on its reviews at August 31, 2019, the Company believes there was no impairment of its intangible assets.

 

9
 

 

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 November 30, 2019, the Company recorded goodwill of $188,275, $218,399 and $188,275, 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   600    696    696    1,992 
Balance, November 30, 2019  $188,275   $218,399   $218,399   $625,073 

 

Acquisition Deposits

 

The Company has signed letters of understanding with two potential acquisition candidates which includes refundable acquisition deposits totaling $606,614 and $716,688 at November 30, 2019 and August 31, 2019, 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, 2019 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.

 

10
 

 

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 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.

 

11
 

 

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 November 30, 2019. 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 $1,144,119 and $1,138,919 at November 30, 2019 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 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.

 

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 November 30, 2019 and August 31, 2019, the amount due to related parties was $840,136 and $920,083, respectively.

 

12
 

 

The Company leases office space from a related party on a month-to-month basis with monthly lease payments of $1,509.

 

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, 2019 and August 31, 2019 consisted of the following:

 

   November 30,   August 31, 
   2019   2019 
Trade receivables  $1,787,472   $1,631,036 
Amounts earned but not billed   327,870    304,059 
    2,115,342    1,935,095 
Allowance for doubtful accounts   (482,405)   (471,566)
Accounts receivable, net  $1,632,937   $1,463,529 

 

Note 5 – Other Receivables

 

Other receivables at November 30, 2019 and August 31, 2019 consisted of the following:

 

   November 30,   August 31, 
   2019   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)  $282,413   $281,513 
Advance to corporation; non-interest bearing; unsecured; due not later than November 18, 2020   30,124    30,028 
Advance to corporation; accrues interest at 12% per annum; unsecured; due December 31, 2020   75,310    75,070 
Advance to corporation; accrues interest at 10% per annum after the first 60 days; unsecured; due February 7, 2020   225,924    225,924 
Advance to corporation; accrues interest at 10% per annum; unsecured; due December 31, 2020   753,100    750,700 
Total other receivables   1,366,871    1,363,235 
Current portion   (301,234)   (300,994)
Long-term portion  $1,065,637   $1,062,241 

 

13
 

 

Note 6 – Property and Equipment

 

Property and equipment at November 30, 2019 and August 31, 2019 consisted of the following:

 

   November 30,   August 31, 
   2019   2019 
Leasehold Improvements  $454,681   $453,233 
Clinical equipment   286,220    285,307 
Computer equipment   23,207    23,133 
Office equipment   28,684    28,593 
Furniture and fixtures   39,019    38,895 
    831,811    829,161 
Accumulated depreciation   (440,143)   (418,973)
Total  $391,668   $410,188 

 

Depreciation expense for the three months ended November 30, 2019 and 2018 was $19,918 and $22,601, respectively.

 

Note 7 – Intangible Assets

 

Intangible assets at November 30, 2019 and August 31, 2019 consisted of the following:

 

   November 30,   August 31, 
   2019   2019 
Land use rights  $21,600,000   $21,600,000 
Software license   758,567    758,567 
    22,358,567    22,358,567 
Accumulated amortization   -    - 
Total  $22,358,567   $22,358,567 

 

There was no amortization expense during the three months ended November 30, 2019 and 2018 as the listed intangible assets have not been placed in service.

 

Note 8 – Accrued Expenses

 

Accrued expenses at November 30, 2019 and August 31, 2019 consisted of the following:

 

   November 30,   August 31, 
   2019   2019 
Accrued liabilities  $26,103   $59,661 
Accrued payroll   116,517    115,912 
Other   41,619    30,211 
   $184,239   $205,784 

 

14
 

 

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 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 November 30, 2019, the amount of debentures outstanding was $1,205,433.

 

Note 10 – 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 consolidated balance sheets as of November 30, 2019:

 

   Classification on Balance Sheet  November 30, 2019 
Assets        
Operating lease assets  Operating lease right of use assets  $2,888,608 
Total lease assets     $2,888,608 
         
Liabilities        
Current liabilities        
Operating lease liability  Current operating lease liability  $519,229 
Noncurrent liabilities        
Operating lease liability  Long-term operating lease liability   2,376,722 
Total lease liability     $2,895,951 

 

Lease obligations at November 30, 2019 consisted of the following:

 

Years ending November 30,    
2020  $727,376 
2021   697,267 
2022   542,181 
2023   448,755 
2024   302,152 
2025   291,941 
Thereafter   720,260 
Total payments   3,729,932 
Amount representing interest   (833,981)
Lease obligation, net   2,895,951 
Less lease obligation, current portion   (519,229)
Lease obligation, long-term portion  $2,376,722 

 

15
 

 

The lease expense for the three months ended November 30, 2019 was $185,371, which consisted of amortization expense of $125,561 and interest expense of $59,810. The cash paid under operating leases during the three months ended November 30, 2019 was $182,321. At November 30, 2019, the weighted average remaining lease terms were 6.6 years and the weighted average discount rate was 8%.

 

Note 11 – Stockholders’ Deficit

 

Convertible preferred stock

 

The Company has authorized 1,000,000 shares of $0.001 par value convertible preferred stock. At November 30, 2019 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 November 30, 2019 and August 31, 2019 there were 224,045,876 and 223,691,507 common shares issued and outstanding, respectively.

 

During the period ended November 30, 2019, the Company issued 354,369 shares of common stock for cash proceeds of $113,399.

 

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, 2019, 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 November 30, 2019 under the 2018 Plan.

 

The following is a summary of stock option/warrant activity:

 

           Weighted     
       Weighted   Average     
   Options/   Average   Remaining   Aggregate 
   Warrants   Exercise   Contractual   Intrinsic 
   Outstanding   Price   Life   Value 
Outstanding, August 31, 2019   10,095,000    0.30    3.58   $1,141,500 
Granted   -                
Forfeited   -                
Exercised   -                
Outstanding, November 30, 2019   10,095,000    0.30    3.33   $2,756,700 
Exercisable, November 30, 2019   10,095,000   $0.30    3.33   $2,756,700 

 

16
 

 

The exercise price for options/warrants outstanding at November 30, 2019:

 

Outstanding and Exercisable 
Number of     
Options/   Exercise 
Warrants   Price 
 5,500,000   $0.16 
 1,000,000    0.32 
 50,000    0.33 
 120,000    0.40 
 2,000,000    0.42 
 100,000    0.50 
 1,000,000    0.62 
 250,000    0.80 
 75,000    0.95 
 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 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.

 

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 November 30, 2019 and 2018, respectively. At November 30, 2019, 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, 2019, are as follows:

 

Risk-free interest rate   2.78%
Expected life of the options   3.5 years 
Expected volatility   294%
Expected dividend yield   0%

 

Note 12 – 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, 2019, results of operations, cash flows or liquidity of the Company.

 

17
 

 

Note 13 – Subsequent Events

 

Intellectual Property Asset Purchase Agreement

 

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. The Acquisition closed on December 17, 2019.

 

Joint Venture Agreement

 

On December 19, 2019, the Company entered into that certain Joint Venture Agreement (the “JV Agreement”) between the Company and Harvest Gold Farms Inc. (“HGF”) relating to the development, management and arrangement of medicinal farming projects involving hemp and cannabis cash crops (the “Project”). Pursuant to the terms of the JV Agreement, the parties agreed to work in a joint venture relationship, with the Company providing the development and operation of the Project, including sales, and HGF providing the land, farming expertise, biomass and necessary approvals for the development of the Project.

 

The initial term of the JV Agreement will, unless sooner terminated by consent of all parties, expire in five years from the effective date of the JV Agreement. The Company and HGF may renew the JV Agreement within two years of the expiration of the initial term upon mutual understanding.

 

Each of the parties agreed to contribute to the start-up of the joint venture (the “JV”) as follows:

 

  The Company:

 

  Complete and finalize a business plan and layout plans, a detailed procurement project binder and an implementation and roll-out plan.
  Make arrangements for construction and financing options of any facilities required for the profitable farming of medicinal crops or related facilities.
  Direct project finance model and selection of engineering, procurement, construction contracts and management service providers.
  Arrange for product purchase contracts.

 

  HGF:

 

  Provide the land and approvals for greenhouse (if necessary), open field farming and other facilities as required.
  Arrange for all required titled land for greenhouses and outdoor agriculture platforms.
  Arrange for all building permits, environmental approvals and HGF internal approvals including confirmation of tax-free JV status for the duration of the proposal (if possible).
  Provide elite farming expertise for the purposes of maximizing potential profits, inclusive of harvesting techniques and process flow and engineering.

 

Pursuant to the terms of the JV Agreement, the Company agreed to maintain all financial records (in U.S. GAAP) of the JV, to provide quarterly and annual reporting to all JV stakeholders, and to assign and direct operational staff from onset to agreement termination. The Company agreed to pay HGF 30% of net JV income on an annual basis commencing 12 months after the first full 12-month revenue period, and to purchase product from the JV at a price of cost plus 5%.

 

In addition, the Company agreed to issue 2,000,000 shares of Company common stock upon achievement of $25,000,000 of net profit by the JV each fiscal year. Such common stock will be delivered to HGF via Novo Healthnet Limited exchangeable preferred shares. Any Company common stock issued to HGF will be subject to pro-rata adjustment in the event that the Company approves, prior to the issuance date, any forward stock split, reverse stock split or other capitalization restructure.

 

HGF agreed, among other things, to grow medicinal agriculture crop at the highest standard, subject to independent third party biomass testing, in the most profitable manner while maintaining the standards of excellence required to maintain elite status, and to provide a minimum of 7,000 acres for the Primary Project. All staffing, including but not limited to, management, specialized or general labor requirements for farming will be the sole responsibility of HGF.

 

18
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and its representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission (“SEC”) and in our reports and presentations to stockholders or potential stockholders. In some cases, forward-looking statements can be identified by words such as “believe,” “expect,” “anticipate,” “plan,” “potential,” “continue” or similar expressions. Such forward-looking statements include risks and uncertainties and there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors, risks and uncertainties can be found in the Part I, Item 1A, “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2019.

 

Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to foresee or identify all factors that could have a material effect on the future financial performance of the Company. The forward-looking statements in this report are made on the basis of management’s assumptions and analyses, as of the time the statements are made, in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate under the circumstances.

 

Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q and the information incorporated by reference in this report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

 

Overview of the Company

 

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 multidisciplinary primary health care services and products to over 400,000 patients annually through our 16 corporate-owned clinics and a contracted network of 99 affiliate clinics and 222 eldercare centric homes located across Canada. Our team of multidisciplinary primary health care clinicians and practitioners provide assessment, diagnosis, treatment, pain management, rehabilitation, education and primary prevention for a wide array of orthopedic, musculoskeletal, sports injury, and neurological conditions across various demographics including pediatric, adult, and geriatric populations.

 

Our clinicians and practitioners provide certain multidisciplinary primary health care services, and related products, beyond the medical doctor first level contact identified as primary care. Our clinicians and practitioners are not licensed medical doctors, physicians, specialist, nurses or nurse practitioners. Our clinicians and practitioners are not authorized to practice primary care medicine and they are not medically licensed to prescribe pharmaceutical based product solutions.

 

19
 

 

Our specialized multidisciplinary primary health care services include physiotherapy, chiropractic care, manual/manipulative therapy, occupational therapy, eldercare, massage therapy (including pre- and post-partum), acupuncture and functional dry needling, chiropody, stroke and traumatic brain injury/neurological rehabilitation, kinesiology, vestibular therapy, concussion management and baseline testing, trauma sensitive yoga and meditation for concussion-acquired brain injury and occupational stress-PTSD, women’s pelvic health programs, sports medicine therapy, assistive devices, fall prevention education, sports team conditioning programs including event and game coverage, and private personal training.

 

Certain of the specialty treatment and recovery programs we offer derive from motor vehicle accident injuries, long-term disability cases, corporate wellness, and job-site injuries approved for treatment by the Workplace Safety and Insurance Board. In addition, we offer specialized treatments and products that include cold laser therapeutics, shockwave therapy, custom bracing and orthotics, custom compression therapy/stockings and lymphatic drainage treatment.

 

Certain of our assessments and treatment technologies include Brain FX, a research based digital cognitive assessment tool measuring cognitive functional skills; and, MyndMove Therapy, a non-invasive functional electrical stimulation (FES) therapy for individuals with arm and hand paralysis due to a stroke, spinal cord or other neurological injury.

 

As we continue to build our health science platform of services and products through the integration of technology and rehabilitative science, one component of our lateral business growth strategy includes developing business units centered on the direct control of the grow, extraction, manufacturing and distribution processes regarding our hemp and medical cannabidiol products. Additionally, we continue to expand on our patient care philosophy of maintaining an on-going continuous connection with our patient community, beyond the traditional confines of a clinic, by extending oversight of patient diagnosis, care and monitoring, directly into the patient’s home, through remote patient monitoring and mobile telemedicine and diagnostic tools.

 

Our strict adherence to public regulatory standards, as well as self-imposed standards of excellence and regulation, have allowed us to navigate with ease through the industry’s licensing and regulatory framework. Compliant treatment, data and administrative protocols are managed through a team of highly trained, certified health care and administrative professionals. We and our affiliates provide service to the Canadian property and casualty insurance industry, resulting in a regulated framework governed by the Financial Services Commission of Ontario.

 

The occupational therapists, physiotherapists and kinesiologists contracted by NHL to provide occupational therapy, physical therapy and fall prevention assessment services are registered with the College of Occupational Therapists of Ontario, the College of Physiotherapists of Ontario and the College of Kinesiologists of Ontario regulatory authorities. In 2013, NHL received its accreditation from the Commission on Accreditation of Rehabilitation Facilities (“CARF”). Currently, NHL is renewing its CARF accreditation.

 

Recent Developments

 

U.S. LA Fitness License Agreement & Guaranty

 

On September 24, 2019, Novomerica Health Group Inc. (“Novomerica”), a wholly owned subsidiary of the Company, entered into a Master Facility License Agreement (the “U.S. License Agreement”) with Fitness International, LLC and Fitness & Sports Clubs, LLC (together with Fitness International, LLC, “LA Fitness U.S.”). Pursuant to the terms of the U.S. License Agreement, the parties agreed that from time to time as set forth in the U.S. License Agreement or as the parties otherwise agree, Novomerica may wish to identify sublicensees to provide certain services in facilities operated by LA Fitness U.S., and LA Fitness U.S. may desire to grant to such sublicenses the right to do the same. Upon execution of applicable documentation as may be required by the U.S. License Agreement, the sublicensee (which may be Novomerica, if Novomerica desires to provide Services (as hereinafter defined) itself) shall have the right, subject to the terms of the U.S. License Agreement, to (i) occupy and use, on an exclusive basis, for the purposes of providing outpatient physical and/or occupational therapy as provided in the U.S. License Agreement (the “Services”), with the applicable LA Fitness U.S. facility, and (ii) access and use, on a non-exclusive basis, for the purpose of providing the Services, the applicable facility’s equipment and a pool lane, and (iii) use, on a non-exclusive basis, the applicable facility’s common areas solely as necessary to access the facility’s service area, equipment and a pool lane.

 

20
 

 

Pursuant to the terms of the U.S. License Agreement, six separate initial licenses in Ohio were granted. Novomerica agreed to develop and open for business (a) at least four of such facilities by December 31, 2019, and (b) beginning in January 2020, at least two of such additional facilities per calendar month until all such facilities are opened for business (the “U.S. Development Schedule”). As of January 13, 2020, Novomerica and LA Fitness U.S. are negotiating an amendment to the U.S. License Agreement that would have the effect, among other things, of adjusting the U.S. Development Schedule.

 

With respect to each license granted under the U.S. License Agreement, for the period beginning as of the commencement date of each such license and continuing until the expiration or earlier termination of such license, Novomerica shall pay to LA Fitness U.S. a monthly payment in an agreed upon amount.

 

Unless sooner terminated as provided in the U.S. License Agreement, the term of the U.S. License Agreement shall expire simultaneously with the expiration of earlier termination of the License Term (as such term is defined in the U.S. License Agreement) of the last remaining license granted under the U.S. License Agreement.

 

Pursuant to the terms of the U.S. License Agreement, the Company agreed to execute that certain Guaranty Agreement (the “U.S. Guaranty”) dated September 24, 2019 by and between the Company and LA Fitness U.S. Pursuant to the terms of the U.S. Guaranty, the Company irrevocably guaranteed the full, unconditional and prompt payment and performance of all of Novomerica’s obligations and liabilities under the U.S. License Agreement.

 

Canada LA Fitness License Agreement & Guaranty

 

On September 24, 2019, NHL entered into a Master Facility License Agreement (“Canada License Agreement”) with LAF Canada Company (“LA Fitness Canada”). Pursuant to the terms of the Canada License Agreement, the parties agreed that from time to time as set forth in the Canada License Agreement or as the parties otherwise agree, NHL may wish to identify sublicensees to provide certain services in facilities operated by LA Fitness Canada, and LA Fitness Canada may desire to grant to such sublicensees the right to do the same. Upon execution of applicable documentation as may be required by the Canada License Agreement, the sublicensee (which may be NHL, if NHL desires to provide Services (as hereinafter defined) itself) shall have the right, subject to the terms of the Canada License Agreement, to (i) occupy and use, on an exclusive basis, for the purposes of providing the Services, with the applicable LA Fitness Canada facility, and (ii) access and use, on a non-exclusive basis, for the purpose of providing the Services, the applicable facility’s equipment and a pool lane, and (iii) use, on a non-exclusive basis, the applicable facility’s common areas solely as necessary to access the facility’s service area, equipment and a pool lane.

 

Pursuant to the terms of the Canada License Agreement, 18 separate initial licenses in Ontario, Canada and Alberta, Canada were granted. NHL agreed to develop and open for business (a) at least four of such facilities by December 31, 2019, and (b) beginning in January 2020, at least two of such additional facilities per calendar month until all such facilities are opened for business. (the “Canada Development Schedule”). As of January 13, 2020, NHL and LA Fitness Canada are negotiating an amendment to the Canada License Agreement that would have the effect, among other things, of adjusting the Canada Development Schedule.

 

With respect to each license granted under the Canada License Agreement, for the period beginning as of the commencement date of each such license and continuing until the expiration or earlier termination of such license, NHL shall pay to LA Fitness Canada a monthly payment in an agreed upon amount.

 

Unless sooner terminated as provided in the Canada License Agreement, the term of the Canada License Agreement shall expire simultaneously with the expiration of earlier termination of the License Term (as such term is defined in the Canada License Agreement) of the last remaining license granted under the Canada License Agreement.

 

Pursuant to the terms of the Canada License Agreement, the Company agreed to execute that certain Guaranty Agreement (the “Canada Guaranty”) dated September 24, 2019 by and between the Company and LA Fitness Canada. Pursuant to the terms of the Canada Guaranty, the Company irrevocably guaranteed the full, unconditional and prompt payment and performance of all of NHL’s obligations and liabilities under the Canada License Agreement.

 

21
 

 

Intellectual Property Asset Purchase Agreement

 

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. The Acquisition closed on December 17, 2019.

 

Joint Venture Agreement

 

On December 19, 2019, the Company entered into that certain Joint Venture Agreement (the “JV Agreement”) between the Company and Harvest Gold Farms Inc. (“HGF”) relating to the development, management and arrangement of medicinal farming projects involving hemp and cannabis cash crops (the “Project”). Pursuant to the terms of the JV Agreement, the parties agreed to work in a joint venture relationship, with the Company providing the development and operation of the Project, including sales, and HGF providing the land, farming expertise, biomass and necessary approvals for the development of the Project.

 

The initial term of the JV Agreement will, unless sooner terminated by consent of all parties, expire in five years from the effective date of the JV Agreement. The Company and HGF may renew the JV Agreement within two years of the expiration of the initial term upon mutual understanding.

 

Each of the parties agreed to contribute to the start-up of the joint venture (the “JV”) as follows:

 

  The Company:

 

  Complete and finalize a business plan and layout plans, a detailed procurement project binder and an implementation and roll-out plan.
  Make arrangements for construction and financing options of any facilities required for the profitable farming of medicinal crops or related facilities.
  Direct project finance model and selection of engineering, procurement, construction contracts and management service providers.
  Arrange for product purchase contracts.

 

  HGF:

 

  Provide the land and approvals for greenhouse (if necessary), open field farming and other facilities as required.
  Arrange for all required titled land for greenhouses and outdoor agriculture platforms.
  Arrange for all building permits, environmental approvals and HGF internal approvals including confirmation of tax-free JV status for the duration of the proposal (if possible).
  Provide elite farming expertise for the purposes of maximizing potential profits, inclusive of harvesting techniques and process flow and engineering.

 

Pursuant to the terms of the JV Agreement, the Company agreed to maintain all financial records (in U.S. GAAP) of the JV, to provide quarterly and annual reporting to all JV stakeholders, and to assign and direct operational staff from onset to agreement termination. The Company agreed to pay HGF 30% of net JV income on an annual basis commencing 12 months after the first full 12-month revenue period, and to purchase product from the JV at a price of cost plus 5%.

 

22
 

 

In addition, the Company agreed to issue 2,000,000 shares of Company common stock upon achievement of $25,000,000 of net profit by the JV each fiscal year. Such common stock will be delivered to HGF via NHL exchangeable preferred shares. Any Company common stock issued to HGF will be subject to pro-rata adjustment in the event that the Company approves, prior to the issuance date, any forward stock split, reverse stock split or other capitalization restructure.

 

HGF agreed, among other things, to grow medicinal agriculture crop at the highest standard, subject to independent third party biomass testing, in the most profitable manner while maintaining the standards of excellence required to maintain elite status, and to provide a minimum of 7,000 acres for the Primary Project. All staffing, including but not limited to, management, specialized or general labor requirements for farming will be the sole responsibility of HGF.

 

For the three months ended November 30, 2019 compared to the three months ended November 30, 2018

 

Revenues for the three months ended November 30, 2019 were $2,548,610, representing an increase of $236,988, or 10.3%, from $2,311,622 for the same period in 2018. The increase in revenue is principally due to providing additional eldercare services and to the acquisition of Action Plus Physiotherapy Rockland in July 2019.

 

Cost of revenues for the three months ended November 30, 2019 were $1,632,941, representing an increase of $204,858 or 14.3%, from $1,428,083 for the same period in 2018. The increase in cost of revenues is principally due the increase in revenue. Cost of revenues as a percentage of revenue was 64.1% for the three months ended November 30, 2019 and 61.8% for same period in 2018. The increase in cost of revenues as a percentage of revenue is principally due to higher costs.

 

Operating costs for the three months ended November 30, 2019 were $992,494, representing a decrease of $106,397, or 9.7%, from $1,098,891 for the same period in 2018. The decrease in operating costs is primarily attributed to a reduction in stock-based compensation and selling expenses.

 

Interest expense for the three months ended November 30, 2019 was $40,329, representing a decrease of $5,992, or 12.9%, from $46,321 for the same period in 2018. The decrease is due to less debt outstanding.

 

Net loss for the three months ended November 30, 2019 was $88,959, representing a decrease of $167,625, or 65.3%, from $256,584 for the same period in 2018. The decrease in net loss is due to the reasons described above.

 

Liquidity and Capital Resources

 

As shown in the accompanying financial statements, for the three months ended November 30, 2019, the Company had a net loss of $88,959.

 

During the three months ended November 30, 2019, the Company used cash in operating activities of $297,863 compared to $162,957 for the same period in 2018. The principal reason for the increase is an increase in accounts receivable and prepaid expenses and other current assets and a decrease in accounts payable.

 

During the three months ended November 30, 2019, the Company generated cash from investing activities of $114,015 compared to cash used in investing activities of $74,408 for the same period in 2018. The principal reason for the change is the return of an acquisition deposit and a decrease in the purchase of furniture and equipment offset by the payment of an acquisition deposit.

 

During the three months ended November 30, 2019, the Company generated cash of $30,147 from financing activities compared to $497,375 for the same period in 2018. The principal reason for the change is the sale of shares of common stock for $113,399 during the three months ended November 30, 2019, compared to $531,929 for the same period in 2018 and an increase in repayments to related parties for the three months ended November 30, 2019.

 

On October 12, 2019, the Company sold 235,400 restricted shares of common stock to an accredited investor residing outside the United States for a purchase price of $75,328, resulting in an effective price per share of $0.32. The shares were issued on October 15, 2019.

 

23
 

 

On October 19, 2019, the Company sold 118,969 restricted shares of common stock to an accredited investor residing outside the United States for a purchase price of $38,071, resulting in an effective price per share of $0.32. The shares were issued on October 22, 2019.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

We believe that the following critical policies affect our more significant judgments and estimates used in preparation of our financial statements.

 

Use of Estimates

 

The preparation of 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.

 

Noncontrolling Interest

 

The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, which governs the accounting for and reporting of non-controlling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance.

 

The net income (loss) attributed to the NCI is separately designated in the accompanying consolidated statements of operations and other comprehensive income (loss).

 

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.

 

24
 

 

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.

 

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.

 

Foreign Currency Transactions and Comprehensive Income

 

U.S. GAAP generally requires recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The functional currency of the Company’s Canadian subsidiaries is the Canadian dollar. Translation gains (losses) are classified as an item of other comprehensive income in the stockholders’ equity section of the balance sheet.

 

25
 

 

New 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 Accounting Standards Codification Standard (“ASC”) 842 - Leases (“ASC 842”). ASC 842 supersedes the lease accounting guidance in ASC 840 Lease 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 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.

 

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.

 

Recent accounting pronouncements issued by the FASB, the American Institute of Certified Public Accountants and the SEC did not or are not believed by management to have a material effect on the Company’s financial statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Company’s Chief Executive Officer and Principal Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of November 30, 2019. Based upon such evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that, as of November 30, 2019, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the fiscal quarter ended November 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Except as set forth herein, as of the date of this Quarterly Report on Form 10-Q, there are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or which our property is the subject. In addition, none of our officers, directors, affiliates or 5% stockholders (or any associates thereof) is a party adverse to us, or has a material interest adverse to us, in any material proceeding.

 

ITEM 1A. RISK FACTORS

 

None.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On October 12, 2019, the Company sold 235,400 restricted shares of common stock to an accredited investor for a purchase price of $75,328. The shares were issued on October 15, 2019.

 

On October 19, 2019, the Company sold 118,969 restricted shares of common stock to an accredited investor for a purchase price of $38,071. The shares were issued on October 22, 2019.

 

26
 

 

The above sales were made pursuant to an exemption from registration as set forth in Regulation S under the Securities Act. The issuances involved an offer and sale of securities outside the United States. The offers and sales were made in offshore transactions and no directed selling efforts were made by the issuer, a distributor, their affiliates or any persons acting on their behalf.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

There have been no defaults in any material payments during the covered period.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

(a) None.

 

(b) There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors since the Company last provided disclosure in response to the requirements of Item 407(c)(3) of Regulation S-K.

 

27
 

 

ITEM 6. EXHIBITS

 

Exhibit

Number

  Description of Document
     
31.1   Rule 13a-14(a) Certification of Principal Executive Officer.
     
31.2   Rule 13a-14(a) Certification of Principal Financial Officer.
     
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Principal Executive Officer and Principal Financial Officer.
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB   XBRL Taxonomy Extension Labels Linkbase
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

28
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

 

  NOVO INTEGRATED SCIENCES, INC.
     
Dated: January 13, 2020 By: /s/ Robert Mattacchione
    Robert Mattacchione
    Chief Executive Officer (principal executive officer)
     
  By: /s/ Klara Radulyne
    Klara Radulyne
    Principal Financial Officer

 

29