SALONA GLOBAL MEDICAL DEVICE CORP MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
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 Columbiaformerly known as Brattle Street Investment Corp.) and its subsidiaries (unless the context indicates a different meaning).
Caution 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, 2022and 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.
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.
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 Dakotacurrently 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 $8,000,000in 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 HealthPlus 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 Stateswith a focus on the Midwest, South and Central United Statesand 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 millionof 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:
• Small private 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
The Company believes it is well positioned to offer upside acquisition targets through equity/cash acquisitions with a liquid listing on the TSXV.
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, August 31, % August 31, August 31, 2022 2021 $ Change Change 2022 2021 $ Change % Change
Adjusted EBITDA is calculated as follows:
Three months ended Six months ended August 31, August 31, August 31, August 31, 2022 2021 2022 2021 Adjusted EBITDA $ 68,733
$ 546,541 $ 1,427,404 $ 274,821Less: 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, August 31, % August 31, August 31, 2022 2021 $ Change Change 2022 2021 $ Change % Change Revenue
$ 10,044,239 $ 3,973,773 $ 6,070,466153% $ 20,092,787
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, August 31, % August 31, August 31, 2022 2021 $ Change Change 2022 2021 $ Change % Change
Direct service personnel
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, August 31, % August 31, August 31, % 2022 2021 $ Change Change 2022 2021 $ Change Change Amortization of intangible assets
$ (251,517 )$
(61,096 ) (12,813 ) 21% (144,854 ) (65,956 ) (78,898 ) 120% Amortization of rights of use
(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
- - - -% (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, August 31, % August 31, August 31, 2022 2021 $ Change Change 2022 2021 $ Change % Change
Foreign currency conversion gain
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.
Cash 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 $0.55per 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 $6,938,101of cash and cash equivalents, which was a decrease of $1,118,999from the balance as of February 28, 2022. During the six months ended August 31, 2022, the Company generated $215,953from the exercise of 454,817 broker share purchase warrants. During the six months ended August 31, 2022, the Company generated $5,329from the exercise of 28,154 of stock options.
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 $6,930,360revolving 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 $6,930,360facility 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 $798,048related to the above note, as compared to $856,119on February 28, 2022.
The following table is a summary of the Company’s cash flows for the six months ended
Net cash used in operating activities
$ (1,190,559 ) $ (912,728 )Net cash (used in) provided by for investing activities (337,965 )
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 ) 37
During the period ended
August 31, 2022, $1,190,559was used for operating activities (compared to $912,728used 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.
During the period ended
August 31, 2022, $337,965was used in investing activities, compared to $937,933that 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, $317,154was provided through financing activities, compared to $891,734used 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 meet its short-term and long-term liquidity needs with 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 had no off-balance sheet arrangements during the periods covered by this report.
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