ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”),
and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a safe harbor for forward-looking
statements made by or on behalf of the Company. The Company and its representatives may from time to time make written or oral statements
that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange
Commission (“SEC”) and in our reports and presentations to stockholders or potential stockholders. In some cases, forward-looking
statements can be identified by words such as “believe,” “expect,” “anticipate,” “plan,”
“potential,” “continue” or similar expressions. Such forward-looking statements include risks and uncertainties
and there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking
statements. These factors, risks and uncertainties can be found in Part I, Item 1A, “Risk Factors,” of the Company’s
Annual Report on Form 10-K for the fiscal year ended August 31, 2021, as the same may be updated from time to time, including in Part
II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q.
Although
we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to
foresee or identify all factors that could have a material effect on the future financial performance of the Company. The forward-looking
statements in this report are made on the basis of management’s assumptions and analyses, as of the time the statements are made,
in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate
under the circumstances.
Except
as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions
to any forward-looking statement contained in this Quarterly Report on Form 10-Q and the information incorporated by reference in this
report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any
statement is based.
Overview
of the Company
When
used herein, the terms the “Company,” “we,” “us” and “our” refer to Novo Integrated Sciences,
Inc. and its consolidated subsidiaries.
The
Company owns Canadian and U.S. subsidiaries which deliver, or intend to deliver, multidisciplinary primary health care related services
and products through the integration of medical technology, advanced therapeutics and rehabilitative science. For the period ended November
30, 2021, the Company’s revenue is generated primarily through its wholly owned Canadian subsidiaries.
We
believe that “decentralizing” healthcare, through the integration of medical technology and interconnectivity, is an essential
solution to the rapidly evolving fundamental transformation of how non-catastrophic healthcare is delivered both now and in the future.
Specific to non-critical care, ongoing advancements in both medical technology and inter-connectivity are allowing for a shift of the
patient/practitioner relationship to the patient’s home and away from on-site visits to primary medical centers with mass-services.
This acceleration of “ease-of-access” in the patient/practitioner interaction for non-critical care diagnosis and subsequent
treatment minimizes the degradation of non-critical health conditions to critical conditions as well as allowing for more cost-effective
healthcare distribution.
The
Company’s decentralized healthcare business model is centered on three primary pillars to best support the transformation of non-catastrophic
healthcare delivery to patients and consumers:
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First
Pillar: Service Networks. Deliver multidisciplinary primary care services through (i) an affiliate network of clinic facilities,
(ii) small and micro footprint sized clinic facilities primarily located within the footprint of box-store commercial enterprises,
(iii) clinic facilities operated through a franchise relationship with the Company, and (iv) corporate operated clinic facilities.
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Second
Pillar: Technology. Develop, deploy, and integrate sophisticated interconnected technology, interfacing the patient to the healthcare
practitioner thus expanding the reach and availability of the Company’s services, beyond the traditional clinic location, to
geographic areas not readily providing advanced, peripheral based healthcare services, including the patient’s home.
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Third
Pillar: Products. Develop and distribute effective, personalized health and wellness product solutions allowing for the customization
of patient preventative care remedies and ultimately a healthier population. The Company’s science-first approach to product
innovation further emphasizes our mandate to create and provide over-the-counter preventative and maintenance care solutions.
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First
Pillar – Service Networks for Hands-on Patient Care
Innovation
through science combined with the integration of sophisticated, secure technology assures us of continued cutting edge advancement in
patient first platforms.
Our
clinicians and practitioners provide certain multidisciplinary primary health care services, and related products, beyond the medical
doctor first level contact identified as primary care. Our clinicians and practitioners are not licensed medical doctors, physicians,
specialist, nurses or nurse practitioners. Our clinicians and practitioners are not authorized to practice primary care medicine and
they are not medically licensed to prescribe pharmaceutical based product solutions.
Our
team of multidisciplinary primary health care clinicians and practitioners provide assessment, diagnosis, treatment, pain management,
rehabilitation, education and primary prevention for a wide array of orthopedic, musculoskeletal, sports injury, and neurological conditions
across various demographics including pediatric, adult, and geriatric populations through our 16 corporate-owned clinics, a contracted
network of affiliate clinics, and eldercare related long-term care homes, retirement homes, and community-based locations in Canada.
Our
specialized multidisciplinary primary health care services include physiotherapy, chiropractic care, manual/manipulative therapy, occupational
therapy, eldercare, massage therapy (including pre- and post-partum), acupuncture and functional dry needling, chiropody, stroke and
traumatic brain injury/neurological rehabilitation, kinesiology, vestibular therapy, concussion management and baseline testing, trauma
sensitive yoga and meditation for concussion-acquired brain injury and occupational stress-PTSD, women’s pelvic health programs,
sports medicine therapy, assistive devices, dietitian, holistic nutrition, fall prevention education, sports team conditioning programs
including event and game coverage, and private personal training.
Additionally,
we continue to expand our patient care philosophy of maintaining an on-going continuous connection with our current and future patient
community, beyond the traditional confines of brick-and-mortar facilities, by extending oversight of patient diagnosis, care and monitoring,
directly through various Medical Technology Platforms either in-use or under development.
The
occupational therapists, physiotherapists, chiropractors, massage therapists, chiropodists and kinesiologists contracted, by NHL, to
provide occupational therapy, physical therapy and fall prevention assessment services are registered with the College of Occupational
Therapists of Ontario, the College of Physiotherapists of Ontario, College of Chiropractors of Ontario, College of Massage Therapists
of Ontario, College of Chiropodists of Ontario, and the College of Kinesiologists of Ontario regulatory authorities.
Our
strict adherence to public regulatory standards, as well as self-imposed standards of excellence and regulation, have allowed us to navigate
with ease through the industry’s licensing and regulatory framework. Compliant treatment, data and administrative protocols are
managed through a team of highly trained, certified health care and administrative professionals. We and our affiliates provide service
to the Canadian property and casualty insurance industry, resulting in a regulated framework governed by the Financial Services Commission
of Ontario.
Second
Pillar – Interconnected Technology for Virtual Ecosystem of Services, Products and Digital Health Offerings
Decentralization
through the integration of interconnected technology platforms has been adopted and is thriving in a variety of sectors and industries
such as transportation (Uber, Lyft), real estate (Zillow, Redfin, Airbnb, VRBO), used car sales (Carvana, Vroom), stock and financial
markets (Robinhood, Acorns, Webull) and so many other sectors. Yet decentralization of the non-critical primary care and wellness sector
of healthcare is lagging significantly in capability and benefit for patient access and delivery of services and products. The COVID
pandemic has taught both patients and healthcare providers the viability, importance, and benefits of decentralized access to primary
care simply through the rapid adoption of telehealth/telemedicine.
The
Company’s focus on a holistic approach to patient-first health and wellness, through innovation and decentralization, includes
maintaining an on-going continuous connection with our current and future patient community, beyond the traditional confines of brick-and-mortar
facilities, by extending oversight of patient evaluation, diagnosis, treatment solutions, and monitoring, directly through various Medical
Technology Platforms and periphery tools either in-use or under development. Through the integration and deployment of sophisticated
and secure technology and periphery diagnostic tools, the Company is working to expand the reach of our non-critical primary care services
and product offerings, beyond the traditional clinic locations, to geographic areas not readily providing advanced primary care service
to date, including the patient’s home.
NovoConnect,
the Company’s proprietary mobile application with a fully securitized tech stock, telemedicine/telehealth and remote patient monitoring
fall under this Second Pillar. In October 2021, we announced the launch of MiTelemed+, Inc. (“MiTelemed”), a joint venture
with EK-Tech Solutions Inc. (“EK-Tech”). MiTelemed will operate, support and expand access and functionality of iTelemed,
EK-Tech’s enhanced proprietary telehealth platform. MiTelemed+, through the iTelemed platform, will allow us to offer the patient
and the practitioner a sophisticated and enhanced telehealth interaction. Through the interface of sophisticated peripheral based diagnostic
tools operated by skilled support workers in the patient’s remote location, we believe that the practitioner’s ability and
comfort to provide a uniquely comprehensive evaluation, diagnosis, and treatment solution will be dramatically elevated.
Third
Pillar – Health and Wellness Products
We
believe our science first approach to product offerings further emphasizes the Company’s strategic vision to innovate, evolve,
and deliver over-the-counter preventative and maintenance care solutions as well as therapeutics and personalized diagnostics that enable
individualized health optimization.
As
the Company’s patient base grows through the expansion of its corporate owned clinics, its affiliate network, its micro-clinic
facility openings, its interconnected technology platforms, and other growth initiatives, the development and distribution of high-quality
wellness product solutions is integral to (i) offering effective product solutions allowing for the customization of patient preventative
care remedies and ultimately a healthier population, and (ii) maintaining an on-going relationship with our patients through the customization
of patient preventative and maintenance care solutions.
The
Company’s product offering ecosystem is being built through strategic acquisitions and engaging in licensing agreements with partners
that share our vision to provide a portfolio of products that offer an essential and differentiated solution to health and wellness globally.
Our 2021 acquisitions of Acenzia Inc. and PRO-DIP, LLC support this Third Pillar. In December 2021, we were granted a Natural Product
Number (NPN) by Health Canada for IoNovo Iodine, a proprietary pure aqueous iodine micronutrient delivered in an oral or nasal spray
format for maximum impact and bioavailability.
We
have two reportable segments: healthcare services and product manufacturing and development. During the quarter ended November 30, 2021,
revenues from healthcare services and product manufacturing and development represented 68.9% and 32.2%, respectively, of the Company’s
total revenues for the quarter. We expect the percentage of revenues generated from the product manufacturing and development segment
to increase at a greater rate than the revenue generated from healthcare services over the coming quarters.
Recent
Developments
Coronavirus
(COVID-19)
While
all of the Company’s business units are operational at the time of this filing, any future impact of the COVID-19 pandemic on the
Company’s operations remains unknown and will depend on future developments, which are highly uncertain and cannot be predicted
with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19
pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an
extended period of continued business disruption, reduced patient traffic and reduced operations. For more information regarding the
impact of COVID-19 on the Company, see “—Liquidity and Capital Resources—Financial Impact of COVID-19” of this
quarterly report on Form 10-Q.
Reverse
Stock Split
On
February 1, 2021, we effected a 1-for-10 reverse stock split of our common stock. We implemented the reverse stock split in connection
with our Nasdaq application. The reverse stock split was an action intended to fulfill the stock price requirements for listing on Nasdaq.
As a result of the reverse stock split, every 10 shares of issued and outstanding common stock were exchanged for one share of common
stock, with any fractional shares being rounded up to the next higher whole share. The reverse stock split was approved by the Company’s
Board of Directors and by stockholders holding a majority of the Company’s voting power.
April
2021 Registered Direct Offering
On
April 13, 2021, the Company sold 2,388,050 shares of common stock under the terms and conditions of a Securities Purchase Agreement,
dated April 9, 2021, in a registered direct offering for an agreed upon purchase price of $3.35 per share resulting in gross proceeds
of $7,999,968. The Company incurred offering costs of $764,388 associated with this offering resulting in net proceeds of $7,235,580.
The shares were issued on April 13, 2021.
Jefferson
Street Capital Stock Purchase Agreement & Secured Convertible Promissory Note
On
November 17, 2021, the Company and Terragenx Inc., a majority owned subsidiary of the Company (“Terra”), entered into that
certain securities purchase agreement (the “Jefferson SPA”), dated as of November 17, 2021, by and among the Company, Terra
and Jefferson Street Capital LLC (“Jefferson”). Pursuant to the terms of the Jefferson SPA, (i) the Company agreed to issue
and sell to Jefferson the Jefferson Note (as hereinafter defined); (ii) the Company agreed to issue to Jefferson the Jefferson Warrant
(as hereinafter defined); and (iii) the Company agreed to issue to Jefferson 1,000,000 restricted shares of Company common stock, as
collateral on the Jefferson Note, which is being held by the escrow agent and subject to return to the Company upon full payment of the
Jefferson Note; and (iv) Jefferson agreed to pay to the Company $750,000 (the “Jefferson Purchase Price”).
Pursuant
to the terms of the Jefferson SPA, on November 17, 2021, Terra issued to Jefferson a secured convertible promissory note (the “Jefferson
Note”) with a maturity date of May 17, 2022 (the “Maturity Date”), in the principal amount of $937,500. The Company
acted as guarantor on the Jefferson Note. Pursuant to the terms of the Jefferson Note, Terra agreed to pay to Jefferson $937,500 (the
“Principal Amount”), with a purchase price of $750,000 plus an original issue discount in the amount of $187,500 (the “OID”),
and to pay interest on the Principal Amount at the rate of 1% per annum.
Any
amount of principal, interest or other amount due on the Jefferson Note that is not paid when due will bear interest at the rate of the
lesser of (i) 12%, or (b) the maximum rate allowed by law.
Jefferson
may, at any time, convert all or any portion of the then outstanding and unpaid principal amount and interest into shares of the Company’s
common stock at a conversion price of $3.35 per share. The Jefferson Note has a 4.99% equity blocker; provided, however, that the 4.99%
equity blocker may be waived (up to 9.99%) by Jefferson, at Jefferson’s election, on not less than 61 days’ prior notice
to the Company.
On
November 17, 2021, Jefferson paid the Jefferson Purchase Price of $750,000 in exchange for the Jefferson Note. Terra intends to use the
proceeds for the acquisition of the certain assets directly and indirectly related to any and all iodine-based related products and technologies
as specified in the Asset Purchase Agreement (the “Mullins APA”), dated as of November 17, 2021, by and between the Company
and Terence Mullins (the “Mullins IP”) and thereafter for working capital and other general purposes.
Terra
may prepay the Jefferson Note at any time in accordance with the terms of the Jefferson Note.
Except
as related to the next transaction after the issue date of the Jefferson Note conducted on the Company’s behalf by the Maxim Group
LLC, Terra and the Company agreed to pay to Jefferson on an accelerated basis, any outstanding Principal Amount of the Jefferson Note,
along with all unpaid interest, and fees and penalties, if any, from the sources of capital below, at Jefferson’s discretion, it
being acknowledged and agreed by Jefferson that the Company and Terra have the right to make bona fide payments to vendors with Company
common stock:
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At
Jefferson’s option, 15% of the net cash proceeds of any future financings by the Company, Terra or any subsidiary, whether
debt or equity, or any other financing proceeds such as cash advances, royalties or earn-out payments.
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All
net proceeds from any sale of assets of the Company, Terra or any subsidiaries other than sales of inventory in the ordinary course
of business or receipt by the Company or any subsidiaries of any tax credits or collections pursuant to any settlement or judgement.
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Net
proceeds resulting from the sale of any assets outside of the ordinary course of business or securities in any subsidiary.
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Platinum
Point Capital Stock Purchase Agreement & Secured Convertible Promissory Note
On
November 17, 2021, the Company and Terra entered into that certain securities purchase agreement (the “Platinum SPA”), dated
as of November 17, 2021, by and among the Company, Terra and Platinum Point Capital LLC (“Platinum”). Pursuant to the terms
of the Platinum SPA, (i) the Company agreed to issue and sell to Platinum the Platinum Note (as hereinafter defined); (ii) the Company
agreed to issue to Platinum the Platinum Warrant (as hereinafter defined); and (iii) the Company agreed to issue to Platinum 1,000,000
restricted shares of the Company common stock, as collateral on the Platinum Note, which is being held by the escrow agent and subject
to return to the Company upon full payment of the Platinum Note; and (iv) Platinum agreed to pay to the Company $750,000 (the “Platinum
Purchase Price”).
Pursuant
to the terms of the Platinum SPA, on November 17, 2021, Terra issued to Platinum a secured convertible promissory note (the “Platinum
Note”) with a maturity date of May 17, 2022 (the “Maturity Date”), in the principal amount of $937,500. The Company
acted as guarantor on the Platinum Note. Pursuant to the terms of the Platinum Note, Terra agreed to pay to Platinum $937,500 (the “Platinum
Principal Amount”), with a purchase price of $750,000 plus an original issue discount in the amount of $187,500 (the “OID”),
and to pay interest on the Principal Amount at the rate of 1% per annum.
Any
amount of principal, interest or other amount due on the Platinum Note that is not paid when due will bear interest at the rate of the
lesser of (i) 12%, or (b) the maximum rate allowed by law.
Platinum
may, at any time, convert all or any portion of the then outstanding and unpaid principal amount and interest into shares of the Company’s
common stock at a conversion price of $3.35 per share. The Platinum Note has a 4.99% equity blocker; provided, however, that the 4.99%
equity blocker may be waived (up to 9.99%) by Platinum, at Platinum’s election, on not less than 61 days’ prior notice to
the Company.
On
November 17, 2021, Platinum paid the Platinum Purchase Price of $750,000 in exchange for the Platinum Note. Terra intends to use the
proceeds for the acquisition of the Mullins IP and thereafter for working capital and other general purposes.
Terra
may prepay the Platinum Note at any time in accordance with the terms of the Platinum Note.
Except
as related to the next transaction after the issue date of the Platinum Note conducted on the Company’s behalf by the Maxim Group
LLC, Terra and the Company agreed to pay to Platinum on an accelerated basis, any outstanding Principal Amount of the Platinum Note,
along with all unpaid interest, and fees and penalties, if any, from the sources of capital below, at Platinum’s discretion, it
being acknowledged and agreed by Platinum that the Company and Terra have the right to make bona fide payments to vendors with Company
common stock:
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At
Platinum’s option, 15% of the net cash proceeds of any future financings by the Company, Terra or any subsidiary, whether debt
or equity, or any other financing proceeds such as cash advances, royalties or earn-out payments.
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All
net proceeds from any sale of assets of the Company, Terra or any subsidiaries other than sales of inventory in the ordinary course
of business or receipt by the Company or any subsidiaries of any tax credits or collections pursuant to any settlement or judgement.
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Net
proceeds resulting from the sale of any assets outside of the ordinary course of business or securities in any subsidiary
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December
2021 Registered Direct Offering
On
December 14, 2021, the Company entered into a Securities Purchase Agreement with an accredited institutional investor (the “Purchaser”)
pursuant to which the Company agreed to issue to the Purchaser and the Purchaser agreed to purchase (the “Purchase”), in
a registered direct offering, (i) $16,666,666 aggregate principal amount of the Company’s senior secured convertible notes, which
notes are convertible into shares of the Company’s common stock, under certain conditions (the “Notes”); and (ii) warrants
to purchase up to 5,833,334 shares of the Company’s common stock (the “Warrants”). The securities, including up to
68,557,248 shares of common stock issuable upon conversion under the Notes and up to 5,833,334 shares of common stock issuable upon exercise
of the Warrants, are being offered by the Company pursuant to an effective shelf registration statement on Form S-3 (File No. 333-254278),
which was declared effective by the SEC on March 22, 2021. The Purchase closed on December 14, 2021.
The
Notes have an original issue discount of 10%, resulting in gross proceeds to the Company of $15,000,000. The Notes bear interest of 5%
per annum and mature on June 14, 2023, unless earlier converted or redeemed, subject to the right of the Purchaser to extend the date
under certain circumstances. The Company will make monthly payments on the first business day of each month commencing on the calendar
month immediately following the sixth month anniversary of the issuance of the Notes through June 14, 2023, the maturity date, consisting
of an amortizing portion of the principal of each Note equal to $1,388,888 and accrued and unpaid interest and late charges on the Notes.
All amounts due under the Notes are convertible at any time, in whole or in part, at the holder’s option, into common stock at
the initial conversion price of $2.00, which conversion price is subject to certain adjustments; provided, however, that the Notes have
a 9.99% equity blocker. If an event of default occurs, the holder may convert all, or any part, of the principal amount of a Note and
all accrued and unpaid interest and late charge at an alternate conversion price, as described in the Notes. Subject to certain conditions,
the Company has the right to redeem all, but not less than all, of the remaining principal amount of the Notes and all accrued and unpaid
interest and late charges in cash at a price equal to 135% of the amount being redeemed.
The
Warrants are exercisable at an exercise price of $2.00 per share and expire on the fourth-year anniversary of December 14, 2021, the
initial issuance date of the Warrants.
For
the three months ended November 30, 2021 compared to the three months ended November 30, 2020
Revenues
for the three months ended November 30, 2021 were $3,161,927, representing an increase of $1,006,421, or 46.7%, from $2,155,506 for the
same period in 2020. The increase in revenue is principally due to the acquisition of Acenzia, Inc. in June 2021. Acenzia’s revenue
for the three months ended November 30, 2021 were $981,852.
Cost
of revenues for the three months ended November 30, 2021 were $1,895,461, representing an increase of $551,405 or 41.0%, from $1,344,056
for the same period in 2020. The increase in cost of revenues is principally due the increase in revenue as described above. Cost of
revenues as a percentage of revenue was 59.9% for the three months ended November 30, 2021 and 62.4% for same period in 2020. The decrease
in cost of revenues as a percentage of revenue is principally due to revenue generated by Acenzia that had a cost of revenue of approximately
52%.
Operating costs for the three months ended November
30, 2021 were $2,630,125, representing an increase of $1,060,951, or 67.6%, from $1,569,174 for the same period in 2020. The increase
in operating costs is principally due to the temporary increase in overhead expenses associated with the acquisitions
of Acenzia, PRO-DIP, and Terragenx which was approximately $808,000 for the three months ended November 30, 2021. In subsequent quarters,
this temporary increase in overhead expenses associated with Acenzia, PRO-DIP, and Terragenx is projected to decrease significantly as
the Company integrates and consolidates operations.
Interest
expense for the three months ended November 30, 2021 was $68,730, representing an increase of $44,789, or 187.1%, from $23,941 for the
same period in 2020. The increase is due to an increase in outstanding debt.
Foreign
currency transaction losses for the three months ended November 30, 2021 was $334,554 compared to $0 for the same period in 2020. Acenzia
and Terragenx both have outstanding debt recorded on their books that is payable in US$ . The exchange rate between the Canadian Dollar
and the US Dollar has decreased since August 31, 2021; therefore creating a foreign currency transaction loss as it will require more
Canadian Dollars to repay the debt.
Net loss attributed to Novo Integrated Sciences,
Inc. for the three months ended November 30, 2021 was $1,806,587, representing an increase of $1,035,117, or 134.2%,
from $771,470 for the same period in 2020. The increase in net loss is principally due (i) an increase in foreign currency
transaction losses, and (ii) a temporary increase in overhead expenses associated with the acquisitions of Acenzia, PRO-DIP, and Terragenx
which was approximately $808,000 for the three months ended November 30, 2021. In subsequent quarters, this temporary increase in overhead
expenses associated with Acenzia, PRO-DIP, and Terragenx is projected to decrease significantly as the Company integrates and consolidates
operations.
Liquidity
and Capital Resources
As
shown in the accompanying condensed consolidated financial statements, for the three months ended November 30, 2021, the Company had
a net loss of $1,816,395.
During
the three months ended November 30, 2021, the Company used cash in operating activities of $759,103 compared to $148,103 for the same
period in 2020. The principal reason for the increase in cash used in operating activities is the net loss incurred and the changes in
noncash expenses and changes in operating asset and liability accounts.
During
the three months ended November 30, 2021, the Company used cash from investing activities of $91,106 compared to $0 for the same period
in 2020. During the period in 2021 the Company purchased property and equipment of $120,397 and acquired $29,291 in cash from the acquisition
of Terragenx.
During
the three months ended November 30, 2021, the Company provided cash from financing activities of $1,399,785 compared to $43,611 for the
same period in 2020. The principal reason for the increase in cash provided by financing activities was the issuance of convertible notes
payable in 2021 for net proceeds of $1,410,000.
Financial
Impact of COVID-19
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. On March 17, 2020, as a result of COVID-19
pandemic having been reported throughout both Canada and the United States, certain national, provincial, state and local governmental
authorities issued proclamations and/or directives aimed at minimizing the spread of COVID-19. Accordingly, on March 17, 2020, the Company
closed all corporate clinics for all in-clinic non-essential services to protect the health and safety of its employees, partners, and
patients.
On
May 26, 2020, the Ontario Ministry of Health announced updated guidance and directives stating that physiotherapists, chiropractors,
and other regulated health professionals, including 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 specific to on-site clinic
and eldercare operations.
Specific
to our clinic-based services and products, operating under COVID-19 related authorized governmental proclamations and directives, between
March 17 through 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.
Specific
to our eldercare based services and products, operating under COVID-19 related authorized governmental proclamations and directives which
included certain eldercare related services being deemed essential, NHL was able to quickly expand its existing eldercare related physiotherapy
service “virtual-care” platform, which pre-pandemic was primarily focused on providing “virtual-care” services
to both smaller and remote eldercare homes to ensure access to service providers, when needed; and continuity of care to eldercare patients
without service providers in their area. Given NHL had established “virtual care” procedures and forms, complete with video
consent and assessment forms already vetted and approved by the Ontario College of Physiotherapists, NHL was well-positioned to expand
the delivery of certain of its eldercare related contracted services, via “virtual-care” technology, ensuring continuity
of service for our long-term care and retirement home clients.
On
June 2, 2020, the Company commenced opening its corporate clinics and providing non-essential services. As of November 30, 2021, all
corporate clinics were open and operational while following all mandated guidelines and protocols from Health Canada, the Ontario Ministry
of Health, and the respective disciplines’ regulatory Colleges to ensure a safe treatment environment for our staff and clients.
Canadian
federal and provincial COVID-19 governmental proclamations and directives, including interprovincial travel restrictions, have presented
unprecedented challenges to launching our Harvest Gold Farms and Kainai Cooperative joint ventures during the period ended November 30,
2021. Accordingly, the Company has decided to delay commencing the projects until the 2022 grow season. These joint ventures relate to
the development, management, and arrangement of medicinal farming projects involving industrial hemp for medicinal Cannabidiol (CBD)
applications.
For
the quarter ended November 30, 2021, the Company’s total revenue from all clinic and eldercare related contracted services was
$2,179,623, representing an increase of $24,117 compared to $2,155,506 during the same period in 2020. As of November 30, 2021, specific
to on-site clinic and eldercare operations, the Company has 91 full-time employees and 60 part-time employees with a total employee count
amongst all subsidiaries of 124 full-time and 83 part-time employees.
Specific
to Acenzia, Terragenx, and PRO-DIP, each company is open and fully operational while following all local, state, provincial, and national
guidelines and protocols related to minimizing the spread of the COVID-19 pandemic.
While
all of the Company’s business units are operational at the time of this filing, any future impact of the COVID-19 pandemic on the
Company’s operations remains unknown and will depend on future developments, which are highly uncertain and cannot be predicted
with confidence, including, but not limited to, (i) the duration of the COVID-19 outbreak and additional variants that may be identified,
(ii) new information which may emerge concerning the severity of the COVID-19 pandemic, and (iii) any additional preventative and protective
actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced
patient traffic, and reduced operations.
Our
capital requirements going forward will consist of financing our operations until we are able to reach a level of revenues and gross
margins adequate to equal or exceed our ongoing operating expenses. We do not have any credit agreement or source of liquidity immediately
available to us.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that is material to investors.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
We
believe that the following critical policies affect our more significant judgments and estimates used in preparation of our financial
statements.
Use
of Estimates
The
preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly
evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience, and various
other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources.
This applies in particular to useful lives of non-current assets, impairment of non-current assets, allowance for doubtful accounts,
allowance for slow moving and obsolete inventory, and valuation allowance for deferred tax assets. The actual results experienced by
the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between
the estimates and the actual results, future results of operations will be affected.
Property
and Equipment
Property
and equipment are stated at cost less depreciation and impairment. Expenditures for maintenance and repairs are charged to earnings as
incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation
of property and equipment is provided using the declining balance method for substantially all assets with estimated lives as follows:
|
Building
|
30
years
|
|
Leasehold
improvements
|
5
years
|
|
Clinical
equipment
|
5
years
|
|
Computer
equipment
|
3
years
|
|
Office
equipment
|
5
years
|
|
Furniture
and fixtures
|
5
years
|
The
Company has not changed its estimate for the useful lives of its property and equipment, but would expect that a decrease in the estimated
useful lives of property and equipment of 20% would result in an annual increase to depreciation expense of approximately $140,000, and
an increase in the estimated useful lives of property and equipment of 20% would result in an annual decrease to depreciation expense
of approximately $95,000.
Intangible
Assets
The
Company’s intangible assets are being amortized over their estimated useful lives as follows:
|
Land
use rights
|
50
years (the lease period)
|
|
Software
license
|
7
years
|
|
Intellectual
property
|
7
years
|
|
Customer
relationships
|
5
years
|
|
Brand
names
|
7
years
|
|
Workforce
|
5
years
|
The
intangible assets with finite useful lives are reviewed for impairment when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized
based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. The Company has not changed its estimate
for the useful lives of its intangible assets but would expect that a decrease in the estimated useful lives of intangible assets of
20% would result in an annual increase to amortization expense of approximately $690,000, and an increase in the estimated useful lives
of intangible assets of 20% would result in an annual decrease to amortization expense of approximately $460,000.
Long-Lived
Assets
The
Company applies the provisions of ASC Topic 360, Property, Plant, and Equipment, which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. ASC 360 requires impairment losses to be recorded on long-lived assets, including
right-of-use assets, used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the
carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar
manner, except that fair values are reduced for the cost of disposal.
Right-of-use
Assets
The
Company’s right-of-use assets consist of leased assets recognized in accordance with ASC 842, Leases, which requires lessees
to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. Right-of-use assets represent the Company’s
right to use an underlying asset for the lease term and lease liability represents the Company’s obligation to make lease payments
arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term
at the commencement date. Leases with a lease term of 12 months or less at inception are not recorded on the consolidated balance sheet
and are expensed on a straight-line basis over the lease term in the condensed consolidated statements of operations and comprehensive
loss. The Company determines the lease term by agreement with lessor. In cases where the lease does not provide an implicit interest
rate, the Company uses the Company’s incremental borrowing rate based on the information available at commencement date in determining
the present value of future payments.
Goodwill
Goodwill
represents the excess of purchase price over the underlying net assets of businesses acquired. Under U.S. GAAP, goodwill is not amortized
but is subject to annual impairment tests. The Company recorded goodwill related to its acquisition of APKA Health, Inc. during the fiscal
year ended August 31, 2017, Executive Fitness Leaders during the fiscal year ended August 31, 2018, Action Plus Physiotherapy Rockland
during the fiscal year ended August 31, 2019 and Acenzia, Inc. during fiscal year ended August 31, 2021.
Accounts
Receivable
Accounts
Receivable are recorded, net of allowance for doubtful accounts and sales returns. Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentration, customer credit worthiness, current economic trends, and changes in customer
payment patterns to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is made when collection
of the full amount is no longer probable. Delinquent account balances are written-off after management has determined that the likelihood
of collection is not probable and known bad debts are written off against the allowance for doubtful accounts when identified. The Company
has not changed its methodology for estimating allowance for doubtful accounts and historically the change in estimate has not been significant
to the Company’s financial statements. If there is a deterioration of the Company’s customers’ ability to pay or if
future write-offs of receivables differ from those currently anticipated, the Company may have to adjust its allowance for doubtful accounts,
which would affect earnings in the period the adjustments are made.
Inventory
Inventories
are valued at the lower of cost (determined by the first in, first out method) and net realizable value. Management compares the cost
of inventories with the net realizable value and allowance is made for writing down their inventories to net realizable value, if lower.
Inventory is segregated into three areas: raw materials, work-in-process and finished goods. The Company periodically assessed its inventory
for slow moving and/or obsolete items and any change in the allowance is recorded in cost of revenue in the accompanying condensed consolidated
statements of operations and comprehensive loss. If any are identified an appropriate allowance for those items is made and/or the items
are deemed to be impaired.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. ASC 740 requires a company to use the asset
and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences,
and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion, or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company has not
changed it methodology for estimating the valuation allowance. A change in valuation allowance affect earnings in the period the adjustments
are made and could be significant due to the large valuation allowance currently established.
Under
ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained
in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that
is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test,
no tax benefit is recorded. The Company has no material uncertain tax positions for any of the reporting periods presented.
Revenue
Recognition
The
Company’s revenue recognition reflects the updated accounting policies as per the requirements of ASU No. 2014-09, Revenue from
Contracts with Customers (“Topic 606”). As sales are and have been primarily from providing healthcare services the Company
has no significant post-delivery obligations.
Revenue
from providing healthcare and healthcare related services and product sales are recognized under Topic 606 in a manner that reasonably
reflects the delivery of its products and services to customers in return for expected consideration and includes the following elements:
|
|
●
|
executed
contracts with the Company’s customers that it believes are legally enforceable;
|
|
|
●
|
identification
of performance obligations in the respective contract;
|
|
|
●
|
determination
of the transaction price for each performance obligation in the respective contract;
|
|
|
●
|
allocation
the transaction price to each performance obligation; and
|
|
|
●
|
recognition
of revenue only when the Company satisfies each performance obligation.
|
These
five elements, as applied to the Company’s revenue category, are summarized below:
|
|
●
|
Healthcare
and healthcare related services – gross service revenue is recorded in the accounting records at the time the services are
provided (point-in-time) on an accrual basis at the provider’s established rates. The Company reserves a provision for contractual
adjustment and discounts that are deducted from gross service revenue. The Company reports revenues net of any sales, use and value
added taxes.
|
|
|
|
|
|
|
●
|
Product
sales – revenue is recorded at the point of time of delivery
|
Stock-Based
Compensation
The
Company records stock-based compensation in accordance with FASB ASC Topic 718, Compensation – Stock Compensation. FASB
ASC Topic 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and
recognize the expense over the requisite service period. The Company recognizes in the condensed consolidated statements of operations
and comprehensive loss the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.
Basic
and Diluted Earnings Per Share
Earnings
per share is calculated in accordance with ASC Topic 260, Earnings Per Share. Basic earnings per share (“EPS”) is
based on the weighted average number of common shares outstanding. Diluted EPS assumes that all dilutive securities are converted. Dilution
is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average
market price during the period.
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 condensed consolidated balance sheets.
New
Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. ASU 2016-13 was issued to improve financial reporting by requiring earlier recognition of credit losses on financing
receivables and other financial assets in scope. The new standard represents significant changes to accounting for credit losses. Full
lifetime expected credit losses will be recognized upon initial recognition of an asset in scope. The current incurred loss impairment
model that recognizes losses when a probable threshold is met will be replaced with the expected credit loss impairment method without
recognition threshold. The expected credit losses estimate will be based upon historical information, current conditions, and reasonable
and supportable forecasts. This ASU as amended by ASU 2019-10, is effective for fiscal years beginning after December 15, 2023. The Company
is currently evaluating the effect of this ASU on the Company’s condensed consolidated financial statements and related disclosures.
In
December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes which amends ASC 740 Income Taxes
(ASC 740). This update is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in
ASC 740 and amending existing guidance to improve consistent application of ASC 740. This update is effective for fiscal years beginning
after December 15, 2021. The guidance in this update has various elements, some of which are applied on a prospective basis and others
on a retrospective basis with earlier application permitted. The Company is currently evaluating the effect of this ASU on the Company’s
condensed consolidated financial statements and related disclosures.
In
May, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50),
Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40):Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options.
This update provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within
the scope of another Topic. This update is effective for fiscal years beginning after December 15, 2021. The Company is currently evaluating
the effect of this ASU on the Company’s condensed consolidated financial statements and related disclosures.
In
August 2020, the FASB issued guidance that simplifies the accounting for debt with conversion options, revises the criteria for applying
the derivative scope exception for contracts in an entity’s own equity, and improves the consistency for the calculation of earnings
per share. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning
after December 15, 2021, our fiscal 2023.
In
March 2020, the FASB issued guidance providing optional expedients and exceptions to account for the effects of reference rate reform
to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued.
The optional guidance, which became effective on March 12, 2020 and can be applied through December 21, 2022, has not impacted our condensed
consolidated financial statements. The Company has various contracts that reference LIBOR and is assessing how this standard may be applied
to specific contract modifications through December 31, 2022.
Management
does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying
condensed consolidated financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under
the circumstances.
Recent
accounting pronouncements issued by the FASB, the American Institute of Certified Public Accountants and the SEC did not or are not believed
by management to have a material effect on the Company’s financial statements.
