UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from to
Commission File Number
(Exact name of registrant as specified in its charter)
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Not Applicable |
| (I.R.S. Employer Identification Number) | (State or other jurisdiction of incorporation or organization) |
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| (Address of principal executive offices) | Zip Code |
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ☐ | Accelerated filer ☐ |
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| Smaller reporting company |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No
On October 14, 2022,
As used in this Quarterly Report on Form 10-Q, the terms "the Company," "us," "our," the "Company" and "Salona" mean Salona Global Medical Device Corporation (a corporation incorporated under the laws of the Province of British Columbia formerly known as Brattle Street Investment Corp.) and its subsidiaries (unless the context indicates a different meaning).
SALONA GLOBAL MEDICAL DEVICE CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
For the Three and Six Months Ended August 31, 2022, and August 31, 2021
(Expressed in Canadian Dollars, unless specified otherwise)
2
Unaudited Interim Condensed Consolidated Balance Sheets
As at August 31, 2022, (unaudited) and February 28, 2022 (audited)
(In Canadian Dollars, unless specified otherwise)
| Note | August 31, 2022 |
February 28, 2022 |
|||||||
| Assets | |||||||||
| Cash and cash equivalents | 19 | $ | $ | ||||||
| Accounts receivable, net | 5 | ||||||||
| Inventories, net | 7 | ||||||||
| Prepaid expenses and other receivables | |||||||||
| Total current assets | |||||||||
| Security deposit | 12 | ||||||||
| Property and equipment, net | 8 | ||||||||
| Right-of-use assets, net | 12 | ||||||||
| Intangible assets, net | 9 | ||||||||
| Goodwill | 4 | ||||||||
| Total assets | $ | $ | |||||||
| Liabilities and stockholders' equity | |||||||||
| Liabilities | |||||||||
| Line of credit | 11 | $ | $ | ||||||
| Accounts payable and accrued liabilities | 10 | ||||||||
| Current portion of debt | 11 | ||||||||
| Current portion of lease liability | 12 | ||||||||
| Other liabilities | 10 | ||||||||
| Obligation for payment of earn-out consideration | 4 | ||||||||
| Total current liabilities | |||||||||
| Debt, net of current portion | 11 | ||||||||
| Lease liability, net of current portion | 12 | ||||||||
| Deferred tax liability | |||||||||
| Total liabilities | |||||||||
| Stockholders' equity | |||||||||
| Common stock; |
13 | ||||||||
| Class A shares; |
13 | ||||||||
|
Common stock to be issued: |
13 | ||||||||
| Class A Shares to be issued: |
13 | ||||||||
| Additional paid-in-capital | 13 | ||||||||
| Accumulated other comprehensive income | |||||||||
| Deficit | ( |
) | ( |
) | |||||
| Total stockholders' equity | |||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||
| Contingencies (Note 20) | |||||||||
| Subsequent events (Note 21) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Unaudited Interim Condensed Consolidated Statements of Operations and Comprehensive Loss
For the three and six months ended August 31, 2022, and 2021
(In Canadian Dollars, unless specified otherwise)
| 3 months ended | 6 months ended | ||||||||||||||
| Note |
August 31, 2022 |
August 31, 2021 |
August 31, 2022 |
August 31, 2021 |
|||||||||||
| Revenues | 6 | $ | $ | $ | $ | ||||||||||
| Cost of revenue | |||||||||||||||
| Direct service personnel | |||||||||||||||
| Direct material costs | |||||||||||||||
| Other direct costs | |||||||||||||||
| Total cost of revenue | |||||||||||||||
| Gross margin | |||||||||||||||
| Operating expenses | |||||||||||||||
| General and administrative | 17 | ||||||||||||||
| Total operating expenses | |||||||||||||||
| Net (loss) income before the undernoted | ( |
) | ( |
) | |||||||||||
| Amortization of intangible assets | 9 | ( |
) | ( |
) | ( |
) | ( |
) | ||||||
| Depreciation of property and equipment | 8 | ( |
) | ( |
) | ( |
) | ( |
) | ||||||
| Amortization of right-of-use assets | 12 | ( |
) | ( |
) | ( |
) | ( |
) | ||||||
| Interest expense | ( |
) | ( |
) | ( |
) | ( |
) | |||||||
| Foreign exchange (loss) gain | ( |
) | |||||||||||||
| Gain on debt settlement | |||||||||||||||
| Change in fair value of SDP earn-out consideration | 4 | ( |
) | ||||||||||||
| Change in fair value of contingent consideration | 4 | ( |
) | ( |
) | ||||||||||
| Transaction costs including legal, financial, audit, US & Canadian regulatory expenses | 18 | ( |
) | ( |
) | ( |
) | ( |
) | ||||||
| Net loss before taxes | ( |
) | ( |
) | ( |
) | ( |
) | |||||||
| Current income tax expense | ( |
) | ( |
) | ( |
) | ( |
) | |||||||
| Deferred income tax recovery | |||||||||||||||
| Net loss | ( |
) | ( |
) | ( |
) | ( |
) | |||||||
| Other comprehensive loss | |||||||||||||||
| Foreign currency translation gain | |||||||||||||||
| Comprehensive loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Net loss per share | |||||||||||||||
| Basic and diluted | 16 | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||
| Weighted average number of common shares outstanding | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Unaudited Interim Condensed Consolidated Statements of Stockholders' Equity
For the three and six months ended August 31, 2022, and 2021
(In Canadian Dollars, unless specified otherwise)
| Common stock | Class A Shares |
Common stock to |
Class A Shares to be issued |
|||||||||||||||||||||||||||||||||||||||||||
Number |
Amount $ |
Number |
Amount $ |
Number |
Amount |
Number |
Amount $ |
Additional paid-in- capital $ |
Accumulated other comprehensive income $ |
Deficit $ |
Total $ |
|||||||||||||||||||||||||||||||||||
| Balance - May 31, 2021 |
|
|
( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - |
- |
- |
- | - | - | - | ||||||||||||||||||||||||||||||||||||
| Shares issued on exercise of options | - | - |
- |
- |
- | - | ( |
) | - | - | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - |
- |
- |
- | - | - | - | ||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - |
- |
- |
- | - | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Balance - August 31, 2021 | ( |
) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance - February 28, 2021 |
|
|
( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - |
- |
- |
- | - | - | - | ||||||||||||||||||||||||||||||||||||
| Shares issued on exercise of options | - | - |
- |
- |
- | - | ( |
) | - | - | ||||||||||||||||||||||||||||||||||||
| Shares exchanged to Class A Shares | ( |
) | ( |
) |
- |
- |
- | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
| Shares for debt settlement | - | - |
- |
- |
- | - | - | |||||||||||||||||||||||||||||||||||||||
| Shares issued on financing, net | - | - |
- |
- |
- | - | - | - | - | |||||||||||||||||||||||||||||||||||||
| Foreign currency translation
gain |
- | - | - | - |
- |
- |
- | - | - | - | ||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - |
- |
- |
- | - | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Balance - August 31, 2021 |
|
|
( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Balance - May 31, 2022 |
|
|
( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - |
- |
- |
- | - | - | - | ||||||||||||||||||||||||||||||||||||
| Shares for debt settlement | - | - |
- |
- |
- | - | - | - | - | |||||||||||||||||||||||||||||||||||||
|
Shares issued on financing, net |
- |
- |
- |
- |
|
|
- |
- |
( |
) |
- |
- |
- |
|||||||||||||||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - |
- |
- |
- | - | - | - | ||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - |
- |
- |
- | - | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Balance - August 31, 2022 |
|
|
( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Balance - February 28, 2022 |
|
|
( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - |
- |
- |
- | - | - | - | ||||||||||||||||||||||||||||||||||||
| Shares issued on exercise of options | - | - |
- |
- |
- | - | ( |
) | - | - | ||||||||||||||||||||||||||||||||||||
| Shares issued on exercise of broker warrants | - | - |
- |
- |
- | - | ( |
) | - | - | ||||||||||||||||||||||||||||||||||||
| Shares for debt settlement | - | - |
- |
- |
- | - | - | - | - | |||||||||||||||||||||||||||||||||||||
|
Shares issued on financing, net |
- |
- |
- |
- |
|
|
- |
- |
( |
) |
- |
- |
- |
|||||||||||||||||||||||||||||||||
| Shares to be issued related to acquisition of SDP |
- |
- | - | - |
- |
- |
- | - | - | |||||||||||||||||||||||||||||||||||||
| Shares issued related to acquisition of SDP | - | - |
- |
- |
( |
) | ( |
) | - | - | - | |||||||||||||||||||||||||||||||||||
| Class A Shares exchanged for common shares | ( |
) | ( |
) |
- |
- |
- | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
| Foreign currency translation gain | - | - | - | - |
- |
- |
- | - | - | - | ||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - |
- |
- |
- | - | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Balance - August 31, 2022 |
|
|
( |
) | ||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Unaudited Interim Condensed Consolidated Statements of Cash Flows
For the six months ended August 31, 2022, and 2021
(In Canadian Dollars, unless specified otherwise)
| August 31, 2022 | August 31, 2021 | ||||||||
| Operating activities | Note | ||||||||
| Net loss | $ | ( |
) | $( |
) | ||||
| Non-cash items: | |||||||||
| Depreciation and amortization | 8, 9, 12 | ||||||||
| Interest accretion on lease liability | 12 | ||||||||
| Stock based compensation | 13 | ||||||||
| Change in fair value of contingent consideration | 4 | ||||||||
| Change in fair value of SDP earn-out consideration | 4 | ||||||||
| Change in fair value of marketable securities | ( |
) | |||||||
| Realized gain on sale of marketable securities | ( |
) | |||||||
| Changes in operating assets and liabilities: | |||||||||
| Accounts receivable | ( |
) | ( |
) | |||||
| Prepaid expenses and other receivables | ( |
) | ( |
) | |||||
| Inventories | ( |
) | |||||||
| Accounts payable and accrued liabilities | |||||||||
| Other liabilities | ( |
) | |||||||
| Deferred tax liability | ( |
) | |||||||
| Net cash used in operating activities | ( |
) | ( |
) | |||||
| Investing activities | |||||||||
| Cash received on acquisition of SDP | 4 | ||||||||
| Cash received on acquisition of Mio-Guard | 4 | ||||||||
| Proceeds on sale of marketable securities | |||||||||
| Acquisition of intellectual property | 9 | ( |
) | ||||||
| Acquisition of property and equipment | 8 | ( |
) | ( |
) | ||||
| Net cash (used in) provided by investing activities | ( |
) | |||||||
| Financing activities | |||||||||
| Repayment of long-term debt | 11 | ( |
) | ( |
) | ||||
| Proceeds from line of credit, net | 11 | ||||||||
| Issuance costs | 13 | ( |
) | ||||||
| Proceeds from exercise of stock options | 13 | ||||||||
| Proceeds from exercise of broker warrants | 13 | ||||||||
| Lease payments | 12 | ( |
) | ( |
) | ||||
| Net cash provided by (used in) financing activities | ( |
) | |||||||
| Effect of foreign exchange rates on cash | |||||||||
| Decrease in cash and cash equivalents | ( |
) | ( |
) | |||||
| Cash and cash equivalents and restricted cash, opening | |||||||||
| Cash and cash equivalents and restricted cash, closing | $ | $ | |||||||
| Supplementary | |||||||||
| Interest | $ | $ | |||||||
| Income taxes | |||||||||
| Common stock issued for debt | |||||||||
| Restricted cash including the closing balance above |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
6
1. Description of the business
Salona Global Medical Device Corporation (formerly known as Brattle Street Investment Corp.) ("the Company," "us," "our," "Salona," “Salona Global,” or the "Company"), is a publicly traded company listed on the TSX Venture Exchange (the "Exchange" or "TSXV"). The Company is an acquisition oriented, US-based and revenue generating medical device technology company. The Company aims to leverage the liquid Canadian capital markets to acquire small to midsize US and internationally based medical device products and companies with the goal of expanding sales and improving operations. The Company's aim is to create a large, broad-based medical device company with global reach.
The Company was incorporated under the Canada Business Corporations Act on September 17, 2013. The Company's common shares trade on the Exchange under the symbol "SGMD". The Company's registered office is Suite 200E - 1515A Bayview Avenue, East York, Ontario, Ontario, M4G 3B5.
On May 21, 2021, the Company acquired South Dakota Partners Inc. ("SDP").
On September 30, 2021, the Companyacquired Simbex, LLC ("Simbex").
On November 29, 2021, the Company launched a new U.S. sales subsidiary called ALG Health Plus, LLC ("Health Plus"), aimed at selling medical devices and supplies to small, independent hospitals and group purchasing organizations, organizations that offer small medical offices and clinics access to devices and supplies on a larger scale creating efficiencies by aggregating purchasing volumes.
On March 11, 2022, the Company acquired Mio-Guard, LLC ("Mio-Guard").
On September 23, 2022, the Company acquired DaMar Plastics Manufacturing, Inc. ("DaMar").
7
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
The Company's operations could be significantly adversely affected by the effects of a widespread global outbreak of a contagious disease, including the recent outbreak of respiratory illness caused by COVID-19. The Company cannot accurately predict the impact COVID-19 will have on its operations and the ability of others to meet their obligations with the Company, including uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak, and the length of travel and quarantine restrictions imposed by governments of affected countries. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could further affect the Company's operations and ability to finance its operations.
2. Basis of presentation
The accompanying unaudited interim condensed consolidated financial statements were prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") and in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The information furnished herein reflects all adjustments, consisting only of normal recurring adjustments, which in the opinion of management, are necessary to fairly state the Company's financial position, the results of its operations, and cash flows for the periods presented. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with U.S. GAAP were omitted pursuant to such rules and regulations.
The financial information contained in this report should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2022, that the Company filed on May 31, 2022.
Functional and presentation currency
These unaudited interim condensed consolidated financial statements are expressed in Canadian dollars unless otherwise stated. The functional currency of the Company is Canadian dollars, and the functional currency of its operating subsidiaries Inspira Financial Company, Inspira SaaS Billing, Inc., Simbex, LLC, ALG Health Plus, LLC, Mio-Guard, SDP, and its holding company subsidiaries noted below is US dollars.
3. Significant accounting policies
a) Basis of consolidation
8
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
These statements consolidate the accounts of the Company and its wholly owned operating subsidiaries, namely, Simbex, LLC ("Simbex"), ALG Health Plus, LLC ("Health Plus"), South Dakota Partners Inc. ("SDP"), Inspira Financial Company, Mio-Guard, LLC ("Mio-Guard"), 1077863 B.C., Ltd, and Inspira SAAS Billing, Inc. in the United States. Additionally, these statements consolidate the Company's wholly owned holding company subsidiaries, namely, Pan Novus Hospital Sales Group, LLC, Brattle Acquisition I Corp., Simbex Acquisition Parent I Corporation, Pan Novus Hospital Sales Group, LLC, Brattle Acquisition I Corp, and Simbex Acquisition Parent I Corporation. The Company owns
b) Basis of measurement
The unaudited interim condensed consolidated financial statements of the Company have been prepared on an historical cost basis except contingent consideration which are carried at fair value.
c) Use of estimates
The preparation of unaudited interim condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. This applies to useful lives of non-current assets, impairment of non-current assets, including goodwill and intangible assets, valuation of stock-based compensation, allowance for doubtful accounts, provisions for inventory and valuation allowance for deferred tax assets. The actual results experienced by the Company may differ materially and adversely from the Company's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
d) Operating segments
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Company's other components. The segment operating results are reviewed regularly by the Company's CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. As of August 31, 2022, the Company has one segment, healthcare operations, which includes production, design, development, and sale of medical devices to businesses in the United States. Assets, liabilities, revenues and expense from this segment are disclosed in the unaudited interim condensed consolidated balance sheets and statements of operations and comprehensive loss.
e) Fair value of financial instruments
The Company's financial instruments consist principally of cash and cash equivalents, accounts receivable, security deposit, accounts payable and accrued liabilities, line of credit, debt, contingent consideration payable, lease liabilities and other liabilities.
9
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
Financial Accounting Standards Board ("FASB") Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, requires disclosure of the fair value of financial instruments held by the Company. FASB ASC Topic 825, Financial Instruments, defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures.
The carrying amounts reported in the unaudited condensed consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization, low risk of counterparty default and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
| Level 1 - | Quoted prices in active markets for identical assets or liabilities. |
| Level 2 - | Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3 - | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. |
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain assets or liabilities within the fair value hierarchy. The Company did not have any transfers of assets and liabilities between the levels of the fair value measurement hierarchy during the years presented.
As of August 31, 2022, and February 28, 2022, respectively, the Company did not identify any financial assets and liabilities other than contingent considerations resulting from the SDP, Simbex, ALG, and Mio-Guard acquisitions, that would be required to be presented on the unaudited interim condensed consolidated balance sheet at fair value.
f) Revenue recognition
Revenue comprises goods and services provided to the Company's contracted customers and sales-based royalties charged by the Company to licensees of the Intellectual Property (IP) developed by the Company.
In accordance with ASC 606 - Revenue from Contracts with Customers, the Company recognizes revenue upon the transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. The Company accounts for a customer contract when the rights of the parties, including the payment terms, are identified, the contract has commercial substance, collection of consideration is probable, and the contract has been signed and agreed to by both parties. Revenue is recognized when, or as, performance obligations are satisfied by transferring control or economic benefit of the service to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for its services. Revenue excludes sales tax and is recorded net of discounts and an allowance for estimated returns unless the terms of the sales are final.
10
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
The principles in ASC 606 are applied using the following five steps:
1. Identify the contract with a customer;
2. Identify the performance obligation(s) in the contract;
3. Determine the transaction price;
4. Allocate the transaction price to the performance obligation(s) in the contract; and
5. Recognize revenue when (or as) the performance obligation(s) are satisfied.
SDP, Mio-Guard and Health Plus recognize revenue at a point-in-time upon transfer of control of goods to customers, which is generally upon shipment or delivery, depending on the delivery terms set forth in the customer contract, at an amount that reflects the consideration the Company received or expects to receive in exchange for the goods. Simbex recognizes its revenue over time as it meets its milestones and performs its obligations as agreed upon in its contracts with its customers. Payment received prior to the delivery of service is classified as deferred revenue.
Provisions for discounts, returns and other adjustments are provided for in the period the related sales are recorded. The Company has concluded that it is the principal in its revenue arrangements because it controls the goods or services before transferring them to the customer.
The Company typically provides warranties for general repairs of defects that existed at the time of sale. These assurance-type warranties are accounted for as warranty provisions, if any.
g) Research and development costs
Research and development costs are generally expensed as incurred. These costs primarily consist of personnel and related expenses and are classified as part of the general and administrative expenses on the unaudited interim condensed consolidated statements of operations and comprehensive loss.
h) Cash and cash equivalents
Cash and cash equivalents comprise highly liquid interest-bearing securities that are readily convertible to cash and are subject to an insignificant risk of changes in value. The maturities of these securities as at the purchase date are 90 days or less. A variable amount of the cash is held in cash backed, liquid US money market funds with high institutional credit ratings. Most of these money market funds are placed in United States dollar and securities issued by the United States Government.
i) Inventories
Inventories are comprised of raw material, work-in-progress, trading goods, and finished goods, which consist principally of electrodes, electronic components, subassemblies, steel, hardware, and fasteners and are stated at the lower of cost (first-in, first-out) and net realizable value and include direct labor, materials, and other related costs. The Company periodically reviews inventory for evidence of slow-moving or obsolete items, and writes inventory down to net realizable value, as needed.
11
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
This write-down is based on management's review of inventories on hand, compared to estimated future usage and sales, shelf-life assumptions, and assumptions about the likelihood of obsolescence. If actual market conditions are less favorable than those projected by the Company, additional write-downs may be required. Inventory impairment charges establish a new cost basis for inventory and charges are not reversed subsequently to income, even if circumstances later suggest that increased carrying amounts are recoverable.
j) Goodwill
Goodwill represents the excess of costs over fair value of net assets acquired from the Company's business combinations. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually in accordance with the FASB issued Accounting Standards Update ("ASU") No. 2017-04 Intangibles-Goodwill and Other (Topic 350). Because an assembled workforce cannot be sold or transferred separately from the other assets in the business, any value attributed to it is subsumed into goodwill. The Company evaluates the carrying value of goodwill annually and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to, (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator.
When evaluating whether the goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to its carrying amount, including goodwill. The Company identifies the reporting unit on a basis that is similar to its method for identifying operating segments as defined by the Segment Reporting Topic of the FASB ASC. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. This evaluation is applied annually on each impairment testing date (February 28) unless there is a triggering event present during an interim period.
k) Property and equipment
Property and equipment are carried at cost less accumulated depreciation and impairment, if any. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
| Asset | Life |
| Machinery and equipment |
|
| Computer equipment and software |
|
| Furniture and fixtures |
|
| Leasehold improvements |
|
l) Right-of-use asset
The Company's right-of-use assets consist of leased assets recognized in accordance with ASC 842, Leases which requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liability represents the Company's obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception are not recorded on the unaudited interim condensed consolidated balance sheets and are expensed on a straight-line basis over the lease term in the unaudited interim condensed consolidated statement of operations and comprehensive loss. The Company determines the lease term by agreement with lessor. In cases where the lease does not provide an implicit interest rate, the Company uses the Company's incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.
12
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
m) Intangible assets
Intangible assets consist of trademarks, intellectual property, customer base and non-competes (Note 4). Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives and are measured at cost less accumulated amortization and accumulated impairment losses per the table below:
| Intangible asset | Life |
| Tradename - Trademarks |
|
| Non-competes |
|
| Intellectual Property |
|
| Customer Base |
|
The intangible assets with finite useful lives are reviewed for impairment when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. The next assessment of useful lives will take place as at the fiscal year ending February 28, 2023.
n) Business Combination and Contingent consideration
A business combination is a transaction or other event in which control over one or more businesses is obtained. A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits. A business consists of inputs and processes applied to those inputs that have the ability to create outputs that provide a return to the Company and its shareholders. A business need not include all of the inputs and processes that were used by the acquiree to produce outputs if the business can be integrated with the inputs and processes of the Company to continue to produce outputs. The Company considers several factors to determine whether the set of activities and assets is a business.
Business acquisitions are accounted for using the acquisition method whereby acquired assets and liabilities are recorded at fair value as of the date of acquisition with the excess of the purchase consideration over such fair value being recorded as goodwill and allocated to reporting units. If the fair value of the net assets acquired exceeds the purchase consideration, the difference is recognized immediately as a gain in the unaudited interim condensed consolidated statements of operations and comprehensive loss. Acquisition related costs are expensed during the period in which they are incurred, except for the cost of debt or equity instruments issued in relation to the acquisition which is included in the carrying amount of the related instrument. Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they are adjusted retrospectively in subsequent periods. However, the measurement period will not exceed one year from the acquisition date.
The determination of the value of goodwill and intangible assets arising from business combinations requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired.
13
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
o) Stock-Based Compensation
The Company records stock-based compensation in accordance with FASB ASC Topic 718, Compensation-Stock Compensation. FASB ASC Topic 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the requisite service period. The Company recognizes in the unaudited interim condensed consolidated statements of operations and comprehensive loss the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.
p) Basic and Diluted Earnings Per Share
The Company has adopted the ASC 260-10 which provides for calculation of "basic" and "diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss available to stockholders by the weighted average number of common shares and Class A shares outstanding for the period. Except for voting rights, the Company's common stock and Class A shares have the same dividend rights, are equal in all respects, and are otherwise treated as if they were one class of shares, including the treatment for the earnings per share calculations. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. Diluted earnings per share exclude all potentially dilutive shares if their effect is anti-dilutive. There were no potentially dilutive shares outstanding as of August 31, 2022.
q) Foreign Currency Transactions and Comprehensive Income
U.S. GAAP generally requires recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The functional currency of the Company's subsidiaries is the US dollar. Translation gains (losses) are classified as an item of other comprehensive income in the stockholders' equity section of the unaudited interim condensed consolidated balance sheet.
r) Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes, which requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company has not changed it methodology for estimating the valuation allowance. A change in valuation allowance affect earnings in the period the adjustments are made and could be significant due to the large valuation allowance currently established.
Under ASC 740, a tax position is recognized as a benefit only if it is 'more likely than not' that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the 'more likely than not' test, no tax benefit is recorded. The Company has no material uncertain tax positions for any of the reporting periods presented.
14
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
s) Share purchase warrants
The Company accounts for the share purchase warrants issued to investor and brokers pursuant to equity financing as either equity-classified or liability-classified instruments based on an assessment of the specific terms of the warrants and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging. The assessment considers whether the Warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and meet all of the requirements for equity classification under ASC 815, including whether the Warrants are indexed to the Company's own shares and whether the holders of the warrants could potentially require "net cash settlement" in a circumstance outside of the Company's control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of issuance of the Warrants and as of each subsequent reporting period end date while the warrants are outstanding. For issued investor warrants and broker warrants that meet all of the criteria for equity classification, such warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued investor warrants and broker warrants that do not meet all the criteria for equity classification, liability-classified warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of such warrants are recognized as a non-cash gain or loss on the unaudited interim condensed consolidated statements of operations.
For the period ended August 31, 2022, the Company concluded based on the above mentioned that the issued investor warrants and broker warrants met the criteria for equity classification in accordance with ASC 815-40 and therefore were classified under equity. The fair value of those warrants is determined by using Black Scholes valuation model on the date of issuance. Relative fair value method is applied to allocate gross proceeds from equity financing into its shares and warrants portion respectively. Those costs directly contributable to equity financing are accounted for as a reduction under stockholders' equity.
t) Reclassification
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
u) Recently issued pronouncements
In October 2021 FASB, issued Accounting Standards Update (ASU) ASU No. 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an entity (acquirer) to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Topic 606. This update is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company is currently evaluating the impact the standard will have on the Company's unaudited interim condensed consolidated Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. This update is effective for annual periods beginning after January 1, 2023, as amended by ASU No. 2019-10, and interim periods within those periods, and early adoption is permitted. The Company is in the process of determining the impact the adoption will have on its unaudited interim condensed consolidated financial statements as well as whether to early adopt the new guidance.
15
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes which amends ASC 740 Income Taxes (ASC 740). This update is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and amending existing guidance to improve consistent application of ASC 740. This update is effective for fiscal years beginning after December 15, 2021. The guidance in this update has various elements, some of which are applied on a prospective basis and others on a retrospective basis with earlier application permitted. The adoption did not have a material impact on the Company's unaudited interim condensed consolidated financial statements and disclosures.
In May 2020, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815- 40): Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This update provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. This update is effective for fiscal years beginning after December 15, 2021. The adoption did not have a material impact on the Company's unaudited interim condensed consolidated financial statements and disclosures.
In August 2020, the FASB issued guidance that simplifies the accounting for debt with conversion options, revises the criteria for applying the derivative scope exception for contracts in an entity's own equity, and improves the consistency for the calculation of earnings per share. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2021. The adoption did not have a material impact on the Company's unaudited interim condensed consolidated financial statements and disclosures.
In March 2020, the FASB issued guidance providing optional expedients and exceptions to account for the effects of reference rate reform to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The optional guidance, which became effective on March 12, 2020, and can be applied through December 21, 2022, has not impacted the unaudited interim condensed consolidated financial statements. The Company has various contracts that reference LIBOR and is assessing how this standard may be applied to specific contract modifications through December 31, 2022.
Management does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying unaudited interim condensed consolidated financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.
4. Acquisitions
South Dakota Partners Inc. ("SDP") Purchase Price
The Company completed the purchase of all of the capital stock of South Dakota Partners Inc. (SDP), under the Purchase Agreement dated May 21, 2021. Under the Purchase Agreement, Salona acquired the manufacturer specializing in medical devices, full electronics box builds, printed circuit board assemblies, electrodes, drug delivery and many other products involving electronics, electro-mechanical assemblies, and various types of material conversion. The acquisition included all of the current customers, contract rights, inventory, equipment, workforce, and manufacturing infrastructure. At the time of the transaction, there were no material relationships between the seller and Salona or any of its affiliates, or any director or officer of Salona, or any associate of any such officer or director. As consideration, the Company will issue
16
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
In accordance with ASC 805 "Business Combinations" the measurement period for the acquisition is for one year during which the Company may re-evaluate the assets acquired, liabilities assumed and the goodwill resulting from the transaction as well as the change in amortization as a result of changes in the provisional amounts as if the accounting had been completed at the acquisition date.
The allocation of the purchase price to the assets acquired and liabilities assumed based on an estimate of fair values at the date of acquisition is as follows:
| Cash | $ | ||
| Security deposit | |||
| Accounts receivable | |||
| Inventories | |||
| Prepaid expenses | |||
| Property and equipment | |||
| Right-of-use assets | |||
| Intangible assets | |||
| Goodwill | |||
| Accounts payable | ( |
) | |
| Accrued expenses | ( |
) | |
| Customer deposits | ( |
) | |
| Line of credit | ( |
) | |
| Debt | ( |
) | |
| Lease liability | ( |
) | |
| Deferred tax liability | ( |
) | |
| Other liabilities | ( |
) | |
| Total adjusted purchase price | |||
| Goodwill | $ | ||
| Tradename - Trademarks | |||
| Intellectual Property | |||
| Customer Base | |||
| Non-Competes | |||
| Total identifiable intangible assets including goodwill | $ |
The table below summarizes the value of the total consideration given in the transaction:
| Stock (Parent Special Stock) | |||
| Floor Guarantee/Contingent Liability | |||
| Earn-out /Contingent Consideration (Revenue) | ( |
) | |
| Earn-out /Contingent Consideration (Net Assets) | ( |
) | |
| Total Consideration | $ |
17
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
As of May 31, 2022, SDP has concluded its earn-out period and has met both the revenue and adjusted net asset threshold requirements to receive its full
Assets Acquired from ALG-Health, LLC:
On November 29, 2021, the Company consummated the acquisition of the customer lists, sales orders and supply agreements and related sales channel and intellectual property assets of ALG-Health, LLC ("ALG"), a business engaged in the selling medical devices and supplies to small, independent hospitals, group purchasing organizations, medical offices and clinics, in exchange for non-voting securities of Health Plus which are exchangeable for up to a maximum of
The table below summarizes the estimated value of the total consideration to be paid to ALG as of August 31, 2022:
| Value of Earn-out / Contingent Consideration | $ | ||
| Total Consideration | $ |
The contingent consideration liability represents potential future earnout payments to the Company that are contingent on Health Plus’s and ALG’s business arrangement achieving certain milestones. The fair value of the contingent consideration liability on November 29, 2021 and February 28, 2022, was estimated to be nil and as such, no contingent liability was recorded on the date of the agreement was executed. As of August 31, 2022, as a result of new arrangements, the fair value of the contingent consideration liability is estimated to be $
Simbex, LLC ("Simbex") Purchase Price:
The Company completed the purchase of all the capital stock of Simbex, LLC (Simbex), under the Purchase Agreement dated September 30, 2021. Under the Purchase Agreement, Salona acquired the company which provides mechanical and electrical design and engineering services as well as consultancy services in the field of biomechanical systems and medical devices. The acquisition includes all its current customers, contract rights, work-in-process, equipment, workforce, as well as its consulting, design, and engineering infrastructure. At the time of the transaction, there were no material relationships between the seller and Salona or any of its affiliates, or any director or officer of Salona, or any associate of any such officer or director. As consideration, the Company provided $
In accordance with ASC 805 "Business Combinations" the measurement period for the acquisition is for one year during which the Company may re-evaluate the assets acquired, liabilities assumed and the goodwill resulting from the transaction as well as the change in amortization as a result of changes in the provisional amounts as if the accounting had been completed at the acquisition date.
18
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
The allocation of the purchase price to the assets acquired and liabilities assumed based on an estimate of fair values at the date of acquisition as follows:
| Cash | $ | ||
| Accounts Receivable | |||
| Work-in-process | |||
| Prepaid expenses | |||
| Property and equipment | |||
| Other receivables | |||
| Intangible Assets | |||
| Goodwill | |||
| Accounts payable and accrued liabilities | ( |
) | |
| Accrued expenses | ( |
) | |
| Unearned revenue | ( |
) | |
| Deferred tax liability | ( |
) | |
| Total adjusted purchase price | $ |
The amount allocated to identifiable intangible assets was determined by the Company's management. Other intangible assets are being amortized over their useful life in accordance with the guidance contained in the FASB issued ASC Topic 350 "Goodwill and Other Intangible Assets". As of August 31, 2022, Management estimates that the amount of goodwill that will be deductible for income tax purposes for the year ending February 28, 2023, is $
| Goodwill | $ | ||
| Tradename - Trademarks | |||
| Customer Base | |||
| Non-Competes | |||
| Total identifiable intangible assets including goodwill | $ |
The table below summarizes the value of the total consideration given in the transaction:
| Cash | $ | ||
| Working Capital Adjustment | |||
| Value of Escrowed Stock | |||
| Value of Earnout / Contingent Consideration | |||
| Total Consideration | $ |
The Working Capital Adjustment comprises:
● the closing cash payment;
● the closing escrowed stock valued at US$100,000, valued at the 30-day Volume Weighted Average Price ("VWAP") determined as of the closing date;
● pro-rata bonuses to be paid to employees for 2021; and
● ordinary course bonuses for 2022.
The contingent consideration liability represents potential future earnout payments to the Company that are contingent on Simbex's business achieving certain milestones. The fair value of the contingent consideration liability of $
19
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
On February 28, 2022, the Company updated its assessment of the fair value of goodwill from the Simbex LLC acquisition, in conjunction with the Company's third-party valuation experts based on updated year to date results of the acquired entity, intangible assets, and other factors resulting in an impairment to goodwill of $
Mio-Guard LLC ("Mio-Guard")
On March 11, 2022, the Company acquired
In accordance with ASC 805 "Business Combinations" the measurement period for the acquisition is for one year during which the Company may re-evaluate the assets acquired, liabilities assumed and the goodwill resulting from the transaction as well as the change in amortization as a result of changes in the provisional amounts as if the accounting had been completed at the acquisition date.
The table below summarizes the value of the total consideration given in the transaction:
| At closing ( |
$ | ||
| Quarterly Earnout payments (Maximum of |
|||
| Total Consideration | $ |
The business combination accounting is not yet complete, and the amounts assigned to assets acquired and liabilities assumed are provisional. Therefore, this may result in future adjustments to the provisional amounts as information is obtained about facts and circumstances that existed at the acquisition date. A summary of the preliminary purchase price allocation at fair value is below.
| Cash | $ | ||
| Accounts receivable | |||
| Inventory | |||
| Property and equipment | |||
| Intangible assets and goodwill | |||
| Accounts payable | ( |
) | |
| Due to related parties | ( |
) | |
| Deferred tax liability | ( |
) | |
| Total adjusted purchase price | $ |
20
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
The amount allocated to identifiable intangible assets was determined by the Company's management. Other intangible assets are being amortized over their useful life in accordance with the guidance contained in the FASB issued ASC Topic 350 "Goodwill and Other Intangible Assets".
| Goodwill (including workforce) | $ | ||
| Tradename | |||
| Customer Relationships | |||
| Non-Competes | |||
| Other intangible assets | |||
| Total identifiable intangible assets including goodwill | $ |
The contingent consideration liability represents potential future earnout payments to the Company that are contingent on Mio-Guard's business achieving certain milestones. The fair value of the contingent consideration liability of $
Since acquisition, Mio-Guard has generated $
5. Accounts receivable
| August 31, 2022 | February 28, 2022 | |||||
| Trade accounts receivable | $ | $ | ||||
| Allowance for doubtful accounts | ( |
) | ( |
) | ||
| Other receivables | ||||||
| Total accounts receivable | $ | $ |
Other receivables consist of reimbursable costs from multiple customers of the Company and taxes receivable.
During the quarter ended, August 31, 2022, SDP had four customers accounting for
During the quarter ended August 31, 2022, Simbex had two customers accounting for
21
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
6. Disaggregation of Revenues
During the three and six months ended August 31, 2022, $
7. Inventories
The Company tracks inventory for manufactured goods as it progresses through the production process. The Company allocates inventory into four major buckets: Raw material, work in progress, trading goods, and finished goods. Purchased finished goods are classified as finished goods.
| August 31, 2022 | February 28, 2022 | |||||
| Raw materials | $ | $ | ||||
| Work in progress | ||||||
| Finished goods | ||||||
| Trading goods | ||||||
| Total | $ | $ |
22
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
8. Property and equipment
| Cost |
February |
Acquired |
Total | Additions | Disposal | Translation |
August 31, |
||||||||||||||
| Machinery and equipment | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Computer equipment and software | |||||||||||||||||||||
| Furniture and fixtures | |||||||||||||||||||||
| Leasehold improvements | |||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ |
| Accumulated Depreciation |
February |
Acquired |
Total | Additions | Disposal | Translation |
August 31, |
||||||||||||||
| Machinery and equipment | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Computer equipment and software | |||||||||||||||||||||
| Furniture and fixtures | |||||||||||||||||||||
| Leasehold improvements | |||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Net Book Value | $ | $ |
9. Intangible assets
| Cost |
February |
Acquired |
Total | Additions | Disposal |
August 31, |
||||||||||||
| Tradename-Trademarks | $ | $ | $ | $ | $ | $ | ||||||||||||
| Intellectual Property | ||||||||||||||||||
| Customer Base | ||||||||||||||||||
| Non-Competes | ||||||||||||||||||
| Other Intangible Assets | ||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ |
| Accumulated depreciation |
February |
Acquired |
Total | Additions | Disposal |
August 31, |
||||||||||||
| Tradename-Trademarks | $ | $ | $ | $ | $ | $ | ||||||||||||
| Intellectual Property | ||||||||||||||||||
| Customer Base | ||||||||||||||||||
| Non-Competes | ||||||||||||||||||
| Other Intangible Assets | ||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||
| Net Book Value | $ | $ |
23
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
10. Accounts payable and accrued liabilities
| August 31, 2022 |
February 28, 2022 |
|||||
| Accounts payable | $ | $ | ||||
| Accrued liabilities | ||||||
| Other liabilities | ||||||
| Total | $ | $ |
Other liabilities include unearned customer deposits and unearned revenues totaling $
11. Line of credit and debt
The line of credit facility is with a financial institution whereby the Company, through SDP, may borrow up to US$
In accordance with the refinanced agreement, the Company is subject to a financial covenant.
Debt
| Crestmark term loan |
|||
| Balance, February 28, 2022 | $ | ||
| Additions | |||
| Forgiveness of loan | |||
| Principal repayments | ( |
) | |
| Translation | |||
| Balance, August 31, 2022 | |||
| Less: current portion | ( |
) | |
| Long-term portion | $ |
24
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
As of August 31, 2022, the Company's total debt is $
Term Note
On June 9, 2021, the Company borrowed $
12. Leases
Set out below are the carrying amount of right of use assets and the movements during the quarter ended August 31, 2022:
| Right-of-use assets | |||
| Balance, February 28, 2022 | $ | ||
| Acquired | |||
| Amortization | ( |
) | |
| Translation | |||
| Balance, August 31, 2022 | $ |
| Lease liability | Current | Long-term | |||||||
| Balance, February 28, 2022 | $ | $ | $ | ||||||
| Acquired | |||||||||
| Interest lease expense | |||||||||
| Lease payments | ( |
) | |||||||
| Translation | |||||||||
| Balance, August 31, 2022 | $ | $ | $ |
Future minimum lease payments payable are as follows:
| Twelve months ending August 31, 2023 | $ | ||
| Twelve months ending August 31, 2024 | |||
| Twelve months ending August 31, 2025 | |||
| Twelve months ending August 31, 2026 | |||
| Twelve months ending August 31, 2027 | |||
| 2028 and thereafter | |||
| Total future minimum lease payments | |||
| Less: Interest on lease liabilities | ( |
) | |
| Total present value of minimum lease payments | |||
| Less: current portion | |||
| Non-current portion | $ |
25
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
On August 31, 2022, the weighted average remaining lease terms were
In October 2018, SDP sold its facility in Clear Lake, South Dakota for $
On October 1, 2021, Simbex LLC entered into a lease agreement for an office space located in Lebanon, NH with an initial lease term of 3 years for a base annual rent of $
On April 1, 2022, Inspira Financial Company entered into a lease agreement for an office space located in Encino, CA with a lease term of 6 months for a base annual rent of $
On September 21, 2022, Inspira Financial Company entered into a lease agreement for its corporate headquarters and distribution center located in Carlsbad, CA for a base annual rent of $
On January 1, 2022, Mio-Guard LLC entered into a lease agreement for an office space located in Holt, MI with an initial lease term of
13. Stockholders' Equity
a. Share capital
26
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
Unlimited voting common shares without par value
Unlimited non-voting convertible Class A shares without par value
Issuances
As of August 31, 2022, and February 28, 2022, the Company had
As of August 31, 2022, and February 28, 2022, the Company had
On May 4, 2022,
On May 25, 2022,
On May 31, 2022,
On July 22, 2022, the Company entered into a share for debt agreement, pursuant to which it issued an aggregate of
Shares to be issued
In connection with the closing of the February 15, 2022 Private Offering, the Company entered into a Registration Rights Agreement with the purchasers and the Underwriters (the “Registration Rights Agreement”) providing for the filing of a registration statement (the “Registration Statement”) with the Securities and Exchange Commission registering the resale of the common shares issued and issuable in connection with the Private Offering (collectively, the “Securities”). Under the Registration Rights Agreement, the Company was obligated to file the Registration Statement no later than April 1, 2022, and to use commercially reasonable efforts to cause the Registration Statement to be declared effective no later than 180 days after February 15, 2022. As a result of the Company’s delay in filing and causing the Registration Statement to become effective timely, the liquidated damages to the purchasers and the Underwriters was an aggregate amount of
On May 31, 2022, SDP has concluded its earn-out period and achieved its milestones allowing SDP to receive its full earn-out compensation of
As of August 31, 2022,
27
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
b. Share based compensation
The Company's Board of Directors determines, among other things, the eligibility of individuals to participate in the Option Plan and the term, vesting periods, and the exercise price of options granted under the Option Plan. The stock option vesting ranges over a 1 year to 10-year period. The outstanding stock options on August 31, 2022 are as follows:
| Grant date | Exercise price |
Number of options |
Number of vested options |
Weighted Avg Remaining Life (years) |
||||||||||||
| March 28, 2014 | $ |
|
||||||||||||||
| September 23, 2019 |
|
|||||||||||||||
| May 29, 2020 |
|
|||||||||||||||
| August 18, 2020 |
|
|||||||||||||||
| June 8, 2021 |
|
|||||||||||||||
| June 8, 2021 |
|
|||||||||||||||
| June 8, 2021 |
|
|||||||||||||||
| July 7, 2021 |
|
|||||||||||||||
| December 6, 2021 |
|
|||||||||||||||
| January 19, 2022 |
|
|||||||||||||||
| March 9, 2022 |
|
|||||||||||||||
| April 13, 2022 |
|
|||||||||||||||
| April 26, 2022 |
|
|||||||||||||||
| July 18, 2022 |
|
|||||||||||||||
| August 29, 2022 |
|
|||||||||||||||
| Total | $ |
|
||||||||||||||
|
A summary of the Company's options are as follows: |
Number of Options |
Weighted Avg. Exercise Price |
||||
| Balance as at February 28, 2021 | $ | |||||
| Options exercised | ( |
) | ||||
| Options expired and forfeited | ( |
) | ||||
| Options issued | ||||||
| Balance as at February 28, 2022 | $ | |||||
| Options exercised | ( |
) | ||||
| Options exercised and forfeited | ||||||
| Options issued | ||||||
| Balance as at August 31, 2022 | $ |
The Company recognized $
On March 9, 2022, the Company issued
28
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
On April 13, 2022, the Company issued
On April 26, 2022, the Company issued
On July 18, 2022, the Company issued
On August 29, 2022, the Company issued
c. Warrants
The outstanding warrants on August 31, 2022, are as follows:
| Grant date | Exercise price |
Number of warrants |
Number of vested warrants |
Weighted Avg Remaining Life (years) |
||||||||
| May 21, 2021 |
|
|||||||||||
| May 21, 2021 |
|
|||||||||||
| May 21, 2021 |
|
|||||||||||
| November 11, 2021 |
|
|||||||||||
| February 15, 2022 |
|
|||||||||||
| February 15, 2022 |
|
|||||||||||
| Total | $ |
|
A summary of the Company's warrants are as follows:
| Number of Warrants |
Weighted Avg. Exercise Price |
|||||
| Balance as at February 28, 2021 | $ | |||||
| Warrants issued as part of finance deal | ||||||
| Broker warrants issued as part of finance deal | ||||||
| Balance as at February 28, 2022 | $ | |||||
| Warrants issued as part of finance deal | ||||||
| Broker warrants issued as part of finance deal | ||||||
| Broker warrants exercised | ( |
) | ||||
| Balance as at August 31, 2022 | $ |
During the three and six months ended August 31, 2022, no additional warrants were issued (February 28, 2022 -
On May 4, 2022,
29
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
14. Related party transactions
The Company's transactions with related parties were carried out on normal commercial terms and in the ordinary course of the Company's business. Other than disclosed elsewhere in the Company's unaudited interim condensed consolidated financial statements, related party transactions are as follows.
| For the six months ended | ||||||
| August 31, 2022 | August 31, 2021 | |||||
| Salaries and short-term benefits | $ | $ | ||||
| Stock based compensation | ||||||
| Total | $ | $ | ||||
Salary, allowance and other include salary, consulting fees, car allowance, vacation pay, bonus and other allowances paid or payable to a shareholder, directors, and executive officers of the Company. Stock based compensation are to the directors and executive officers of the Company (Note 13).
15. Capital management
The Company's objectives when managing capital are to: (a) maintain financial flexibility in order to preserve its ability to meet financial obligations and continue as a going concern; (b) maintain a capital structure that allows the Company to finance its growth using internally generated cash flow and debt capacity; and (c) optimize the use of its capital to provide an appropriate investment return to its shareholders commensurate with risk.
The Company's financial strategy is formulated and adapted according to market conditions in order to maintain a flexible capital structure that is consistent with its objectives and the risk characteristics of its underlying assets.
The Company manages its capital structure and may make adjustments to it in light of changes in economic conditions and the risk characteristics of its underlying assets. To maintain or adjust its capital structure, the Company may, from time to time, change the amount of dividend paid to shareholders, return capital to shareholders by way of normal course issuer bid, issue new shares, or reduce liquid assets to repay other debt.
16. Net loss per share
| Three months ended | Six months ended | |||||||||||
| |
August 31, 2022 |
August 31, 2021 |
August 31, 2022 |
August 31, 2021 |
||||||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
| Weighted average number of Common and Class A shares | ||||||||||||
| Net loss per share from operations | ||||||||||||
| Basic | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Diluted | ( |
) | ( |
) | ( |
) | ( |
) |
17. Operating expenses
General and administrative expenses include stock-based compensation of $
30
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
The Company incurred costs associated with the Change of Business transaction, due diligence of acquisition targets, financing costs, US regulatory costs and the associated accounting and regulatory costs. While these costs are crucial to future operations, they do not represent regular operational costs of the business. The Company presents these costs separately to better allow investors to evaluate the operational status of the Company independently of financing, regulatory and other transaction focused expenses, which were as follows:
| Three months ended | Six months ended | |||||||||||
| August 31, 2022 |
August 31, 2021 |
August 31, 2022 |
August 31, 2021 |
|||||||||
| Consulting and professional fees | $ | $ | $ | $ | ||||||||
| General expenses | ||||||||||||
| Transaction costs | $ | $ | $ | $ |
19. Cash and cash equivalents
Cash represents bank deposits at financial institutions with high credit rating. Cash equivalents represent short-term, highly liquid investments, which are readily convertible to cash and have maturities of 90 days or less at time of purchase. Cash equivalents, which are carried at fair value and amortized cost, and consist of holdings in a money market fund and in treasury bills. As of August 31, 2022, there are no cash equivalents presented on the unaudited interim condensed consolidated balance sheet (February 28, 2022- $nil).
31
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Interim Condensed Consolidated Financial Statements For the three and six months ended August 31, 2022, and 2021 (In Canadian Dollars, unless otherwise stated) |
21. Subsequent Events
DaMar Plastics Acquisition:
On September 23, 2022, the Company successfully closed its acquisition of DaMar Plastics Inc. ("DaMar Plastics"), a company focused on designing, producing and selling specialty plastics in several markets including the medical device market.
With over 50 years in business, DaMar currently serves the medical and consumer industries with precision plastic molding technology. The acquisition builds upon the Company's strategy to create a fully integrated global medical device company and adds precision plastics technology capabilities to the Company.
Under the terms of the Purchase Agreement, the Company acquired DaMar through an indirect wholly owned subsidiary of the Company (“Salona Global Buyer”) in exchange for US$
Pursuant to a Contribution and Exchange Agreement, the sellers will be entitled to exchange common shares of the Salona Global Buyer for Class “A” non-voting common shares of SGMD on a one-for-one basis.
As used in this Quarterly Report on Form 10-Q, the terms "the Company," "us," "our," the "Company" and "Salona" mean Salona Global Medical Device Corporation (a corporation incorporated under the laws of the Province of British Columbia formerly known as Brattle Street Investment Corp.) and its subsidiaries (unless the context indicates a different meaning).
Cautionary Note Regarding Forward-Looking Statements
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes. This quarterly report, including, without limitation, statements under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). These forward-looking statements can be identified by the use of forward-looking terminology, including the words "believes," "estimates," "anticipates," "expects," "intends," "plans," "may," "will," "potential," "projects," "predicts," "continue," or "should," or, in each case, their negative or other variations or comparable terminology. There can be no assurance that actual results will not materially differ from expectations. Such statements include, but are not limited to, economic and competitive conditions, the effects of the COVID 19 pandemic, regulatory changes and other uncertainties, the general expansion of its business, and other statements which are not statements of current or historical facts.
The forward-looking statements contained in this quarterly report are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. Future developments affecting us may not be those that the Company have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond its control) and other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading "Risk Factors" in this Report as well as in the Company’s Annual Report on Form 10-K for the year ended February 28, 2022 and Quarterly Report on Form 10-Q for the quarterly period ended May 31, 2022, all of which are difficult to predict. Should one or more of these risks or uncertainties materialize or should any of these assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. These risks and others described under "Risk Factors" may not be exhaustive.
32
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. The Company cautions you that forward-looking statements are not guarantees of future performance and that its actual results of operations, financial condition and liquidity, and developments in the industry in which it operates may differ materially from those made in or suggested by the forward-looking statements contained in this Report. In addition, even if the Company's results or operations, financial condition and liquidity, and developments in the industry in which it operates are consistent with the forward-looking statements contained in this Report, those results or developments may not be indicative of results or developments in subsequent periods.
Non-GAAP Measures
Throughout this management discussion and analysis, management uses a number of financial measures to assess its performance, and these are intended to provide additional information to investors concerning the Company. Some of these measures, including net profit (loss) from operations and Adjusted EBITDA (i) are not calculated in accordance with Generally Accepted Accounting Principles (GAAP), which are based on the United States Generally Accepted Accounting Principles (U.S. GAAP), (ii) are not defined by GAAP, and (iii) do not have standardized meanings that would ensure consistency and comparability between companies using these measures. Readers are cautioned that the disclosure of these items is meant to add to, and not replace, the discussion of financial results as determined in accordance with U.S. GAAP. The Company's presentation of this financial measure may not be comparable to similarly titled measures used by other companies The primary purpose of these non-GAAP measures is to provide supplemental information that may prove useful to investors who wish to consider the impact of certain non-cash or uncontrollable items on its operating performance and who wish to separate revenues and related costs associated with client acquisition that may not be ongoing.
Financial information presented in this Report is presented in Canadian dollars, unless otherwise indicated. Unless otherwise indicated, all references to years are to the Company's fiscal year ended on the last calendar day of February.
Acquisition Pipeline
On March 11, 2021, the Company completed a Change of Business, as defined by the TSX Venture Exchange, to become an acquisition-oriented medical device company with plans to achieve scale through further acquisitions and organic growth. The Company presently intends to operate in the recovery science market, including post-operative pain, wound care and other markets serving the aging population in the United States.
On May 21, 2021, the Company acquired South Dakota Partners Inc. ("SDP"). SDP operates a large state-of-the-art production facility located in the State of South Dakota currently producing proprietary and white label medical devices for pain management, cold and hot therapy, NMES, PEMF and ultrasound. Information relating to SDP contained in this Report covers the entire three and six months ending August 31, 2022.
On September 30, 2021, the Company acquired Simbex, LLC ("Simbex"), an IP-based business that has a portfolio of several revenue and royalty generating products ranging from wearable technology to products for physical stability as well as expertise in development and design of many medical devices on the market it has innovated over the past several years. Simbex generated over $8,000,000 in audited revenues in 2020 with reported gross margins of 50% and was cash flow positive. Information relating to Simbex contained in this Report covers the entire three- and six-months ending August 31, 2022.
33
On November 29, 2021, the Company acquired the customer lists, sales orders and supply agreements, and related sales channel and intellectual property assets of ALG-Health, LLC ("ALG"), a business engaged in the selling medical devices and supplies to small, independent hospitals, group purchasing organizations, medical offices and clinics, in exchange for nonvoting securities of ALG Health Plus which are exchangeable for up to a maximum of 21,000,000 nonvoting Class A shares of the Company subject to the achievement of certain revenue and EBITDA targets. In connection with the transaction, its subsidiary ALG Health Plus entered into an exclusive supply agreement with ALG.
On March 11, 2022, the Company acquired Mio-Guard, LLC, ("Mio-Guard") a business engaged in medical device sales and marketing serving the Midwest United States. Mio-Guard and its predecessors had 2021 unaudited annual revenues of approximately $4.5M (US $3.6M) with 25% gross margins. Since 2009, Mio-Guard has sold into the athletic training, physical therapy and orthopedics markets for sports medicine products. Mio-Guard has over fifty sales representatives in the United States with a focus on the Midwest, South and Central United States and long-standing relationships with institutions ranging from high school to college to professional athletics.
On September 23, 2022, the Company acquired DaMar Plastics Manufacturing Inc. ("DaMar"), a business engaged in designing, producing and selling specialty plastics in several markets including the medical device market. With over 50 years in business, DaMar currently provides the medical and consumer industries with precision plastic molding technology. The acquisition builds upon the Company's strategy to create a fully integrated global medical device company and adds precision plastics technology capabilities to the Company. The addition of DaMar Plastics to Salona Global is projected to add $6.6 million of revenue annually with gross profit margins of approximately 45%.
Additionally, the Company's management team has a pipeline of small, privately held, stand-alone and bolt-on medical device companies targeted for acquisition in the highly fragmented global market for injury, surgical prevention, rehabilitation and recovery for the aging population throughout the continuum of care, which fall into one of three primary categories:
• Private smaller medical device companies struggling with sufficient capitalization and operational expertise to fully realize the value of their intellectual property;
• Niche players that succeed in developing a handful of quality products often turn to larger listed companies that do not allow ownership to participate in the upside of including their device in a larger company; and
• Smaller U.S.-listed companies that lack liquidity and coverage to offer sufficient upside to vendors.
The Company believes it is the well positioned to offer acquisition targets upside through stock/cash acquisitions with a liquid TSXV listing.
The Company intends to acquire any identified medical device targets using a structure similar to its prior acquisitions. It is intended that potential targets would primarily or solely receive Company equity as consideration for the potential acquisition rather than cash, which would reduce its requirement for additional capital. Additionally, to date, discussions are most advanced with targets that are operationally cash flow positive, which may enhance the Company's ability to borrow for additional capital needs.
Selected Financial Information
The Company uses Adjusted EBITDA, as calculated below, to assess the financial health of its acquisitions and determine the overall potential of its business not including transaction costs and other activities associated with the ongoing growth strategy of the Company. Adjusted EBITDA is calculated as net loss less interest, taxes, depreciation, amortization, stock-based compensation, foreign exchange gain, change in fair value of contingent consideration, and transaction costs.
34
Revenues
| Three months ended | 2022 vs 2021 | Six months ended | 2022 vs. 2021 | |||||||||||||||||||||
| August 31, 2022 |
August 31, 2021 |
$ Change | % Change |
August 31, 2022 |
August 31, 2021 |
$ Change | % Change | |||||||||||||||||
| Revenue | $ | 10,044,239 | $ | 3,973,773 | $ | 6,070,466 | 153% | $ | 20,092,787 | $ | 4,564,213 | $ | 15,528,574 | 340% | ||||||||||
| Gross Margin | 3,028,513 | 1,204,171 | 1,824,342 | 152% | 6,670,778 | 1,411,146 | 5,259,632 | 373% | ||||||||||||||||
| Adjusted EBITDA | $ |
68,733 |
$ | 546,541 | $ | (477,808 | ) | (87%) | $ |
1,427,404 |
$ | 274,821 | $ |
1,152,583 |
419% | |||||||||
Adjusted EBITDA
Adjusted EBITDA is calculated as follows:
| Three months ended | Six months ended | |||||||||||
| August 31, 2022 |
August 31, 2021 |
August 31, 2022 |
August 31, 2021 |
|||||||||
| Adjusted EBITDA | $ |
68,733 |
$ | 546,541 | $ |
1,427,404 |
$ | 274,821 | ||||
| Less: Stock Based Compensation | (378,683 | ) | (446,213 | ) | (867,772 | ) | (465,300 | ) | ||||
| Amortization of intangible asset | (251,517 | ) | (70,609 | ) | (484,852 | ) | (78,788 | ) | ||||
| Depreciation of property and equipment | (73,909 | ) | (61,096 | ) | (144,854 | ) | (65,956 | ) | ||||
| Amortization of right-of-use asset | (113,843 | ) | (35,266 | ) | (222,218 | ) | (38,883 | ) | ||||
| Interest Expense | (150,227 | ) | (136,840 | ) | (282,076 | ) | (144,084 | ) | ||||
| Foreign exchange (loss) gain | (12 | ) | 7,291 | 232 | 10,537 | |||||||
| Change in fair value of SDP earn-out consideration | - | - | (2,451,600 | ) | - | |||||||
| Change in fair value of contingent consideration | (8,053,337 | ) | - | (8,513,030 | ) | - | ||||||
| Gain on share for debt settlement | - | - | - | 15,538 | ||||||||
| Transaction costs including legal, financial, audit and US & Canadian regulatory expenses | (709,460 | ) | (886,793 | ) | (1,348,683 | ) | (1,225,468 | ) | ||||
| Current income tax expense | (30,032 | ) | (1,988 | ) | (30,032 | ) | (1,988 | ) | ||||
| Deferred income tax recovery | 60,203 | - | 119,183 | - | ||||||||
| Net Loss | $ | (9,632,084 | ) | $ | (1,084,973 | ) | ($12,798,298 | ) | $ | (1,719,571 | ) | |
35
RESULTS OF OPERATIONS`
Revenues
| Three months ended | 2022 vs 2021 | Six months ended | 2022 vs. 2021 | |||||||||||||||||||||
| August 31, 2022 |
August 31, 2021 |
$ Change | % Change |
August 31, 2022 |
August 31, 2021 |
$ Change | % Change | |||||||||||||||||
| Revenue | $ | 10,044,239 | $ | 3,973,773 | $ | 6,070,466 | 153% | $ | 20,092,787 | $ | 4,564,213 | $ | 15,528,574 | 340% | ||||||||||
Since the acquisition of SDP on May 21, 2021, Simbex on September 30, 2021, Mio-Guard on March 11, 2022, and the sales channel assets of ALG on November 28, 2021, the Company has continued generating sales revenue in line with each of their pre-COVID revenue figures and each continue to grow. From March 1, 2022, through August 31, 2022, the Company generated sales of $20,092,787.
| Three months ended | 2022 vs 2021 | Six months ended | 2022 vs. 2021 |
||||||||||||||||||||||
| August 31, 2022 |
August 31, 2021 |
$ Change | % Change |
August 31, 2022 |
August 31, 2021 |
$ Change | % Change | ||||||||||||||||||
| Cost of Revenue | |||||||||||||||||||||||||
| Direct service personnel | $ | 1,478,335 | $ | 232,269 | $ | 1,246,066 | 536% | $ | 2,992,174 | $ | 277,183 | $ | 2,714,991 | 979% | |||||||||||
| Direct material costs | 5,240,254 | 2,537,333 | 2,702,921 | 107% | 9,876,335 | 2,875,884 | 7,000,451 | 243% | |||||||||||||||||
| Other direct costs | 297,137 | - | 297,137 | 100% | 553,500 | - | 553,500 | 100% | |||||||||||||||||
Cost of revenue includes the Company's labor costs expended in the production of medical devices, and related expenses allocated directly to the production of medical devices, and its cost of actual materials used in the production process from March 1, 2022, through August 31, 2022. Cost of revenue also includes the purchase of trading goods and costs associated with contract service revenue. The ongoing issues with the global supply chain process caused by COVID-19 and other economic factors has impacted the Company's ability to source affordable components. While there can be no assurances, management believes that the negative impacts on the Company's sourcing of components ,will diminish as the global supply chain stabilizes.
Amortization, Depreciation, Interest, Transaction Costs and Foreign Exchange Gain Change in fair value of earn-out and contingent consideration
| Three months ended | 2022 vs 2021 | Six months ended | 2022 vs. 2021 | |||||||||||||||||||||
| August 31, 2022 |
August 31, 2021 |
$ Change | % Change |
August 31, 2022 |
August 31, 2021 |
$ Change | % Change |
|||||||||||||||||
| Amortization of intangible assets | $ | (251,517 | ) | $ | (70,609 | ) | $ | (180,908 | ) | 256% | $ | (484,852 | ) | $ | (78,788 | ) | $ | (406,064 | ) | 515% | ||||
| Depreciation of property and equipment | (73,909 | ) | (61,096 | ) | (12,813 | ) | 21% | (144,854 | ) | (65,956 | ) | (78,898 | ) | 120% | ||||||||||
| Amortization of right-of-use assets | (113,843 | ) | (35,266 | ) | (78,577 | ) | 223% | (222,218 | ) | (38,883 | ) | (183,335 | ) | 472% | ||||||||||
| Interest expense | (150,227 | ) | (136,840 | ) | (13,387 | ) | 10% | (282,076 | ) | (144,084 | ) | (137,992 | ) | 96% | ||||||||||
| Foreign exchange (loss) gain | (12 | ) | 7,291 | (7,303 | ) | (100%) | 232 | 10,537 | (10,305 | ) | (98%) | |||||||||||||
| Transaction costs including legal, financial, audit, US & Canadian Regulatory |
(709,460 | ) | (886,793 | ) | 177,333 | (20%) | (1,348,683 | ) | (1,225,468 | ) |
(123,215 |
) | 10% | |||||||||||
| Change in fair value of earn-out consideration | - | - | - | -% | (2,451,600 | ) | - | (2,451,600 | ) | 100% | ||||||||||||||
| Change in fair value of contingent consideration | (8,053,337 | ) | - | (8,053,337 | ) | 100% | (8,513,030 | ) | - | (8,513,030 | ) | 100% | ||||||||||||
36
Amortization of intangible assets reflects the amortization of intangible assets such as trademarks, non-compete agreement, intellectual property, and customer base. The Company depreciates property and equipment across their useful lives. While there can be no assurances, the Company expects depreciation of property and equipment and of right of use asset and interest expense to increase as the Company continues to grow its balance sheet through acquisitions.
The change in fair value of earnout consideration represents the increase in fair value of SDP’s 19,162,000 earnout shares on May 31, 2022, the date of issuance. The change in fair value of the contingent consideration represents the obligations resulting from the Simbex, Health Plus and Mio-Guard acquisitions. The company assesses its potential obligations related to these commitments during the quarter and fair values them accordingly.
Transaction costs include legal, financial, audit, US and Canadian regulatory expenses and other fees incurred in connection with the Change of Business transaction, the SDP, Simbex, Mio-Guard, and ALG acquisitions, due diligence of acquisition targets, financing costs, US regulatory costs, and associated accounting and other costs. While these costs are necessary to the change of its line of business, they are not operational expenses of the business.
| Three months ended | 2022 vs 2021 | Six months ended | 2022 vs. 2021 | |||||||||||||||||||||
| August 31, 2022 |
August 31, 2021 |
$ Change | % Change |
August 31, 2022 |
August 31, 2021 |
$ Change | % Change | |||||||||||||||||
| Foreign currency translation gain | $ | 419,339 | $ | 328,126 | $ | 91,213 | 28% | $ | 41,952 | $ | 16,001 | $ | 25,951 | 162% | ||||||||||
Since the Company operates in the United States, it is exposed to foreign currency risk. Management is unable to effectively predict swings in the foreign exchange value of the U.S. Dollar against the Canadian Dollar. When currency is moved between denominations, a gain or loss may be realized which management is unable to accurately predict.
Liquidity and Capital Resources
The Company funds its operations through cash from operations and asset-based loans secured by subsidiary inventory and accounts receivable from third parties. In February 2022, the Company completed a private placement of 7,749,000 units (the “Units”) at $0.55 per Unit (consisting of one common share and one warrant to purchase one common share) for gross proceeds of approximately $4.26 million. As of August 31, 2022, the Company had $6,938,101 of cash and cash equivalents, which was a decrease of $1,118,999 from the balance as of February 28, 2022. During the six months ended August 31, 2022, the Company generated $215,953 from the exercise of 454,817 broker share purchase warrants. During the six months ended August 31, 2022, the Company generated $5,329 from the exercise of 28,154 of stock options.
Long Term Debt
On June 9, 2021, the Company's subsidiary SDP entered into a $6,930,360 (US$5,400,000) revolving loan facility with a third-party financial institution, which refinanced their existing revolving loan facility and other notes. All amounts outstanding under the $6,930,360 revolving loan facility bear interest at the greater of 4% or prime plus 0.75% per annum, and any accrued unpaid interest is payable monthly, with a maturity of August 1, 2023. The repayment obligations under the $6,930,360 facility are secured by a first priority lien on substantially all of the assets of SDP and are not guaranteed by the Company or any other subsidiary. In addition, on June 9, 2021, SDP issued a secured promissory note in the principal amount of $936,696 (US$750,000) which evidenced the refinancing of two outstanding loans. The note bears interest at the greater of 6% or prime rate plus 2.75% per annum. Principal and accrued but unpaid interest due on the note are payable monthly in equal installments over a 36-month period, and the repayment obligations under the note are secured by a lien on substantially all of the assets of SDP. As of August 31, 2022, the Company had long term debt of $798,048 related to the above note, as compared to $856,119 on February 28, 2022.
Cash Flows
The following table is a summary of the Company's cash flows for the six months ended August 31, 2022, and August 31, 2021:
| August 31, 2022 |
August 31, 2021 |
|||||
| Net cash used in operating activities | $ | (1,190,559 | ) | $ | (912,728 | ) |
| Net cash (used in) provided by for investing activities | (337,965 | ) | 937,933 | |||
| Net cash provided by (used in) financing activities | 317,154 | (891,734 | ) | |||
| Net decrease in cash and cash equivalents and restricted cash | (1,211,370 | ) | (866,529 | ) |
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During the period ended August 31, 2022, $1,190,559 was used for operating activities (compared to $912,728 used for operating activities for the period ended August 31, 2021). This cash flow was used primarily to improve the back office and administrative capacity of the Company, fund certain design and development projects, make expenditures to expand the market for certain products, support efforts to reduce supply chain constraints and increase productivity in all aspects of the business.
Net Cash (Used in) Provided by Investing Activities
During the period ended August 31, 2022, $337,965 was used in investing activities, compared to $937,933 that was provided for the period ended August 31, 2021. The use of cash flow reflects the acquisition of new property and equipment of $98,793. It also includes the purchase of intellectual property of $242,535.
Net Cash Provided by (Used in) Financing Activities
During the period ended August 31, 2022, $317,154 was provided through financing activities, compared to $891,734 used during the period ended August 31, 2021. The cash provided during the period ended August 31, 2022, was primarily from proceeds from the line of credit and proceeds from the exercise of broker warrants, offset by lease payments. The cash used in in the period ended August 31, 2021, was primarily for the repayment of long-term debt, offset partially by the proceeds from the line of credit and proceeds from the exercise of stock options.
The Company currently intends to satisfy its short- and long-term liquidity requirements through its existing cash, current assets and cash flow from operating activities.
To date, the Company never paid a cash dividend on its capital stock. Any future determination to pay cash dividends will be at the discretion of the Company’s Board of Directors (the "Board") and will depend upon the Company’s financial condition, operating results, capital requirements and such other factors as the Board deems relevant.
Off-Balance Sheet Arrangements
The did not have any off-balance sheet arrangements during the periods covered by this Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not ordinarily hold market risk sensitive instruments for trading purposes and currently does not have any investments in marketable securities, which would expose it to market risks.
Interest Rate Risk
As part of its ongoing operations, the Company is exposed to interest rate fluctuations on borrowings. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources - Long Term Debt". As of August 31, 2022, the Company has two variable rate debt instruments outstanding that are impacted by changes in interest rates. The interest rate of the Company’s revolving loan facility is equal to the 4% or prime plus 0.75% per annum, and the interest rate of the Company’s secured promissory note is equal to the greater of 6% or prime rate plus 2.75% per annum.
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Foreign Currency Risk
The Company receives and makes payments in U.S. currency and accordingly is subject to the financial risks associated with changes in the exchange rate between U.S. currency and Canadian currency. The Company has not entered into any hedge arrangements intending to mitigate this exchange rate risk, and there is no assurance that the exchange rates will not fluctuate over the next fiscal year or that such fluctuations will not have a material adverse effect on the Company’s operations.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed with the U.S. Securities and Exchange Commission (the "SEC") is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of August 31, 2022, an evaluation was performed under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) to the Securities Exchange Act of 1934). Based on that evaluation, management, including our Interim Chief Executive Officer concluded as of August 31, 2022, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
Changes in Internal Control Over Financial Reporting
During the period covered by this Report, the Company has not made any change to its internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may become involved in legal proceedings arising in the ordinary course of its business. The Company is not currently a party to any legal proceedings the outcome of which, if determined adversely to the Company, would individually or in the aggregate have a material adverse effect on its business, financial condition, results of operations or prospects.
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There have been no material changes to the risk factors included in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended February 28, 2022, and “Part II. Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended May 31, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following information represents securities sold by the Company within the fiscal quarter ended on August 31, 2022, which the were not registered under the Securities Act. Included are new issues, securities issued in exchange for property, services or other securities, securities issued upon conversion from other share classes and new securities resulting from the modification of outstanding securities. The Company sold all of the securities listed below to accredited investors pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated under the Securities Act or pursuant to Regulation S promulgated under the Securities Act.
• On July 22, 2022, the Company entered into a share for debt agreement, pursuant to which it issued an aggregate of 260,921 shares of common stock in satisfaction of $201,401 (US$156,553) of indebtedness owed to a service provider. The 260,921 shares of common stock were valued at $201,401 (US $156,553) based on a share price of US $0.60 per share on July 22, 2022, the date of issuance. No gain or loss was recognized on the settlement of this debt.
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The following exhibits are filed with this Report:
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SALONA GLOBAL MEDICAL DEVICE CORPORATION | |
| By: /s/ Luke Faulstick | |
| Name: Luke Faulstick
Title: Chief Executive Officer (principal executive officer and duly authorized signatory for the registrant) |
|
| Date: October 17, 2022 | |
|
SALONA GLOBAL MEDICAL DEVICE CORPORATION |
|
|
By: /s/ Dennis Nelson |
|
|
Name: Dennis Nelson |
|
|
Date: October 17, 2022 |
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