EVOME MEDICAL TECHNOLOGIES INC. As used in this Quarterly Report on Form 10-Q, the terms "we," "us," "our," the "Company" and "Salona" meanSalona Global Medical Device Corporation (a corporation incorporated under the laws of the Province ofBritish Columbia formerly known asBrattle Street Investment Corp. ) and its subsidiaries (unless the context indicates a different meaning).
Cautionary Note Regarding Looking Forward 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 our 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
our current expectations and beliefs concerning future developments and their
potential effects on us. Future developments affecting us may not be those that
we have anticipated. These forward-looking statements involve a number of risks,
uncertainties (some of which are beyond our 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 our periodic reports, and our
Registration Statement on Form S-1 declared effective by the U.S. Securities and
Exchange Commission (SEC) on May 21, 2021 (the "Registration Statement"),
particularly in "Risk Factors" and "Cautionary Note Regarding Forward-Looking
Statements," all of which are difficult to predict. Should one or more of these
risks or uncertainties materialize, or should any of our assumptions prove
incorrect, actual results may vary in material respects from those projected in
these forward-looking statements. We undertake 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.
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. We caution you that forward-looking statements are not
guarantees of future performance and that our actual results of operations,
financial condition and liquidity, and developments in the industry in which we
operate may differ materially from those made in or suggested by the
forward-looking statements contained in this Report. In addition, even if our
results or operations, financial condition and liquidity, and developments in
the industry in which we operate 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.
25
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SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Condensed Consolidated Financial Statements
For the three and nine months ended
(In Canadian Dollars)
Non-GAAP Measures
Throughout this management discussion and analysis, our management uses a number
of financial measures to assess its performance, and these are intended to
provide additional information to investors concerning the Company. This year
and 2022 mean the fiscal year ended February 28, 2022 . Last year and 2021 mean
the fiscal year ended February 28, 2021 . 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. Salona'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 our 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 our fiscal year ended on the last calendar day of February.
Business Overview
OnMarch 11, 2021 , we completed the Change of Business, as defined by theTSX Venture Exchange , to become an acquisition-oriented medical device company with plans to achieve scale through further acquisitions and organic growth. We presently intend to operate in the recovery science market, including post-operative pain, wound care and other markets serving the aging population inthe United States . OnMay 21, 2021 , we consummated the acquisition ofSouth Dakota Partners Inc. ("SDP") through a subsidiary. SDP operates a large state-of-the-art production facility located in theState of South Dakota currently producing proprietary and white label medical devices for pain management, cold and hot therapy, NMES, PEMF and ultrasound. Since its acquisition, SDP has generated$8,080,154 of revenue and has generated net earnings of$359,289 . We anticipate SDP will continue to be profitable in future quarters. Information relating to SDP contained in this Report covers the period fromMay 22, 2021 , throughNovember 30, 2021 . OnSeptember 30, 2021 , the Company consummated the acquisition ofSimbex, 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 period fromSeptember 30, 2021 , throughNovember 30, 2021 . Since acquisition, Simbex has generated$1,670,797 of revenue and has generated net earnings of$206,145 . OnNovember 29, 2021 , the Company consummated the acquisition of the customer lists, sales orders and supply agreements, and related sales channel and intellectual property assets ofALG-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, our subsidiary ALG Health Plus entered into an exclusive supply agreement with ALG.January 12, 2022 Melissa Polesky-Meyrowitz, CPA, was appointed the Chief Financial Officer for the Company.Mrs. Polesky-Meyrowitz is a CPA with a BBA in accounting fromHofstra University . She has over ten years experience in the accounting and taxation. She was previously an International Tax Services Supervisor atRSM, LLP and an US Tax Compliance and Advisory Manager atRichter LLP located inToronto . Melissa has previously worked with the Company in the role of senior controller. 26
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SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Condensed Consolidated Financial Statements
For the three and nine months ended
(In Canadian Dollars)
RESULTS OF OPERATIONS
Results of Operations for the Three and Nine Months ended
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 income less
interest, taxes, depreciation, amortization, stock-based comp, foreign exchange
gain (loss) and transaction costs.
Three Months Ended 2021 vs 2020 Nine Months Ended 2021 vs 2020
November 30, November 30, November 30, November 30,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Revenue $ 5,286,702 $ 223,587 $ 5,063,115 2,264% $ 9,850,915 $ 293,411 $ 9,557,504 3,257%
Gross
Margin 1,662,636 223,587 1,439,049 644% 3,073,782 293,411 2,780,371 948%
Adjusted
EBITDA $ 302,536 $ 14,886 $ 287,650 1,932% $ 557,357 $ (394,339 ) $ 951,696 (246%)
Adjusted EBITDA is calculated as follows:
Three Months Ended Nine Months Ended
November 30, 2021 November 30, 2020 November 30, 2021 November 30, 2020
Adjusted
EBITDA $ 302,536 $ 14,886 $ 557,357 $ (394,339 )
Less: Stock
Based
Compensation (292,492 ) (69,200 ) (757,792 ) (136,004 )
Amortization
of
intangible
asset (165,552 ) - (244,340 ) -
Depreciation
of property
and
equipment (65,458 ) - (131,414 ) -
Depreciation
of
right-of-use
asset (67,817 ) - (106,700 ) -
Interest
Expense (121,518 ) - (265,602 ) -
Foreign
exchange
loss (48,934 ) - (38,397 ) -
Transaction
costs
including
legal, audit
and US
Regulatory (1,044,455 ) (306,909 ) (2,269,923 ) (306,909 )
Gain on debt
settlement - - 15,538 -
Income tax
expense (7 ) - (1,995 ) -
Net Loss $ (1,503,697 ) $ (361,223 ) $ (3,223,268 ) $ (837,252 )
Revenue
Business Overview
Three Months Ended 2021 vs 2020 Nine Months Ended 2021 vs 2020
November 30, November 30,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Revenue $ 5,286,702 $ 223,587 $ 5,063,115 2,264% $ 9,850,915 $ 293,411 $ 9,557,504 3,257%
Since the acquisition of SDP on May 21, 2021 , Simbex on September 30, 2021 , and
the sales channel assets of ALG on November 29, 2021 , we have continued
generating sales revenue in line with each of their pre-COVID revenue figures
and each continue to grow. From June 1, 2021 , through November 30, 2021 , we have
generated sales of $9,750,915 .
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SALONA GLOBAL MEDICAL DEVICE CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements
For the three and nine months ended
(In Canadian Dollars)
Three Months Ended 2021 vs 2020 Nine Months Ended 2021 vs 2020
November 30, November 30,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Cost of
Revenue
Direct
service
personnel $ 953,260 $ - $ 953,260 100% $ 1,230,443 $ - $ 1,230,443 100%
Direct
material
costs $ 2,431,065 $ - $ 2,431,065 100% $ 5,306,949 $ - $ 5,306,949 100%
Other
direct
costs $ 239,741 $ - $ 239,741 100% $ 239,741 $ - $ 239,741 100%
Cost of revenue includes our labor costs expended in the production of medical
devices, and related expenses allocated directly to the production of medical
devices, and our cost of actual materials used in the production process from
June 1, 2021 , through November 30, 2021 . 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 (Loss)
Three Months Ended 2021 vs 2020 Nine Months Ended 2021 vs 2020
November 30, November 30, November 30, November 30,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Amortization
of
intangible
assets $ (165,552 ) $ - $ (165,552 ) 100% $ (244,340 ) $ - $ (244,340 ) 100%
Depreciation
of property
and
equipment (65,458 ) - (65,458 ) 100% (131,414 ) - (131,414 ) 100%
Amortization
of
right-of-use
assets (67,817 ) - (67,817 ) 100% (106,700 ) - (106,700 ) 100%
Interest
expense (121,518 ) - (121,518 ) 100% (265,602 ) - (265,602 ) 100%
Foreign
exchange
gain (48,934 ) - (48,934 ) 100% (38,397 ) - (38,397 ) 100%
Gain on debt
settlement - - - 0% 15,538 - 15,538 100%
Transaction
costs
including
legal,
financial,
audit, US &
Canadian
Regulatory $ (1,044,455 ) $ (306,909 ) $ (737,546 ) 240% $ (2,269,923 ) $ (306,909 ) $ (1,963,014 ) 640%
Amortization of intangible assets reflects the amortization of intangible assets
such as trademarks, non-compete agreement, intellectual property and customer
base. We depreciate property and equipment across their useful lives. While
there can be no assurances, we expect 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.
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 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 our line of
business, they are not operational expenses of the business.
Three Months Ended 2021 vs 2020 Nine Months Ended 2021 vs 2020
November 30, November 30, November 30, November 30,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
Foreign
currency
translation
gain (loss) $ 112,505 $ (45,406 ) $ 157,911 (348%) $ 128,506 $ (300,397 ) $ 428,903 (143%)
28
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SALONA GLOBAL MEDICAL DEVICE CORPORATION Notes to the Unaudited Condensed Consolidated Financial Statements
For the three and nine months endedNovember 30, 2021 and 2020 (In Canadian Dollars) Since we operate inthe United States , we are exposed to foreign currency risk. We are unable to effectively predict swings in the foreign exchange value of theU.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
We fund our operations through cash from operations and asset-based loans secured by subsidiary inventory and accounts receivable from third parties. As ofNovember 30, 2021 , we had$6,127,736 of cash and cash equivalents, total restricted cash and marketable securities, which was a decrease of$6,867,090 from the balance as ofFebruary 28, 2021 . During the quarter endedMay 31, 2021 , we generated$5,550,258 from the sale of 9,990,237 of our common shares. OnAugust 20, 2021 , we generated$21,392 from the exercise of 112,617 of stock options.
Long Term Debt
OnJune 9, 2021 , our subsidiary SDP entered into a$6,813,180 (US$5,400,000 ) revolving loan facility with a third-party financial institution, which refinanced their existing revolving loan facility and other notes. All amounts outstanding under the$ 6,813,180 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 ofAugust 1, 2023 . The repayment obligations under the$6,813,180 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, onJune 9, 2021 , SDP issued a secured promissory note in the principal amount of$936,895 (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 ofNovember 30, 2021 , we had long term debt of$730,527 related to the above note, as compared to$0 onFebruary 28, 2021 , and$0 as ofAugust 31, 2020 .
Cash Flows
The following table is a summary of our cash flows for the nine-month periods
ended
Nine months Ended
November 30, November 30,
2021 2020
Net cash used in operating activities $ (1,336,020 ) $ (400,142 )
Net cash (used in) provided by for investing
activities (4,142,266 ) 81,451
Net cash (used in) provided by in financing activities (1,092,067 ) 5,348 Net decrease in cash (6,570,353 ) (313,343 )
During the nine-month period endedNovember 30, 2021 ,$1,336,020 was used in operating activities, compared to$400,142 for the period endedNovember 30, 2020 . This cash flow was mostly used in the continued acquisition activity of the Company as well as to ensure continued operation of the Company and capital raising expenses. Cash losses were substantially lower than the book loss of the Company due to an increase in accounts payable of$827,727 fromFebruary 28, 2021 , reflecting expenses incurred but not yet paid.
Net Cash Provided by Investing Activities
During the nine-month period endedNovember 30, 2021 ,$4,142,266 was provided by investing activities, compared to$81,451 that was provided for the period endedNovember 30, 2020 . This decrease in cash flow reflects the funds used to acquire Simbex onSeptember 30, 2021 . Net cash used for investing activities was offset by cash received upon the acquisition of SDP and Simbex. 29 --------------------------------------------------------------------------------SALONA GLOBAL MEDICAL DEVICE CORPORATION
Notes to the Unaudited Condensed Consolidated Financial Statements
For the three and nine months ended
(In Canadian Dollars)
During the nine-month period endedNovember 30, 2021 ,$1,092,067 was used in financing activities, compared to$5,348 during the period endedNovember 30, 2020 . The cash was primarily used to pay off loans held by SDP. Net cash used in financing activities was offset by cash generated 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.
We have never paid a cash dividend on our capital stock. Any future determination to pay cash dividends will be at the discretion of our Board of Directors (the "Board") and will depend upon our financial condition, operating results, capital requirements and such other factors as our Board deems relevant.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements during the periods covered by this Report.
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