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Newtopia Inc. — Management Reports 2024
Jun 6, 2024
47712_rns_2024-06-05_da86370b-5ee9-4f52-8fb5-b8c6ccc7b2ae.pdf
Management Reports
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Management’s Discussion and Analysis
Dated: June 5, 2024
For the Fourth Quarter and Fiscal Year Ended December 31, 2023
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, 2023. This MD&A is dated June 5, 2024 and should be read in conjunction with the annual audited financial statements and related notes for the years ended December 31, 2023 and 2022 (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. 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.
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Business Overview
Newtopia was incorporated on May 9, 2008, pursuant to the provisions under the Ontario Business Corporations Act . The Company’s shares are listed on the TSX Venture Exchange under the symbol “NEWU” and on the U.S. OTCQB® Venture Market under the ticker “NEWUF”.
The Company’s head office is located at 33 Bloor Street East, 5[th] Floor, Toronto, Ontario, M4W 3H1.
Newtopia is a tech-enabled whole health platform helping people create positive lifelong habits that prevent, slow, or reverse chronic disease while reducing healthcare costs for health insurers. The platform leverages genetic, social and behavioral insights to create individualized prevention programs with a focus on metabolic disease, diabetes, mental health challenges, hypertension, weight management and musculoskeletal disorders. With a person-centered approach that combines virtual care, digital tools, connected devices and actionable data science, Newtopia delivers sustainable clinical and financial outcomes.
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-sizefits-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 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
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be identified by leveraging existing risk identification data including in-person biometric test outcomes, 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 personality-matched 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 continually optimize its philosophy of humans helping humans amplified by technology.
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, and access to a personalized mobile or web app. 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 genetic engagement and leveraging behavioral genetic testing primarily for habit change and engagement purposes. Newtopia’s genetic testing allows the Company to help participants understand if they have inherited genetic factors that may be having an impact on their physical or mental health and to personalize lifestyle recommendations by gaining a deeper understanding of how genes impact an individual’s risk. Newtopia’s behavior 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 genetically-driven 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.
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:
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, 2023 of $2,343,249 and $9,783,546 decreased by 25% and 12%, respectively over the same periods of the previous year. The decreases are mainly attributed to lower engaged participant fees which were charged based on engagement criteria as defined in each customer’s contract such as the number of coaching sessions or logging weight through a smart weight scale.
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During the quarter ended December 31, 2023, the Company performed an impairment test of intangible asset in accordance with IAS 36 - Impairment of assets. The intangible asset consists of the purchase and customization of a new customer relationship management platform and the development of integrated web and mobile applications in fiscal year 2021 and was available for use by the end of fiscal year 2022. Given that the Company’s internal plan of generating revenue from the intangible asset remained on hold due to cost cutting efforts in order to achieve positive cash flows from operations, and the Company’s external licensing plan was still under negotiations with potential business partners, the Company’s management concluded that the carrying amount of $2,409,314 as at December 31, 2023 should be fully impaired until the business plans are in a more advanced stage or materialized, at which point the impairment may possibly be reversed in whole or in part. This impairment loss was presented as an operating expense in the Statements of Loss and Comprehensive Loss for the year ended December 31, 2023.
Operating expenses during the three and twelve months ended December 31, 2023 of $4,110,426 and $10,282,934 have increased by 24% and decreased by 20% respectively, over the same periods of the previous year. The increase during the current quarter compared with the same quarter of last year is due to the $2,409,314 impairment of intangible and partially offset by lower technology and development, sales and marketing, general and administrative expenses due to reductions in headcounts, outside purchases and marketing activities that did not meet the Company’s ROI performance indicator. The decrease during the twelve months ended December 31, 2023 compared to the same period of fiscal year 2003 was due to lower expenses in technology and development, sales and marketing, general and administrative for the same reasons mentioned above, partially offset by the $2,409,314 impairment of intangible asset.
Net loss and comprehensive loss for the three and twelve months ended December 31, 2023 increased by103% and decreased by 14% respectively compared with the same periods of the previous year. Excluding the above-mentioned fiscal year 2023 impairment loss and fiscal year 2022 impairment of right-of-use asset of $200,168, net loss and comprehensive loss for the quarter decreased by 49% and for the year ended December 31, 2023 decreased by 39% over the same respective periods of the previous year because total decrease in operating expenses was much higher than decline in gross profit resulting from lower revenue by $713,262 for the current quarter and $4,008,592 for the twelve months ended December 31, 2023.
On March 7, 2023, the Company closed a private placement offering of units at a price of $0.07 per unit for gross proceeds of $1,534,960. Each unit is comprised of: (i) one Common Share in the capital of the Company; (ii) a first one-half of one Common Share purchase warrant (each whole first warrant, an "A Warrant"); and (iii) a second one-half of one Common Share purchase warrant (each whole second warrant, a "B Warrant"). Each A Warrant entitling the holder thereof to acquire one Common Share at an exercise price of $0.10 per A Warrant Share for a period of six months from the closing date of the offering. Each B Warrant entitling the holder thereof to acquire one Common Share at an exercise price of $0.15 per B Warrant Share for a period of 24 months from the closing date of the Offering. As consideration for certain services provided to the Company in connection with the offering, the Company paid an aggregate of $42,151 and issued 595,021 compensation options exercisable to acquire one Common Share at a price of $0.07 per Common Share for a period of 24 months following the closing date of the offering, as finders' fees to certain persons. The Company received net proceeds of $1,467,295 after deducting finders' fees paid in cash of $42,151 and cash closing costs of $25,514.
In connection with the operating credit line facility in the amount of $5,000,000 provided by a Canadian schedule 1 bank, the Company provides regular updates on all strategic alternatives to the bank, and the bank is continuing to provide credit as Company plans begin to materialize.
During the third quarter of the fiscal year, the Company has successfully concluded a flurry of financing deals:
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Classified as Highly Confidential
On July 14, 2023, the Company closed a non-brokered offering of subordinated and postponed 13% secured non-convertible debenture units for gross proceeds of $1,500,000. Each unit is comprised of: (i) $10,000 principal amount of subordinated and postponed secured non-convertible debentures maturing on July 14, 2025; and (ii) for no additional consideration, such number of common shares in the capital of the Company equal to 20% of the principal amount of debentures purchased divided by $0.065, being the closing market price of the common shares of the Company on the TSX Venture Exchange on June 29, 2023. Pursuant to the offering, the Company issued an aggregate of 4,615,366 common shares.
On September 7, 2023, the Company received cash proceeds of $258,299 from several investors associated with the Company’s March 2023 equity raise, who collectively exercised 2,590,490 warrants (converting each warrant to one common share of the Company).
On September 15, 2023, the Company amended $1,735,000 of its $2,545,000 subordinated and postponed 8.0% secured non-convertible debentures issued on September 15, 2021 (maturing on September 15, 2023), to extend the maturity date by one year and to amend the annual interest to a rate to12%. As consideration, the holders that agreed to the amendments received, for no additional consideration, an aggregate of 1,505,682 of common shares in the capital of the Company. Of the remaining $810,000 debentures, the Company repaid $30,000 on September 15, 2023 and repaid the remaining $780,000 on October 15, 2023.
On September 11, 2023, the Company also announced a non-brokered offering of subordinated and postponed 12% secured non-convertible debenture units. Each unit is comprised of $10,000 principal amount of subordinated and postponed secured non-convertible debentures of the Company and such number of common shares in the capital of the Company as is equal to 10% of the principal amount of Debentures purchased divided by $0.115, being the closing market price of the common shares of the Company on the TSXV on September 11, 2023. The Debentures will mature on the date that is 12 months from the closing date. On September 29, 2023 and October 16, 2023, the Company closed the first and final tranches of the offering for gross proceeds of $380,000 and $425,000 and issued 330,424 and 369,565 common shares in the capital of the Company, respectively. The aggregate proceeds from the offering of $805,000 was used to fully repay the $780,000 debentures on October 15, 2023 mentioned above.
In March 2024 a client informed the Company that they have decided to stop providing our program to their employees effective June 1, 2024. During the twelve months ended December 31, 2023, revenue from the client was $2,999,310. To address the financial impact upon the departure of this client, management is actively reducing variable costs associated with this lost revenue, accelerating new market opportunities, and exploring a variety of strategic alternatives.
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 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 $6,600,347 for the year ended December 31, 2023, which was 14% or $1,100,116 lower than the previous fiscal year 2022. The Company has an accumulated deficit of $72,974,444 as at December 31, 2023. 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. The current
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extension letter from the bank who provided the Company a credit facility sets out May 31, 2024 as the date for the credit facility to be repaid or refinanced. As of the date of issuance of this MD&A, the Company has not repaid or refinanced the credit facility. There is no certainty additional financing will be available to the Company on favourable terms, or at all. 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. Throughout 2023 and in early 2024, we have made great strides in reducing our cost to serve participants while at the same time increasing our operational efficiencies – all while maintaining and improving our industry leading engagement and whole health outcomes. In the first quarter of 2024, we delivered our best ever outcomes for the first two cohorts of our innovative health coaching project with the Heartland Whole Health Institute in Northwest Arkansas. While we made great progress, revenue in Q4 2023 and Q1 2024 was impacted by a change with a long-standing incentive program at one of our largest clients. Fortunately, our relationship with the client remains incredibly strong, and commencing in Q2, we are working with them on strengthening new registrations through market expansion and the re-introduction of Newtopia to existing markets. We see three distinct and exciting strategic areas of opportunity for growth for Newtopia including: (1) expanding our key innovation partnerships, such as Heartland Whole Health Institute; (2) combining Newtopia's proven habit change platform with GLP-1 drugs for obesity and type 2 diabetes; and (3) partnering with health AI and clinical discovery innovators to improve our collective ability to deliver best in breed outcomes that prevent, reverse and slow chronic disease.
The financial statements do not reflect adjustments that would be necessary if the going concern assumption was not appropriate. These adjustments could be material.
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
| lected Financial Information | |
|---|---|
| Revenue Cost of revenue Gross profit Gross profit margin Operating expenses Operating loss Other expenses Net loss and comprehensive loss Basic and diluted loss per share |
Three Months Ended December 31, |
| 2023 2022 Favourable (Unfavourable) Change |
|
| $ $ $ % 2,343,249 3114,317 (771,068) (25%) 1,004,225 1,079,576 75,351 7% 1,339,024 2,034,741 (695,717) (34%) 57% 65% (8 ppts) (12%) 4,110,426 3,310,258 (800,168) (24%) (2,771,401) (1,275,517) (1,495,884) (117%) 454,385 314,382 (140,003) (45%) (3,225,787) (1,589,899) (1,635,888) (103%) (0.02) (0.01) (0.01) (100%) |
| Revenue Cost of revenue Gross profit Gross profit margin Operating expenses Operating loss Other expenses Net loss and comprehensive loss Basic and diluted loss per share |
Twelve Months Ended December 31, |
|---|---|
| 2023 2022 Favourable (Unfavourable) Change |
|
| $ $ $ % 9,783,546 11,166,428 (1,382,882) (12%) 4,505,888 5,140,369 634,481 12% 5,277,658 6,026,059 (748,401) (12%) 54% 54% - -% 10,282,934 12,830,781 2,547,847 20% (5,005,276) (6,804,722) 1,799,446 26% 1,595,071 895,741 (699,330) (78%) (6,600,347) (7,700,463) 1,100,116 14% (0.04) (0.07) 0.03 43% |
As a result of losses reported during the years ended December 31, 2023 and 2022, the outstanding stock options and warrants have an anti-dilutive effect and are not included in the computation of diluted loss per share. Consequently, basic and diluted loss per share are the same. With the exclusion of the $2,409,314 impairment of intangible asset, the basic and diluted loss per share for the three months and twelve months ended December 31, 2023 would be a negative $0.01 and negative 0.03 respectively. Earnings per share excluding impairment loss is not a GAAP measurement with no standardized definition. The presentation of the non-GAAP earnings per share is to show the impact of this one time impairment on the Company’s financial performance. Below is a reconciliation between the earnings per share and the non-GAAP earnings per share excluding impairment loss:
Three months ended Twelve months ended December 31, 2023 December 31, 2023 $ $
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| Net loss and comprehensive loss Weighted average number of common shares outstanding Basic and diluted loss per share Net loss and comprehensive loss Add back impairment loss Adjusted net loss and comprehensive loss Weighted average number of common shares outstanding Adjusted basic and diluted loss per share |
(3,225,787) (6,600,347) 158,287,099 148,613,837 (0.02) (0.04) (3,225,787) (6,600,347) 2,409,314 2,409,314 |
|---|---|
| (816,473) (4,191,033) 158,287,099 148,613,837 (0.01) (0.03) |
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 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, 2023 decreased by 25% and 12%, respectively over the same periods in the previous year. The decrease in revenue is mainly attributed to lower engaged participant fees which were charged based on engagement criteria as defined in each customer’s contract such as the number of coaching sessions or logging weight through a smart weight scale.
Gross Profit
Gross profit is comprised of revenue less direct expenses, which consists of the cost of Welcome Kits sold to new participants, the labour costs associated with the Company’s coaching team or “Inspirators” and amortization of the intangible asset, which consists of a new CRM platform developed by the Company with an estimated useful life of four years. Amortization of the platform for the three and twelve months ended December 31, 2023 was $206,513 and $826,049 respectively (three months and twelve months ended December 31, 2022 $68,838).
Cost of revenue for the three and twelve months ended December 31, 2023 decreased by 7% and 12%, respectively over the same periods in the previous year. The decrease is due primarily to efforts by the Company to improve efficiencies amongst the front line coaching team and employ fractional coaches to better manage workflow. The decrease is partially offset by the increase in the amortization of intangible asset mentioned above equivalent to a decrease in the full year gross profit margin of 7.7%.
Operating Expenses
| Three Months | Ended December 31, | |
|---|---|---|
| 2023 | 2022 | Change |
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| $ | $ | $ | % | |
|---|---|---|---|---|
| Technology and development | 438,561 | 1,013,667 | (575,106) | (57%) |
| Sales and marketing | 291,573 | 562,131 | (270,558) | (48%) |
| General and administrative | 881,079 | 1,241,739 | (360,660) | (29%) |
| Share-based compensation | 88,929 | 88,608 | 321 | -% |
| Depreciation of property and equipment | 970 | 6,713 | (5,743) | (86%) |
| Impairment of intangible asset | 2,409,314 | - | 2,409,314 | 100% |
| Impairment of right-of-use asset | - | 200,168 | (200,168) | (100%) |
| Loss on disposal of property and equipment | - | 15,534 | (15,534) | (100%) |
| Depreciation of right-of-use asset | - | 30,791 | (30,791) | (100%) |
| Lease modification | - | 150,907 | (150,907) | (100%) |
| 4,110,426 | 3,310,258 | 800,168 | 24% |
| Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, | ||
|---|---|---|---|---|
| 2023 | 2022 | Change | ||
| $ | $ | $ | % | |
| Technology and development | 2,329,837 | 3,923,663 | (1,593,826) | (41%) |
| Sales and marketing | 1,386,548 | 2,720,728 | (1,334,180) | (49%) |
| General and administrative | 3,595,484 | 5,111,304 | (1,515,820) | (30%) |
| Share-based compensation | 555,816 | 492,720 | 63,096 | 13% |
| Depreciation of property and equipment | 5,935 | 46,387 | (40,452) | (87%) |
| Impairment of intangible asset | 2,409,314 | - | 2,409,314 | 100% |
| Impairment of right-of-use asset | - | 200,168 | (200,168) | (100%) |
| Loss on disposal of property and equipment | - | 15,534 | (15,534) | (100%) |
| Depreciation of right-of-use asset | - | 169,370 | (169,370) | (100%) |
| Leasemodification | - | 150,907 | (150,907) | (100%) |
| 10,282,934 | 12,830,781 | (2,547,847) | (20%) |
Operating expenses consist of technology and development, sales and marketing and general and administrative expenses, depreciation of assets and impairment of assets.
Technology and development expenditures during the three and twelve months ended December 31, 2023 decreased by 57% and 41% respectively over the same period in the prior year, driven by headcount reductions and reduced outside purchases.
Sales and marketing expenses during the three and twelve months ended December 31, 2023 decreased by 48% and 49% respectively over the same periods in the prior year. The Company downsized the team and eliminated marketing activities that did not meet ROI performance indicator.
General and administrative expenses during the three and twelve months ended December 31, 2023 decreased by 29% and 30% respectively over the same period of the previous year due to headcount reductions, exiting the Company’s expensive office lease and reduced outside purchases.
Share-based compensation expenses during the three months ended December 31, 2023 were about the same as the same quarter of last year. The expenses during the twelve months ended December 31, 2023 increased by 13%. The increase is due primarily to stock options granted in March and August 2023 as compensation to certain employees and the Company’s Board of Directors.
Depreciation of property and equipment during the three and twelve months ended December 31, 2023 decreased by 86% and 87%, respectively, over the same periods of the previous year. The Company disposed of its office equipment after adopting a remote office model in the final quarter of 2022
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Impairment
Beginning with the third quarter of 2022, the Company adopted a remote office model and initiated negotiations with its landlord to terminate the office space lease and vacate the leased premises prior to the end of the lease term on December 31, 2023. The lease was terminated in November 2022 with an agreement reached with the landlord in January 2023. Under the terms of the agreement, the Company agreed to continue monthly lease payments at a reduced level from January 1, 2023 to December 31, 2023. As a result, the lease obligation was remeasured from $393,793 to $544,700 and the change of $150,907 was reported as lease modification expense on November 30, 2022. The Company also wrote off the net book value of the right-of-use asset at November 30, 2022 and recognized a $200,168 impairment of right-of-use asset in other expenses (see Other Expenses).
Other Expenses
The table below sets forth the details of other expenses for the three and twelve months ended December 31, 2023 and 2022:
| Three | Months Ended December 31, | Months Ended December 31, | ||
|---|---|---|---|---|
| 2023 | 2022 | Change | ||
| $ | $ | $ | % | |
| Interest on lease obligations | 1,326 | 10,050 | (8,724) | (87%) |
| Interest and accretion expense | 314,174 | 111,564 | 202,610 | 182% |
| Finance charges | 132,248 | 125,920 | 6,328 | 5% |
| Foreign exchange loss | 7,769 | 9,945 | (2,176) | (22%) |
| Loss on settlement of related party payable | 20,400 | - | 20,400 | 100% |
| Amortization of deferred finance charges | 42,396 | 56,903 | (14,507) | (25%) |
| Debt modification | (63,928) | - | (63,928) | (100%) |
| 454,385 | 314,382 | 140,003 | 45% | |
| Twelve Months Ended December 31, | ||||
| 2023 | 2022 | Change | ||
| $ | $ | $ | % | |
| Interest on lease obligations | 28,110 | 70,979 | (42,687) | (60%) |
| Interest and accretion expense | 908,153 | 388,448 | 519,705 | 134% |
| Finance charges | 509,238 | 273,736 | 235,502 | 86% |
| Capitalized borrowing costs | - | (67,000) | 67,000 | 100% |
| Foreign exchange loss (gain) | 44,560 | (19,053) | 63,613 | 334% |
| Loss on settlement of related party payable | 10,086 | - | 10,086 | 100% |
| Amortization of deferred finance charges | 149,896 | 248,813 | (98,917) | (40%) |
| Debt modification | (54,972) | - | (54,972) | (100%) |
| 1,595,071 | 895,741 | 699,330 | 78% |
Other Expenses (continued)
Interest on lease obligations as of December 31, 2023 decreased by 87% and 60% over the prior year periods. The Company terminated its expensive headquarters lease when it adopted a remote office model in the final quarter of 2022.
Interest and accretion expense relates to the accretion of the debt portion of the subordinated, postponed and secured non-convertible debenture units and interests on the debentures. Interest and accretion expense for
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the three and twelve months ended December 31, 2023 increased by 182% and 134%, respectively over the same periods of the previous year, reflecting debenture issuances in July, September and October 2023 at higher interest rates.
Finance charges relate to interest and fees connected to the credit facility and other loans. Finance charges for the three and twelve months and ended December 31, 2023 are higher by 5% and 86% respectively over the same periods of the previous year, driven by the rising macro interest rate environment.
The Company derives most of its revenue in U.S. currency. The Company’s USD denominated assets include U.S. cash and 100% of its trade receivables. The slight decrease of USD/CAD exchange rate by 2.3% from the beginning of fiscal year 2023 has resulted in unrealized foreign exchange loss from the translation of USD denominated assets into Canadian dollars.
Amortization of deferred finance charges relates to the fees paid to the EDC to guarantee 50% of the Company’s credit facility with a Schedule 1 Canadian bank and the maintenance fees paid to the lenders of the debentures. The charges are deferred and amortized over their respective terms. Amortization for the three and twelve months ended December 31, 2023 was lower by 25% and 40% respectively as compared to prior year. Amortization in the prior year includes closing costs related to the credit facility that became fully amortized in December 2022.
| Total assets Total liabilities Equity Total liabilities and equity |
As at | ||
|---|---|---|---|
| December 31, 2023 $ 2,332,893 11,751,553 (9,418,660) 2,332,893 |
December 31, 2022 $ 5,944,688 11,478,344 (5,533,656) 5,944,688 |
**Change ** | |
| $ % (3,611,795) (61%) |
|||
| 273,209 2% (3,885,004) (70%) |
|||
| (3,611,795) (61%) |
Total Assets
Total assets as at December 31, 2023 decreased by 61% from total assets as at December 31, 2022 primarily due to a decrease in the net book value of intangible asset by $3,235,363, decrease in inventories and prepaid expenses by $210,339 and $104,800 respectively.
Total Liabilities
The Company’s total liabilities as at December 31, 2023 increased by 2% from December 31, 2022, primarily as result of the increase in the debentures, partially offset by decreases in trade and other payables and the termination of lease obligations.
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Summary of Quarterly Results
The table below sets forth selected financial data for the most recent nine quarters ended December 31, 2023:
| (In thousands, except loss per share) | (In thousands, except loss per share) | (In thousands, except loss per share) | |
|---|---|---|---|
| Revenue | Net Loss | Loss per Share | |
| Quarter-ended | (Unaudited) | (Unaudited) | (Unaudited) |
| $ | $ | $ | |
| December 31, 2023 | 2,343 | (3,226) | (0.02) |
| September 30, 2023 | 2,435 | (770) | (0.01) |
| June 30, 2023 | 2,357 | (1,231) | (0.01) |
| March 31, 2023 | 2,649 | (1,373) | (0.01) |
| December 31, 2022 | 3,114 | (1,590) | (0.01) |
| September 30, 2022 | 2,653 | (2,251) | (0.02) |
| June 30, 2022 | 2,532 | (2,232) | (0.02) |
| March 31, 2022 | 2,867 | (1,628) | (0.02) |
| December 31, 2021 | 2,403 | (1,795) | (0.02) |
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. Success Fees are typically triggered by milestones such as a participant’s one year mark in the program.
Strategic Growth Drivers and Outlook
In order to continue to expand its market share and further enhance overall engagement levels, the Company is focusing 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 2023.
The Company is also in the early stages of opening 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, including the Medicare Advantage market. Health plan funding is highly dependent on a five-star quality
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system. Star ratings are released on an annual basis and reflect the experience of a health plan’s membership base. An increase in a half a star could result in millions of dollars in additional funding for that health plan. The Newtopia platform is therefore resonating with health plans’ ability to increase their star ratings by working directly with Newtopia to fill in gaps in care that ultimately result in improved star ratings and funding.
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 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.
The third pillar of growth will be to increase enrolment 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 30% 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 efforts and promote the aforementioned pillars of growth, the Company has invested approximately $3.3 million on a new engagement platform. The new platform includes a state-of-the-art participant experience for habit change and enhanced communications and nudges that combined enable the personalized programs that are core to Newtopia. The new engagement platform is anticipated to drive both operational and technological efficiencies so that the Company can enhance its Inspirator to participant service ratios. Increasing the number of participants per Inspirator should also lead to improved gross margin.
Going forward, 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 a high-level of individualized care. 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.
Liquidity and capital resources
The table below sets forth the cash flows for the twelve months ended December 31, 2023 and 2022:
| Cash from (used) in Operating activities Investing activities Financing activities |
Twelve Months Ended December 31, | Twelve Months Ended December 31, | Twelve Months Ended December 31, |
|---|---|---|---|
| 2023 $ (2,269,743) (2,548) 2,313,680 |
2022 $ (5,915,218) (989,175) 6,438,759 |
Change | |
| $ % 3,645,475 62% 986,627 100% (4,125,079) (64%) |
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41,389
(465,634)
507,023 109%
Increase (Decrease) in cash
Cash used in operating activities during the twelve months ended December 31, 2023 decreased by $3.6 million or 62% compared to the same period ended December 31, 2022. This improvement is mainly attributed to the reduction in operating loss (excluding non-cash items such as impairment, amortization and depreciation, share-based compensation) by $4.0 million, partially offset by increase in non-cash working capital of $0.4 million comparing to last fiscal year.
Cash used in investing activities during the twelve months ended December 31, 2022 related to the investment by the Company on the acquisition and integration of a new engagement platform software. This development was completed in July 2022, and no development costs were incurred during the twelve months ended December 31, 2023.
Cash inflow from financing activities during the twelve months ended December 31, 2023 decreased by $4.0 million or 64% over the same period of the previous year due mainly to reductions in credit facility net drawings by $2.5 million and net cash proceeds from share issuance by $1.4 million.
Financing
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.
Below is a summary of recent, successfully raised financing activities:
Upon the maturity of Debentures on September 15, 2023, the Company amended $1,735,000 of the $2,545,000 8% Debentures to (a) extend the maturity date of the Debentures by one year to September 15, 2024; (b) bear interest at a rate of 12% for the period from September 15, 2023 until the new maturity date; and (c) include an early repayment fee equal to (i) six percent (6%) of the principal amount of the Debentures if such repayment occurs prior to March 15, 2024; or (ii) four percent (4%) of the principal amount of the 8% Debentures if such repayment occurs following March 15, 2024 but prior to September 15, 2024 (the "Amendment Debentures"). As consideration, the holders that agree to the amendments will receive, for no additional consideration, such number of common shares in the capital of the Company (the "Bonus Amendment Shares") as is equal to 10% of the principal of amount of Amendment Debentures held divided by $0.115, being the closing market price of the common shares of the Company on the TSXV on September 11, 2023. The Bonus Amendment Shares are subject to a four month hold period that expires on January 16, 2024. An aggregate of 1,505,682 Bonus Amendment Shares were issued to the holders of the $1,735,000 Amendment Debentures.
In addition to the above amendments to the 8% Debentures, $780,000 of the $2,545,000 8% Debentures was extended at the maturity date by one month until October 15, 2023 to allow the Company additional time to raise up to $2,545,000 in a non-brokered offering of replacement debenture units announced by the Company on September 15, 2023 (see (iii)) to repay any of the 8% Debentures that do not agree to the amendments provided under the Amendment Debentures.
On September 15, 2023, the Company repaid $30,000 of the $2,545,000 8% Debentures that matured on September 15, 2023. On October 15, 2023 the Company repaid the extended $780,000 8% Debentures.
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On September 11, 2023, the Company announced a non-brokered offering (the "Replacement Offering") of subordinated and postponed 12% secured non-convertible debenture units (the "Replacement Units"). Up to 255 Units may be issued pursuant to the Replacement Offering. Each Unit is comprised of: (i) $10,000 principal amount of subordinated and postponed secured non-convertible debentures of the Company (the "Replacement Debentures"); and (ii) for no additional consideration, such number of common shares in the capital of the Company (the "Bonus Replacement Shares") as is equal to 10% of the principal amount of Debentures purchased divided by $0.115, being the closing market price of the common shares of the Company on the TSXV on September 11, 2023. The Debentures will mature on the date that is 12 months from the closing date of the Replacement Offering and are secured by the assets of the Company and bear interest at a rate of 12% per annum payable quarterly in arrears in cash. The Replacement Debentures may be repaid in part or in full at any time subject to an early repayment fee equal to: (i) six percent (6%) of the principal amount of the Replacement Debentures if such repayment occurs prior to six months following the closing date; or (ii) four percent (4%) of the principal amount of the Replacement Debentures if such repayment occurs following the date that is six months following the closing date but prior to the maturity date.
The Company will pay to the holders of the Replacement Debentures an annual work and credit maintenance fee of 2% of the principal amount in cash to be paid on the date that is two months following the completion of the Replacement offering.
As consideration for certain services provided to the Company in connection with the Replacement Offering, the Company may pay a finder's fee comprised of a cash fee equal to 6% of the principal amount of Replacement Debentures purchased by subscribers that are introduced to the Company by each such finder and such number of compensation options to purchase common shares in the capital of the Company (the "Replacement Compensation Options") calculated based on 6% of the principal amount of Replacement Debentures purchased by subscribers that were introduced to the Company by each such finder divided by $0.115, being the closing market price of the common shares of the Company on the TSXV on September 11, 2023. Each Replacement Compensation Option is exercisable into one common share of the Company at $0.115 per share, subject to adjustments in certain events, until the date that is 24 months following the closing date.
On September 29 and October 15, 2023, the Company closed the first and second tranches of Replacement Units for gross proceeds of $380,000 and $425,000 respectively. The Debentures issued in connection with these tranches have a 12-month term, and the Company will pay to the holders a work and credit maintenance fee of 2% of the principal amount in cash payable on October 29 and November 15, 2023. The Company will defer and amortize the maintenance fee over the date the fee is due to the maturity date.
On July 14, 2023, the Company closed a non-brokered offering of subordinated and postponed 13% secured non-convertible debenture units (the "July 2023 Units"). Each July 2023 Unit is comprised of: (i) $10,000 principal amount of subordinated and postponed secured non-convertible debentures maturing on July 14, 2025; and (ii) for no additional consideration, such number of common shares in the capital of the Company equal to 20% of the principal amount of debentures purchased divided by $0.065, being the closing market price of the common shares of the Company on the TSX Venture Exchange on June 29, 2023. The Company issued 150 July 2023 Units for gross proceeds of $1,500,000 and pursuant to the offering issued 4,615,366 Common Shares.
On March 7, 2023, the Company closed a private placement offering of units (the "March 2023 Units") at a price of $0.07 per unit for gross proceeds of $1,534,960. Each March 2023 Unit is comprised of: (i) one Common Share in the capital of the Company; (ii) a first one-half of one Common Share purchase warrant (each whole first warrant, an "A Warrant"); and (iii) a second one-half of one Common Share purchase warrant (each whole second warrant, a "B Warrant"). Each A Warrant entitling the holder thereof to acquire
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one Common Share at an exercise price of $0.10 per A Warrant Share for a period of six months from the closing date of the offering. Each B Warrant entitling the holder thereof to acquire one Common Share at an exercise price of $0.15 per B Warrant Share for a period of 24 months from the closing date of the Offering. As consideration for certain services provided to the Company in connection with the offering, the Company paid an aggregate of $42,151 and issued 595,021 compensation options exercisable to acquire one Common Share at a price of $0.07 per Common Share for a period of 24 months following the closing date of the offering, as finders' fees to certain persons.
Subsequent to the fiscal year 2023, on February 29, 2024 the Company closed a brokered private placement offering of 14,430,000 units of the Company at a price of $0.05 per unit for aggregate gross proceeds of $721,500. Each unit is comprised of one common share in the capital of the Company and one common share purchase warrant. Each warrant is exercisable to acquire one common share of the Company at an exercise price of $0.10 per common share, subject to adjustments in certain events, until March 1, 2027.
The Company also concurrently closed a non-brokered private placement of 500,000 units for gross proceeds of $25,000 on the same terms as the above-mentioned brokered private placement offering.
Credit Facility
On December 4, 2020, the Company closed an Operating Credit Line Agreement (the “ Facility ”) in the amount of $5,000,000 with a schedule 1 bank (the “ Bank ”). The Company could 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 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 covered the period from October 14, 2020 to September 30, 2021. In October 2021 the guarantee was extended until September 30, 2022, and in October 2022 the guarantee was further extended until October 2024.
In accordance with the terms of the Facility, the lender received 210,526 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 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 October 2021 the guarantee obtained from Export Development Canada was extended until September 30, 2022.
On June 29, 2022, the Company entered into a 2nd amendment of the Facility with the Bank to replace the cash runway ratio covenant with a covenant to maintain minimum total liquidity thresholds for the months from May to September 2022 and to reduce the cash runway ratio covenant for the month of October 2022.
The Company was not in compliance with the covenants of the Facility from September 30, 2022 to the date of this MD&A. On November 1, 2022, the Bank agreed to not accelerate repayment of the Facility on the conditions that the Company receives minimum capital injections of $700,000 by November 11, 2022 and $2,500,000 by December 15, 2022. The maximum credit on the Facility was capped at $4,880,760. Any injection in the form of debt financing would be fully subordinated to the Facility.
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On May 15, 2023, the Bank issued a letter to the Company with the following amendments i) the Company was to provide evidence by May 31, 2023 of its intention to raise capital no less than $1,500,000 by June 30, 2023, ii) the Facility was to be repaid on or prior to November 30, 2023, iii) effective May 23, 2023, the Company is to pay 15% annual interest on advances in excess of the lesser of the borrowing base and the maximum limit of the Facility which is adjusted from $4,880,760 to $4,900,000, and iv) pricing on the Facility is increased by 3%, payable in kind and subject to ratable forgiveness tied to full repayment of the loan before November 30, 2023. On July 14, 2023, the Company successfully raised $1.5M from a private placement of debenture units (See above). The credit facility needs to be repaid, refinanced or extended at the discretion of the bank by May 31, 2024.
On January 11, 2024, the Bank issued a letter to the Company maintaining the existing loan facilities until May 31, 2024. The Facility shall be subject to the agreement by the Company to the following: i) the Company is to provide evidence by February 15, 2024 of its intention to raise capital of no less than $500,000 by February 29, 2024, ii) the Company is to provide evidence of refinance from a third-party lender by March 31, 2024, and present a binding commitment to the Bank by April 30, 2024. Subsequent to the year ended December 31, 2023, on February 29, 2024, the Company raised a capital of $746,500. As of the date of issuance of the MD&A, the Company has not repaid or refinanced the credit facility. The Company continues to work closely with the bank and provides regular updates on all corporate and strategic developments.
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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 173,265,303 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. On September 14, 2022 the Company amended and restated the existing plan. Under the new plan (the “ 2022 Option Plan ”), the maximum number of options that may be granted cannot exceed 23,598,557, representing 20% of the aggregate of issued and outstanding Common Shares on September 14, 2022 being the date of the annual and special meeting of shareholders of the Company. As of the date of this MD&A, there are 19,482,823 stock options outstanding under the Plan.
As of the date of this MD&A, there are a total of 39,950,290 outstanding warrants consisting of 36,644,000 non-broker warrants to purchase up to 36,644,000 Common Shares and 3,306,290 compensation options to purchase up to 3,306,290 Common Shares.
Material Accounting Policies and Estimates
The Company’s material accounting policies and accounting estimates under International Financial Reporting Standards (“ IFRS ”) are contained in the Annual Financial Statements. Certain of these policies involve critical accounting estimates as they require management 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 and Revised IFRS Standards issued but not yet effective
In January 2020, the IASB issued amendments to IAS 1, Presentation of Financial Statements, to clarify the requirements for classifying liabilities as current or non-current. The amendments clarify the classification of liabilities as current or non-current based on rights that are in existence at the end of the reporting period and are unaffected by expectations about whether an entity will exercise its right to defer settlement of a liability. The amendments also clarify the definition of "settlement" of a liability. The amendments are effective January 1, 2024, with early adoption permitted. The amendments are to be applied retrospectively. Management does not expect any material impact to the Corporation’s financial statements upon adoption of these amendments.
In October 2022, the IASB issued amendments to IAS 1 – Presentation of Financial Statements, which specifies that covenants whose compliance is assessed after the reporting date do not affect the classification of debt as current or non-current at the reporting date. Instead, the amendments require disclosure of information about these covenants in the notes to the financial statements. The amendments are effective for annual reporting periods beginning on or after January 1, 2024, with early adoption permitted. Management does not expect any material impact to the Company’s financial statements upon adoption of these amendments.
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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, 2023 and 2022 consisted of the following:
| Three Months Ended | Three Months Ended | Twelve months Ended | Twelve months Ended | |
|---|---|---|---|---|
| December 31, | December 31, | |||
| 2023 | 2022 | 2023 | 2022 | |
| $ | $ | $ | $ | |
| Salaries, fees and short-term benefits | 670,723 | 880,585 | 2,956,237 | 3,338,994 |
| Share-based benefits | 114,932 | 124,293 | 528,821 | 526,019 |
| 785,655 | 1,004,878 | 3,485,058 | 3,865,013 |
On March 10, 2023, the Company issued 2.2M stock options to the directors of the Company for fees related to the three months ended December 31, 2022 and year ended December 31, 2023 of $33,125 and $165,625, respectively. Each option vests quarterly over one year and is exercisable at a price of $0.10 per common share at any time up to March 3, 2028. The fair value of the stock options was determined at $198,000 using the Black-Scholes option pricing model with the following assumptions: grant date share price $0.09, risk free interest rate 3.16%, expected life of 5 years and expected volatility of 124.19%.
As at December 31, 2023, aggregate bonuses payable to members of the Company's executive team were $133,600 (December 31, 2022 - $196,100).
Financial Instruments and Risk Management
The Company may be exposed to risks of varying degrees of significance that affect its ability to achieve its strategic objectives. The main objectives of the Company’s risk processes are to ensure that the risks are properly identified and managed within Board approved policies and guidelines. The principal risks to which the Company is exposed to are as follows:
Customer Concentration Risk
Newtopia’s client base is fairly concentrated with two customers comprising 89% of the total revenues. In March 2024 a client informed the Company that they have decided to stop providing our program to their employees effective June 1, 2024. During the twelve months ended December 31, 2023, revenue from the client was $2,999,310.
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
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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, 2023 and 2022, none of these customer’s balances have 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, 2022 and 2021, the exposure to credit risk for trade receivables and contract assets was limited to the United States. At December 31, 2023, two customers whose trade receivables exceeded 10% of the total trade and other receivables balance represented 89% (December 31, 2022 – 84%) 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, 2023 and 2022, the following items were denominated in foreign currency:
| 2023 2022 |
|
|---|---|
| $ $ Balances (U.S. Dollars) Cash 292,861 255,426 Trade and other receivables 997,032 1,008,451 |
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360,208
590,667
Trade and other payables
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, 2023 and 2022.
| Change in | Effect on loss before tax | |
|---|---|---|
| USD rate | inCAD | |
| $ | ||
| 2023 | 10% | 122,960 |
| -10% | (122,960) | |
| 2022 | 10% | 91,180 |
| -10% | (91,180) |
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, 2023:
| Less than | After | ||||
|---|---|---|---|---|---|
| Total | 1year | 1-3 years | 4-5 years | 5 years | |
| $ | $ | $ | $ | $ | |
| Trade and other payables | 1,825,356 | 1,825,356 | - | - | - |
| Credit facility | 4,767,006 | 4,767,006 | - | - | - |
| Debentures | 5,390,000 | 3,890,000 | 1,500,000 | - | - |
| 11,982,362 | 10,482,362 | 1,500,000 | - | - |
The following are the contractual maturities of the financial liabilities as at December 31, 2022:
| Less than | After | ||||
|---|---|---|---|---|---|
| Total | 1year | 1-3years | 4-5years | 5years | |
| $ | $ | $ | $ | $ | |
| Trade and other payables | 2,584,039 | 2,584,039 | - | - | - |
| Credit facility | 4,823,545 | 4,823,545 | - | - | - |
| Lease obligations | 544,700 | 544,700 | - | - | - |
| Debentures | 3,895,000 | 2,545,000 | 1,350,000 | - | - |
| 11,847,284 | 10,497,284 | 1,350,000 | - | - |
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Events after December 31, 2023 year end
In March 2024 a client informed the Company that they have decided to stop providing our program to their employees effective June 1, 2024. During the twelve months ended December 31, 2023, revenue from the client was $2,999,310 (2022 - $2,172,684). To address the financial impact upon the departure of this client, management is actively reducing variable costs associated with this lost revenue, accelerating new market opportunities, and exploring a variety of strategic alternatives.
On February 29, 2024 the Company closed a brokered private placement offering of 14,430,000 units of the Company at a price of $0.05 per unit for aggregate gross proceeds of $721,500. Each unit is comprised of one common share in the capital of the Company and one common share purchase warrant. Each warrant is exercisable to acquire one common share of the Company at an exercise price of $0.10 per common share, subject to adjustments in certain events, until March 1, 2027.
The Company also concurrently closed a non-brokered private placement of 500,000 units for gross proceeds of $25,000 on the same terms as the above-mentioned brokered private placement offering.
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, 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
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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 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
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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 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, 2023, the Company derived 89% of its services and product revenues from two customers (December 31, 2022 - 84%).
In March 2024 a client informed the Company that they have decided to stop providing our program to their employees effective June 1, 2024. During the twelve months ended December 31, 2023, revenue from the client was $2,999,310. To address the financial impact upon the departure of this client, management is actively reducing variable costs associated with this lost revenue, accelerating new market opportunities, and exploring a variety of strategic alternatives.
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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 monitors 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 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.
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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 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,
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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 care. Failure to maintain proper CLIA certification and CAP accreditation could significantly affect Newtopia’s business, financial condition, results of operations and reputation.
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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 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
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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 increases in demand for such support. Increased participant demand for support could increase costs and
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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.
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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 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.
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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.
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.
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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 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, 2023, 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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