Novo Integrated Sciences(NVOS) - 2024 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the company's unaudited financial statements, detailed notes, management's discussion and analysis, and controls and procedures Financial Statements The company presents its unaudited condensed consolidated financial statements for the period ended February 29, 2024, highlighting a net loss of $7.4 million and a "Going Concern" warning - The company has incurred recurring losses, negative cash flows from operations, and an accumulated deficit, raising substantial doubt about its ability to continue as a going concern[90][91][93] Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | February 29, 2024 | August 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $5,019,227 | $4,388,089 | | Total Assets | $34,949,271 | $35,563,047 | | Total Current Liabilities | $9,959,061 | $7,904,858 | | Total Liabilities | $13,058,987 | $11,063,972 | | Total Stockholders' Equity | $21,890,284 | $24,499,075 | Condensed Consolidated Statements of Operations Highlights (Unaudited) | Metric | Six Months Ended Feb 29, 2024 | Six Months Ended Feb 28, 2023 | | :--- | :--- | :--- | | Revenues | $7,061,810 | $5,975,789 | | Gross Profit | $3,268,104 | $2,710,436 | | Loss from Operations | ($4,857,405) | ($4,028,770) | | Net Loss | ($7,406,283) | ($8,581,898) | | Net Loss Per Share (Basic & Diluted) | ($0.43) | ($1.52) | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | Cash Flow Activity | Six Months Ended Feb 29, 2024 | Six Months Ended Feb 28, 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | ($3,865,953) | ($1,156,821) | | Net cash provided by (used in) financing activities | $3,299,455 | ($604,704) | | Net increase (decrease) in cash | $235,424 | ($1,568,949) | Note 1: Organization and Basis of Presentation Novo Integrated Sciences operates a decentralized healthcare model based on three pillars: Service Networks, Technology, and Products, with a 1-for-10 reverse stock split in November 2023 - The company's business model is centered on three pillars: Service Networks (multidisciplinary primary care), Technology (interconnected platforms), and Products (health and wellness solutions)[80][81][82] - On November 7, 2023, the company executed a 1-for-10 reverse stock split, retroactively adjusting all share and per-share data in the report[86] - Management concluded that substantial doubt exists about the Company's ability to continue as a going concern within one year, as its plans to raise capital are not entirely within its control[90][91][93] Note 3: Related Party Transactions This note details transactions with related parties, primarily consisting of loans from stockholders and officers, which decreased from $533,001 to $434,039 Due to Related Parties | Date | Amount Due | | :--- | :--- | | February 29, 2024 | $434,039 | | August 31, 2023 | $533,001 | Note 5: Inventory Inventory, net of allowances, decreased from $1.11 million to $0.95 million, with a significant write-off due to spoilage - Inventory worth $1,175,306 was written off due to spoilage during the six months ended February 29, 2024[4] Inventory, Net | Date | Amount | | :--- | :--- | | February 29, 2024 | $947,351 | | August 31, 2023 | $1,106,983 | Note 8: Intangible Assets Total net intangible assets decreased from $16.22 million to $15.21 million, primarily due to approximately $1.0 million in amortization expense for the six-month period Intangible Assets, Net | Date | Amount | | :--- | :--- | | February 29, 2024 | $15,205,967 | | August 31, 2023 | $16,218,539 | - Amortization expense for intangible assets was $1,002,693 for the six months ended February 29, 2024[154] Note 11: Convertible Notes Payable This note details the company's extensive use of convertible notes for financing, including agreements with Mast Hill Fund and FirstFire Global Opportunities Fund, many of which were converted or repaid - The $16.66 million+ convertible notes from December 2021 were fully settled, with the aggregate principal amount owed being $nil as of February 29, 2024[14] - On September 12, 2023, the company entered into a $3.5 million promissory note with Mast Hill Fund, featuring a 12% interest rate, a $350,000 OID, and a variable conversion price, resulting in a derivative liability of $3.07 million[44][49] - On September 18, 2023, the company entered into a $277,778 promissory note with FirstFire, also with a 12% interest rate, an OID, and a variable conversion price, resulting in a derivative liability of $200,136[190][199] - Multiple convertible notes from Mast Hill and FirstFire were fully converted into common stock during the period, settling the outstanding principal and interest[23][43][180] Note 12: Debentures, Related Parties The company is in breach of its debenture agreements with related parties due to failure to make scheduled repayments, reclassifying the entire $914,219 outstanding balance as a current liability - The company is in breach of its debenture loan agreement with related parties due to failure to make scheduled repayments, reclassifying the outstanding balance of $914,219 to current liabilities[201][202] Note 13: Leases The company has operating leases for corporate office space and facilities expiring through fiscal 2031, with total lease liabilities of $2.06 million and a weighted average remaining lease term of 3.89 years Lease Liabilities | Date | Total Lease Liability | | :--- | :--- | | February 29, 2024 | $2,056,733 | | August 31, 2023 | $2,108,969 | - At February 29, 2024, the weighted average remaining lease term was 3.89 years with a weighted average discount rate of 8.68%[431] Note 14: Stockholders' Equity This note details significant changes in stockholders' equity, including a 1-for-10 reverse stock split, substantial share issuances for debt settlement and services, and the approval of a new 2023 Equity Incentive Plan - A 1-for-10 reverse stock split was effectuated on November 7, 2023[422] - During the six-month period, common stock was issued for various purposes, including conversion of debt (e.g., 519,845 shares to FirstFire, 457,128 shares to Mast Hill), cashless exercise of warrants, and as consideration for consulting services[436][217][425] - The 2023 Equity Incentive Plan was approved, authorizing 2,500,000 shares of common stock for issuance, with 2,300,000 shares available for award as of February 29, 2024[221] Note 16: Segment Reporting The company operates in healthcare services and product manufacturing/development segments, with the product segment showing significant growth in sales and gross profit for the six months ended February 29, 2024 Segment Sales (Six Months Ended) | Segment | February 29, 2024 | February 28, 2023 | | :--- | :--- | :--- | | Healthcare services | $4,148,105 | $4,055,368 | | Product manufacturing & development | $2,835,455 | $1,303,132 | Segment Gross Profit (Six Months Ended) | Segment | February 29, 2024 | February 28, 2023 | | :--- | :--- | :--- | | Healthcare services | $1,459,808 | $1,554,300 | | Product manufacturing & development | $1,730,046 | $538,847 | Note 17: Subsequent Events After the reporting period, the company engaged in significant financing activities, including a $6.21 million secured convertible promissory note with Streeterville Capital, LLC, used to repay prior notes - On April 5, 2024, the company issued a $6.21 million secured convertible promissory note to Streeterville Capital, LLC, with proceeds used to repay prior notes from Mast Hill and FirstFire[342] - The Streeterville note has a 10.9% interest rate, a maturity date of April 8, 2025, and a conversion price equal to 85% of the lowest daily VWAP during the five trading days prior to conversion[342][343] - Subsequent to the period end, the company issued 826,203 shares to Mast Hill and 480,000 shares to FirstFire to convert remaining note balances[340][341] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's business strategy, recent developments including significant financing agreements and asset transfers, and financial results showing an 18% revenue increase and a 13% net loss decrease - The company entered into a Master Agreement with Blacksheep Trust for the transfer of $1 billion in collateral to be used for monetization, with Blacksheep receiving 15% of the monetization proceeds[264] - The company entered into an agreement to purchase the 'Ophir Collection,' a collection of 43 gemstones, for $60 million from a court-appointed receiver, with the transaction pending closing[289][291] - The company received a Nasdaq notification for non-compliance with the minimum $1.00 bid price requirement and has until August 7, 2024, to regain compliance[319] - For the six months ended February 29, 2024, cash used in operating activities increased to $3.9 million from $1.2 million in the prior year period, while cash from financing activities was a source of $3.3 million, a significant reversal from the prior year's use of cash[355][336] Results of Operations For the six months ended February 29, 2024, revenues increased by 18% to $7.1 million, gross profit rose 21% to $3.3 million, operating costs increased 21% to $8.1 million, and net loss decreased by 13% to $7.4 million Comparison of Results (Six Months Ended) | Metric | Feb 29, 2024 | Feb 28, 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $7,061,810 | $5,975,789 | +18% | | Cost of Revenues | $3,793,706 | $3,265,353 | +16% | | Operating Costs | $8,125,509 | $6,739,206 | +21% | | Net Loss Attributed to Novo | ($7,426,471) | ($8,556,768) | -13% | Liquidity and Capital Resources The company reported a net loss of $7.4 million and negative operating cash flow of $3.9 million for the six months ended February 29, 2024, relying on financing activities, primarily convertible notes, for liquidity - The company had a net loss of $7,406,283 for the six months ended February 29, 2024[354] - Cash provided by financing activities was $3,299,455, mainly from $3.31 million in proceeds from convertible notes[336] - Management states the company does not have any credit agreement or source of liquidity immediately available[357] Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of February 29, 2024, with no material changes to internal control over financial reporting identified - The Chief Executive Officer and Principal Financial Officer concluded that as of February 29, 2024, the Company's disclosure controls and procedures were not effective[404] - There were no changes in internal control over financial reporting during the period that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[405] PART II – OTHER INFORMATION This section addresses legal proceedings and any defaults on senior securities Legal Proceedings The company states that it is not a party to any material pending legal proceedings, other than ordinary routine litigation incidental to its business - The company is not party to any material pending legal proceedings, other than ordinary routine litigation incidental to its business[395] Defaults Upon Senior Securities The company reports a default on its debentures, having failed to make scheduled repayments to debenture holders and is currently in discussions to formalize a new payment arrangement - The Company could not make repayments to debenture holders in accordance with the revised repayment schedule and is in breach of the loan agreement as of the period end[407]