Novo Integrated Sciences(NVOS) - 2022 Q4 - Annual Report

Part I Item 1. Business Novo Integrated Sciences operates a decentralized healthcare model, integrating service networks, technology, and health products for primary care Business Overview and Strategy The company's strategy leverages Service Networks, Interconnected Technology, and Health Products to expand primary care and product offerings - The Company's business model is centered on three primary pillars: Service Networks for hands-on care, Interconnected Technology for virtual services, and Health and Wellness Products[16][19] - The Service Networks pillar includes 17 corporate-owned clinics and a contracted affiliate network of 115 clinics across Canada, providing multidisciplinary primary health care services such as physiotherapy, chiropractic care, and eldercare[18][24] - The Technology pillar focuses on developing platforms like the Novo Connect mobile app, telehealth services, and remote patient monitoring (RPM) through a licensing agreement with Cloud DX to extend patient care beyond physical clinics[41][48][40] - The Products pillar is being built through strategic acquisitions, including Acenzia (nutraceuticals), PRO-DIP (oral energy pouches), and Terragenx (water-soluble iodine micro-nutrient), to offer a portfolio of preventative and maintenance care solutions[51][52][59] - The Company has acquired and is developing a portfolio of intellectual property, including patents for an oral supplement pouch (U.S. Patent No. 11,273,965), a personalized cancer diagnostic platform called Zgraft (U.S. Patent No. 10,760,060B2), and various iodine-based product formulations[65] Recent Developments Recent developments include a $15 million offering, Terragenx and CCI acquisitions, a $2 million unit offering, and a Nasdaq non-compliance notice - On December 14, 2021, the Company completed a registered direct offering, raising gross proceeds of $15,000,000 through the sale of $16.67 million in senior secured convertible notes and warrants[89][90] - The Company acquired a 91% controlling interest in Terragenx Inc. and its related intellectual property for iodine-based products on November 17, 2021, financed in part by issuing two secured convertible promissory notes totaling $1.875 million[68][73][81] - On April 5, 2022, the Company acquired 100% of Clinical Consultants International LLC (CCI) in exchange for 800,000 restricted shares of common stock and appointed CCI's Dr. Joseph Chalil as the Company's Chief Medical Officer[100][101][103] - In October 2022, the Company sold 4,000,000 units at $0.50 per unit in an offering, raising gross proceeds of approximately $2,000,000. Each unit consisted of one share of common stock and two warrants[130][132] - Subsequent to the fiscal year end, the Company received a notification from Nasdaq on November 21, 2022, for non-compliance with the minimum bid price requirement of $1.00 per share[156] Business Growth Initiatives Growth initiatives target increased Canadian market share, U.S. expansion through micro-clinics and technology, and building an intellectual property portfolio - Increase market share in Canada through organic growth, acquisitions, and expanding the affiliate network for both clinic and eldercare operations[181] - Expand operations into the United States via technology platforms, micro-clinics in partnership with retailers, and strategic acquisitions of clinics and pharmacies[186] - Open micro-clinic facilities within LA Fitness locations in the U.S. and Canada, focusing on physiotherapy and occupational therapy services[186] - Further develop and commercialize technology platforms, including the Novo Connect app, enhanced telehealth services, and the Remote Patient Monitoring (RPM) platform licensed from Cloud DX[186][189] - Build the intellectual property portfolio through acquisitions or licensing, with a specific interest in medical cannabis-related medicines and nano-formulation[190] Competition and Regulation The company faces intense competition and extensive, evolving healthcare regulations in Canada and the U.S., especially for planned CBD products - The company operates in a highly competitive primary healthcare sector in both Canada and the U.S., competing with other clinics, pharmacies, hospitals, and non-traditional providers for patients, acquisitions, and payor contracts[206][207] - In Canada, the healthcare system is a mix of public and private funding, with federal and provincial governments sharing regulatory jurisdiction. The Canada Health Act governs the publicly funded system, but many services are privately delivered and paid for[213][214][219] - Expansion into the U.S. will subject the company to extensive regulation, including state-level Certificate of Need (CON) programs, licensure requirements, and federal laws like the Anti-Kickback Statute, False Claims Act (FCA), HIPAA, and the Stark Law[237][238][247] - The company's future plans for medicinal Cannabidiol (CBD) products are subject to complex and evolving regulations in both Canada (Cannabis Act) and the U.S. (2018 Farm Bill and FDA oversight)[269][272][275] Corporate History and Acquisitions Novo Integrated Sciences, formerly Turbine Truck Engines, transformed through Novo Healthnet's reverse acquisition and subsequent purchases of PRO-DIP, Acenzia, and CCI - The Company was originally incorporated as Turbine Truck Engines, Inc. in 2000 and changed its name to Novo Integrated Sciences, Inc. in July 2017[279] - On May 9, 2017, the Company acquired Novo Healthnet Limited (NHL) in a reverse acquisition, making NHL a wholly-owned subsidiary and shifting the Company's focus to healthcare services[282][283] - In May 2021, the Company acquired PRO-DIP, LLC, a provider of nutritional oral energy pouches, for 189,796 restricted shares and $10,000 in cash[302] - In June 2021, the Company's subsidiary NHL acquired Acenzia Inc., a nutraceutical research, development, and manufacturing company, for a final purchase price valued at $14.16 million, payable in exchangeable shares[303] - In March 2022, the Company acquired Clinical Consultants International LLC (CCI) for 800,000 restricted shares of common stock, accounted for as an asset acquisition with a purchase price of $1,704,000[316][317][318] Item 1A. Risk Factors The Company faces significant risks from operating losses, negative cash flow, and going concern doubts, alongside competitive and regulatory challenges - The Company has a history of operating losses, with a net loss of $32.8 million in FY 2022 and an accumulated deficit of $53.8 million, raising substantial doubt about its ability to continue as a going concern[325] - The healthcare industry is heavily regulated in both Canada and the U.S. Failure to comply with laws such as the Canada Health Act, U.S. Anti-Kickback Statute, False Claims Act, and HIPAA could result in significant penalties[411][428][460] - The successful development and market acceptance of the Company's Telemedicine, Remote Patient Monitoring, and Novo Connect technology platforms are uncertain and subject to risks such as software defects and competition[482][487] - The planned entry into the medicinal CBD market is subject to significant regulatory risk, as changes in federal or state laws in the U.S. (e.g., the 2018 Farm Act) or FDA regulations could render products illegal or restrict sales[501][504] - The Company's common stock is classified as a "penny stock" under SEC rules, which may impose additional sales practice requirements on broker-dealers, potentially reducing trading activity and liquidity[521] Item 2. Properties The Company's corporate address is in Bellevue, Washington; its subsidiary operates 17 leased clinics across Canada - The Company's U.S. corporate address is 11120 NE 2nd Street, Suite 100, Bellevue, Washington 98004, for which it pays no rent[561] - Novo Healthnet Limited (NHL) operates 17 corporate-owned clinics in Canada, all located in leased properties[563] - The aggregate monthly rent for the 17 clinic properties is CAD$109,575 (approximately $143,412 as of August 31, 2022), with leases expiring between 2023 and 2031[564] Item 3. Legal Proceedings The Company is not a party to any material pending legal proceedings beyond routine litigation as of the filing date - There are no material pending legal proceedings against the Company, other than ordinary routine litigation incidental to its business[566] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock trades on Nasdaq under 'NVOS', with 634 shareholders, no dividends paid, and unregistered stock issuances in FY2022 - The Company's common stock is traded on the Nasdaq Capital Market under the symbol "NVOS"[569] - As of March 31, 2023, there were approximately 634 shareholders of record, and the closing stock price was $0.1228[570] - The Company has not paid any cash dividends and intends to retain future earnings for business development and expansion[571] - During fiscal year 2022, the Company issued restricted common stock in multiple transactions for consulting services, as collateral for a convertible note, and for an acquisition, all exempt from registration under the Securities Act[572] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations FY2022 revenues increased 26% to $11.7 million, but net loss widened to $32.8 million due to higher operating costs and impairments, raising going concern doubts Results of Operations FY2022 revenues increased 26% to $11.7 million from product sales, while net loss widened to $32.8 million due to increased operating costs and impairments Fiscal Year 2022 vs. 2021 Performance | Metric | FY 2022 | FY 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $11,737,937 | $9,305,255 | +26% | | Cost of Revenues | $6,938,699 | $5,482,257 | +27% | | Operating Costs | $29,825,915 | $8,196,517 | +264% | | Other Expense | $8,040,803 | $97,416 | +8154% | | Net Loss (Attributed to Novo) | $32,849,215 | $4,462,147 | +636% | - The 26% increase in revenue was principally due to an increase in product sales, with Acenzia and Terragenx contributing $3,067,772 and $266,635, respectively. Revenue from healthcare services decreased by 5.2% due to COVID-19 related impacts[715] - The significant increase in net loss was primarily driven by higher impairment of intangible assets and goodwill, increased amortization of debt discount related to convertible notes, and higher overhead from acquired operations[717][718][719] Liquidity and Capital Resources The Company reported a $33.0 million loss in FY2022 with negative operating cash flow, raising substantial doubt about its going concern ability - The Company has a history of recurring net losses, reporting a loss of $33.0 million for FY 2022, which raises substantial doubt about its ability to continue as a going concern[720][824] Cash Flow Summary (Fiscal Year Ended August 31) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($5,884,145) | ($1,024,802) | | Net Cash Provided by Investing Activities | $163,459 | $2,999,122 | | Net Cash (Used in) Provided by Financing Activities | ($427,117) | $4,316,862 | - Financing activities in FY 2022 included receiving $15.27 million from convertible notes, offset by repayments of $5.1 million for convertible notes and $10.6 million for other notes payable[723] - The COVID-19 pandemic continued to impact operations, with healthcare services revenue decreasing by 5.2% in FY 2022 due to a surge in Ontario and related staffing shortages[733] Item 8. Financial Statements and Supplementary Data FY2022 consolidated financial statements show total assets of $40.9 million, a $33.0 million net loss, and an auditor's 'Going Concern' uncertainty Consolidated Balance Sheet Highlights (As of August 31) | | 2022 | 2021 | | :--- | :--- | :--- | | Total Assets | $40,872,840 | $61,958,281 | | Total Current Assets | $5,731,795 | $11,133,509 | | Goodwill & Intangibles, net | $26,666,463 | $41,518,347 | | Total Liabilities | $18,825,269 | $18,154,126 | | Total Current Liabilities | $14,074,706 | $8,463,923 | | Total Stockholders' Equity | $22,047,571 | $43,804,155 | Consolidated Statement of Operations Highlights (For the Year Ended August 31) | | 2022 | 2021 | | :--- | :--- | :--- | | Revenues | $11,737,937 | $9,305,255 | | Gross Profit | $4,799,238 | $3,822,998 | | Loss from Operations | ($25,026,677) | ($4,373,519) | | Net Loss | ($33,045,178) | ($4,470,935) | | Net Loss per Share | ($1.13) | ($0.18) | - The independent auditor's report expresses substantial doubt about the Company's ability to continue as a going concern due to recurring losses, negative cash flows, and an accumulated deficit[771] - Critical Audit Matters identified by the auditor include the impairment of goodwill & intangibles, accounting for business combinations, and determining the Company's role as principal vs. agent in revenue recognition[775] Item 9A. Controls and Procedures Management concluded disclosure controls were ineffective as of August 31, 2022, citing a material weakness from lack of segregation of duties - Management concluded that the Company's disclosure controls and procedures were not effective as of August 31, 2022[1041] - A material weakness was identified in the Company's internal control over financial reporting due to a lack of segregation of duties[1046] Part III Item 10. Directors, Executive Officers and Corporate Governance The board comprises five directors, a majority independent, with Robert Mattacchione as Chairman and CEO, and three independent standing committees - The Board of Directors consists of five members: Robert Mattacchione (Chairman & CEO), Christopher David (COO, President), Sarfaraz Ali, Alex Flesias, and Michael Pope[1053][1068] - A majority of the Board is independent, with Messrs. Pope, Flesias, and Ali determined to be independent under Nasdaq listing rules[1069] - The Board has three standing committees: Audit, Compensation, and Nominating and Corporate Governance, each composed entirely of independent directors[1072] - Michael Pope serves as the Chairman of the Audit Committee and qualifies as an "audit committee financial expert"[1073] Item 11. Executive Compensation Executive compensation for CEO and COO includes base salaries and performance bonuses linked to net income and market capitalization; non-employee directors receive equity 2022 Summary Compensation Table | Name and Principal Position | Fiscal Year | Salary | Total | | :--- | :--- | :--- | :--- | | Robert Mattacchione, CEO | 2022 | $185,000 | $185,000 | | Christopher David, COO-President | 2021 | $171,000 | $171,000 | - The CEO and COO have executive agreements that include bonuses based on a percentage of positive net income (PNI) and significant stock-based bonuses tied to achieving market capitalization milestones (e.g., for every $50 million increase)[1089][1099] - On February 23, 2022, each of the then-independent directors was granted a stock option to purchase 93,955 shares of common stock at an exercise price of $1.33[1109] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters CEO Robert Mattacchione beneficially owned 9.0% of common stock; all directors and executive officers held 10.0% as a group, with 5.1 million shares available for future equity issuance - As of March 31, 2023, CEO Robert Mattacchione is the largest beneficial owner, holding approximately 9.0% of the common stock, primarily through ALMC-ASAP Holdings, Inc[1116] - All directors and executive officers as a group beneficially owned approximately 14.5 million shares, representing 10.0% of the outstanding common stock as of March 31, 2023[1116][1117] - As of August 31, 2022, the Company had approximately 5.1 million securities remaining available for future issuance under its equity compensation plans, primarily the 2021 Equity Incentive Plan[1121] Item 13. Certain Relationships and Related Transactions, and Director Independence The Company has related party transactions, including $478,897 in advances to stockholders and officers, and $946,250 in outstanding debentures due to related parties - As of August 31, 2022, the Company owed $478,897 in demand-payable advances to various related parties, including stockholders and officers[1126][1129] - The Company has outstanding debentures due to related parties with a principal balance of $946,250 as of August 31, 2022. These debentures accrue interest at 8% and the maturity date has been extended to December 1, 2023[1127][1128] Item 14. Principal Accounting Fees and Services Fruci & Associates II, PLLC was appointed new independent auditor on July 27, 2022, billing no fees for FY2022 or FY2021, with all services requiring board pre-approval - On July 27, 2022, Fruci & Associates II, PLLC was appointed as the Company's new independent registered public accounting firm[1131] - No fees were billed by Fruci & Associates II, PLLC for the fiscal years ended August 31, 2022, and 2021[1132][1133] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists all Form 10-K exhibits, including corporate governance, financing, acquisition, and employment agreements, plus required certifications - Lists key corporate documents including the Amended and Restated Articles of Incorporation (Exhibit 3.1) and Bylaws (Exhibit 3.7)[1136] - Includes major financing and acquisition agreements, such as the Membership Interest Purchase Agreement for Clinical Consultants International (Exhibit 2.1) and various Securities Purchase Agreements and Promissory Notes (Exhibits 10.37-10.54)[1136][1139][1140] - Contains executive employment agreements (Exhibits 10.26, 10.44) and equity incentive plans (Exhibits 10.1, 10.6, 10.21)[1137][1138][1139] - Includes required certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sarbanes-Oxley Act Sections 302 and 906 (Exhibits 31.1, 31.2, 32.1)[1140]