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Newtopia Inc. — Management Reports 2022
Apr 5, 2022
47712_rns_2022-04-05_2e730077-ec98-400b-9665-a42827c3e83d.pdf
Management Reports
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Management’s Discussion and Analysis
Dated: April 4, 2022
For the Year Ended December 31, 2021
MANAGEMENT’S DISCUSSION AND ANALYSIS
Introduction
This Management’s Discussion and Analysis (“ MD&A ”) is provided to enable readers to assess the results of the operations and financial condition for Newtopia for the twelve months ended December 31, 2021. This MD&A is dated April 4, 2022 and should be read in conjunction with the annual audited financial statements and related notes for the year ended December 31, 2021 (the “ Annual Financial Statements ”). Unless the context indicates otherwise, references to “Newtopia”, “the Company”, “we”, “us” and “our” in this MD&A refer to Newtopia Inc. and its operations.
Forward-looking information
Certain information included in this MD&A contains forward-looking information within the meaning of applicable Canadian securities laws. This information includes, but is not limited to, statements made in “Business Overview”, “Results from Operations”, “Debt Operations”, “Debt-Profile” and other statements concerning Newtopia’s objectives, its strategies to achieve those objectives, as well as statements with respect to management’s beliefs, plans, estimates and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Forward-looking information generally can be identified by the use of forward-looking terminology such as “outlook”, “objective”, “may”, “will”, “would”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “plan”, “continue”, or similar expressions suggesting future outcomes or events or the negative thereof. Such forward-looking information reflects management’s beliefs and is based on information currently available. All forward-looking information in this MD&A is qualified by the following cautionary statements.
Forward-looking information necessarily involves known and unknown risks and uncertainties, which may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, assumptions may not be correct and objectives, strategic goals and priorities may not be achieved. A variety of factors, many of which are beyond the Company’s control, affect the operations, performance and results of the Company, and could cause actual results to differ materially from current expectations of estimated or anticipated events or results.
Although Newtopia believes that the expectations reflected in such forward-looking information is reasonable and represents the Company’s projections, expectations and beliefs at this time, such information involves known and unknown risks and uncertainties which may cause the Company’s actual performance and results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking information. Important factors that could cause actual results to differ materially include, but are not limited to: ability to maintain and expand its customer base with products that result in lasting health benefits to customers; ability to invest in technology as tools to support and enhance the customer experience; risks of regulatory changes applicable to the healthcare industry in the United States; general economic conditions that we operate in; and the ability to raise financing to fund capital expenditures and operations. The reader is cautioned to consider these factors, uncertainties and potential events carefully and not to put undue reliance on forward-looking information, as there can be no assurance that actual results will be consistent with such forward-looking information.
The forward-looking information included in this MD&A is made as of the date of this MD&A and should not be relied upon as representing the Company’s view as of any date subsequent to the date of this MD&A.
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Management undertakes no obligation, except as otherwise required by applicable law, to publicly update or revise any forward-looking information, whether as a result of new information, future events or otherwise.
Business Overview
Newtopia was incorporated on May 9, 2008, pursuant to the provisions under the Ontario Business Corporations Act . The Company’s head office is located at 4101 Yonge Street, Suite 706, Toronto, Ontario, M2P 1N6.
On May 4, 2020, the Company commenced trading on the TSX Venture Exchange under the symbol “NEWU”. On August 26, 2021 Newtopia also listed on the U.S. OTCQB® Venture Market under the ticker “NEWUF”. With this listing both in the U.S. and Canada, the Company broaden its reach and increased visibility for U.S. investors, while providing greater liquidity in its stock.
Newtopia is a tech-enabled habit change provider focused on disease prevention and reducing the cost of care for health insurers. Newtopia leverages precision health tools (including genetic testing and behavioural evaluations) to develop and implement personalized experiences combining the best of human intervention (health coaches or “Inspirators” ) with the best of digital interaction. Through habit change and lifestyle intervention, individuals at risk of developing preventable chronic disease improve their habits around their physical and mental health. The Company partners with insurers and employers (primarily in the United States) and focuses its efforts on employees or members at risk of developing chronic diseases including, but not limited to, obesity, type 2 diabetes, heart disease, stroke or fatty liver disease. Each personalized program aims to sustainably reduce the five primary metabolic risk factors of chronic disease, including (1) waist circumference or BMI, (2) blood pressure, (3) blood glucose, (4) triglycerides, and (5) cholesterol, along with mental and emotional health risk factors, thereby delivering proven meaningful and growing healthcare risk reduction to individuals and cost savings to risk-bearing employers or insurers. While many population and disease management companies today focus on either managing those with chronic disease or offering general wellness or engagement solutions across the entire member population, the Company’s platform instead targets the approximately 50% to 80% at-risk population. Newtopia enables participants to sustainably change habits, maintain health, avoid or reduce their likelihood of developing chronic disease and reduce exorbitant healthcare costs in the United States by delivering clinical and cost savings outcomes proven to grow and improve over time.
The Company’s personalized habit change platform focuses on physical and mental health risk reduction (i.e. whole person care) rather than disease management or aesthetic weight loss. The Company believes it is time to get ahead of the increasing prevalence of chronic disease and focus on sustainable prevention rather than disease management. The key to achieving sustainable risk and cost reduction is a focus on building confidence and habit change as opposed to increasing knowledge and education. While disease prevention is still limited in the market, most disease prevention guidelines and offerings focus on teaching a “one-size-fits-all” curriculum in order to build greater knowledge of how to live a healthier lifestyle. Built on similar assumptions as those within the dominant one-size-fits-all education model, the end goal of curriculum-based prevention is to educate individuals in order to build enough knowledge that will hopefully translate into the appropriate behaviour changes to reduce risk. However, in a personalized habit change model, the ultimate goal is not to teach and build knowledge; rather, it is to inspire and instill confidence in order to build new progressive habits and reduce risk. The biggest advantage of a habit change platform relative to a learning platform is sustainability and growth of outcomes and cost savings. With a habit change platform, the value increases over 12 and 24 months (and beyond) as opposed to producing short-term outcomes within the first few months, with both clinical risk factors and costs returning the
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following year. Therefore, habit change platforms produce a higher level of engagement, clinical risk reduction and cost savings that grow over time compared to many existing knowledge-based models.
The Company’s patented persuasive enterprise technology platform converges genetic testing and the latest social and behavioural science with real-time online human coaching and a cutting-edge virtual platform, wireless tracking devices, personalized gamification and a curated social health network to ensure lasting results at scale and a strong return on investment for risk-bearing insurers.
The Company markets to individuals (employees of the self-insured employer market or members of private and public health plans) covered by risk-bearing insurers that have out-of-range physical and mental health risk factors and is paid by the risk-bearing insurer on behalf of the member. These out-of-range factors can be identified by leveraging existing risk identification data including in-person biometric test outcomes, online health risk assessments, claims or risk screener data. Eligible at-risk individuals are offered an exclusive invitation to enroll. Once enrolled, they are referred to as participants, and complete a personal profile which helps the Company understand their personality type, level of motivation, readiness to change, eating habits, activity level and underlying social determinants of health. Participants are then personalitymatched with a Company Inspirator who acts as a personal health coach and works with each participant to build confidence and develop new progressive habits with respect to nutrition, exercise and behavioural/mental well-being. Participants and Inspirators meet virtually which leverages a combination of online video, text messaging, email or telephone. The use of virtual care has been part of the Newtopia program since day one, enabling the company to continue to provide whole person care despite lockdowns as a result of the global pandemic.
In addition to working with a health coach, participants are also provided tools for success in their personal program. These tools can include a genetic test, smart scale, activity tracker, access to a personalized mobile app and measuring tape for measuring waist circumference. The Company’s mobile platform provides participants access to their Inspirator, video lessons, reporting from bio-sensors, goals, messaging, and their progress from anywhere in the world. It also helps to extend the relationship between participant and Inspirator, and increase accountability and engagement between coaching sessions.
Newtopia is a pioneer in leveraging genetic testing primarily for behaviour change and engagement purposes. Newtopia’s genetic testing allows the Company to help participants understand if they have inherited any genetic factors that may be having an impact on their physical and mental health and to personalize lifestyle recommendations by gaining a deeper understanding of how genes impact an individual’s risk. The genetic test is designed specifically to look for genetic characteristics related to physical and mental health as well as lifestyle management. The Company provides specific geneticallydriven recommendations that are evidence and guideline-based for nutrition, exercise and behaviour management to combat the potential effect of those genetic characteristics. These recommendations could include changes in the proportion of fats, carbohydrates and proteins the participant eats, the form and intensity of exercise required to burn a sufficient number of calories and appropriate behavioural and mental health support and exercises related to satiety signals, cravings and resilience to stress. These genetically driven recommendations are then incorporated into the participant’s personalized lifestyle plan to further refine and personalize each participant’s experience in order to create more durable habit change. Newtopia’s Innovation Lab is frequently working on identifying new genes that could prove helpful in chronic disease prevention. Recently, the BDNF gene, which gauges reliance to stress, was add to Newtopia’s genetic profiling.
In addition to its whole person care solution for lowering risk for broad chronic disease prevention, Newtopia delivers individualized support through the following personalized program focus areas:
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1. Habit Change and Resiliency
2. Weight Management
3. Diabetes Prevention
4. Hypertension and Heart Health
5. Healthy Living with Diabetes
Corporate Update
Revenue during the three and twelve months ended December 31, 2021 of $2,402,793 and $10,455,848 decreased by 3% and 8%, respectively over the same periods of the previous year. The Company’s revenue and growth has faced strong headwinds since the outbreak of the Covid-19 pandemic in March 2020. 2020 revenue was also bolstered by a novel incentivized program that launched January 2020 prior to the global shut down in the second quarter by one of its Fortune 500 financial services customers. In June 2021, Newtopia was granted expanded marketing opportunities within the employee population of an existing Fortune 50 health services client. The strong response in enrolments during June carried over into the third quarter. However, as companies started returning to normal operations following the rollout of effective vaccines, the emergence of Omicron as the dominant Covid 19 strain in the last quarter of 2021 caused some governments and businesses to reinstate previously relaxed physical distancing protocols.
Operating expenses during the three months ended December 31, 2021 of $2,782,721 have decreased by 34%, over the same period of the previous year. The decrease is largely driven by reduced senior level resources and compensation costs. During the twelve months ended December 31, 2021, operating expenses were consistent with the same period of the previous year.
Net loss and comprehensive loss during the three months ended December 31, 2021 decreased by 39% and was substantially consistent during the twelve months over the same periods of the previous year (+1%). The reduced losses are a result of the decline in operating expenses.
On September 15, 2021, the Company issued $2,545,000 debenture units that included non-convertible debentures and commons share purchase warrants. The debentures will mature on September 15, 2023 and are secured by the assets of the Company and bear interest at a rate of 8.0% per annum payable quarterly in arrears in cash. The capital injection was a condition for the refinancing of the Company’s credit facility with a leading Canadian Schedule I Bank and the waiver of breaches by the Company of its cash runway covenant.
On September 30, 2021, the Company accordingly amended the credit facility for an increased revolving credit facility of $7.5 million, up from the $5.0 million in funding secured previously. This new credit facility, along with the $2.5 million private placement offering, doubles the amount of growth capital available to the Company for working capital and general corporate purposes. The Company will strategically leverage these funds to: (i) hire additional Inspirators for its growing participant base, (ii) expand its sales and marketing teams and (iii) advance its habit change technology to improve efficiencies and drive increased margins.
Board of Directors
During the fiscal year 2021, Newtopia announced the appointment of Roger Poirier, CFA to the Company’s Board of Directors. With Mr. Poirier’s appointment, Newtopia has expanded its Board of Directors to include five directors. Mr. Poirier has more than three decades of capital markets, finance and M&A experience and will serve on Newtopia’s Audit Committee.
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COVID-19
On March 12, 2020, the World Health Organization declared the global outbreak of the COVID-19 virus as a pandemic. The outbreak has spread throughout Europe, the Middle East, Canada and the United States, causing companies and various international jurisdictions to impose restrictions, such as quarantines, closures, cancellations and travel restrictions.
The pandemic has led to widespread economic uncertainty and volatility in the financial markets which could adversely impact the Company’s cost and access to capital. With concerns over the spreading of the virus, the Company has proactively implemented several protective measures, including work-from-home arrangements for its staff, cancellation of conferences and limits on non-essential employee travel.
The recent release of effective COVID-19 vaccines has provided a positive boost to consumer confidence and to the outlook for an economic rebound. While these are positive trends and the Company confirms the rebound in economic activity also correlates with the Company’s current growth, the onset of the Delta variant first and Omicron after has resulted in the reinstallation of some COVID-19-related restrictions in the United States, which could have a negative impact on Newtopia’s future operations in the event that the Delta and Omicron variants or other variants of concern cause further or renewed restrictions. The future impact of COVID-19 therefore remains uncertain and could have a material adverse effect on the Company’s business, financial position, results of operations and/or cash flows.
Newtopia will continue to work with its stakeholders (including customers, employees and suppliers) to responsibly address this global pandemic. The Company continues to monitor the situation, to assess further possible implications to its business, supply chain and customers, and to take actions in an effort to mitigate adverse consequences.
Trends
Management regularly monitors economic conditions and estimates their impact on the Company’s operations and incorporates these estimates in both short-term operating and longer-term strategic decisions.
Apart from the impact of COVID-19 noted above and the risk factors noted under the heading “Risks and Uncertainties”, management is not aware of any other trends, commitments, events or uncertainties that would have a material effect on the Company’s business, financial condition or results of operations.
The Company’s financial statements have been prepared on a going concern basis. The going concern basis of presentation assumes that the Company will continue in operation for the foreseeable future and be able to realize the carrying value of its assets and discharge its liabilities in the normal course of operations. The Company incurred a comprehensive loss of $7,649,754 for the year ended December 31, 2021 and as of that date has an accumulated deficit of $58,673,634. To date, the Company has funded operations through debt financing and private equity offerings. On September 15, 2021, the Company issued $2,545,000 debenture units with attached warrants and on September 20, 2021, the bank agreed to increase the Company's credit facility from $5,000,000 to $7,500,000. The Company’s ability to continue as a going concern is dependent upon its ability to obtain additional financing and/or achieve profitable operations in the future. These conditions indicate the existence of a material uncertainty that may cast significant doubt regarding the company's ability to continue as a going concern.
The financial statements do not reflect adjustments that would be necessary if the going concern assumption was not appropriate. These adjustments could be material.
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Off-Balance Sheet Arrangements
As of the date of this filing, the Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition of the Company including, without limitation, such considerations as liquidity and capital resources that have not previously been discussed.
Proposed Transactions
There are no proposed transactions of a material nature being considered by the Company.
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Selected Financial Information
`
Three Months Ended December 31,
| ` | Three | Months Ended | December 31, | December 31, |
|---|---|---|---|---|
| 2021 | 2020 | Change | ||
| $ | $ | $ | % | |
| Revenue | 2,402,793 | 2,476,904 | (74,111) | (3%) |
| Cost of sales | 1,164,683 | 1,215,148 | (50,465) | (4%) |
| Gross profit | 1,238,110 | 1,261,756 | (23,646) | (2%) |
| Gross profit margin | 52% | 51% | 1% | 2% |
| Operating expenses | 2,782,721 | 4,228,490 | (1,445,769) | (34%) |
| Operating loss | (1,544,611) | (2,966,734) | 1,422,123 | (48%) |
| Other expenses | 250,766 | (38,342) | 289,108 | (754%) |
| Net loss and comprehensive loss | (1,795,377) | (2,928,392) | 1,133,015 | (39%) |
| Basic and diluted loss per share | (0.02) | (0.03) | 0.01 | (38%) |
Years Ended December 31,
| ` Revenue Cost of sales Gross profit Gross profit margin Operating expenses Operating loss Other expenses Net loss and comprehensive loss Basic and diluted loss per share |
2020 $ 11,416,319 5,913,724 5,502,595 48% 12,094,333 (6,591,738) 1,140,108 (7,731,846) (0.12) Years Ended De |
cember 31, | |
|---|---|---|---|
| 2021 $ 10,455,848 5,384,184 5,071,664 49% 12,034,712 (6,963,048) 686,706 (7,649,754) (0.08) |
Change | ||
| $ % (960,471) (8%) (529,540) (9%) (430,931) (8%) 1% 2% (59,621) (0%) (371,310) 6% (453,402) (40%) 82,092 (1%) 0.04 (33%) |
Revenue
The Company’s performance-based revenue model consists of three elements: (1) Welcome Kit sales, (2) monthly subscription fees, and (3) outcome milestone fees. Welcome Kit sales are recognized when they are delivered to participants upon enrollment. Subscription fees are tied to participant engagement in the Company’s programs based on specific criteria outlined in an individual contract.
Certain customer contracts contain clauses that trigger success fees and/or outcome guarantees. Success fees are paid by customers upon the completion of certain target metrics such as a specific percentage weight loss on average across participants engaged in the program. Upon achievement of those metrics, success fees are billed on a monthly basis. Outcome guarantees result in a repayment of a portion of the
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engagement fees previously earned by the Company in the event that average participant weight-loss does not meet a targeted range.
Revenue for the three and twelve months ended December 31, 2021 decreased by 3% and 8%, respectively over the same periods in the previous year. The Company’s revenue has been negatively impacted by social distancing restrictions related to the Covid 19 outbreak, which reduced in-person biometric employee testing and constrained the Company’s ability to identify and address at-risk populations. Following the rollout of effective vaccines and a period of easing restrictions in the third quarter of 2021, the emergence of the new more spreadable Omicron variant led certain governments and companies to return to lock down measures in the fourth quarter.
During this period when clients turned to remote methods of risk-identification, Newtopia identified novel options in partnership with its clients to approach entire populations with its habit change offering. The Company is now finding that more of its customers are open to a combined approach to risk identification, one that leverages in-person biometric testing with online health risk assessments to enable identification despite unfavorable macro-conditions.
Gross Profit
Gross profit is comprised of revenue less direct expenses, which consists of the cost of Welcome Kits sold to new participants and the labour costs associated with the Company’s coaching team or Inspirators. Welcome Kits carry a lower gross profit margin than the fees earned on participant engagements.
Cost of sales for the three and twelve months ended December 31, 2021 decreased by 4% and 9%, respectively over the same periods in the previous year.. The decrease is due to the lower number of Welcome Kit sales and lower coaching team compensation during the year.
Gross profit during the three and twelve months ended December 31, 2021 decreased by 2% and 8%, respectively over the same period of the previous year, as a result of a higher proportion of enrolments and Welcome Kit sales.
Operating Expenses
The table below sets forth the details of operating expenses for the three and twelve months ended December 31, 2021 and 2020:
| The table below sets forth the details of December 31, 2021 and 2020: |
operating expenses for the three and twelve months ended | operating expenses for the three and twelve months ended |
|---|---|---|
| Technology and development Sales and marketing General and administrative Share-based compensation |
Three Months Ended December 31, | |
| 2021 $ 698,776 613,105 1,331,630 139,210 2,782,721 |
2020 $ $ % 1,057,629 (358,853) (34%) 1,203,927 (590,822) (49%) 1,571,891 (240,261) (15%) 395,043 (255,833) (65%) 4,228,490 (1,445,769) (34%) Change |
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Years Ended December 31,
2021 2020 Change
$ $ $ %
Technology and development 3,126,963 3,439,845 (312,882) (9%)
Sales and marketing 3,156,822 3,528,912 (372,090) (11%)
General and administrative 4,679,652 4,353,914 325,738 7%
Share-based compensation 1,071,275 771,662 299,613 39%
12,034,712 12,094,333 (59,621) (0%)
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Operating expenses consist of administrative, technology and development, and selling and marketing expenses.
Technology and development expenditures during the three and twelve months ended December 31, 2021 decreased by 34% and 9% respectively over the same period in the prior year, primarily as result of a reduction in senior-level resources during the current year, partially offset by higher research costs incurred during the current year related to a new Company’s customer relationship (CRM) platform. Consistent with the previous quarters in 2021, the Company is making investments in a new CRM platform in order to improve service efficiency that will ultimately lead to higher gross margins on recurring engagement revenues. The adoption of the new CRM will eliminate the annual licencing cost associated with the existing platform of approximately $450,000 per year.
Selling and marketing expenses during the three and twelve months ended December 31, 2021 decreased by 49% and 11% respectively over the same periods in the prior year. The decrease in expenditures during the twelve-month period was primarily as result of lower sales team headcount. Selling and marketing expenses during the three months ended December 31, 2021 was lower compared to the same period of the previous year as the Company contracted one-time marketing and public relations firms in late 2020 and early 2021 to help drive expansion to new client verticals with higher aggregations of potential participants. The Company’s sales funnel is growing commensurate with investment in sales and marketing activities, which are expect to further expand in 2022.
General and administrative expenses during the three ended December 31, 2021 decreased by 15% over the same period of the previous year. The decrease is due to filing fees and charges associated with becoming a public company in May 2020. Employee compensation costs were also lower during the three months ended December 31, 2021 due to the departure of certain senior level resources during the year. Expenditures during the twelve months ended December 31, 2021 increased compared to the same period of the previous year (+7%) due to the increases in compensation, occupancy costs, insurance and general office expenditures during the year.
Share-based compensation expenses during the three months ended December 31, 2021 decreased by 65%, compared to the share-based compensation expenses during the three months ended December 31, 2020, primarily due to stock options forfeited during the three months period ended December 31, 2021. Expenditures during the twelve months ended December 31, 2021 increased by 39% over the same period in the prior year due to the bump in share-based expense related to stock options granted to all employees in the latter part of last year in November 2020 following the Company’s initial public offering in May 2020.
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Other Expenses
The table below sets forth the details of other expenses for the three and twelve months ended December 31, 2021 and 2020:
| 2021 2020 $ $ $ % Depreciation of property and equipment 15,652 18,393 (2,741) (15%) Depreciation of right-of-use asset 46,188 46,189 (1) (0%) Interest on lease obligations 25,525 33,358 (7,833) (23%) Interest and accretion expense 97,338 - 97,338 100% Finance charges 22,592 2,005 20,587 1027% Amortization of deferred finance charges 61,471 - 61,471 100% Foreign exchange loss (gain) 2,236 56,679 (54,443) (96%) Change in value of derivative liability - (194,966) 194,966 (100%) Capitalized borrowing costs (39,200) - (39,200) (100%) Loss on settlement of related party payable 18,964 - 18,964 100% 250,766 (38,342) 289,108 (754%) Three Months Ended December 31, Change |
Three Months Ended December 31, | Three Months Ended December 31, | Three Months Ended December 31, |
|---|---|---|---|
| 2020 $ 18,393 46,189 33,358 - 2,005 - 56,679 (194,966) - - (38,342) |
Change | ||
| $ % (2,741) (15%) (1) (0%) (7,833) (23%) 97,338 100% 20,587 1027% 61,471 100% (54,443) (96%) 194,966 (100%) (39,200) (100%) 18,964 100% |
|||
| 289,108 (754%) |
| Depreciation of property and equipment Depreciation of right-of-use asset Interest on lease obligations Interest and accretion expense |
Years Ended December 31, | |
| 2021 $ 66,590 184,767 113,714 112,990 |
2020 $ $ % 80,298 (13,708) (17%) 184,767 - 0% 143,325 (29,611) (21%) 233,542 (120,552) (52%) Change |
|
| Finance charges | 67,342 | 13,000 54,342 418% |
| Amortization of deferred finance charges 174,397 Foreign exchange loss (gain) 34,650 Change in value of convertible debenture derivative liabilities - Change in value of derivative liability (47,508) Capitalized borrowing costs (39,200) Loss on settlement of related party payable 18,964 686,706 |
- 174,397 100% (34) 34,684 (102012%) 448,656 (448,656) (100%) (131,162) 83,654 (64%) - (39,200) (100%) 167,716 (148,752) (89%) 1,140,108 (453,402) (40%) |
Depreciation of property and equipment during the three and twelve months ended December 31, 2021 was lower by 15% and 17%, respectively, over the same periods of the previous year as a result of computer equipment additions during 2020 to support the growth in the coaching team.
Interest and accretion expense for the three months and year ended December 31, 2021 relates to the amortization of the debt portion of subordinated and postponed 8.0% secured non-convertible debenture
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units issued on September 15, 2021. Interest and accretion expense for the same periods of the previous year relates to the amortization of the debt portion of the convertible debenture units issued in November 2018 (See “Financing”).
The change in convertible debentures derivative liabilities mainly relate to convertible debenture units issued by the Company in November 2018. The convertible debenture units were converted following the Company’s listing in May 2020.
Finance charges and amortization of deferred finance charges in the three and twelve months ended December 31, 2021 relate to the Company’s credit facility secured in October 2020. Finance charges incurred on the closing of the facility are being deferred and amortized over the term of the facility.
The Company derives most of its revenue in U.S. currency and the weakening U.S. dollar relative to the Canadian dollar during the first quarter of 2020, due largely to the economic impact of COVID-19, resulted in the recognition of a substantial foreign exchange gain on the Company’s U.S. dollar monetary assets in 2021. As at December 31, 2021, the Company’s U.S.-denominated assets include U.S. cash and 100% of its trade receivables.
Loss on settlement of related party payable relates to the settlement of $400,000 of unpaid bonuses owing to the Company’s Chief Executive Officer (“ CEO ”) with 865,849 Common Shares and 188,571 stock options. The stock options are exercisable at $0.70 per Common Share until November 6, 2021, subsequently extended to May 6, 2023. The aggregate fair value of the Common Shares and stock options at the date of the settlement was determined to be $567,716. The difference from the bonuses payable of $400,000 (being $167,716) was recognized as a loss on settlement of debt.
| Total assets Total liabilities Equity Total liabilities and equity |
As at | |
|---|---|---|
| December 31, 2021 $ 5,505,962 7,350,276 (1,844,314) 5,505,962 |
December 31, 2020 $ $ % 7,488,852 (1,982,890) (26%) 3,288,991 4,061,285 123% 4,199,861 (6,044,175) (144%) 7,488,852 (1,982,890) (26%) Change |
Total Assets
Total assets as at December 31, 2021 decreased by 26% from total assets as at December 31, 2020 due to a lower cash balance, right-of-use asset and unbilled revenue related to the variable success fee consideration for achieving weight loss targets, partially offset by an increase in trade and other receivables and intangibles (new CRM platform). The cash balance was higher as at December 31, 2020 following the closing of a $7,505,000 private placement offering of units on October 29, 2020. The net cash outflow from operations, together with the investments in the new CRM platform, resulted in a reduction in cash during the twelve months period ended December 31, 2021. The unbilled revenue balance as at December 31, 2020 related primarily to the high number of participants that enrolled in the first quarter of 2020 that
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successfully achieved weight loss success fee targets after 12 months. Decrease in the right-of-use asset in 2021 is due to normal depreciation of the asset during the year. Trade and other receivables are higher due to higher engagements in the last quarter.
Total Liabilities
The Company’s total liabilities as at December 31, 2021 increased by 123% from December 31, 2020, primarily as result of the $2,545,000 debenture units with attached warrants issued by the Company in September 2021 and the withdrawals from the credit facility during the period, in order to finance operations and investments in the CRM platform. The increase was partially offset by decreases in trade payables and the lease obligation.
Summary of Quarterly Results
The table below sets forth selected financial data for the most recent nine quarters ended December 31, 2021:
(In thousands, except loss per share)
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Revenue Net LossLoss per Share
Quarter-ended (Unaudited) (Unaudited) (Unaudited)
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| $ | $ | $ | |
| December 31, 2021 | 2,403 | (1,795) | (0.02) |
| September 30, 2021 | 2,905 | (1,121) | (0.01) |
| June 30, 2021 | 2,529 | (2,457) | (0.02) |
| March 31, 2021 | 2,619 | (2,276) | (0.02) |
| December 31, 2020 | 2,477 | (2,928) | (0.03) |
| September 30, 2020 | 2,389 | (1,755) | (0.02) |
| June 30, 2020 | 2,687 | (1,540) | (0.02) |
| March 31, 2020 | 3,863 | (1,508) | (0.10) |
| December 31, 2019 | 1,538 | (4,079) |
(0.26) |
The Company’s revenues fluctuate quarterly depending on the level of Welcome Kit sales, which usually occur in bulk at the outset of a new customer contract or in phases as customers roll out Newtopia’s programs to its at-risk employees. Recurring engagement revenues, which follow Welcome Kit sales, are subject to seasonality with greater participant engagement at the start of the calendar year. As new clients onboard or as new phases within existing clients launch, Welcome Kit revenue is followed by recurring engagement revenues. The easing of COVID-19 restrictions in the United States in the second half of 2021 and the return to normal in-person biometric testing impacted the seasonality of revenue in 2021, with most of the onboardings having moved from the beginning of the year to the second half of 2021.
Strategic Growth Drivers and Outlook
The Company intends to continue to deliver disease prevention solutions by leveraging technology, behavioral science and genetics to help individuals prevent chronic disease and reduce costs for employers and insurers.
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There is no assurance that equity capital will be available to the Company in the future in the amounts or at the times desired or on terms that are acceptable to the Company, if at all. See “Risks and Uncertainties” below.
See “Cautionary Note Regarding Forward-Looking Statements” above.
Through the latter part of 2020 and the first five months of 2021, Newtopia underwent a delayed rollout of products to some of its clients due to the impact of COVID-19. Beginning in June 2021, however, this pattern reversed itself due to an increased and expanded marketing effort with one of the Company’s customers, a Fortune 50 health services client, along with the beginning of the return to more standard operating procedures in the United States with the easing of pandemic-related restrictions throughout the country.
The recent positive client onboarding trajectory in the second quarter resulted in a return to growth for the Company in the third quarter of 2021, with more moderate revenue performance in Q4 and the full year 2021.
Importantly, Newtopia’s underlying business is very healthy as indicated by record levels of recurring participant engagement in the second quarter 2021 that resulted in record enrolment in Q3 of 37,000 participants. In order to continue to expand its market share and further enhance overall engagement levels, the Company will focus on three key pillars of growth.
First, Newtopia will look to expand its current client base beyond the existing customer pipeline. The addressable market for chronic disease prevention is significant and growing. The Centers for Disease Control reports that 90% of the $4.0 trillion annual healthcare costs paid for by health insurers in the United States are spent to cover chronic physical and mental health conditions. Clients are expected to be generated from one of three verticals, though there can be additional opportunities to expand beyond these identified target markets. United States-based verticals include the 140 million lives covered by self-insured employers, the 100 million lives covered by private insurers and 100 million lives covered by the public and government insurers such as Medicare and Medicare Advantage. The Canadian market also offers an additional 38 million individuals covered by government supplied health insurance. The Company is in its early stages in the Canadian market, having at present signed with a single prevention pilot program. In the large public and private health plans, Newtopia has been leveraging its world-class advisors to wire into many of these accounts in the third quarter. This pipeline of potential new customers is strong, with 2021 outreach setting the stage for growth in 2022. The Company is in the early stages of opening up new client channels by repackaging its current offerings that focus on self-insured employers to make such offerings accessible to public and private health plans as well.
The second core pillar of growth will come from improving product density within new markets or crossselling of current products within Newtopia’s existing customer base. This cross-selling of products will include those on the prevention side, including weight management and diabetes prevention offerings, as well as those that reverse and slow chronic disease, including hypertension and related heart health conditions, all of which are aimed at improving resiliency and building strong, long-term habits. In June 2021, the Company also added new mental health offerings to its disease prevention platform as a means by which to provide whole health care (physical and mental) to the participant. Opportunities to cross-sell mental health offerings also now offer incremental revenue opportunities, and the Company believes it has positioned itself very strongly for future customer expansion. Newtopia’s research and development team is actively looking into identifying other chronic disease risk identifiers that will continue to differentiate the Company from other health tech providers.
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The third pillar of growth will be to increase enrollment rates with its existing customers. Newtopia’s customer contracts are often set up in phases where only a portion of the total at-risk population is offered to onboard onto the Company’s health tech platform initially. As a result of this phased, strategic approach to customer contracts, the Company has only rolled out to approximately 20% of the potential population across Newtopia’s entire customer base at present. While an improvement in sales is not guaranteed, expanding with this current customer base offers significant opportunity for potential incremental revenue for the Company.
To support these growth efforts, Newtopia will focus on making strategic investments in its technology that increase the efficiency of its services and provide participants with improved user engagement and better leverage of its health coaches while still maintaining the high-level of individualized care provided to the Company’s client base. As the Company expands its participant base, it may also make a number of investments to scale the business further including, but not limited to: bringing on additional Inspirators to maintain the same level of one-on-one service; enhancing claims processing and reimbursement toolset; and improving its enterprise risk management integrations.
In 2021, a total of $2.1 million in capital expenditures were made on a new CRM platform to support these efforts and promote the aforementioned pillars of growth. The Company has added further planned enhancements to its customer web and mobile application platforms and anticipates decreasing technology hiring expenses leveraging more expert consultants to build out key elements of its upgraded technology platform. An annual licensing cost associated with the existing CRM platform of approximately $450,000 per year will also be eliminated once migration to the new technology platform is completed. Of note, the Company’s capital expenditures will be capitalized over their lifetime and any increases in expenses in the future will continue to be more modest than the Company’s growth in revenue and gross profits.
In light of the push in revenue growth towards the second-half of the year and Newtopia’s investment in an important technology upgrade, cash flow from operations and investments was negative. That said, with a strong business development pipeline, the Company is striving to hit cash flow positive from operations in 2022.
Liquidity and capital resources
The table below sets forth the cash flows for the twelve months ended December 31, 2021 and 2020:
| Years Ended December 31, | Years Ended December 31, | Years Ended December 31, | ||
|---|---|---|---|---|
| 2021 | 2020 | Change | ||
| $ | $ | $ | % | |
| Cash from (used) in | ||||
| Operating activities | (5,949,358) | (4,785,176) | (1,164,182) | 24% |
| Investing activities | (2,146,528) | (92,783) | (2,053,745) | 2213% |
| Financing activities | 4,233,787 | 7,165,301 | (2,931,514) | (41%) |
| Decrease in cash | (3,862,099) | 2,287,342 | (6,149,441) | (269%) |
The Company may be adversely impacted by uncertain market conditions and adverse results from operations. The Company may face challenges due to such factors as the loss of a major customer contract, entry of new competitors or significant changes in healthcare regulations. Should expected revenue growth not materialize, the Company may be required to seek additional financing through the sale of equity securities and/or through debt.
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Cash
The cash used in operating activities during the twelve months ended December 31, 2021 increased by 24% as compared to cash used in operating activities during the twelve months ended December 31, 2020. This increase is mainly attributed to the increase in net cash used in operations.
Cash used in investing activities relate to the investment by the Company on the acquisition and integration of a new CRM platform software. This project was launched during the fourth quarter of the 2020 fiscal year and is expected to be completed by the first half of 2022.
The cash inflow from financing activities during the twelve months ended December 31, 2021 represent the proceeds from the private placement of $2,545,000 debenture units on September 15, 2021 and the net withdrawal of money from the credit facility during 2021, net of the lease payments on the right-of-use asset lease obligation.
Financing
On December 4, 2020, the Company closed an Operating Credit Line Agreement (the “ Facility ”) in the amount of $5,000,000. The Company may avail itself of the operating credit under the Facility by way of either Canadian dollars at prime lending rate plus 2.25% or United States dollars at the U.S. base lending rate plus 2.25%. The Facility matures on December 4, 2022 (the “ Maturity Date ”), is secured by all Newtopia property and is subject to certain covenants where the Company is required to meet minimum cash runway ratios.
In connection with the Facility, the Company was required to obtain a guarantee from Export Development Canada of 50% of the available Facility plus accrued and unpaid interest up to a maximum of 120 days (the “ Guaranteed Amount ”). The Company agreed to pay a guarantee fee of 2.35% of the Guaranteed Amount and guaranteed interest on outstanding amounts at the lender’s prime rate minus 0.05%. The initial guarantee covers the period from October 14, 2020 to September 30, 2021.
In accordance with the terms of the Facility, the lender received 210,526 Warrants (the “ Warrants ”) on December 4, 2020, with each Warrant entitling the lender to acquire one common share at a price of $0.95 at any time within the earlier of the Maturity Date and December 4, 2025.
On September 15, 2021 (the “ Closing Date ”), the Company closed a non-brokered private placement of subordinated and postponed 8.0% secured non-convertible debenture units (the “ Units ”) for gross proceeds of $2,545,000 (the “ Offering ”). The additional loan funding was a condition for refinancing the Company’s Facility and waiver of breaches by the Company of its cash runway covenant.
Each Unit is comprised of: (i) $10,000 principal amount of subordinated and postponed secured nonconvertible debentures of the Company (the “ Debentures ”); and (ii) 1,724 common share purchase warrants of the Company (each whole warrant, a “ Warrant ”, and collectively, the “ Warrants ”). Each Warrant is exercisable for one common share of the Company (a “ Common Share ”) until September 15, 2023 (the “ Expiry Date ”). The exercise price of Warrants shall be $0.58 per share during the first year following the closing date of the Offering (the “ Closing Date ”) and $0.75 per share following the one year anniversary of the Closing Date until the Expiry Date. The securities issued pursuant to the Offering are subject to a four month hold period that expires on January 16, 2022. An aggregate of 438,777 Warrants were issued in connection with the closing of the Offering.
The Debentures will mature on September 15, 2023 (the “ Maturity Date ”) and are secured by the assets of the Company and bear interest at a rate of 8.0% per annum payable quarterly in arrears in cash.
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The Debentures cannot be redeemed for four months from closing of the Offering; however can thereafter be repaid in part or in full at any time subject to an early repayment fee equal to: (i) 6% of the principal amount of the Debenture if repayment occurs prior to the date that is six months following the Closing Date; (ii) 4% of such principal amount if repayment occurs following the date that is six months following the Closing Date but prior to the first anniversary of the Closing Date; (iii) 3% of such principal amount if repayment occurs following the first anniversary of the Closing Date but prior to the date that is six months following such first anniversary; or (iv) 2% of such principal amount if repayment occurs following the date is six months following the first anniversary of the Closing Date but prior to the Maturity Date.
Finders acting in connection with this Offering received a finder’s fee in the aggregate total amount of $108,500 and an aggregate 187,067 finder’s warrants exercisable for Common Shares until September 15, 2022 at an exercise price of $0.58 per share.
The Company agrees to pay an annual work and credit maintenance fee of 2% of the Principal Amount in cash, due and payable annually in advance.
On September 30, 2021, the Company refinanced the Facility for an increased revolving credit facility of $7.5 million, up from the $5.0 million in funding secured previously. In September 2021 the guarantee obtained from Export Development Canada was extended until September 30, 2022.
Issued and Outstanding Share Capital
The Company’s authorized capital consists of an unlimited number of Common Shares and unlimited number of Class A Preferred Shares, issuable in series. As of the date of this MD&A, the issued and outstanding shares consists of 100,492,786 Common Shares with no Class A Preferred Shares outstanding.
The Company has established a stock option plan (the “ Plan ”) for the benefit of its employees, directors, officers and consultants. The maximum number of options that may be granted under the Plan cannot exceed 18,114,870, representing 20% of the aggregate of issued and outstanding Common Shares on May 4, 2020 being the date the Company’s Common Shares were listed for trading on the TSX Venture Exchange. As of the date of this MD&A, there are 12,957,600 stock options outstanding under the Plan.
As of the date of this MD&A, there are outstanding 15,521,993 non-broker warrants to purchase up to 15,521,993 Common Shares and 1,373,517 compensation options to purchase up to 1,373,517 Common Shares.
Significant Accounting Policies and Estimates
The Company’s significant accounting policies and accounting estimates under International Financial Reporting Standards (“ IFRS ”) are contained in the unaudited Condensed Interim Financial Statements. Certain of these policies involve critical accounting estimates as they require us to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions. Actual results may differ from estimates under different assumptions and conditions. Significant judgments include income taxes and significant estimates include fair value measurements and the valuation process.
New Standards Adopted During The Year
During the year ended December 31, 2021, the Company adopted the following amendments to IFRS Standards and Interpretations:
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Amendments to IAS 1 and IAS 8 Definition of material (Amendments to IAS 1 and IAS 8)
In October 2018, the IASB issued amendments to IAS 1 and IAS 8 to align the definition of “material” across the standards and to make it easier to understand. The definition of material in IAS 8 has been replaced by a definition of material in IAS 1. The new definition states that, “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.”
The adoption of the Amendments to IAS1 and IAS 8 had no impact on the Company’s financial statements.
New and Revised IFRS Standards in issue but not yet effective
The Company has not applied the following new and revised IFRS Standards that have been issued but are not yet effective:
| not yet effective: | |
|---|---|
| IFRS 17 | Insurance Contracts (as amended in December 2021) |
| IFRS 10 and IAS 28 (amendments) | Sale or Contribution of Assets between an Investor and its |
| Associate or Joint Venture | |
| Amendments to IAS 1 | Classification of Liabilities as Current or Non Current |
| Amendments to IFRS 3 | Reference to the Conceptual Framework |
| Amendments to IAS 16 | Property, plant and equipment – proceeds before intended use |
| Amendments to IAS 37 | Onerous contracts – costs of fulfilling a contract |
| Amendments to IFRS 16 | Leases – COVID 19 related rent concessions (extension of the |
| practical expedient) | |
| Amendments to IAS 12 | Deferred tax related to assets and liabilities arising from a single |
| transaction |
The Company does not expect that the adoption of the amendments to IFRS 17, IFRS 10, IAS 28, IFRS 3, IAS 16 and IAS 12 will have a material impact on the financial statements of the Company. The Company has not yet completed its assessment of the impact of adoption of amendments to IAS 1 and IAS 37.
Amendments to IAS 1 – Classification of Liabilities as Current or Non current
The amendments to IAS 1 affect only the presentation of liabilities as current or non current in the statement of financial position and not the amount or timing of recognition of any asset, liability, income or expenses, or the information disclosed about those items. The amendments clarify that the classification of liabilities as current or non current is based on rights that are in existence at the end of the reporting period, specify that classification is unaffected by expectations about whether an entity will exercise its right to defer settlement of a liability, explain that rights are in existence if covenants are complied with at the end of the reporting period, and introduce a definition of ‘settlement’ to make clear that settlement refers to the transfer to the counterparty of cash, equity instruments, other assets or services. The amendments are applied retrospectively for annual periods beginning on or after 1 January 2023, with early application permitted.
Amendments to IAS 37 – Onerous Contracts — Cost of Fulfilling a Contract
The amendments specify that the ‘cost of fulfilling’ a contract comprises the ‘costs that relate directly to the contract’. Costs that relate directly to a contract consist of both the incremental costs of fulfilling that contract (examples would be direct labour or materials) and an allocation of other costs that relate directly to fulfilling contracts (an example would be the allocation of the depreciation charge for an item of property, plant and equipment used in fulfilling the contract). The amendments apply to contracts for which the entity
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has not yet fulfilled all its obligations at the beginning of the annual reporting period in which the entity first applies the amendments. Comparatives are not restated. Instead, the entity shall recognize the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings or other component of equity, as appropriate, at the date of initial application. The amendments are effective for annual periods beginning on or after 1 January 2022, with early application permitted. The Company is still assessing the impact of adopting these amendments on its financial statements.
Related party transactions
The Company’s key management is comprised of the Board of Directors and current or former members of the executive team of the Company. Key management compensation for the three and twelve months ended December 31, 2021 and 2020 consisted of the following:
| Three Months Ended | Three Months Ended | Twelve months Ended | Twelve months Ended | |
|---|---|---|---|---|
| December 31, | December 31, | |||
| 2021 | 2020 | 2021 | 2020 | |
| $ | $ | $ | $ | |
| Salaries, fees and short-term benefits | 1,250,925 | 1,197,987 | 2,996,308 | 2,599,515 |
| Share-based benefits | 396,100 | 257,574 | 952,279 | 583,529 |
| 1,647,025 | 1,278,737 | 3,948,587 | 3,183,044 |
On March 2, 2020, the Company and the CEO of the Company agreed to settle $400,000 of unpaid bonuses related to years prior to 2019 with 865,849 common shares and 188,571 stock options. The stock options are exercisable at $0.70 per common share until November 6, 2021. The fair value of the common shares and stock options at the date of the settlement was determined to be $528,168 and $39,548, respectively. The fair value of the stock options was determined using the Black Scholes pricing model with the following assumptions: risk free interest rate of 1.75%, expected life of 1.7 years and expected volatility of 75.43%. The difference from the bonus payable of $400,000, being $167,716 has been recognized as a loss on settlement of debt in the Statements of Loss and Comprehensive Loss in 2020. The shares were issued to the CEO in March 2021 and $528,168 was allocated from shares to be issued to Common Shares in the statement of equity.
In November 16, 2020, the Company issued 348,028 stock options to the directors of the Company as settlement of unpaid 2020 directors fees of $160,000. Each option vests quarterly over one year and is exercisable at a price of $0.85 per common share at any time up to November 16, 2025. The fair value of the stock options of $178,956 was determined using the Black Scholes option pricing model with the following assumptions: risk free interest rate 1.29%, expected life of 5 years and expected volatility of 73.99%. The unpaid fees are reduced by the amortization of the fair value of the stock options over the vesting period. During the twelve months ended December 31, 2021, the 2020 directors' fees liability was fully settled. The difference from the bonus payable of $160,000, being $18,956 has been recognized as a loss on settlement of debt in the Statements of Loss and Comprehensive Loss in 2021.
On May 19, 2021, the Company issued 797,200 stock options to the directors of the Company for fees related to the year ended December 31, 2021 of $210,000. Each option vests quarterly over one year and is exercisable at a price of $0.47 per common share at any time up to May 19, 2026. The fair value of the stock options was determined at $215,536 using the Black Scholes option pricing model with the following
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assumptions: risk free interest rate 0.96%, expected life of 5 years and expected volatility of 69.80%. The unpaid fees are reduced by the amortization of the fair value of the stock options over the vesting period. During the year ended December 31, 2021, the 2021 directors’ fees liability was reduced by $184,650 and as at December 31, 2021, the remaining balance owing was $25,350.
As at December 31, 2021, aggregate bonuses payable to key management personnel was $552,678 (December 31, 2020 - $774,850).
Financial Risk Management
Customer Concentration Risk
Newtopia’s client base is fairly concentrated with two companies comprising 84% of the total revenues. As new clients are added to the Company’s platform, Newtopia anticipates this customer concentration risk will reduce significantly. In the third quarter of 2021, Newtopia expanded its sales strategy into new health insurer verticals, public and private health plans and risk-bearing providers which if on-boarded would significantly broaden the Company’s total addressable market and diversify its customer concentration. A strong pipeline of new business and an active sales process provides the Company with confidence that it will be able to reduce its customer concentration as it evolves and expands its target customer.
Credit risk
Credit risk is the risk of financial loss to the Company that arises from the possibility that the Company’s customers may experience financial difficulty and be unable to fulfil their contract commitments. The Company mitigates the risk of credit loss by entering into contracts with large and established customers and by placing its cash with major financial institutions.
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers the factors that may influence the credit risk of its customer base, including the default risk associated with the industry and country in which its customers operate. A customer is considered to be at default when they are unable to fulfill their contractual commitments and make the required payments on their debt obligations. Given the customer base is comprised of large established corporations, customer balances are also considered to be in default when they are more than 90 days past due. The gross carrying amount of a trade receivable is written off when the Company has no reasonable expectations of recovering the balance in its entirety or a portion thereof. The Company makes an assessment on a customer-by-customer basis with respect to the timing and amount of write-off based on the specific circumstances of the customer and determines the amount to write-off based on whether there is a reasonable expectation of recovery.
Management has established a credit policy under which each new customer is analyzed individually for creditworthiness. The majority of the Company’s current customers are large established corporations with high credit quality consisting primarily of U.S. healthcare insurance payors or self-insured employers. The Company limits its exposure to credit risk from trade receivables by establishing a maximum payment period of 1-2 months. When determining whether there is an increase in credit risk of any of its trade receivables, the Company considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes quantitative and qualitative information, that includes forward-looking information. At December 31, 2021 and 2020, none of these customer’s balances have
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been written off or are credit impaired at the reporting date. There has been no change to the Company's policies and processes with respect to the way it manages credit risk.
The Company does not require collateral in respect of trade and other receivables. The Company does not have trade receivable and contract assets for which no loss allowance is recognized because of collateral.
At December 31, 2021 and 2020, the exposure to credit risk for trade receivables and contract assets was limited to the United States. At December 31, 2021, two customers whose trade receivables exceeded 10% of the total trade and other receivables balance represented 84% (December 31, 2020 – 89%) of the Company’s trade and other receivables.
Foreign currency risk
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate based on the changes in foreign exchange rates. The Company enters into transactions to purchase and sell goods denominated in foreign currencies, which relate to revenues, cost of sales, expenses, cash, accounts receivable and accounts payable balances.
As at December 31, 2021 and 2020, the following items were denominated in foreign currency:
| 2021 | 2020 | |
|---|---|---|
| $ | $ | |
| Balances denominated in U.S. Dollars | ||
| Cash | 640,096 | 837,943 |
| Trade and other receivables | 1,051,904 | 750,632 |
| Trade and other payables | 445,808 | 230,174 |
The following table demonstrates the sensitivity to a reasonably possible change in the U.S. dollar exchange rate, with all other variables held constant, on the translation of the Company’s foreign currency denominated monetary assets and liabilities as at December 31, 2021 and 2020.
| Change in | Effect on loss | |
|---|---|---|
| U.S. rate | before tax | |
| $ | $ | |
| 2021 | 10% | 158,000 |
| -10% | (158,000) | |
| 2020 | 10% | 174,00 |
| -10% | (174,000) |
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Liquidity risk
The Company’s objective is to have sufficient liquidity to meet its liabilities when due. The Company monitors its cash balances and cash flows generated from operations to meet its requirements. There has been no change to the Company’s policies and processes with respect to the way it manages liquidity risk.
The following are the contractual maturities of the financial liabilities as at December 31, 2021:
| Less than | After | ||||
|---|---|---|---|---|---|
| Total | 1year | 1-3years | 4-5years | 5years | |
| $ | $ | $ | $ | $ | |
| Trade and other payables | 1,965,420 | 1, 965,420 | - | - | - |
| Credit facility | 2,331,314 | 2,331,314 | - | - | - |
| Lease obligations | 667,556 | 300,555 |
367,001 | - | - |
| Debentures | 2,182,403 | - | 2,182,403 | - | - |
| 4, 597,289 | 2,549,404 | - | - | ||
| 7,146,693 |
The following are the contractual maturities of the financial liabilities as at December 31, 2020:
| Less than | After | ||||
|---|---|---|---|---|---|
| Total | 1year | 1-3 years | 4-5 years | 5 years | |
| $ | $ | $ | $ | $ | |
| Trade and other payables | 2,358,393 | 2,358,393 | - | - | - |
| Lease obligations | 883,090 | 215,532 | 667,558 | - | - |
| Derivative liability | 47,508 | 47,508 | - | - | - |
| 3,288,991 | 2,621,433 | 667,558 | - | - |
Risks and Uncertainties
The achievement of Newtopia’s objectives, is in part, dependent on the successful mitigation of the business risks identified below. They are affected by various factors including general economic and market conditions, equity and credit markets, fluctuations in interest costs, competition, credit worthiness of customers and various other factors.
Limited Operating History
Newtopia was founded in 2008 and spent several years experimenting with direct to consumer distribution before settling on an enterprise sales model in 2012. Following the completion of a three-year Aetna sponsored RCT in 2013, the Company launched commercially in 2016. This limited operating history makes the Company’s current business and future prospects difficult to evaluate.
The Company has encountered and will continue to encounter risks and uncertainties frequently experienced by new and growing companies in rapidly changing industries, such as determining appropriate investments of its limited resources, market adoption of the Company’s existing and future offerings,
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competition from other companies, acquiring and retaining customers, managing customer deployments, hiring, integrating, training and retaining skilled personnel, developing new offerings, determining prices for its services, unforeseen expenses and challenges in forecasting accuracy. If the Company’s assumptions regarding these and other similar risks and uncertainties, which the Company uses to plan its business, are incorrect or change as the Company gains more experience operating its business or due to changes in its industry, or if Newtopia does not address these challenges successfully, its operating and financial results could differ materially from expectations and its business could suffer.
Lack of Profitability and Negative Operating Cash Flow
The Company has incurred losses in recent periods. The Company may not be able to achieve or maintain profitability and may continue to incur significant losses in the future. In addition, the Company expects to continue to increase operating expenses as it implements initiatives to continue to grow its business. If the Company’s revenues do not increase to offset these expected increases in costs and operating expenses, the Company will not be profitable. There is no assurance that future revenues will be sufficient to generate the funds required to continue operations without external funding.
Additional Financing
There is no guarantee that the Company will be able to achieve its business objectives. The continued development of the Company may require additional financing. The failure to raise such capital could result in the delay or indefinite postponement of current business objectives or the Company going out of business. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, the terms of such financing will be favourable to the Company. If additional funds are raised through issuances of equity or convertible debt securities, existing shareholders could suffer significant dilution, and any new equity securities issued could have rights, preferences and privileges superior to those of holders of Common Shares.
Market Forces
The disease prevention market is immature and volatile, and if it does not develop or if it develops more slowly than the Company expects, or if it does not achieve expected levels of engagement and outcomes, the growth of business will be harmed. The disease prevention market is new and unproven, and it is uncertain whether it will achieve and sustain high levels of demand and market adoption. The Company’s success will depend to a substantial extent on the willingness of employers and insurers to internally promote Newtopia’s service offering and its ability to drive engagement and outcomes. If employer or insurer customers and participants do not perceive the benefits of the Company’s offering or its offering does not drive engagement and outcomes, then disease prevention market might not develop at all, or it might develop more slowly than the Company expects, either of which could significantly adversely affect the Company’s operating results. In addition, the Company has limited insight into trends that might develop and affect its business. The Company might make errors in predicting and reacting to relevant business, legal and regulatory trends, which could harm its business. If any of these events occur, it could materially adversely affect the Company’s business, financial condition or results of operations.
The U.S. healthcare industry is massive, with a number of large market participants with conflicting agendas and is subject to significant government regulation and is currently undergoing significant change. Changes in the industry, such as the emergence of new technologies as more competitors enter the market, could result in Newtopia’s solution being less desirable or relevant. For example, the Company currently derive substantially all of its revenue from sales to customers that are self-insured employers. The demand for Newtopia’s offering depends on the need of self-insured employers to manage the costs of health care
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services that they pay on behalf of their employees. While the percentage of employers who are self-insured has been increasing over the past decade, there is no assurance that this trend will continue. Various factors, including changes in the health care insurance market or in government regulation of the health care industry, could cause the percentage of self-insured employers to decline, which would adversely affect the Company’s business and operating results. Furthermore, such trends and Newtopia’s business could be affected by changes in health care spending resulting from the Patient Protection and Affordable Care Act . There is no guarantee that the Company would be able to compensate for the loss in revenue from employers by increasing sales of its solution to health insurance companies or to individuals or government agencies. In such a case, the Company’s results of operations would be adversely affected. If healthcare benefits trends shift or entirely new technologies are developed that replace existing solutions, Newtopia’s existing or future solutions could be rendered obsolete and its business could be adversely affected.
Competition
Newtopia’s competitors, as well as a number of other companies, within and outside the disease prevention industry, may be pursuing new services, programs and technologies for the purpose of preventing or treating chronic conditions. Any technological breakthroughs in monitoring, treatment or prevention could reduce the potential market for Newtopia’s platform, which would significantly reduce its market appeal.
The frequent introduction by competitors of solutions that are or claim to be superior to the Company’s platform may create market confusion, which may make it difficult for potential clients to differentiate the benefits of Newtopia’s platform over competitive products. As a result, the Company’s sales may decline significantly or may not increase in line with forecasts, either of which would adversely affect the Company’s business, financial condition and results of operation.
Some of the Company’s competitors may have greater name and brand recognition, longer operating histories, significantly greater resources and may be able to offer similar programs at more attractive prices. Further, current or potential customers may be acquired by third parties with greater available resources. As a result, Newtopia’s competitors may be able to respond more quickly and effectively to new or changing opportunities, technologies, standards or client requirements and may have the ability to initiate or withstand substantial price competition. In addition, Newtopia’s competitors have established, and may in the future establish, cooperative relationships with vendors of complementary products, technologies or services to increase the availability of their solutions in the marketplace.
New competitors or alliances may emerge that have greater market share, a large client base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources and larger sales forces, which could put the Company at a competitive disadvantage. Newtopia’s competitors could also be better positioned to serve certain segments of the Company’s market, which could create additional price pressure. In light of these factors, even if Newtopia’s platform is more effective than those of its competitors, current or potential clients may accept competitive solutions in lieu of purchasing Newtopia’s solution. If the Company is unable to successfully compete, its business, financial condition, and results of operations could be adversely affected.
Customer Concentration
The Company’s current customer base is concentrated to a few large customer contracts and the contract with the Company’s largest customer contains a termination for convenience feature allowing the customer to terminate on 30 days’ notice. In the event that a contract with one of its major customers is terminated
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and the Company is unable to find new customers or other sources of comparable revenue within a reasonable time period, the Company’s operations and financial results would be adversely affected.
During the year ended December 31, 2021, the Company derived 84% of its services and product revenues from two customers.
Participant Enrollment and Engagement
Certain fees the Company charges customers are dependent upon voluntary participant participation in the platform and the achievement of clinical outcomes. If participants drop out of the platform, leave their employer, choose to participate in the platform sporadically or not at all, or do not achieve clinical outcomes, the Company will lose revenue and this will negatively affect its operations. If the number of employees covered by one or more of its customer’s health plan programs were to be reduced, this decrease would also lead to a decrease in the Company’s revenue. In addition, the growth forecasts of Newtopia’s customers are subject to significant uncertainty and are based on assumptions and estimates that may prove to be inaccurate and their enrollment in Newtopia’s platform could fail to grow at anticipated rates, if at all, which could have an adverse effect on its business, financial condition or results of operations.
In addition, the Company’s ability to achieve significant growth in revenue in the future will depend, in large part, upon its ability to attract new employer and insurer customers. If the Company fails to attract new customers and fails to maintain and expand new customer relationships, its revenue may grow more slowly than expected and business may be adversely affected.
Customer Rollout
The rollout of Newtopia’s platform can vary widely by customer and is typically phased out over time across the enterprise. Its employer customers have the ability to alter the size and timing of phased rollouts to at-risk employees which affects the timing of the Company’s revenue and makes revenue difficult to forecast. In addition, if the Company’s customers do not allocate the internal resources necessary for a successful rollout for their employees, or the rollout date is delayed, the Company could incur significant costs, the customer enrollment rate may decline and/or customers could become dissatisfied and decide not to increase utilization of Newtopia’s platform.
Regulatory Risks
The Company faces regulatory risks, many of which are outside of its control. Healthcare laws and regulations are constantly evolving and could significantly change in the future. The Company closely monitor these developments and will modify its operations from time to time as the regulatory environment requires. There can be no assurances, however, that the Company will always be able to adapt its operations to address new laws or regulations or that new laws or regulations will not adversely affect its business. Potential changes to laws and regulations, more vigorous enforcement thereof, or unanticipated events could require extensive changes to the Company’s operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the Company.
Compliance with various laws and regulations including but not limited to the Genetic Information Nondiscrimination Act (“ GINA ”) and HIPAA in the U.S. and the Genetic Non-Discrimination Act (“ GNDA ”) in Canada, is necessary for the Company to achieve its business objectives. Failure to comply with such laws and regulations may result in additional costs for corrective measures, penalties or restrictions on the Company’s operations. Although the Company believes that is operating materially in compliance with applicable federal and state laws and regulations, neither the Company’s current or
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anticipated business operations nor the operations of the Company’s contracted suppliers have been the subject of judicial or regulatory interpretation. The Company cannot assure that a review of the Company’s business by courts or regulatory authorities will not result in a determination that could materially adversely affect the Company’s operations.
Genetic Testing
The marketing, sale and use of the genetic testing component of Newtopia’s platform could subject it to liability for errors in, misunderstandings of, providing genetic counseling, or inappropriate reliance on, information it provides to participants, and lead to claims against the Company. A product liability or professional liability claim could result in substantial damages and be costly and time-consuming for the Company to defend. Although the Company maintains liability insurance, including for errors and omissions, there is no assurance that the Company’s insurance would fully protect from the financial impact of defending against these types of claims or any judgments, fines or settlement costs arising out of any such claims. Any liability claim, including an errors and omissions liability claim, brought against the Company, with or without merit, could increase the Company’s insurance rates or prevent it from securing insurance coverage in the future. Additionally, any liability lawsuit could cause injury to Newtopia’s reputation. The occurrence of any of these events could adversely affect the Company’s business, reputation and results of operations.
Ethical, legal and social concerns related to the use of genetic information could impact Newtopia’s business. Currently, the GINA and GNDA protects individuals from discrimination based on their genetic information in both health insurance and employment. However, governmental authorities could, for social or other purposes, limit, regulate or prohibit the use of genetic information or genetic testing. Similarly, these concerns may lead participants to refuse to engage in genetic testing, even if permissible. These and other ethical, legal and social concerns may limit market acceptance of genetic testing which could adversely affect the Company’s business, financial condition, or results of operations.
Liability
As a provider of lifestyle coaching, recommending nutrition, exercise and behaviour modification, Newtopia is exposed to the risk of liability claims. To mitigate against this risk, Newtopia has taken the following steps:
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Newtopia’s programs have been designed by a team of leading experts, each with accountability to oversight bodies, in compliance with medical and lifestyle guidelines including: Center of Disease Control, Clinical Obesity Guidelines, Food Guides, Physical Activity Guidelines and Mental Health Association Guidelines;
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Newtopia’s personal profile tool identifies nutrition, exercise, behaviour and medical contraindications that must be explored before a client is enrolled in a Newtopia program;
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Participants complete a comprehensive limitation of liability waiver and genetic consent agreement within Newtopia’s service agreement upon program enrolment;
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Newtopia programs are standardized and rules-based to ensure that coaches do not exercise personal discretion in the application of lifestyle recommendations; and
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Newtopia carries extensive insurance policies covering personal, general and professional liability along with property.
It is the Company’s belief that its platform does not constitute the practice of medicine or provide medically necessary services and is strictly offered for educational purposes only. To the extent that the Company
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extends to other market areas (i.e., Medicare and Medicaid) or changes billing methods, it may be exposed to increased regulatory requirements under the Employee Retirement Income Security Act of 1974 (“ ERISA ”), a federal law that sets minimum standards for employee benefit plan maintained by privatesector employers. The Company is not currently bound by ERISA standards, but should it become bound, violating these standards can have serious and costly consequences that could adversely affect the Company’s business, financial condition or results of operation.
The Company’s platform is also not currently subject to regulation or pre-approval by the Food and Drug Administration (“ FDA ”). The FDA is a federal agency of the U.S. Department of Health and Human Services and is responsible for regulating a wide range of products, including foods, medical devices, drugs and cosmetics. If the scope of regulation under the FDA were to be broadened or the Company expands its platform in such a way as to fall under the existing scope of the FDA, the Company may be exposed to preapproval and increased regulatory requirements, which could require changes to the Company’s operations and lead to increased compliance costs. Should the Company become subject to the FDA and fail to comply with these new regulatory requirements, a number of sanctions could be imposed that could adversely affect the Company’s business, financial condition or results of operation.
Employee Misconduct
The Company’s employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could cause significant liability and harm to Newtopia’s reputation. The Company is exposed to the risk of employee fraud or other misconduct, including intentional failure to comply with laws and regulations. The Company has a Code for its directors, officers and employees, but it is not always possible to identify and deter employee misconduct, and the precautions it takes to detect and prevent this activity may not be effective in controlling risks or losses or in protecting from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against the Company, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on business and results of operations, including the imposition of significant fines or other sanctions.
Reliance on Suppliers
The Company relies on a number of suppliers, or, in some cases, sole suppliers for genetic testing and physician prescription services for genetic testing. While the Company does have service agreements in place with these suppliers, they could cease to provide such services and as a result, limit the Company’s ability to fulfill its service obligations to customers. There are alternative supplier options, however, transitioning to a new supplier could be time consuming and expensive. Therefore, any such interruption could significantly affect Newtopia’s business, financial condition, results of operations and reputation.
The Company relies on genetic testing lab to maintain compliance with applicable laws and regulations, including maintenance of required licensing and certificates. Newtopia’s genetic testing labs are subject to the Clinical Laboratory Improvement Amendments of 1988 (“ CLIA ”), a U.S. federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention, or treatment of disease. CLIA regulations establish specific standards with respect to personnel qualifications, facility administration, proficiency testing, quality control, quality assurance, and inspections. The College of American Pathologists (“ CAP ”) maintains a clinical laboratory accreditation program. Designed to go well beyond regulatory compliance, CAP asserts that the program helps laboratories achieve the highest standards of excellence to positively impact patient
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care. Failure to maintain proper CLIA certification and CAP accreditation could significantly affect Newtopia’s business, financial condition, results of operations and reputation.
Failure to comply with applicable clinical laboratory licensure requirements may result in a range of enforcement actions, including license suspension, limitation, or revocation, directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions, as well as significant adverse publicity.
Data Privacy and Security
Security breaches, loss of data, changes to genetic or phenotypic data ownership and other disruptions could compromise sensitive information related to the Company’s business and expose it to liability, which could adversely affect Newtopia’s business and reputation.
In the ordinary course of business, the Company collects, uses and stores sensitive data, including legally protected health information, genetic data, personally identifiable information, intellectual property and proprietary business information. The Company manages and maintains its applications and data utilizing a combination of on-site systems, managed data center systems, and cloud-based data center systems. These applications and data encompass a wide variety of business-critical information including commercial information, and business and financial information. The Company faces a number of risks relative to protecting this critical information, including loss of access risk, inappropriate disclosure, inappropriate modification, and the risk of being unable to adequately monitor and modify controls over such critical information.
The secure processing, storage, maintenance and transmission of this critical information are vital to the Company’s operations and business strategy, and it devotes significant resources to protecting such information. Although the Company takes measures to protect sensitive information from unauthorized access or disclosure, Newtopia’s information technology and infrastructure may be vulnerable to attacks by hackers or viruses or breached due to employee error, malfeasance, or other disruptions. Any such breach or interruption could compromise the Company’s networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under federal or state laws that protect the privacy of personal information, such as Canada’s PIPEDA which, along with its provincial counterparts, governs the collection, use and disclosure of personal information in the course of commercial activities by private sector organizations in Canada, and the U.S.’ HIPAA and the HITECH Act as well as regulatory penalties. HIPAA establishes privacy and security standards that limit Newtopia’s use and disclosure of personal health insurance (“ PHI ”) and requires it to implement administrative, physical and technical safeguards to ensure the confidentiality, integrity and availability of PHI, as well as notify the Company’s covered entity customers of breaches of unsecured PHI and security incidents. The Company acts as a HIPAA “business associate” to its covered entity customers because it collects, uses and maintains PHI in order to provide services to these customers. HIPAA requires the Company to enter into satisfactory written business associate agreements with its covered entity customers, which contain specified written assurances that the Company will safeguard PHI that it creates or accesses and will fulfill other material obligations. Under the Omnibus Final Rule, whose primary purpose is to implement HITECH Act mandates, the Company may be held directly liable under its business associate agreements and HIPAA for any violations of HIPAA. Therefore, the Company could face liability to its customers under its contracts with them as well as liability to the government under HIPAA if the Company does not comply with its business associate obligations and those provisions of HIPAA that are applicable to us. While the Company takes measures to comply with applicable laws and regulations as well as its own internally disseminated privacy and security policies, such laws, regulations and related legal standards for privacy and security
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continue to evolve and any failure or perceived failure to comply with applicable laws, regulations and standards may result in threatened or actual proceedings, actions and public statements against the Company by government entities, private parties, consumer advocacy groups or others, or could cause the Company to lose clients, which could have a material adverse effect on the Company’s business, financial condition and results of operations. In addition, the Company could be exposed to risk of a data breach affecting any of its subcontractors. The penalties for a violation of HIPAA are significant and, if imposed, could have a material adverse effect on the Company’s business, financial condition and results of operations. In addition, the interpretation and application of consumer, health-related, and data protection laws in Canada, the U.S. and elsewhere are often uncertain, contradictory and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with the Company’s practices. If so, this could result in government-imposed fines or orders requiring that the Company change its practices, which could adversely affect its business. Complying with these various laws could cause us to incur substantial costs or require the Company to change its business practices and compliance procedures in a manner adverse to the Company’s business.
Security Threats
Cyber incidents can result from deliberate attacks or unintentional events. Cyber-attacks could result in any person gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, including personally identifiable information, corrupting data or causing operational disruption. Cyber-attacks could also result in important remediation costs, increased cyber security costs, lost revenues due to a disruption of activities, litigation and reputational harm affecting customer and investor confidence, which could materially adversely affect the Company’s business and financial results.
The Company has not experienced any material losses to date related to cyber-attacks or other information security breaches, but there can be no assurance that the Company will not incur such losses in the future which could be in excess of any available insurance, and could materially adversely affect its business and financial results. The Company’s risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, the Company may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.
Managing Growth
Newtopia may not be able to manage future growth effectively, which could make it difficult to execute its business strategy. Expected future growth could create a strain on the Company’s organizational, administrative and operational infrastructure, including coaching, customer service, technology, marketing and sales, and management. The Company may not be able to maintain the quality of or expected turnaround times for its services or satisfy customer demand as it grows. The Company’s ability to manage and scale its growth properly will require it to continue to improve its operational, technological, financial and management controls, as well as its reporting systems and procedures. If the Company is unable to manage its growth effectively, it may be difficult for the company to execute its business strategy and business could be harmed. Future growth could also make it difficult to maintain corporate culture.
Participant Support
In implementing and using the Company’s platform, its participants depend on support to resolve issues in a timely manner. The Company may be unable to respond quickly enough to accommodate short-term
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increases in demand for such support. Increased participant demand for support could increase costs and adversely affect the Company’s results of operations and financial condition. The Company’s sales are highly dependent on its reputation and on positive recommendations from its existing participants and clients. Any failure to maintain high-quality participant support, or a market perception that the Company does not maintain high-quality participant support, could adversely affect Newtopia’s reputation and in turn could have a material adverse effect on the Company’s business, operating results or financial condition.
Reliance on Management
The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management. While employment agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on the Company’s business, operating results or financial condition.
In addition, as the Company continues to grow, it may be unable to continue to attract or retain the personnel needed to maintain its competitive position. In addition to hiring new employees, the Company must continue to focus on retaining its best talent. The Company may need to invest significant resources on new and existing employees and may never realize returns on these investments. If the Company is not able to effectively increase and retain talent, its ability to achieve its strategic objectives will be adversely impacted, and Newtopia’s business will be harmed.
Possible Acquisitions
As part of its business strategy, the Company may pursue acquisitions of complementary businesses or assets, form joint ventures or make investments in other companies or technologies that could harm its operating results, dilute stockholders’ ownership, or cause it to incur debt or significant expense. The Company also may pursue strategic alliances to expand its offerings or distribution or make investments in other companies. As an organization, Newtopia has limited experience with respect to acquisitions as well as the formation of strategic alliances and joint ventures. If the Company makes any acquisitions in the future, it may not be able to integrate these acquisitions successfully into its existing business, and the Company could assume unknown or contingent liabilities. Any future acquisitions by the Company also could result in significant write-offs or the incurrence of debt and contingent liabilities, any of which could harm its operating results. Integration of an acquired company or business also may require management resources that otherwise would be available for ongoing development of the Company’s existing business. The Company may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and the Company may not realize the anticipated benefits of any acquisition, technology license, strategic alliance, joint venture or investment. To finance any acquisitions or investments, the Company may choose to raise additional funds. If the Company raises funds by issuing equity securities, dilution to its stockholders could result. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of the Company’s Common Shares. If the Company raises funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to those of holders of its Common Shares. The terms of debt securities issued or borrowings could impose significant restrictions on the Company’s operations. If the Company raises funds through collaborations and licensing arrangements, it might be required to relinquish significant rights to its technologies or products or grant licenses on terms that are not favourable to the Company. It may be necessary for the Company to raise additional funds for these activities through public or private financings. Additional funds may not be available on terms that are favourable, or at all.
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Conflicts of Interest
The Company may be subject to various potential conflicts of interest because some of its officers and directors may be engaged in a range of business activities. In addition, the Company’s executive officers and directors may devote time to their outside business interests provided that such activities do not materially or adversely interfere with their duties to the Company. In some cases, the Company’s executive officers and directors may have fiduciary obligations associated with these business interests that could interfere with their ability to devote time to the Company’s business and affairs and that may adversely affect the Company’s operations. These business interests could require significant time and attention of the Company’s executive officers and directors to the detriment of the Company. In addition, the Company may also become involved in other transactions which conflict with the interests of its directors and the officers who may from time to time deal with persons, firms, institutions or corporations with which the Company may be dealing, or which may be seeking investments similar to those desired by it. The interests of these persons could conflict with those of the Company. In addition, from time to time, these persons may be competing with the Company for available investment opportunities. Conflicts of interest, if any, will be subject to the procedures and remedies provided under applicable laws. In particular, in the event that such a conflict of interest arises at a meeting of the Company’s directors, a director who has such a conflict will abstain from voting for or against the approval of such participation or such terms. In accordance with applicable laws, the directors of the Company are required to act honestly, in good faith and in the best interests of the Company.
Litigation
The Company may become party to litigation from time to time which could adversely affect its business. It is the Company’s belief that its platform does not constitute the practice of medicine or subject it to professional malpractice claims. Nonetheless, such claims relating to the services the Company provides may arise. Should any litigation in which the Company becomes involved be determined against the Company, such a decision could adversely affect the Company’s ability to continue operating and the market price for the Common Shares and could use significant resources. Even if the Company is involved in litigation and is successful, litigation can redirect significant Company resources. Litigation may also create a negative perception of the Company’s brand.
Intellectual Property Rights
The Company relies on trade secret, patent, copyright and trademark laws, and confidentiality, licensing and other agreements with executives, consultants and third parties, all of which offer only limited protection. If the Company is compelled to spend significant time and money protecting or enforcing its intellectual property, its business and financial prospects may be harmed. If the Company is unable to effectively protect the intellectual property it owns, other companies may be able to offer the same or similar services, which could materially adversely affect its competitive business position and business prospects. The Company’s patent may be challenged, narrowed, invalidated or circumvented, which could limit its ability to stop competitors from marketing the same or similar services. Even if the Company’s patent is unchallenged, it may not adequately protect its intellectual property, provide exclusivity for its services or prevent others from designing around its claims. Any of these outcomes could impair the Company’s ability to prevent competition from third parties, which may have an adverse impact on Newtopia’s business.
International Expansion
The Company may in the future expand its operations and business into jurisdictions outside of Canada and the U.S. There can be no assurance that any market for the Company’s products will develop in any such
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foreign jurisdiction. The Company may face new or unexpected risks or significantly increase its exposure to one or more existing risk factors, including economic instability, changes in laws and regulations, lack of brand familiarity and the effects of competition. These factors may limit the Company’s capability to successfully expand its operations and may have a material adverse effect on the Company’s business, financial condition and results of operations.
Technical Problems
The Company may encounter technical obstacles, and it is possible that it discovers additional problems or design defects that prevent its platform from operating properly. If the platform is not performed properly and reliably, malfunctions or fails to achieve customer expectations in terms of performance, customers could assert liability claims against the Company or attempt to cancel their contracts. This could damage Newtopia’s reputation and impair ability to attract or maintain customers.
Any real or perceived errors, failures, bugs or other vulnerabilities discovered in the Company’s products could result in negative publicity and damage to its reputation, loss of clients, loss of participants, loss or delay in market acceptance of its platform, loss of competitive position, loss of revenue or liability for damages, overpayments and/or underpayments, any of which could harm enrollment rates. Similarly, any real or perceived errors, failures, design flaws or defects in the Company’s products could have similar negative results. In such an event, the Company may be required or may choose to expend additional resources in order to help correct the problem. Such efforts could be costly, or ultimately unsuccessful. Even if the Company is successful at remediating issues, it may experience damage to its reputation and brand.
Economic Conditions
A potential downturn in general economic conditions and the associated market volatility and uncertainty, could have a negative impact on both the Company’s customers’ and its ability to accurately forecast and plan future business activities. In addition, these conditions could cause the Company’s customers or prospective customers to decrease headcount, benefits or human resources budgets, which could decrease corporate spending on its services, resulting in delayed and lengthened sales cycles, a decrease in new customer acquisition and loss of existing customers. Furthermore, during challenging economic times, the Company’s customers may have difficulty gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to make timely payments to us and adversely affect the Company’s revenue. If that were to occur, the Company’s financial results could be harmed. Further, challenging economic conditions might impair the ability of the Company’s customers to pay for the services they have already purchased from the Company and, as a result, the Company’s write-offs of accounts receivable could increase. The Company cannot predict the timing, strength, or duration of any potential economic slowdown or recovery and such a slowdown could cause its business to be harmed.
Seasonality
The Company’s revenue fluctuates quarterly depending on the level of Welcome Kit sales which usually occur in bulk at the outset of a new customer implementation or in phases as customers introduce the Company’s platform to its employees.
Subscription revenues are subject to seasonality with greater engagement at the start of the calendar year. The Company may be affected by seasonal trends in the future, particularly as its business matures. To the extent the Company experiences this seasonality, it may cause fluctuations in its operating results and financial metrics and make forecasting future operating results and financial metrics more difficult.
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Additional Taxes
The Company may be subject to assessments for additional taxes, including sales taxes, which could reduce the Company’s operating results. In accordance with current law, the Company pays, collects and/or remits taxes in those jurisdictions where it maintains a physical presence. In computing its tax obligations in these jurisdictions, the Company is required to take various tax accounting and reporting positions on matters that may not be entirely free from doubt and for which the Company has not received rulings from the governing authorities.
While the Company believes it has appropriately remitted all taxes based on its interpretation of applicable law, it is possible that some taxing jurisdictions may attempt to assess additional taxes and penalties on the Company if the applicable authorities do not agree with its positions. A successful challenge by a tax authority, through asserting either an error in the Company’s calculation, or a change in the application of law or an interpretation of the law that differs from the Company’s own, could adversely affect its results of operations.
Exchange Rate Fluctuations
Due to the Company’s operations in the U.S., the Company may be exposed to the effects of fluctuations in currency exchange rates. The Company generates revenue and incurs expenses for employee compensation and other operating expenses in Canadian dollars. Fluctuations in the exchange rates between the Canadian dollar and the U.S. dollar could result in the dollar equivalent of such revenue and expenses being lower, which could have a negative net impact on the Company’s reported operating results.
Brand Awareness
The Company believes that developing and maintaining strategic awareness of its brand in a cost-effective manner is critical to achieving widespread acceptance of its services and attracting new clients. The Company’s marketing efforts are primarily directed at the development of new clients and increased penetration of existing clients. Brand promotion activities may not generate client awareness or increase revenues, and even if they do, any increase in revenues may not offset the expenses the Company incurs in building its brand. If the Company fails to successfully promote and maintain its brand, or incur substantial expenses, it may fail to attract or retain clients necessary to realize a sufficient return on the Company’s brand-building efforts, or to achieve the widespread brand awareness that is critical for broad client adoption of the Company’s Program .
Corporate Culture
The Company believes that its corporate culture is a critical component of its success. As the Company develops the infrastructure of a public company and continues to grow, the Company may find it difficult to maintain these valuable aspects of its corporate culture. Failure to preserve its corporate culture could negatively impact the Company’s future success, including its ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue its corporate objectives.
Disclosure controls and procedures and internal controls over financial reporting
Disclosure controls and procedures
The CEO and CFO have designed or caused to be designed controls to provide reasonable assurance that (i) material information relating to the Company is made known to management by others, particularly during the period in which the annual and interim filings are being prepared; and (ii) information required
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to be disclosed by the Company in its annual and interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time frame specified in the securities legislation. Based on the evaluations, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were adequate and effective.
Internal controls over financial reporting
Newtopia has established internal controls over financial reporting to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of the financial statements for external purposes in accordance with IFRS. Management, including the CEO and CFO, have determined that as at December 31, 2021, the internal controls over financial reporting were effective.
Inherent limitations
It should be noted that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Given the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, including instances of fraud, if any, have been detected. These inherent limitations include, among other items: (i) that management’s assumptions and judgments could ultimately prove to be incorrect under varying conditions and circumstances; (ii) the impact of any undetected errors; and (iii) controls may be circumvented by unauthorized acts of individuals, by collusion of two or more people, or by management override.
Additional Information
Additional information relating to the Company can be found on SEDAR at www.sedar.com.
APPROVAL
The Board of Directors of the Company has approved the disclosure contained in this MD&A.
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