EVOME MEDICAL TECHNOLOGIES INC. As used in this Quarterly Report on Form 10-Q, the terms "the Company," "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 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 ,
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.
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-------------------------------------------------------------------------------- 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 withU.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
OnMarch 11, 2021 , the Company completed a 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. The Company presently intends 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 , the Company acquiredSouth Dakota Partners Inc. ("SDP"). 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. Information relating to SDP contained in this Report covers the entire three- and nine-months endedNovember 30, 2022 . OnSeptember 30, 2021 , the Company acquiredSimbex, 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. Information relating to Simbex contained in this Report covers the entire three- and nine-months endedNovember 30, 2022 . 34 -------------------------------------------------------------------------------- OnNovember 29, 2021 , the Company acquired 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 ofALG 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. Information relating to ALG contained in this Report covers the entire three and nine months endedNovember 30, 2022 . OnMarch 11, 2022 , the Company acquiredMio-Guard, LLC , ("Mio-Guard") a business engaged in medical device sales and marketing serving the Midwest United States. Mio-Guard has sold into the athletic training, physical therapy and orthopedics markets for sports medicine products. Mio-Guard has over fifty sales representatives inthe United States with a focus on the Midwest, South andCentral United States and long-standing relationships with institutions ranging from high school to college to professional athletics. . Information relating to Mio-Guard contained in this Report covers substantially all of the three- and nine-months endedNovember 30, 2022 . OnSeptember 23, 2022 , the Company acquiredDaMar 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%. Information relating to DaMar contained in this Report covers the period since acquisition (fromSeptember 23, 2022 throughNovember 30, 2022 ). OnDecember 15, 2022 , the Company announced its intention to focus on listing on the Nasdaq Capital Market ("Nasdaq") in 2023. As a first step, the Company has changed its fiscal year end toDecember 31, 2022 , with the aim of preparing for aU.S. listing. 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
The Company believes it is the well positioned to offer acquisition targets upside through stock and 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.
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Revenues
Three months ended 2022 vs 2021 Nine months ended 2022 vs. 2021
November 30, November 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Revenue
30,640,439
10,165,938 3,073,782 7,092,156 231%
Adjusted
EBITDA
1,267,687$ 577,357 $ 690,330 120% Adjusted EBITDA
Adjusted EBITDA is calculated as follows:
Three months ended Nine months ended
November 30, November 30, November 30, November 30,
2022 2021 2022 2021
Adjusted EBITDA $ (159,717 ) $ 302,536 $ 1,267,687 $ 577,357
Less: Stock Based
Compensation (380,937 ) (292,492 ) (1,248,709 ) (757,792 )
Net loss before
the undernoted (540,654 ) 10,044 18,978 (180,435 )
Amortization of
intangible asset (301,990 ) (165,552 ) (786,842 ) (244,340 )
Depreciation of
property and
equipment (147,622 ) (65,458 ) (292,476 ) (131,414 )
Amortization of
right-of-use asset (285,967 ) (67,817 ) (508,185 ) (106,700 )
Interest Expense (226,573 ) (121,518 ) (508,649 ) (265,602 )
Foreign exchange
loss (13,703 ) (48,934 ) (13,471 ) (38,397 )
Change in fair
value of earn-out
consideration - - (2,451,600 ) -
Change in fair
value of
contingent
consideration 980,730 - (7,532,300 ) -
Gain on share for
debt settlement - - - 15,538
Transaction costs
including legal,
financial, audit
and US & Canadian
regulatory
expenses (1,054,602 ) (1,044,455 ) (2,403,285 ) (2,269,923 )
Current income tax
expense (11,754 ) (7 ) (41,786 ) (1,995 )
Deferred income
tax recovery 73,538 - 192,721 -
Net Loss $ (1,528,597 ) $ (1,503,697 ) $(14,326,895 ) $ (3,223,268 )
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RESULTS OF OPERATIONS`
Revenues
Three months ended 2022 vs 2021 Nine months ended 2022 vs. 2021
November 30, November 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Revenue $ 10,547,652 $ 5,286,702 $ 5,260,950 100% $ 30,640,439 $ 9,850,915 $ 20,789,524 211%
Since the acquisition of SDP on May 21, 2021 , Simbex on September 30, 2021 ,
Mio-Guard on March 11, 2022 , DaMar on September 23, 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 November 30, 2022 , the Company generated
sales of $30,640,439 .
Three months ended 2022 vs 2021 Nine months ended 2022 vs. 2021
November 30, November 30, November 30, November 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Cost of Revenue
Direct service personnel $ 1,472,850 $ 953,260 $ 519,590 55%
117% 15,146,076 5,306,949 9,839,127 185%
Other direct costs 309,901 239,741 70,160 29% 863,401 239,741 623,660 260%
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 November 30, 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 Nine months ended 2022 vs. 2021
November 30, November 30, November 30, November 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Amortization of
intangible assets $ (301,990 ) $ (165,552 ) $ (136,438 ) 82% $ (786,842 ) $ (244,340 ) $ (542,502 ) 222%
Depreciation of
property and equipment (147,622 ) (65,458 ) (82,164 ) 126% (292,476 ) (131,414 ) (161,062 ) 123%
Amortization of
right-of-use assets (285,967 ) (67,817 ) (218,150 ) 322% (508,185 ) (106,700 ) (401,485 ) 376%
Interest expense (226,573 ) (121,518 ) (105,055 ) 86% (508,649 ) (265,602 ) (243,047 ) 92%
Foreign exchange loss (13,703 ) (48,934 ) 35,231 (72%) (13,471 ) (38,397 ) 24,926 (65%)
Transaction costs
including legal,
financial,
audit, US & Canadian
Regulatory (1,054,602 ) (1,044,455 ) (10,147 ) 1% (2,403,285 ) (2,269,923 ) (133,362 ) 6%
Change in fair value
of earn-out
consideration - - - -% (2,451,600 ) - (2,451,600 ) 100%
Change in fair value
of contingent
consideration 980,730 - 980,730 100% (7,532,300 ) - (7,532,300 ) 100%
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-------------------------------------------------------------------------------- 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 onMay 31, 2022 , the date of issuance. The change in fair value of the contingent consideration represents the obligations resulting from the Simbex, Health Plus, DaMar, 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, DaMar and ALG acquisitions, due diligence of acquisition targets, financing costs, US regulatory costs, and associated accounting and other costs. While these costs are necessary, they are not operational expenses of the business. Three months ended 2022 vs 2021 Nine months ended 2022 vs. 2021 November 30, November 30, November 30, November 30, 2022 2021 $ Change % Change 2022 2021 $ Change
% Change
Foreign currency translation gain (loss)
Since the Company operates inthe United States , it is exposed to foreign currency risk. Management is 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
The Company funds its operations through cash from operations and asset-based loans secured by subsidiary inventory and accounts receivable from third parties. InFebruary 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 ofNovember 30, 2022 , the Company had$3,138,860 of cash and cash equivalents, which was a decrease of$4,918,240 from the balance as ofFebruary 28, 2022 . During the nine months endedNovember 30, 2022 , the Company generated$215,953 from the exercise of 454,817 broker share purchase warrants. During the nine months endedNovember 30, 2022 , the Company generated$5,329 from the exercise of 28,154 of stock options.
Long Term Debt
OnJune 9, 2021 , the Company's subsidiary SDP entered into a$7,294,320 (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$6,162,803 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$7,294,320 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$982,200 (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, 2022 , the Company had long term debt of$781,228 related to the above note, as compared to$856,119 onFebruary 28, 2022 . OnJanuary 13, 2023 , the Company entered into an asset-based loan (ABL). The ABL is with a financial institution whereby the Company, through its subsidiaries, may borrow up toUS$5,500,000 . Borrowings' bear interest at 6% or prime +0.75% per annum, whichever is greater. The balance will be secured by the receivables of the Company's subsidiaries. The loan is not subject to any financial covenants.
Cash Flows
The following table is a summary of the Company's cash flows for the nine months
ended
November 30 ,
2022 2021
Net cash used in operating activities$ (87,964 ) $ (1,336,020 ) Net cash used in investing activities (5,322,020 ) (4,142,266 ) Net cash provided by (used in) financing activities 560,708 (1,092,067 ) Net decrease in cash and cash equivalents and restricted cash (4,849,276 ) (6,570,353 ) 38
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During the period endedNovember 30, 2022 ,$87,964 was used for operating activities (compared to$1,336,020 used for operating activities for the period endedNovember 30, 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 endedNovember 30, 2022 ,$5,322,021 was used in investing activities, compared to$4,142,266 that was used in the period endedNovember 30, 2021 . The use of cash flow reflects the acquisition of DaMar of$4,318,236 , the acquisition of Mio-Guard of$589,340 , and the acquisition new property and equipment of$339,588 . It also includes the purchase of intangible assets including intellectual property of$278,202 .
Net Cash Provided by (Used in) Financing Activities
During the period endedNovember 30, 2022 ,$560,708 was provided through financing activities, compared to$1,092,067 used during the period endedNovember 30, 2021 . The cash provided during the period endedNovember 30, 2022 , was primarily from proceeds from the line of credit, net proceeds received fromALG-Health , and proceeds from the exercise of broker warrants, offset by lease payments. The cash used in in the period endedNovember 30, 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 has not 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 Company did not have any off-balance sheet arrangements during the periods covered by this Report.
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