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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Evome Medical Technologies Inc (CE) | USOTC:LNDZF | OTCMarkets | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0.000001 | 0.000001 | 0.000001 | 0.00 | 01:00:00 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KT
☐ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from March 1, 2022, to December 31, 2022
Commission File Number 333-266806
SALONA GLOBAL MEDICAL DEVICE CORPORATION
(Exact name of registrant as specified in its charter)
| British Columbia, Canada | Not Applicable |
| (State or other jurisdiction of | (IRS Employer |
| incorporation) | Identification Number) |
| 6160 Innovation Way, Carlsbad, California | 92009 |
| (Address of principal executive office) | (Zip Code) |
Registrant's telephone number, including area code: 1-800-760-6826
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
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. Yes ☒ No ☐
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).
Yes ☒ No ☐
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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 ☐ | Non-accelerated filer ☒ |
| 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
As of December 31, 2022, the last business day of the registrant's most recently completed fiscal year, the aggregate market value of the voting stock held by non-affiliates of the registrant was $23,858,811 (based on the closing price of the common shares as reported on the TSXV of $ 0.45 per share).
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SALONA GLOBAL MEDICAL DEVICE CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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| PART IV | |
| Item 15 Exhibits and Financial Statement Schedules | 80 |
| Item 16 Form 10-K Summary | 84 |
| SIGNATURES | |
| EXHIBIT INDEX | |
| LIST XBRL DOCUMENTS |
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EXPLANATORY NOTE
On December 14, 2022, the Board of Directors of the Company approved a change to its fiscal year from February 28 to December 31. The Company’s fiscal year now begins on January 1 and ends on December 31 of each year, starting on January 1, 2023. The required ten-month transition period of March 1, 2022, to December 31, 2022, is included in the Company’s consolidated financial statements. For comparative purposes, the Company’s unaudited consolidated statements of operations and comprehensive loss, statements of stockholders’ equity, balance sheet, and statements of cash flow for the ten-months ended December 31, 2021, are also presented.
As used in this Annual Report on Form 10-KT, the terms "we," "us," "our," the "Company" and "Salona" mean Salona Global Medical Device Corporation and its subsidiaries (unless the context indicates a different meaning).
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual 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," "could", "may", "might" "will" and "would" 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, any statements relating to the future effects of the COVID-19 pandemic, 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 annual 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." 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 caution readers not to place undue reliance on any forward-looking statements, which speak only as of the dates on which they are made. 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 annual 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 annual report, those results or developments may not be indicative of results or developments in subsequent periods.
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
We are a U.S. -based corporation focused on human performance and rehabilitative solutions. Via strategic acquisitions we leverage intellectual properties of specialized companies to deliver market-leading products and services through our wholly owned subsidiaries. Our subsidiaries consist of South Dakota Partners, Inc., a South Dakota corporation ("SDP"), Simbex, LLC, a New Hampshire limited liability company ("Simbex"), ALG Health Plus, LLC, a Delaware limited liability company ("Health Plus"), Mio-Guard, LLC, a Michigan limited liability company ("Mio-Guard"), and DaMar Plastics Manufacturing Inc., a California corporation ("DaMar"). These acquisitions allow us to develop, manufacture, and sell medical devices, some of which are proprietary and white label. Our products include devices used for pain management and physical therapy treatments, including cold/hot therapy products, neuromuscular electrical stimulation ("NMES") devices, transcutaneous electrical nerve stimulation ("TENS") devices, ultrasound treatment devices, as well as wearable technology and other products used for prevention, treatment, and rehabilitation of the human body.
We intend to achieve scale through further acquisitions and organic growth. An emphasis will be placed on products/services in the human performance and rehabilitation space. Some of our areas of focus will aim to serve people over the age of sixty-five, which demographic provides steady demand by virtue of government sponsored medical coverage in the U.S. Our current operations are focused predominantly on the business of recovery science, technologies that help individuals recover from surgery and prevent disease. We expect to expand our business in the human performance and rehabilitation space, and we will continue to explore acquisitions within and adjacent to this business vertical. The U.S. occupational & physical therapy services market is projected to grow from $50.26 billion in 2022 to $72.70 billion by 2029, at a CAGR of 5.4% (Source: fortunebusinessinsights.com).
Our common shares trade on the TSX Venture Exchange ("TSXV") under the symbol "SGMD." Our registered office is Suite 200E - 1515A Bayview Avenue, East York, Ontario and our headquarters is located at 6160 Innovation Way, Carlsbad, California, 92009.
Unless otherwise noted, all figures in this report are reported in Canadian Dollars.
Plan of Operations
Our primary objective is to become a leading developer, manufacturer and supplier, of non-invasive medical device products through both acquisitions and organic growth. We expect to use a combination of available working capital, debt and equity to finance identified and future acquisitions. Our immediate short-term objectives will be to evaluate and acquire additional complementary medical device companies to expand our distribution networks and product lines.
Our longer-term objectives will be to:
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Growth Plan
We anticipate that our acquisition-oriented growth strategy will leverage the capital markets to target smaller U.S.-based private medical device companies by offering stock and cash to acquire such companies and integrate them into a large, broad-based medical device company. Through this growth strategy, we intend to increase our overall revenue and profits and therefore earnings per share by (a) increasing revenues through international distribution networks in Europe, Australia and other markets to increase sales for each acquired company; (b) increasing our product lines by developing, in-licensing or acquiring new intellectual property for protected devices that are synergistic with the acquisitions; and (c) increasing profits through operational integration in an effort to reduce supply chain risks and increase cash flow and margin.
Acquisition Pipeline
In the pursuit of our acquisition-oriented growth strategy, we have acquired five businesses since May, 2021. Additionally, our 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 prevention, post operative healing and rehabilitation. We believe that this will allow us to provide products from cradle-to-grave throughout the continuum of care, by acquiring businesses which fall into one of three primary categories:
We believe we are well positioned to offer acquisition targets upside by offering the Company's equity which should provide additional liquidity due to its listing on the TSXV, and if we are successful in qualifying for listing on the U.S. NASDAQ exchange, a larger trading market.
The Company’s goal is to negotiate to pay Company equity to the sellers of potential targets, rather than cash. To the extent this is possible, this reduces our requirement for additional capital. However, where appropriate, we will consider paying a mixture of cash and equity. In the case of our acquisitions of SDP and Mio-Guard, we were successful in negotiating a purchase price consisting primarily of equity. In the case of Simbex and DaMar, we agreed to pay a purchase price consisting of cash and equity based on the value of the target, the timing to complete the acquisition and other factors. Over the last six months, we have negotiated the terms of an acquisition of the physical medicine and rehabilitation business of Biodex Medical Systems, Inc., an attractive medical device company with a strong brand in the markets that we have targeted. Based on our evaluation of the Biodex business, the timing of payments of the purchase price, and our desire to successfully bid for this company, we agreed to pay an all-cash purchase price. In addition to the composition of the purchase price, when assessing potential targets our intent is to focus our efforts on acquiring businesses that are operationally cash flow positive, which should enhance our ability to borrow for additional capital needs.
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OUR OPERATIONS
South Dakota Partners, Inc.
Overview
Based in Clear Lake, South Dakota (the "Clear Lake Facility"), our subsidiary, South Dakota Partners, Inc. ("SDP") is a packager, producer and seller of private white-label medical devices in the United States, primarily focusing on devices for pain management, cold and hot therapy, TENS, NMES, PEMF and ultrasound therapy. The United States represents roughly 40% of the global medical device market (SelectUSA: Medical Technology Spotlight: The Medical Technology Industry in the United States) with organic growth opportunities by virtue of a growing aging population. Recent threats of disruption in international trade markets, whether from trade disputes, pandemic or geopolitical factors, have made some companies seek to diversify sources of supply to include firms with operations in the United States, presenting another opportunity for organic growth. The United States is a heavily regulated market, and as a result, medical device businesses that operate in the United States require expertise in the fields of compliance, production, product design, packaging, marketing and more. SDP's overall strategic plan has been to position itself as a respected, reliable, and successful partner offering production, packaging, marketing and other ancillary services within the medical device industry.
Products
Production Line of Services: The majority of SDP's revenue is derived from services related to production, production planning, shipping, and packaging and servicing products. SDP offers an end-to-end solution for the supply chain within the medical device industry. SDP not only assists in the development of medical device products but also provides the layout and design of the entire production process of a device, from sourcing to final fulfillment, which requires expertise from engineers of many different disciplines, compliance experts, and technical experts. This process often includes the production of specialized automated robotic systems for use in reducing cost and increasing efficiency and fidelity of the process. A typical onboarding starts with the outlining of customer expectations, current projected annual volumes, and order frequency. Once this information is assessed, SDP works with the customer to establish the resources required for design transfer, new infrastructure needs (if any), new equipment needs (if any) and supply chain details, and to evaluate potential risks. Once the logistical concerns have been assessed and considered, SDP commences a technical data review, during which it reviews the technical documentation provided by the customer to assess for accuracy, develops a full product specification and production plan, develops a product traceability and recall plan and ensures compliance with relevant regulatory and labeling requirements, to the extent they are already in place. Following completion of its technical review, SDP's production engineering and quality engineering teams commence the process of establishing new supply chains, production cells, protocols and begin the prototypic phase, if necessary. Once the initial phases are complete, SDP enters the production readiness phase to verify standard operating procedure (SOP) sufficiency and pilot procedures to ensure production meets necessary quality standards. Finally, SDP's production team will then commence process validation to train employees, prepare relevant procedures, and troubleshoot issues discovered in pilot production runs before undertaking the full production process of a device.
Service & Sales Product Line: The process of servicing equipment and providing customer assistance is one that is often labor intensive and requires expertise, particularly when working with complex and sensitive technologies. Many medical device companies prefer to have these services offered by the very same experts who design and produce the devices. SDP offers repairs on damaged or malfunctioning products as well as the ability to interface and troubleshoot devices and answer questions from potential customers, the device end users. SDP only offers these services to end users of the devices produced by SDP. SDP offers these services to both domestic and international customers.
Fulfillment Service Line: Many medical device designers or producers lack the expertise, capacity, and bandwidth to contend with a growing and deeply fragmented customer base. SDP offers management of the interface with customers down to final fulfillment and tracking. Once production is complete, SDP will store products for existing customers that it has already sold to them in order to maintain, track and ultimately deliver finished goods directly to end users. What seems on its face to be a simple process, becomes increasingly difficult as the number of product variants increases, and the number of outgoing deliveries increases into the hundreds or thousands.
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SDP's product line is designed to remove all but the development of intellectual property and sales channels from the purview of its customers. SDP's goal is to reduce the complexity and burdens of medical device operations of its customers once the technology has been developed by reducing cost, streamlining operations, managing quality to six sigma standards, and managing the end user interface. SDP offers a wide and focused scope of services and products to address the needs of its customers within the medical device market in which SDP operates, SDP focuses upon: TENS, NMES, PEMF, ultrasound, therapy supplies, combo devices, traction devices, laser treatment, hot/cold therapy, muscle stimulation, wound care, and bone growth, which are explained in greater detail below. End users of SDP's products include healthcare professionals, physical therapists or patients, however, SDP only contracts directly with the supplier of the products and not end users.
The services provided by SDP for its customers are part of an integrated service package, which is typically governed by a single agreement. As such, these services account for the vast majority of SDP's revenues. SDP's remaining revenue is derived from sales of scrap, obsolete inventory, and other customer prompted liquidation events. These events often occur during the development process for a new iteration of a product. To date, all SDP sales have been made to arm's length customers.
Technologies
The products that SDP produces and operates its other services around, are predominantly focused on the pain management and post-surgical care space. The technologies used are myriad but some of the most important technologies are laid out below:
• Transcutaneous Electronic Nerve Stimulation (TENS): This technology operates by running electricity directly through the patient's skin to interfere with the typical functioning of neurons key to the pain feedback cycle. This technology falls into the much broader class of electronic stimulation products, which are SDP's specialty focus. These products have been around for some time and are generally well accepted in the medical community and by the FDA. SDP focuses primarily on producing large, capital equipment variants of these products typically used by physicians in their offices and workplaces as opposed to home use by the patient. The ultimate service provider will often bill an insurance provider for the use of the equipment on the patient. Some patients pay for these services directly and may or may not later seek reimbursement from an insurance provider.
• Pulsed Electromagnetic Field Technology (PEMF): This technology operates by generating magnetic fields around the device stimulating the activation of various cell types within patients. These products do not require the electrodes and wires of TENS products (although some manufacturers do make use of this delivery method) as magnetic fields do not need assistance in passing through the patients' skin. This technology was originally developed for use in bone stimulation but has since been applied to other issues as well in compliance with FDA rules and regulations. PEMF is part of the broader electronic stimulation device grouping. The ultimate service provider will often bill an insurance provider for the use of the equipment on the patient. Some patients pay for these services directly and may or may not later seek reimbursement from an insurance provider.
• Neuromuscular Electrical Stimulation (NMES): This technology utilizes similar systems as TENS. An electrical current is passed through the skin of the patient using electrodes. However, the goal and specifics of this technology are used not to interfere with nerve signaling, but to instead cause muscle contraction of a targeted muscle or muscle group. This technology is often used in rehabilitation of muscles post-surgery as well as for post-workout recovery in athletes. NMES is also a part of the larger electronic stimulation device grouping. The ultimate service provider will often bill an insurance provider for the use of the equipment on the patient. Some patients pay for these services directly and may or may not later seek reimbursement from an insurance provider.
• Hot/Cold Therapy: Hot and cold therapy has been a mainstay of recovery sciences for a very long time. The majority of this equipment is not regulated by the FDA medical device regulations; however, it is ubiquitous in its usage in the recovery sciences. Hot and cold therapy used in conjunction or separately, is used by both individual patients, sports trainers and medical practitioners to relieve pain, enhance recovery, and reduce swelling. The manufacture and development of these products requires specific knowledge and production strategies to create appropriate gel matrices, which are typically proprietary, to create a safe and effective product.
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• Laser Treatment: The use of lasers of various wavelengths in healthcare is a somewhat more recent development with applications having been approved by the FDA for everything from the recovery sciences to cosmetic procedures. SDP specializes in working with laser medical device products that cater to the recovery science space.
• Continuous Passive Motion (CPM): CPM devices are used in post-surgical recovery, typically related to repair and/or damage to joints. Often in the recovery process it is important that a limb be moved to prevent excessive formation of scar tissue. CPM devices serve to fill this need by passively moving a limb during the recovery process without assistance from the patient. These devices are typically not owned by individual patients but are supplied by practitioners who then bill a patient's insurance provider for use of the equipment.
The majority of SDP's revenue is derived from supply agreements with its customers, none of which expire within twelve months of the date hereof, however, they do contain cancellation provisions, both for cause and upon notice. Among those, SDP derives a significant amount of its revenue from two principal supply agreements. If either of these Supply Agreements were to be canceled, the reduction in revenue and profitability would have a material adverse effect on SDP's business. In the event of the cancellation of a contract by a key customer, SDP anticipates that it would use any notice period to reduce payroll and costs in order to mitigate against any adverse effects of such cancellation.
Entities domiciled in the United States, such as SDP, are required to comply with federal, state and local environmental regulations. All waste is disposed of in compliance with EPA regulations. To date, SDP has never received a notice regarding violation of any environmental law or regulation. SDP is not aware of any restrictions on profit repatriation. Future political or economic conditions may affect any business, but SDP is not aware of any specific economic or political risks relevant to its products or services. SDP expects that recession or depression would adversely affect its business. Although SDP generally does not sell directly to consumers, any decision by the government to restrict or reduce public or private health insurance would be expected to reduce demand in the healthcare industry generally, including the business of SDP.
SDP employs various experts to ensure compliance with FDA regulatory matters, Occupational Safety and Health Administration of the United States Department of Labor ("OSHA") regulatory matters, restriction of hazardous substance directive in electrical and electronic equipment ("RoHS") regulatory matters, and other production and healthcare regulators. SDP also employs experienced process, design, and production engineers who have the expertise to design, plan for and actually produce compliant medical device products.
SDP may, from time to time, import goods or raw materials produced in other nations, and a disruption of the supply from other nations, or even other U.S.-based suppliers, could slow production and reduce revenues. As of the date of this report, SDP does not have any foreign investments.
Production Controls and Quality
The Clear Lake Facility is FDA Registered and ISO 13485:2016 certified. SDP manages all internal and external activities following the in-place Quality Management System to ensure compliance with the requirements of ISO 13485:2016, current Good Manufacturing Practices (GMP), and drives continuous improvement using lean and six sigma tools.
SDP is vertically integrated and can build many of its products from the raw material level up. The internal automation teams have automated many production processes. Much of the automation has been specifically designed by SDP engineers for their customers. This automation serves as an additional barrier to entry as it makes it difficult for competitors to be competitive on cost and quality.
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All SDP suppliers are approved by its quality and procurement teams. SDP manages the activities of the supply chain daily. SDP's procurement team partners directly with suppliers to find new materials and processes that will improve its products and services.
SDP designs many of its own testing processes, engages in design for manufacturability activities on new and existing products and has partnerships with several design companies to help with product design.
Regulatory
The FDA, Health Canada, and comparable agencies in other foreign countries impose requirements upon the design, development, manufacturing, marketing, and distribution of medical devices. The applicable regulations require that the device owner obtain clearance or approval before the devices can be sold. After the applicable approvals and/or clearances are granted, the regulatory agencies require companies to comply with quality system requirements, investigate complaints, report and investigate certain adverse events and device malfunctions, comply with marketing restrictions and maintain annual registrations.
SDP is registered with the FDA as a contract manufacturer and as an importer of medical devices, and it maintains a quality system that is certified to ISO13485:2016. SDP's specific responsibilities are defined in written quality agreements with its customers. In general, SDP is responsible for investigating complaints and providing the results of the investigation to its customers. The customers are responsible for reporting adverse events to appropriate regulatory authorities.
Market
SDP services medical device companies with operations across the globe. The largest concentration of customer orders is delivered to the U.S. operating arms of customers. The U.S. healthcare industry continues to grow rapidly as the population of 65+ individuals continue to climb. The U.S. healthcare industry is often seen as acyclical or recession resistant due to the critical nature of its services.
SDP strives to iterate and improve its products based on customer needs. However, SDP's products are not reliant on a single technology, process, or patent and as such is not subject to substantial obsolescence risk from a single technological innovation.
In the United States, facilities that build medical devices and the medical devices themselves must be cleared by the FDA. The level of rigor involved with this clearance process depends on the devices themselves as there are various levels of clearance. As an entity that operates within the U.S. medical device space, SDP employs FDA regulatory experts to ensure facility and product compliance with all appropriate regulations.
Marketing Strategies
SDP sells through reputation, word of mouth and contacts known within the industry. To date, all of SDP's sales have been with arm's length customers.
Simbex, LLC
Overview
Based in Lebanon, New Hampshire, our subsidiary Simbex, LLC is a medical device and consumer health product design and development firm. They offer both engineering services and commercialization strategy consulting for the Salona subsidiaries and other companies of all sizes. They take a holistic approach to product design and development to ensure any products they develop are not only engineered well, but have excellent market fit. Products range from wearable technology to products for physical stability. Given the nature of their services, they have been instrumental in developing and innovating IP-based assets for their customers and have agreements that generate ongoing royalties.
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Products - Engineering Expertise
Mechanical & Electrical Design & Engineering - Simbex approaches Mechanical and Electrical Hardware Design from a systems integration viewpoint. Their process starts by defining functional requirements and specifications of the design that take into consideration every step of the product life cycle. The outcome allows the final product to not only seamlessly integrate to meet functional needs, but also allows the product to integrate with external systems to meet manufacturing, distribution, packaging, and maintenance needs.
Design & Human Factors - By incorporating user feedback throughout development, Simbex creates products that meet human needs. We begin this process by obtaining the user's product requirements which are then verified and validated during critical times in the product development process.
Software & Web Development - Software development continually evolves with increasing complexity and integration of new technologies to help keep pace with customer expectations. Simbex has a diverse group of developers to cover the needs of users from embedded firmware to cloud based solutions. They utilize an agile approach to software development to ensure development remains on track, and customer needs and requirements are met. Their DevOps and quality assurance processes helps ensure each project is "right sized" with a focus on delivering the right software at the right time and with the appropriate level of verification/validation from unit testing to integrated systems testing.
Applied Research and Algorithm Development - Drawing from their background in academic research and data analytics, Simbex helps drive product direction and strategy that is based on sound science and actionable data. The Simbex team of algorithm developers understand how to leverage biometric data to produce meaningful information for the patient, clinician and user. To do this, Simbex works to thoroughly understand the product being developed and the underlying mechanisms of action, while leveraging real-world data to validate the product and its benefits. The emphasis on scientific integrity has allowed Simbex to create products of the highest quality and proven benefits. They consider applied research expertise a critical component of our product development partnership.
Quality and Regulatory
Simbex maintains a Quality Management System which is compliant to ISO 13485 and the FDA's Quality System Regulation 21 CFR 820 for the development of medical devices and meets all applicable regulatory standards. Their experienced engineering staff has developed products for many industry leading companies and provide a detailed Design History File, Device Master Record, and Risk Analysis compliant to ISO 14971.
Commercialization Strategy
Simbex recognizes that great products require both technical implementation and well-thought out business strategy. In collaboration with it’s engineering, Simbex commercialization strategy team helps companes understand product market fit, regulatory strategy, reimbursement opportunities, and general business requirements. In the United States, medical device manufacturers have to undergo rigorous testing and registration processes. Simbex brings unique expertise to these businesses in the design, registration, and go to market strategy of businesses attempting to take novel medical devices to market.
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Market
Simbex services medical device and consumer health companies with operations predominantly in the U.S. The U.S. healthcare industry continues to grow rapidly as the population of 65+ individuals continues to climb. The U.S. healthcare industry is often seen as acyclical or recession resistant due to the critical nature of its services. Simbex strives to innovate and develop products that meet the needs of the rapidly aging U.S. population and assist clients and Salona in growing revenues, improving products, and developing IP.
Marketing Strategies
Simbex is recognized as a premier product design and development firm. It’s business is driven by reputation, word of mouth and contacts known within the industry.
ALG Health Plus, LLC
On November 29, 2021, in connection with the acquisition of certain assets of ALG Health, LLC, the Company launched a new U.S. sales subsidiary called ALG Health Plus, LLC ("ALG Health Plus"), aimed at selling medical devices and supplies to small, independent hospitals and group purchasing organization ("GPO"), organizations that offer small medical offices and clinics access to devices and supplies on a larger scale creating efficiencies by aggregating purchasing volumes. As the Company continues to acquire and develop additional products, we also look to expand sales opportunities by ALG Health Plus with those products. ALG Health Plus was developed in partnership with experienced sales executives to attempt to sell medical supplies and devices to GPO's and other large businesses and systems. The sales channel is still in development at this time.
Mio-Guard, LLC
On March 11, 2022, the Company acquired Mio-Guard LLC, a Michigan based company engaged in the wholesale sale of sports medicine products in the majority of the United States, through a wholly owned subsidiary. Since 2009, the team at Mio-Guard has sold into the athletic training, physical therapy and orthopedics markets for sports medicine products. Mio-Guard has over 50 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 and college athletics to professional sports teams.
Products
To address the need for medical care in organized sports, Mio-Guard distributes products focused on injury prevention and improving recovery from injury or surgical intervention. Their products are predominantly sold into athletic training rooms, physical therapy clinics, and organized sports institutions, which fit into four broad categories:
Mio-Guard Capital Equipment Furnishings (Athletic Training Room/PT Clinics Builds/Remodels) - Mio-Guard has extensive expertise in the organization and layout of cutting-edge training and recovery facilities and works closely with top US universities, professional athletic teams and other treatment providers to equip their facilities with top-of-the-line capital equipment to assist in the treatment of patients including large scale treatment systems, ergonomic treatment platforms, and other large and expensive equipment. The creation of recurring revenue through the ongoing setup and large capital equipment sales continue to deliver great value over time to the Mio-Guard business.
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Mio-Guard Capital Equipment Modalities - Mio-Guard sells many of the types of products currently produced in the Company's SDP subsidiary including TENS, NMES, Lasers, Hot/Cold Therapy and more. Mio-Guard has worked with training experts for years to help them identify the latest and greatest treatment modalities so they can better aid the recovery of their patients.
Mio-Guard Supplies for Preventative Care - Many of Mio-Guard's products require the use of disposable treatment accessories including bracing, padding, athletic tape, medications, ultrasound gel and more for use in preventative care. These products are often used for acute care injuries that occur during highly visible athletic competition.
Mio-Guard Supplies for Injury & Rehabilitation - Mio-Guard offers many additional products that are used when an injury is sustained and in the rehabilitation of patient-athletes to return to full activity after an injury. Products in this category include wound care, emergency response, electrodes, resistance bands, analgesics, rollers and massagers. Returning athletes to the field of play after an injury can be a lengthy and expensive process and Mio-Guard offers supplies and equipment to assist in every stage of the athlete's continuum of care.
Market
Mio-Guard services physical therapists and athletic trainers predominantly in the Midwest and Southern U.S. The U.S. healthcare industry continues to grow rapidly as the population of 65+ individuals continue to climb. As the U.S. population ages, management expects that the number of individuals attempting to recover from surgery and regain physical independence will increase. The U.S. healthcare industry is often seen as cyclical or recession resistant due to the critical nature of its services. The U.S. occupational & physical therapy services market is projected to grow from $50.26 billion in 2022 to $72.70 billion by 2029, at a CAGR of 5.4% (Source: fortunebusinessinsights.com).
A 2015 study found that approximately 1.4 million injuries occur annually just in the secondary school setting1. Between 2009-14 there were about 210,700 injuries on average per year among roughly 478,900 college athletes2.
Marketing Strategies
Mio-Guard approaches the market through a combination of contracted and employed sales reps who are each responsible for a set geographic territory within the U.S. These representatives' interface with universities, professional athletic teams, physical therapists and athletic trainers to sell products and develop relationships. Mio-Guard has strong connections throughout the recovery science industry which we intend to utilize to grow sales of other product lines. Mio-Guard supports our sales team with industry leading knowledge and expertise in the products and technologies that we promote coupled with installation and design services that most of our competitors do not offer.
Our go to market strategy includes meeting customers in their clinic or athletic training room, seeing them at conventions and professional conferences and pairing that with a targeted social media approach utilizing the power of micro-influencers. In working with our customers closely and in person we're able to recognize opportunities in advance of our competitors and put Mio-Guard in an advantageous position long before an opportunity is publicly available.
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1 New Study Shows 37 Percent of Public Secondary Schools Meet Gold Standard of Care For Their Athletes, NATA Press Release, March 11, 2015. URL accessed 4/8/2022. https://www.nata.org/press-release/031115/new-study-shows-37-percent-public-secondary-schools-meet-gold-standard-care
2 College Athletes Often Bear the Cost of Injuries and Insurance, Best Colleges.com by Dean Golembeski, November 10, 2021. URL accessed 4/8/2022. https://www.bestcolleges.com/news/2021/09/10/college-athletes-ncaa-injuries-insurance.
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DaMar Plastics Manufacturing, Inc.
Overview
Based in El Cajon, California, our subsidiary DaMar Plastics Manufacturing, Inc. (“DaMar Plastics”) was founded in 1970 and is a custom plastics injection molding business. In addition to providing plastic injection molding parts to their customers, DaMar Plastics also offers several ancillary, including but not limited to assembly, packaging and mold making. On September 23, 2022, Salona Global acquired DaMar Plastics as a strategic acquisition complementing the suite of services Salona already offers and providing a more complete package to offer our customers. The business capability matches well with the electromedical, and assembly services offered by South Dakota Partners (SDP). They serve a variety of customers not only in medical device industry, but also in satellite technology and many consumer-based products.
Products
As a custom plastics manufacturing company, DaMar Plastics specializes in producing injection molded parts for our customers primarily in the medical, construction, consumer products and Original Equipment Manufacture (OEM) companies in Oil & Gas, Pool and Scientific Research. DaMar Plastics has the capability to make micro molded parts and large products up to 6.5 pounds in weight. DaMar Plastics provides value add solutions such as packaging, assembly, printing. They are a leader regionally in manufacturing products with sustainable materials such as reprocessed, recycled resins, compostable materials, and biodegradable materials.
Regulatory
DaMar Plastics maintains a Quality Management System which is compliant and certified by ISO 9001:2015. They are in to process of completing their ISO 13485 certification. They are not required to be FDA registered but many of their customers are FDA registered.
Market
The global plastic contract manufacturing market reached a value of US$ 32.4 Billion in 2021. Looking forward, IMARC Group expects the market to reach a value of US$ 44.52 Billion by 2027, exhibiting a CAGR of 5.30% during 2022-2027. The increasing demand for consumer electronics, such as smartphones, wearable devices, televisions, computers, laptops, cameras, and video recorders, represents one of the key factors driving the growth of the market. The use of plastic in the production of medical devices due to the increasing number of medical tests performed for the diagnosis of diseases has also propelled the market growth. Plastics, such as polyvinylchloride (PVC), polyethylene (PE), polypropylene (PP), and engineering plastics are increasingly used to manufacture medical devices. Moreover, manufacturers are rapidly adopting contract manufacturing as it offers various advantages such as integrated design, rapid prototyping, streamlined production trials and reduced cost of plastic production. Furthermore, contract manufacturing allows the OEMs to focus on other crucial business aspects, including increasing sales, strategic planning, marketing, and customer services, resulting in steady production and efficient supply chain management. These factors are expected to create a positive outlook for the market in the coming years. (Source: Plastic Contract Manufacturing Market: Global Industry Trends, Share, Size, Growth, Opportunity and Forecast 2022-2027 (imarcgroup.com))
DaMar Plastics services the entire nation and is proud to lead the plastics injection market with its use of recycled materials and biodegradable plastics. Made in the USA is very important to many of our customers and helps drive our business forward. Many of our customers value our ability to work with them on research and development projects in order to get their products to the marketplace.
Marketing Strategies
DaMar Plastics sells through reputation, word of mouth and contacts known within the industry. In addition, our website drives many customers to our sales and marketing team. To date, all of DaMar Plastics’ sales have been made on an arm's length basis.
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EMPLOYEES
As of December 31, 2022, the Company and its subsidiaries had no full-time and no part-time employees in Canada and had 144 full-time employees and 13 part-time employees in the United States through its subsidiaries.
AVAILABLE INFORMATION
Our investor relations website address is www.salonaglobal.com. We are required to file Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q with the SEC on a regular basis, and are required to disclose certain material events in a Current Report on Form 8-K. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The SEC's website is located at http://www.sec.gov.
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1A. RISK FACTORS
Investing in our common shares involves a high degree of risk. You should carefully consider the following risks and all other information contained in this Annual Report, including our financial statements and the related notes, before investing in our securities. The risks and uncertainties described below are not the only ones we face, but include the most significant factors currently known by us that make investing in our securities speculative or risky. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations could be materially harmed. In that case, the trading price of our securities could decline, and you may lose some or all of your investment.
RISKS RELATED TO LIQUIDITY AND CAPITAL RESOURCES
Our financial statements have been prepared on a going concern basis, we must raise additional capital during 2023 to fund our operations and meet existing obligations resulting from acquisitions in order to continue as a going concern.
SRCO Professional Corporation, our independent registered public accounting firm for the fiscal year ended December 31, 2022, has included an explanatory paragraph in their opinion that accompanies our audited consolidated financial statements as of and for the ten months ended December 31, 2022, indicating that our current liquidity position raises substantial doubt about our ability to continue as a going concern. If we are unable to improve our liquidity position, we may not be able to continue as a going concern. The accompanying audited consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern and, therefore, be required to realize our assets and discharge our liabilities other than in the normal course of business which could cause investors to suffer the loss of all or a substantial portion of their investment.
We anticipate that our principal sources of liquidity will only be sufficient to fund our activities, but may not be sufficient to satisfy obligations we have incurred with respect to certain of our acquisitions. In order to have sufficient cash to fund these obligations, we will need to raise additional equity or debt capital, or restructure the payment terms for those obligations in order to continue as a going concern and we cannot provide any assurance that we will be successful in doing so.
We may not be able to cover our obligations incurred in connection with our acquisitions of Simbex and/or Biodex Medical Systems, which would have a material adverse effect on our financial condition and ability to continue as a going concern.
We anticipate that we will need to raise debt or equity capital in the near future in order to repay outstanding obligations we incurred in connection with the Simbex and Biodex Medical Systems, Inc. acquisitions when they mature. In the case of Biodex Medical Systems, these amounts consist of (i) $2 million due on July 1, 2023, $3 million due on October 1, 2023 and $2 million due on January 1, 2024 and in the case of Simbex, consist of approximately $3.3 million in earnout payments due in April 2023. If we are unable to raise sufficient capital to repay these obligations at maturity and we are otherwise unable to extend the maturity dates, we would be in default. We cannot provide any assurances that we will be able to raise the necessary amount of capital to repay these obligations or that we will be able to extend the maturity dates. Upon a default, our counterparty to the various agreements related to the acquisition would have the right to exercise its rights and remedies to collect against us. Accordingly, a default would have a material adverse effect on our business.
Although we have a limited business history, we have always operated at a loss and always generated negative cash flow and we anticipate that we will need to raise additional funds to finance our operations.
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On March 11, 2021, we 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, with the intent to operate in the recovery science market, including postoperative pain, wound care and other markets serving the aging population in the United States. Prior to our Change of Business, we were engaged in the business of making loans to third parties.
We have incurred recurring net losses, including net losses from operations before income taxes of $ 19.0 million and $4.5 million for the ten-months ended December 31, 2022, and the fiscal year ended February 28, 2022, respectively. We used $0.2 million and $3.7 million of cash for operating activities during the ten (10) months ended December 31, 2022, and the fiscal year ended February 28, 2022, respectively.
To fund our existing operations and business plan, we will need to raise additional capital. Our cash needs will depend on numerous factors, including our revenues, our ability to integrate companies we acquire and our ability to reduce and control costs. We expect to devote substantial capital resources to, among other things, fund operations and continue to integrate systems. If we are unable to secure such additional financing, it will have a material adverse effect on our business, and we may have to limit operations in a manner inconsistent with our development plans. If additional funds are raised through the issuance of equity securities or convertible debt securities, it will be dilutive to our stockholders and could result in a decrease in our stock price.
We have funded our operations primarily with proceeds from public and private offerings of our common stock. Our history of operating losses and cash uses, our projections of the level of cash that will be required for our operations to reach profitability, the terms of the private placement transactions that we completed in the past, and increasingly restricted availability of credit, may impair our ability to raise capital on terms that we consider reasonable and at the levels that we will require over the coming months. We cannot provide any assurances that we will be able to secure additional funding from public or private offerings on terms acceptable to us, if at all. If we are unable to obtain the requisite amount of financing needed to fund our planned operations, it would have a material adverse effect on our business and ability to continue as a going concern.
Our financial condition may impair our ability to obtain credit terms with our suppliers.
Our supplier contracts typically provide us with payment terms of at least thirty (30) days. However, our financial condition may make it difficult for us to continue to receive payment terms of at least thirty (30) days or may result in one or more of our suppliers making demand for adequate assurance, which could include a demand for payment-in-advance. If we are unable to obtain reasonable payment terms or if any of our material suppliers were to successfully demand payment-in-advance, it could have a material adverse effect on our liquidity.
We may be negatively impacted by challenging global economic conditions.
Our business, financial condition, results of operations and cash flow may be negatively impacted by challenging global economic conditions. For example, since early 2020, the U.S. and other world economies have experienced turmoil due to the novel coronavirus pandemic and related "shelter-in-place" orders and other governmental mandates ("COVID-19"), which has resulted in global economic uncertainty. A global economic slowdown would cause disruptions and extreme volatility in global financial markets, increased rates of default and bankruptcy and declining consumer and business confidence. The COVID-19 pandemic has already disrupted, and could potentially further disrupt, our supply chain or interfere with normal business operations due to the loss of employee availability. The broader impact of the COVID-19 pandemic on investors, businesses, the global economy or financial and commodity markets may also have a material adverse impact on our results of operations, financial condition and the trading price of our common shares.
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Additionally, the U.S. has imposed and may impose additional quotas, duties, tariffs, retaliatory or trade protection measures or other restrictions or regulations and may adversely adjust prevailing quota, duty or tariff levels, which can affect both the materials that we use in our products and the sale of finished products. [For example, the tariffs imposed by the U.S. on materials from China are impacting materials that we import for use in packaging in the U.S.] Measures to reduce the impact of tariff increases or trade restrictions, including geographical diversification of our sources of supply, adjustments in packaging design and fabrication or increased prices, could increase our costs, delay our time to market and/or decrease sales. Other governmental action related to tariffs or international trade agreements has the potential to adversely impact demand for our products and our costs, customers, suppliers and global economic conditions and cause higher volatility in financial markets. While we actively review existing and proposed measures to seek to assess the impact of them on our business, changes in tariff rates, import duties and other new or augmented trade restrictions could have a number of negative impacts on our business, including higher consumer prices and reduced demand for our products and higher input costs.
RISKS RELATED TO OUR BUSINESS
Our business, results of operations, cash flows, financial condition and liquidity may be negatively impacted by the effects of disease outbreaks, epidemics, pandemics, or similar wide-spread public health concerns and other natural disasters. The COVID-19 pandemic and the responses of governments to it had, and may again have, a material adverse effect on our business, results of operations and cash flows and may result in a material adverse effect on our financial condition and liquidity.
Our business, results of operations, cash flows, financial condition and liquidity may be negatively impacted by the effects of disease outbreaks, epidemics, pandemics, similar wide-spread public health concerns and other natural disasters. The COVID-19 pandemic has had, and continues to have, an unprecedented impact on society, worldwide economic activity, and the health care sector. The COVID-19 pandemic and the governmental responses to it had, and may again have, a material adverse effect on our business, results of operations and cash flows and may result in a material adverse effect on our financial condition and liquidity. Even after the COVID-19 pandemic has begun to subside, we may again experience material adverse impacts to our business, results of operations and cash flows as a result of, among other things, its global economic impact, including any recession that may occur in the future, or a prolonged period of economic slowdown.
The impact of the COVID-19 pandemic may also exacerbate other risks discussed below, any of which could have a material adverse effect on us.
Our future growth is dependent upon our ability to develop or acquire and maintain new products and technologies that achieve market acceptance with acceptable margins.
Our future success depends on our ability to timely develop (or obtain the right to sell) competitive and innovative products and services and to market them quickly and cost-effectively. Our ability to anticipate customer needs and emerging trends and develop or acquire new products, services and technologies at competitive prices requires significant resources, including employees with the requisite skills, experience and expertise. The failure to successfully address these challenges could materially disrupt our sales and operations.
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Our failure to comply with all regulatory, permit and license requirements could result in criminal or civil sanctions or an adverse effect on our business.
We are operating in an industry that is subject to extensive federal and state regulation. Failure to comply with applicable regulations could result in severe criminal or civil sanctions or require us to make significant changes to our operations that could adversely affect our business, financial condition and operating results. Our operations are also subject to state laws governing, among other things, distribution of medical equipment and certain types of health activities, and we may be required to obtain and maintain licenses in each state to act as an equipment supplier. If we fail to obtain or maintain any required licenses and/or accreditations, it could have an impact on our business.
Increased regulatory burdens may result in significant loss of revenue, substantial out-of-pocket costs and loss of management focus on our business.
Increasing regulatory burdens, including premarketing approval delays, may result in significant loss of revenue, unpredictable costs and loss of management focus on developing and marketing products. Medical device companies are increasingly burdened with bureaucratic and regulator demands that may not be reasonably related to assuring the safety or effectiveness of the devices that they provide. Premarketing submission administrative burdens, and substantial "user fees" or notified body review fees, represent a significant non-clinical and/or non-scientific barrier to new product introduction, resulting in lack of investment or delays to revenues from new or improved devices. The risks associated with such circumstances relate not only to substantial out-of-pocket costs, including potential litigation, but also loss of business and a diversion of attention of key employees for an extended period of time from managing their normal responsibilities, particularly in new product development and routine quality assurance activities.
Healthcare reform legislation may negatively impact us.
Healthcare reform laws significantly affect the U.S. healthcare services industry. In recent years, many legislative proposals have been introduced or proposed in Congress and in some state legislatures that would affect major changes in the healthcare system, either nationally or at the state level. The ultimate content, timing or effect of any healthcare reform legislation and the impact of potential legislation on us is uncertain and difficult, if not impossible, to predict. That impact may be material to our business, financial condition or results of operations. Legislative or executive order healthcare reform in the United States has the potential to render the U.S. medical device marketplace unpredictable. A fully government-run healthcare system might expand demand for healthcare services to previously uninsured populations but may also reduce or eliminate healthcare consumer choice as well as commercial incentives for innovation. Although we do not collect revenue by billing insurance providers, changes in reimbursement by public or private insurance could reduce the profitability of providing physical therapy services, and indirectly decrease demand for our products or our acquisition targets.
The health care products distribution industry is highly competitive (including, without limitation, competition from third-party online commerce sites) and consolidating, and we may not be able to compete successfully.
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The healthcare and medical device industry is highly competitive and dynamic and will become more competitive as new players enter the market. Certain competitors will be subsidiaries or divisions of larger, much better capitalized companies. Certain competitors will have vertically integrated production and services sectors of the market. We may have less capital and may encounter greater operational challenges in serving the market. Better capitalized competitors may be able to borrow money or raise debt to purchase equipment on more favorable terms or more easily than us. Potential competitors could have significantly greater financial, research and development, production, and sales and marketing resources than we have and could utilize their greater resources to acquire or develop new technologies or products that could effectively compete with ours. Additionally, demand for our products could be diminished by technological change or equivalent or superior products developed by competitors. Competing in these markets could result in price-cutting, reduced profit margins and loss of market share, any of which would harm our business, financial condition and results of operations. Additionally, traditional health care supply and distribution relationships are being challenged by electronic online commerce solutions. The continued advancement of online commerce by third parties will require us to cost-effectively adapt to changing technologies, to enhance existing services and to differentiate our business (including with additional value-added services) to address changing demands of consumers and our customers on a timely basis. The emergence of such potential competition and our inability to anticipate and effectively respond to changes on a timely basis could have a material adverse effect on our business. Our ability to compete effectively depends upon our ability to distinguish ourselves from our competitors and their products, on such factors as safety and effectiveness, product pricing, compelling clinical data and quality of customer support.
We may be unable to identify and complete acquisitions.
We may not be able to successfully identify and complete corporate transactions on favorable terms or achieve anticipated synergies relating to any acquisitions in the medical technology sector, and such acquisitions could result in unforeseen operating difficulties and expenditures or require significant management resources and significant charges. As a part of our anticipated growth strategy, we are continuously exploring potential acquisitions of complementary businesses, technologies, services or products. We may be unable to find suitable acquisition candidates. Even if we identify appropriate acquisition candidates, we may be unable to complete the acquisitions on favorable terms, if at all, as a result of changes in tax laws, regulations, financial market, or other economic or market conditions. We may incur material costs in pursuing successful or unsuccessful acquisitions. Acquisition activities can be thwarted by overtures from competitors for the targeted candidates, government regulation and replacement product developments within the industry in which we are expected to operate. Competition may intensify due to the ongoing consolidation in the healthcare industry, which may increase our acquisition costs. Competition from other buyers of medical device companies may drive asset prices to levels that we do not believe are justified in the long term, which could delay our acquisition strategy. In addition, the process of integrating an acquired business, technology, service or product into existing operations could result in unforeseen difficulties and expenditures. Acquired businesses may require capital infusions for the possibility of future growth. Integrating completed acquisitions into existing operations involves numerous short-term and long-term risks, including diversion of management's attention, failure to retain key personnel, long-term value of acquired intangible assets and acquisition expenses. In addition, we may be required to comply with laws, rules and regulations that may differ from those of the states in which our operations are currently conducted. Moreover, we may not realize the anticipated financial or other benefits of an acquisition.
Future acquisitions could also involve the issuance of equity securities, the incurrence of debt, assumption of actual or contingent liabilities or amortization of expenses related to other intangible assets, any of which could adversely impact our financial condition or results of operations. The issuance of shares for an acquisition may result in dilution to our shareholders and, depending on the number of shares that may be issued, the resale of such shares could affect the trading price of our common shares. In addition, equity or debt financing required for such acquisitions may not be available. We may not be able to identify all actual or contingent liabilities associated with a particular acquisition, and representations and warranties in a purchase agreement, if any, may not be sufficient to allow for recovery of losses.
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Any corporate transaction will be accompanied by certain risks including but not limited to: exposure to unknown liabilities of acquired companies and the unknown issues with any associated technologies or research; certain acquired businesses may have business models with lower operating margins, which could affect our overall operating results in future periods; higher than anticipated acquisition costs and expenses; the difficulty and expense of integrating operations, systems, and personnel of acquired companies; disruption of ongoing business; uncertainty that an acquired business will continue to maintain its pre-acquisition revenue and growth rates, or be profitable; inability to retain key customers, vendors, and other business partners of the acquired company; diversion of management's time and attention; the realization of financial and operating risks not fully anticipated; and potential challenges under antitrust laws, either before or after an acquisition is consummated, which could involve substantial legal costs and result in our having to abandon the transaction or make a divestiture. We may not be able to successfully overcome these risks and other problems associated with acquisitions and this may adversely affect our business, financial condition or results of operations.
We are dependent upon third parties for the manufacture and supply of a significant volume of our products.
We obtain a significant percentage of the products we distribute from third parties, with whom we generally do not have long-term contracts. While there is typically more than one source of supply, some key suppliers, in the aggregate, supply a significant portion of the products we sell. In the event of any interruption in supply, we would need to identify and obtain acceptable replacement sources on a timely basis. There is no guarantee that we would be able to obtain such alternative sources of supply on a timely basis, if at all, and an extended interruption in supply, particularly of a high-sales volume product, could result in a significant disruption in our sales and operations, as well as damage to our relationships with customers and our reputation. Our supply chain could be materially disrupted if our suppliers fail to comply with or are unable to satisfy our demand for products.
Adverse changes in supplier rebates or other purchasing incentives could negatively affect our business.
The terms on which we purchase or sell products from many suppliers may entitle us to receive a rebate or other purchasing incentive based on the attainment of certain growth goals. Suppliers may reduce or eliminate rebates or incentives offered under their programs or increase the growth goals or other conditions we must meet to earn rebates or incentives to levels that we cannot achieve. Increased competition either from generic or equivalent branded products could result in us failing to earn rebates or incentives that are conditioned upon achievement of growth goals. Additionally, factors outside of our control, such as customer preferences, consolidation of suppliers or supply issues, can have a material impact on our ability to achieve the growth goals established by our suppliers, which may reduce the number of rebates or incentives we receive. The occurrence of any of these events could have an adverse impact on our business, financial condition or operating results.
Risks inherent in acquisitions, dispositions and joint ventures could offset the anticipated benefits.
One of our business strategies has been to expand our domestic and international markets in part through acquisitions and joint ventures and we expect to continue to make acquisitions and enter into joint ventures in the future. Such transactions require significant management attention, may place significant demands on our operations, information systems, legal, regulatory, compliance-functions and financial resources, and there is risk that one or more may not succeed. We cannot be sure, for example, that we will achieve the benefits of revenue growth that we expect from these acquisitions or joint ventures or that we will avoid unforeseen additional costs, taxes or expenses. Our ability to successfully implement our acquisition and joint venture strategy depends upon, among other things, the following:
1. the availability of suitable acquisition or joint venture candidates at acceptable prices;
2. our ability to consummate such transactions, which could potentially be prohibited due to U.S. or foreign antitrust regulations;
3. the liquidity of our investments and the availability of financing on acceptable terms;
4. our ability to retain customers or product lines of the acquired businesses or joint ventures;
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5. our ability to retain, recruit and incentivize the management of the companies we acquire; and
6. our ability to successfully integrate these companies' operations, services, products and personnel with our culture, management policies, legal, regulatory and compliance policies, cybersecurity systems and policies, internal procedures, working capital management, financial and operational controls and strategies.
Furthermore, some of our acquisitions and future acquisitions may give rise to an obligation to make contingent payments or to satisfy certain repurchase obligations, which payments could have material adverse impacts on our financial results individually or in the aggregate.
Additionally, when we decide to sell assets or a business, we may encounter difficulty in finding buyers or executing alternative exit strategies on acceptable terms in a timely manner, which could delay the accomplishment of our strategic objectives. Alternatively, we may dispose of assets or a business at a price or on terms that are less than we had anticipated. Dispositions may also involve continued financial involvement in a divested business, such as through transition service agreements, indemnities or other current or contingent financial obligations. Under these arrangements, performance by the acquired or divested business, or other conditions outside our control, could affect our future financial results.
The health care industry is experiencing changes due to political, economic and regulatory influences that could materially adversely affect our business.
The health care industry is highly regulated and subject to changing political, economic and regulatory influences. In recent years, the health care industry has undergone, and is in the process of undergoing, significant changes driven by various efforts to reduce costs, including, among other factors: trends toward managed care; collective purchasing arrangements and consolidation among office-based health care practitioners; and changes in reimbursements to customers, including increased attention to value-based payment arrangements, as well as growing enforcement activities (and related monetary recoveries) by governmental officials. Both our profitability and the profitability of our customers may be materially adversely affected by laws and regulations reducing reimbursement rates for pharmaceuticals, medical supplies and devices, and/or medical treatments or services, or changes to the methodology by which reimbursement levels are determined. If we are unable to react effectively to these and other changes in the health care industry, our business could be materially adversely affected.
Expansion of group purchasing organizations ("GPO"), or provider networks and the multi-tiered costing structure may place us at a competitive disadvantage.
The health care products industry is subject to a multi-tiered costing structure, which can vary by manufacturer and/or product. Under this structure, certain institutions can obtain more favorable prices for health care products than we are able to obtain. The multi-tiered costing structure continues to expand as many large integrated health care providers and others with significant purchasing power, such as GPOs, demand more favorable pricing terms. Additionally, the formation of provider networks, GPOs may shift purchasing decisions to entities or persons with whom we do not have a historical relationship and may threaten our ability to compete effectively, which could in turn negatively impact our financial results. Although we are seeking to obtain similar terms from manufacturers to access lower prices demanded by GPO contracts or other contracts, and to develop relationships with existing and emerging provider networks, GPOs, we cannot guarantee that such terms will be obtained, or contracts executed.
Increases in shipping costs or service issues with our third-party shippers could harm our business.
Our ability to meet our customers’ expedited delivery expectations is an integral component of our business strategy for which our customers rely. Shipping is a significant expense in the operation of our business. We ship almost all of our orders through third-party delivery services, and typically bear the cost of shipment. Accordingly, any significant increase in shipping rates could have a material adverse effect on our business, financial condition or operating results. While we have recently experienced increases in the cost of shipping, we do not expect these additional expenses to be material to our results. However, it is possible that such costs could be material in the future. Similarly, strikes or other service interruptions by those shippers, including at transportation centers or shipping ports, could cause our operating expenses to rise and materially adversely affect our ability to deliver products on a timely basis.
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We may be unable to achieve our growth strategy.
We may have difficulty identifying or acquiring suitable acquisition targets and in achieving organic growth, which is a significant aspect of our proposed business model. In the event that we are successful in consummating acquisitions in the future, such acquisitions may negatively impact our business, financial condition, results of operations, cash flows and prospects due to a variety of factors, including the acquired company's business not achieving the anticipated revenue, earnings or cash flows, assumption of liabilities or risks beyond our estimates or the diversion of the attention of management from our then existing business. If we are unable to continue to grow or manage our growth for any of these reasons, we may be unable to achieve our proposed expansion strategy, which could adversely impact our earnings, revenue and profits.
We may fail in our efforts to manage growth.
The success of our business strategy depends, in part, on our ability to expand our operations in the future. Our anticipated growth strategy is expected to place demands on management, operational and financial information systems, and other resources. Expansion of our operations may require substantial financial resources and management attention. To accommodate anticipated future growth, and to compete effectively, we may need to improve our management, implement operational and financial information systems, and expand, train, manage, and motivate our workforce. Our personnel, systems, procedures, or controls may not be adequate to support our operations in the future. Further, focusing financial resources and diverting management's attention to the expansion of our operations may negatively impact our financial results. Any failure to improve our management, to implement operational and financial information systems, or expand, train, manage, or motivate our workforce, as required, may reduce or prevent our growth plans.
We are dependent on key distributors.
Our reliance on third party distributors in some markets may result in less predictable revenues. Distributors may have varying expertise in marketing and selling specialty medical devices and may also sell other devices that could result in less focus on our products.
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We are dependent on key customers, markets and products.
We produce and offer for sale a limited number of products and have a concentration of orders from key customers, primarily in the U.S. market, from which we derive a substantial portion of our revenue. Customers may cancel or choose not to renew their contracts. Changes in economic conditions could influence future actions of our partners or other customers. To the extent that any significant agreement or agreements with our customers are canceled, including, without limitation, our supply agreements, or are not renewed or replaced with other arrangements having at least as favorable terms, our business, financial condition and results of operations could be materially adversely affected. We seek to expand our product offerings, increase the number of customers and expand our markets, but there is no assurance that this plan will succeed.
Our customers depend on third-party coverage and reimbursements. The failure of healthcare programs to provide coverage and reimbursement, or reductions in levels of reimbursement, could have a material adverse effect on our business.
The ability of our customers to obtain reimbursements for products they purchase from us or from intermediaries, or from therapies they provide using the products they purchase from the Company, or our intermediaries is important to our business. Demand for many of our existing and new medical products is, and will continue to be, affected by the extent to which government healthcare programs and private health insurers reimburse our customers for patients' medical expenses in the countries where we do business. Any reduction in the number of reimbursements received by our customers could harm our business by reducing their selection of our products and the prices they are willing to pay.
In addition, as a result of their purchasing power, third-party payors are implementing cost-cutting measures such as seeking discounts, price reductions or other incentives from medical products suppliers and imposing limitations on coverage and reimbursements for medical technologies and procedures. These trends could compel us to reduce prices for our existing products and potential new products and could cause a decrease in the size of the market or a potential increase in competition that could have a material adverse effect on our business, results of operations, financial condition and cash flows.
We may be unable to successfully market our products and services.
We may not be successful in marketing our products and services. In order to sustain and increase revenues, our products and services must achieve a significant degree of market acceptance. If we are unable to promote, market and sell our products and services or secure relationships with customers, our business, financial condition and results of operations would be materially adversely affected. Levels of market acceptance for products and services could be impacted by several factors, many of which are not within our control, including but not limited to: safety, efficacy, convenience and cost-effectiveness of our products and services; scope of approved uses and marketing approval; difficulty in, or excessive costs to, manufacturing; infringement or alleged infringement of the patents or intellectual property rights of others; maintenance of business arrangements with healthcare providers; availability of alternative products or services from competitors; and acceptance of the price of products and services. If our competitors are able to develop and market products that are preferred over those offered by us, are able to grow service businesses that are preferred over our services or other businesses preferred over other products and services that may be developed, we may not be able to generate sufficient revenues to continue our operations. We may not be able to contend successfully with competitors. The medical device industry is highly competitive and subject to significant and rapid technological changes as new technologies, services and treatments are developed. We plan to market our products in other countries besides the United States. We may not succeed in our marketing efforts. We may incur substantial initial costs associated with entering a new market. It may take time to meet all the legal, regulatory and economic burdens of entering a new market, and those costs may not be recouped for some time or at all, which may have an impact upon our financial performance.
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We may fail to keep pace with necessary technological changes.
The market for some of our products may be characterized by rapid change and technological improvements. Failure to respond in a timely and cost-effective way to these technological developments could result in serious harm to our business and operating results. We derive, and it is expected that we will continue to derive, a substantial portion of revenues from the development and sale of products in the medical device industry. As a result, our success will depend, in part, on our ability to develop and market product offerings that respond in a timely manner to the technological advances of our competitors, evolving industry standards and changing patient preferences. There is no assurance that we will keep up with technological improvements.
MACRO ECONOMIC AND POLITICAL RISKS
Uncertain global and domestic macro-economic and political conditions could materially adversely affect our results of operations and financial condition.
Uncertain global and domestic macro-economic and political conditions that affect the economy and the economic outlook of the United States, Europe, Asia and other parts of the world could materially adversely affect our results of operations and financial condition. These uncertainties, include, among other things:
1. election results;
2. greater restrictions on imports and exports;
3. supply chain disruptions;
4. changes in laws and policies governing health care or data privacy;
5. tariffs and sanctions;
6. changes to the relationship between the United States and China; • sovereign debt levels;
7. the inability of political institutions to effectively resolve actual or perceived economic, currency or budgetary crises or issues;
8. consumer confidence;
9. unemployment levels (and a corresponding increase in the uninsured and underinsured population);
10. changes in regulatory and tax regulations;
11. interest rate fluctuations, and strengthening of the dollar, which have and will continue to impact our results of operations;
12. availability of capital;
13. increases in fuel and energy costs;
14. the effect of inflation on our ability to procure products and our ability to increase prices over time and pass through to our customers price increases we may receive;
15. changes in tax rates and the availability of certain tax deductions;
16. increases in labor costs;
17. increases in health care costs;
18. our aspirations, goals and disclosures related to environmental, social and governance (ESG) matters;
19. the threat or outbreak of war, terrorism or public unrest (including, without limitation, the war in Ukraine and the possibility of a wider European or global conflict); and
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20. changes in laws and policies governing manufacturing, development and investment in territories and countries where we do business.
Additionally, changes in government, government debt and/or budget crises may lead to reductions in government spending in certain countries, which could reduce overall health care spending, and/or higher income or corporate taxes, which could depress spending overall. Recessionary or inflationary conditions and depressed levels of consumer and commercial spending may also cause customers to reduce, modify, delay or cancel plans to purchase our products and may cause suppliers to reduce their output or change their terms of sale. We have experienced inflationary pressures, including higher freight costs and interest expense. Although inflation impacts both our revenues and costs, the depth and breadth of our product portfolio often allows us to offer lower-cost national brand solutions or corporate brand alternatives to our more price-sensitive customers who are unable to absorb price increases, thus positioning us to protect our gross profit. The strengthening of the dollar, likewise, has impacted our revenues and costs, but neither inflation nor exchange rates have materially impacted our results of operations in fiscal year 2022. We generally sell products to customers with payment terms. If customers' cash flow or operating and financial performance deteriorate, or if they are unable to make scheduled payments or obtain credit, they may not be able to, or may delay, payment to us. Likewise, for similar reasons suppliers may restrict credit or impose different payment terms.
REGULATORY AND LITIGATION RISKS
Failure to comply with existing and future regulatory requirements could materially adversely affect our business.
We strive to be compliant with the applicable laws, regulations and guidance described below in all material respects, and believe we have effective compliance programs and other controls in place to ensure substantial compliance. However, compliance is not guaranteed either now or in the future as certain laws, regulations and guidance may be subject to varying and evolving interpretations that could affect our ability to comply, as well as, future changes, additions and enforcement approaches, including in light of political changes. When we discover situations of non-compliance we seek to remedy them and bring the affected area back into compliance. Changes with respect to the applicable laws, regulations and guidance described below may require us to update or revise our operations, services, marketing practices, and compliance programs and controls, and may impose additional and unforeseen costs on us, pose new or previously immaterial risks to us, or may otherwise have a material adverse effect on our business. There can be no assurance that current and future government regulations will not adversely affect our business, and we cannot predict new regulatory priorities, the form, content or timing of regulatory actions, and their impact on the health care industry and on our business and operations.
We face inherent risk of exposure to product liability, intellectual property infringement and other claims in the event that the use of the products we sell results in injury.
Our business involves a risk of product liability, intellectual property infringement and other claims in the ordinary course of business. Another potential risk we face in the distribution of our products is liability resulting from counterfeit or tainted products infiltrating the supply chain.
We may be subject to certain conflicts of interest.
Certain of our directors and officers will be engaged in, and will continue to engage in, other business activities on their own behalf and on behalf of other companies and, as a result of these and other activities, such directors and officers may become subject to conflicts of interest. Our independent members of the Board will review any such transactions and report to the Audit Committee of the Board. The Business Corporations Act of British Columbia, as amended, including the regulations promulgated thereunder (the "BCBCA") provides that in the event that a director has a material interest in a contract or proposed contract or agreement that is material to an issuer, the director shall disclose his interest in such contract or agreement and shall refrain from voting on any matter in respect of such contract or agreement, subject to and in accordance with the BCBCA. To the extent that conflicts of interest arise, such conflicts will be resolved in accordance with the provisions of the BCBCA.
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We do not have foreign private issuer status.
As of March 1, 2020, we ceased to meet the definition of a "foreign private issuer" set out in Rule 405 of the Securities Act. As a result, our equity securities will be deemed to be "restricted securities" as such term is defined in Rule 144 of the Securities Act. Any such securities issued by us must be registered with the SEC or be issued on an exempt basis and carry resale restrictions. As a result of the loss of foreign private issuer status, we filed a registration statement on Form S-1 to register the resale of securities issued in connection with certain private equity financings, and we are now subject to SEC rules and regulations regarding disclosure which require the filing of various periodic reports on Forms 10-K, 10-Q and 8-K. Compliance with these obligations requires significant financial and management resources. We are also subject to liability under the Securities Act and the Exchange Act. Liability under these acts can lead to monetary fines, limitations on future financings and, if imposed, may impede our ability to finance our business.
We may be subject to litigation.
We and/or our directors may be subject to a variety of civil or other legal proceedings, with or without merit, which may redirect substantial amounts of our resources. Our devices may be used in inherently risky situations to help physicians achieve a more positive outcome than what might otherwise be the case. In any lawsuit where an individual plaintiff suffered permanent physical injury, the possibility of a large award for damages exists whether or not a causal relationship exists. Moreover, even if we are successful in litigation, litigation can redirect significant resources including, but not limited to, our management's time and attention and our capital.
We face risks relating to our insurance coverage.
The marketing and sale of medical device products creates an inherent risk of claims for product liability. We carry product liability insurance that we consider adequate to protect us from claims. There can be no assurance that we will have resources sufficient to satisfy liability claims in excess of policy limits if required to do so. Also, if we are subject to such liability claims, there is no assurance that our insurance provider will continue to insure us or that our insurance rates will not substantially rise, resulting in increased costs to us or forcing us to either pay higher premiums or reduce our coverage amounts, which would result in increased liability to claims.
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We may be unable to maintain the intellectual property rights on which our future success is dependent.
It is anticipated that our trademarks, trade secrets and other intellectual property will be a component of our success. Effective trademark, trade secret and intellectual property protection may not be available to us in every jurisdiction in which our products may be available. In addition, if any third-party confidentiality agreements in our favor are breached, there may not be an adequate remedy available to us. If our trade secrets become publicly known, it may cause us to lose competitive advantages.
We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to us, could subject us to significant liabilities and other costs.
Other companies, including our competitors, may obtain patents or other proprietary rights that would limit, interfere with, or otherwise circumscribe our ability to make, use, or sell products. Should there be a successful claim of infringement against us and if we could not license the alleged infringed technology at a reasonable cost, our business and operating results could be adversely affected. There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. The validity and breadth of claims covered in medical technology patents involve complex legal and factual questions for which important legal principles remain unresolved. Any litigation claims against us, independent of their validity, may result in substantial costs and the diversion of resources with no assurance of success.
Our products may be subject to product recalls.
Our products may be subject to recall, which would harm our reputation and business. The FDA and similar governmental authorities in other countries have the authority to require the recall of medical device products in the event of material deficiencies or defects in design or manufacturing. A government mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design defects, including defects in labeling. Any recall would divert managerial and financial resources and could harm our reputation with customers. There can be no assurance that we will not have product recalls in the future or that such recalls would not have a material adverse effect on our business.
We face risks related to our information technology systems, and potential cyber-attacks and security breaches.
Increased sophistication and activities of perpetrators of cyber-attacks have resulted in an increase in information security risks in recent years. Hackers develop and deploy viruses, worms, and other malicious software programs that attack products and services and gain access to networks and data centers. If we were to experience difficulties maintaining existing systems or implementing new systems, we could incur significant losses due to disruptions in our operations. Additionally, these systems may contain valuable proprietary and confidential information and personal customer data. A security breach could result in disruptions of our internal systems and business applications, harm to our competitive position from the compromise of confidential business information or subject us to liability under laws that protect personal data. As cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities. Any of these consequences would adversely affect our revenue and margins.
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We are subject to debt instruments and restrictive covenants that may impede our ability to conduct our business.
We are subject to various restrictive covenants and events of default, including payment of interest and principal when due, under a commercial loan agreement entered into by our subsidiary SDP with a third party financial institution on June 9, 2021 in connection with a $7,313,760 (US$5,400,000) revolving loan facility with a maturity on August 1, 2023, and a secured promissory note issued by SDP in the principal amount of $1,015,800 (US$750,000) maturing on June 1, 2024 (collectively, the "Loans"). If there is an event of default under the Loans, the principal amount owing thereunder, plus accrued and unpaid interest, may be declared immediately due and payable. If such an event occurs, it could have a material negative financial impact on the Company. Any extended default under the Loans could result in the loss of our entire business. In addition, the Loans include various conditions and covenants that require us to obtain consents prior to carrying out certain activities and entering into certain transactions. The inability to meet these conditions and covenants or obtain lenders' consent to carry out restricted activities could materially and adversely affect our business and results of operations.
We are subject to environmental regulations and any failure to comply may result in substantial fines and sanctions.
Our operations are subject to state, federal and international environmental laws and regulations governing, among other things, emissions to air, discharges to waters and the generation, handling, storage, transportation, treatment and disposal of raw materials, waste and other materials. Many of these laws and regulations provide for substantial fines and criminal sanctions for violations. We believe that we are operating our business and facility in a manner that complies in all material respects with environmental, health and safety laws and regulations; however, we may incur material costs or liabilities if we fail to operate in full compliance. We do not maintain environmental damage insurance coverage with respect to the products which we manufacture.
We may have to make significant expenditures in the future to comply with evolving environmental, health and safety requirements, including new requirements that may be adopted or imposed in the future. To meet changing licensing and regulatory standards, we may have to make significant additional site or operational modifications that could involve substantial expenditures or reduction or suspension of some of our operations. We cannot be certain that we have identified all environmental and health and safety matters affecting our activities, and in the future our environmental, health and safety problems, and the costs to remediate them, may be materially greater than we expect.
Our results of operations could be affected by currency fluctuations.
Our properties are all located in the United States and most costs associated with these properties are paid in U.S. dollars. At this time, all revenues are earned in U.S. dollars. If we are successful in marketing products to Europe and Japan, revenues may be earned in euros, yen and other diverse currencies. Marketing costs may also be incurred in such currencies. There can be significant swings in the exchange rate between these currencies and the Canadian dollar. There are no plans at this time to hedge against any exchange rate fluctuations in currencies.
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Risks Related to Our Finances and Capital Requirements
We may invest in pre-revenue and other revenue-generating medical device companies which may not be able to meet anticipated revenue targets in the future.
We may make investments in companies with no significant sources of operating cash flow and no revenue from operations, or companies that have revenues but are introducing new product lines with no revenue history and a need to fund production and marketing expenses. Our investments in such companies will be subject to risks and uncertainties that new companies with no operating history may face. In particular, there is a risk that our investment in these pre-revenue companies or new products will not be able to meet anticipated revenue targets or will generate no revenue at all. The risk is that underperforming pre-revenue companies may lead to these businesses failing, which could have a material adverse effect on our business, prospects, revenue, results of operation and financial condition.
Our sales are difficult to forecast.
As a result of recent and ongoing regulatory and policy changes in the medical device industries, the market data available is limited and may be unreliable. We must rely largely on our own market research to forecast sales, as detailed forecasts are not generally obtainable from other sources in the states in which our business operates. Additionally, any market research and our projections of estimated total retail sales, demographics, demand and similar consumer research, are based on assumptions from limited and unreliable market data. Projections are inherently subject to varying degrees of uncertainty and their achievability depends on the timing and probability of a complex series of future events. There is no assurance that the assumptions upon which these projections are based will be realized. Actual results may differ materially from projected results for several reasons including increases in operating expenses, changes or shifts in regulations or applicable laws, undiscovered or unanticipated adverse industry and economic conditions, and unanticipated competition. Accordingly, our investors should not rely on any projections to indicate the actual results we might achieve.
Changes in our customer, product or competition mix could cause our product margin to fluctuate.
From time to time, we may experience changes in our customer mix, our product mix or our competition mix. Changes in our customer mix may result from geographic expansion or contractions, legislative or enforcement priority changes affecting the products we distribute, selling activities within current geographic markets and targeted selling activities to new customer sectors. Changes in our product mix may result from marketing activities to existing customers, the needs communicated to us from existing and prospective customers and from legislative changes. Changes in our competition mix may result from well-financed competitors entering into our business segment. If customer demand for lower-margin products increases and demand for higher-margin products decreases, our business, results of operations and financial condition may suffer.
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We may not achieve or maintain profitability in the future.
We intend to expend significant funds to make acquisitions and to fund our working capital. Our efforts to grow our business may be more costly than we expect, and we may not be able to increase our revenue enough to offset higher operating expenses. We may incur significant losses in the future for a number of reasons, including as a result of unforeseen expenses, difficulties, complications and delays, the other risks described in this Annual Report and other unknown events. The amount of future net losses will depend, in part, on the growth of our future expenses and our ability to generate revenue. If we continue to incur losses in the future, the net losses and negative cash flows incurred to date, together with any such future losses, will have an adverse effect on our shareholders' equity and working capital. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. If we are unable to achieve and sustain profitability, the market price of our common shares may significantly decrease and our ability to raise capital, expand our business or continue our operations may be impaired. A decline in our value may also cause an investor to lose all or part of their investment.
RISKS RELATED TO OUR COMMON SHARES
Our common shares are a high-risk investment.
Our common shares are listed in Canada on the TSXV, and we are not listed on any U.S. national securities exchange. Consequently, there is a limited trading market for our common shares, which may affect the ability of shareholders to sell our common shares in the U.S. and the prices at which they may be able to sell our common shares. The TSXV is a smaller exchange in Canada and a United States broker may not facilitate trades in Canada. The market price of our common shares has been volatile and fluctuates widely in price in response to various factors which are beyond our control. The price of our common shares is not necessarily indicative of our operating performance or long-term business prospects. In addition, the securities markets have from time-to-time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common shares.
In the United States, our common shares are considered a "penny stock", and our shares are not listed and trading on any U.S. exchange. The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks". These rules further restrict the trading activity and marketability of our common shares. As a result of the foregoing, an investment in our common shares should be considered a high-risk investment.
Additional issuances of common shares may result in further dilution.
We may issue additional common shares in the future to finance acquisitions or operations, which may dilute an existing investor's holdings. We cannot predict the size or nature of future issuances or the effect that future issuances and sales of common shares will have on the market price of our common shares. Issuances of a substantial number of additional common shares, or the perception that such issuances could occur, may adversely affect prevailing market prices for our common shares. With any additional issuance of common shares, our investors will suffer dilution to their voting power and economic interest.
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Our share price may be volatile and as a result investors could lose all or part of their investment.
In addition to volatility associated with equity securities in general, the value of an investment in our common shares could decline due to the impact of any of the following factors upon the market price of our common shares:
• our ability to execute our business plan;
• period-to-period fluctuations in our financial results;
• changes in the economic performance or market valuations of companies in the industry in which we operate;
• addition or departure of our executive officers and other key personnel;
• sales or perceived sales of additional shares of our common shares;
• operating and financial performance that varies from the expectations of management, securities analysts and investors;
• regulatory changes affecting our industry generally and our business and operations both domestically and abroad;
• announcements of developments and other material events by us or our competitors;
• changes in global financial markets and global economies and general market conditions;
• significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; and
• news reports relating to trends, concerns, technological or competitive developments, regulatory changes and other related issues in our industry or target markets.
In addition, the securities markets have from time-to-time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common shares.
Resales of our common shares in the United States must comply with state blue sky laws.
Our common shares are not "covered securities" under Section 18(a) of the Securities Act of 1933, as amended, because the common shares are not listed for trading on a U.S. national securities exchange and must be resold in compliance with applicable state blue sky laws. Applicability is based upon the residence of the purchaser. While some states may have an exemption for resale without compliance with state blue sky laws, other states will require compliance with blue sky laws. Such compliance can be costly and lengthy. Any delays could result in burdensome wait times or the termination of the resale transaction.
We do not intend to pay dividends on our common shares and, consequently, the ability of investors to achieve a return on their investment will depend on appreciation in the price of our common shares.
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Because we have no near-term plans to pay cash dividends on our common shares, investors must look solely to share appreciation for a return on their investment. We anticipate retaining all available funds and any future earnings for use in the operation and expansion of our business and there is no expectation that we will declare or pay any cash dividends on our common shares in the near term. Any future determination as to the declaration and payment of cash dividends will be at the discretion of the Board and will depend on the existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, and other factors that the Board considers relevant. Accordingly, investors will only see a return on their investment if the value of our common shares appreciates.
We are subject to the continued listing criteria of the TSXV and our failure to satisfy these criteria may result in the suspension or delisting of the common shares.
Our common shares are currently listed on the TSXV. In order to maintain the listing, we must maintain certain financial and share distribution targets, including maintaining a minimum number of public shareholders. In addition to objective standards, the TSXV may delist or suspend from trading the securities of any issuer if, in the TSXV's opinion, the issuer or its principal operating subsidiary substantially reduces or impairs its principal operating assets, ceases or discontinues a substantial portion of its operations or business for any reason, or seeks protection or is placed under the protection of any insolvency or bankruptcy laws or is placed into receivership, or if any other event occurs or any condition exists which, in the opinion of the TSXV, makes continued listing on the TSXV inadvisable or not in the public interest.
If the TSXV suspends or delists our common shares, investors may face material adverse consequences, including, but not limited to, a lack of trading market for our common shares, reduced liquidity, decreased analyst coverage of the Company, and an inability for us to obtain additional financing to fund our operations.
We are eligible to be treated as an "emerging growth company" as defined in the JOBS Act, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common shares less attractive to investors.
As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
• have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
• comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm;
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• rotate audit firms or provide a supplement to the auditor's report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);
• submit certain executive compensation matters to shareholder advisory votes, such as "say-on-pay" and "say-on- frequency"; and
• disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer's compensation to median employee compensation.
We will remain an "emerging growth company" until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1.07 billion, (ii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period or (iv) the last day of the fiscal year in which we celebrate the fifth anniversary of our first sale of registered common equity securities pursuant to the Securities Act. Until such time, however, we cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our stock price may be more volatile.
It may be difficult to enforce judgments or bring actions outside the United States against us and our directors.
We are a British Columbia corporation and, as a result, it may be difficult or impossible for an investor to enforce in courts outside the United States judgments obtained in United States courts based upon the civil liability provisions of United States federal securities laws against these persons and the Company; or bring in courts outside the United States an original action to enforce liabilities based upon United States federal securities laws against these persons and the Company.
GENERAL RISKS
Our future success is substantially dependent upon our senior management, and our revenues and profitability depend on our relationships with capable sales personnel as well as customers, suppliers and manufacturers of the products that we distribute.
Our future success is substantially dependent upon the efforts and abilities of members of our existing senior management, particularly Luke Faulstick, our Chief Executive Officer. The loss of the services of Mr. Faulstick could have a material adverse effect on our business. We do not currently have "key man" life insurance policies on any of our employees. Competition for senior management is intense, burnout and turn-over rates are increasing workplace concerns during and after the COVID-19 pandemic, and we may not be successful in attracting and retaining key personnel. Additionally, our future revenues and profitability depend on our ability to maintain satisfactory relationships with qualified sales personnel as well as customers, suppliers and manufacturers. If we fail to maintain our existing relationships with such persons or fail to acquire relationships with such key persons in the future, our business may be materially adversely affected.
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Changes in U.S. economic conditions may negatively impact our business.
For the foreseeable future, our business is expected to be concentrated in the U.S. market. Changes in the economic conditions in the U.S. may have a substantial impact on our financial performance, business, financial condition or results of operations.
Changes in U.S. tax law may adversely affect us or our investors.
The rules dealing with U.S. federal, state and local income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive application) could adversely affect us or holders of our common shares. In recent years, many changes have been made and changes are likely to continue to occur in the future.
For example, the Tax Cuts and Jobs Act enacted in 2017 made significant changes to corporate taxation, including the reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, which is a historically low rate. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act was enacted, which included certain changes in tax law intended to stimulate the U.S. economy in light of the COVID-19 pandemic, including temporary beneficial changes to the treatment of net operating losses, interest deductibility limitations and payroll tax matters. In light of the new presidential administration, it cannot be predicted whether, when, in what form, or with what effective dates, new tax laws may be enacted, or regulations and rulings may be enacted, promulgated or issued under existing or new tax laws, which could result in an increase in our or our investors' tax liability or require changes in the manner in which we operate in order to minimize or mitigate any adverse effects of changes in tax law or in the interpretation thereof.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable
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ITEM 2.
PROPERTIES.
Our corporate headquarters is in Carlsbad, California. The table below provides selected information regarding the leased principal properties used in our operations.
| Location | Use | Lease Termination Date |
Approximate |
||
| Carlsbad, California | Corporate headquarters | 11/26 | 7,057 | ||
| Clear Lake, South Dakota | Manufacturing facility and office space (SDP) | 10/38 | 77,000 | ||
| Lebanon, New Hampshire | Office facility (Simbex) | 09/24 | 10,548 | ||
| Holt, Michigan | Distribution facility (Mio-Guard) | 12/26 | 18,414 | ||
| El Cajon, California | Manufacturing facility and office space (DaMar) | 06/26 | 38,960 |
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ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any pending legal proceedings that we believe will have a material adverse effect on our business or financial conditions. We may, however, be subject to various claims and legal actions arising in the ordinary course of business from time to time.
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ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Price Information for our Common Shares
Our common shares have been traded on the TSXV under the symbol "SGMD" since December 15, 2020. From January 15, 2020, through December 15, 2020, our common shares traded on the TSXV under the symbol "BRTL". The TSXV is the only trading market for our common shares. Our common stock is not traded on any United States exchange but is currently available for trading in the over-the-counter market and is quoted on the OTC Markets. Trading in stocks quoted on these markets is often thin and is characterized by wide fluctuations in trading prices due to many factors, including the requirement that brokers deliver certain risk disclosure documents and other information about the pricing and broker compensation, information that may have little to do with a company's operations or business prospects. As a result of these rules, investors may find it difficult to sell their shares in the U.S. trading market.
The Company’s Class A Common Shares have the same rights as the Company’s Common Shares, except that the Class A Common Shares are (i) non-voting except as required under the Business Corporations Act (British Columbia) [Act], (ii) are subject to restrictions on transfer other than in connection with conversion to Common Shares, transfer to family members, and transfers for tax or estate purposes to affiliated companies or persons, and (iii) limitations on conversion into Common Shares. The Class A Common Shares are convertible into Common Shares on a 1:1 basis, subject to a beneficial ownership limit that restricts any conversion that would result in the holder beneficially owning more than 9.9% of the outstanding number of Common Shares after giving effect to the issuance of the Common Shares upon conversion. Upon the occurrence of a Change of Control Event as defined in the terms of the Class A Common Shares, the Class A Common Shares shall be mandatorily converted 1:1 into Common Shares. Certain of the agreements covering acquisition transactions also impose limits on the conversion of Class A Shares to Common Shares, including provisions in the Simbex, Mio-Guard and DaMar agreements that restrict conversion of the Class A Shares if the holder beneficially owns more than 500,000 Common Shares, and similar provisions in the SDP agreement that impose a limit of 368,500 Common Shares.
Holders
As of March 21, 2023, we believe there were approximately 1,646 non-objecting beneficial owners of record holding 22,352,386 common shares of the Company. The number of non-objecting beneficial owners of record does not include an indeterminate number of shareholders whose shares are held by brokers in street name through depositaries, including CDS & Co and CEDE & Co.
The holders of our common shares are entitled to receive notice of and to attend and vote at all meetings of our shareholders and each common share shall confer the right to one vote in person or by proxy at all meetings of our shareholders. The holders of our common shares shall be entitled to receive such dividends payable in cash or property as may be declared thereon by the Board from time to time. The Board may declare no dividend payable in cash or property on our common shares unless the Board simultaneously declares a dividend payable in cash or property on our Class A Shares, in an amount per Class A Share equal to the amount of the dividend declared per common share. In the event of our liquidation, dissolution or winding-up, whether voluntary or involuntary, the holders of our common shares are entitled to receive, subject to the prior rights, if any, of the holders of any other class of our shares, our remaining property and assets pari passu with the holders of our Class A Shares, with the amount of such distribution per common share equal to the amount of such distribution per Class A Shares. Holders of our common shares and Class A Shares have no pre-emptive rights and no right to convert their common shares into any other securities. There are no redemption or sinking fund provisions applicable to our common shares.
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Dividend Policy
We have never paid cash dividends on our securities, and we do not anticipate paying any cash dividends on our common shares or Class A Shares in the foreseeable future. We intend to retain any future earnings for reinvestment in our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors, and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as our Board of Directors deems relevant.
Unregistered Sales of Securities
The following information represents securities sold by the Company within the ten-month transition period ended December 31, 2022 which 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. We 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 May 4, 2022, we issued 454,817 common shares pursuant to the exercise of broker warrants previously issued in connection with the Company's financing completed on May 21, 2021.
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ITEM 6. [Reserved]
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to those statements appearing elsewhere in this Annual Report on Form 10-KT. A discussion regarding our financial condition and results of operations for the ten months ended December 31, 2022, compared to the ten months ended December 31, 2021 is presented under “Results of Operations” further below in this Item 7. For discussion regarding our financial condition and the results of operations for February 28, 2022, compared to February 28, 2021, refer to Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended February 28, 2022.
Some of the information contained in this discussion and analysis or set forth elsewhere in this report include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See "Item 1A Risk Factors" included elsewhere in this Annual Report on Form 10-KT.
OVERVIEW
On March 11, 2021, we completed the Change of Business, as defined by the TSX Venture Exchange, to become an acquisition-oriented business focused on human performance and rehabilitative solutions with plans to achieve scale through further acquisitions and organic growth. We presently intend to operate in the recovery science market, including postoperative pain, wound care and other markets serving the aging population in the United States.
On May 21, 2021, of the Company acquired South Dakota Partners Inc. ("SDP") through a subsidiary. 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. Results relating to SDP contained in this Report covers the period from May 21, 2021, through December 31, 2022.
On September 30, 2021, the Company acquired Simbex, LLC ("Simbex"), a medical device and consumer health product design and development firm. They offer both engineering services and commercialization strategy consulting for the Salona subsidiaries and other companies of all sizes. Results relating to Simbex contained in this Report covers the period from September 30, 2021, through December 31, 2022.
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 non-voting 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. Results relating to ALG Health Plus contained in this Report covers the period from November 28, 2021, through December 31, 2022.
On March 11, 2022, the Company acquired Mio-Guard, LLC, a Michigan based company engaged in the wholesale sale of sports medicine products in the mid-western, southern and central United States, through a wholly owned subsidiary. Since 2009, the team at Mio-Guard has sold into the athletic training, physical therapy and orthopedics markets for sports medicine products. Mio-Guard has over 50 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. Results relating to Mio-Guard contained in this Report covers the period from March 11, 2022, through December 31, 2022.
On September 23, 2022, the Company acquired DaMar Plastics, Inc, a California based company that manufactures custom plastics. In addition to providing plastic injection molding parts to their customers DaMar Plastics also offers several ancillary, including but not limited to assembly, packaging and mold making. The business capability matches well with the electromedical, and assembly services offered by South Dakota Partners (SDP). Results relating to DaMar Plastics contained in this Report covers the period from September 23, 2022, through December 31, 2022.
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RECENT DEVELOPMENTS
On January 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 to US$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.
On February 7, 2023, 432,150 Class A shares were issued to one key individual at ALG at a fair market price of $0.69 per share for achieving a revenue milestone as described in the agreement. $298,183 in cash was given as consideration for these shares.
On February 7, 2023, 172,421 Class A shares were issued to one key individual at ALG at a fair market price of $0.69 per share for achieving a revenue milestone as described in the agreement. No cash was given as consideration for these shares.
On February 21, 2023, 1,275,770 Class A shares were issued to former owner of SDP at a price of $0.75 per share. These shares were issued upon completion of SDP's earn-out period. No cash was required to be received as consideration for these shares.
On February 23, 2023, 11,481,890 Class A shares were issued to former owner of SDP at a price of $0.75 per share. These shares were issued upon completion of SDP's earn-out period. No cash was required to be received as consideration for these shares.
On March 15, 2023, the Company entered into a stock purchase agreement providing for the acquisition of all of the capital stock of Biodex Medical Systems, Inc., which consists principally of the Biodex Physical Medicine business. The Purchase Agreement replaces the previously disclosed asset purchase agreement covering the same business that was first announced on November 29, 2022. The Company expects to close the Acquisition on April 3, 2023. The purchase agreement provides that the Company shall purchase all of the capital stock of Biodex in consideration for a total of $8 million in cash, minus indebtedness, transaction expenses and plus or minus a working capital adjustment, payable as follows: (i) a closing payment to the Sellers of $1,000,000 in cash, and (ii) three installment payments totaling $7 million, plus or minus the post-closing adjustment, as follows: $2 million on July 1, 2023, $3 million on October 1, 2023, plus or minus the Post-Closing Adjustment, and $2 million on January 1, 2024. The payment of the installment payments is guaranteed by the Company and is secured by the pledge of the Biodex capital stock as security to Seller, pursuant to the terms of a promissory note.
REVENUE AND EXPENSE COMPONENTS
The following is a description of the primary components of our revenue and expenses:
Revenue. We derive our revenue primarily from the sale of 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. Currently, most of our business is conducted with customers within markets in which we have experience, and with payment terms that are customary to our business.
Cost of revenue. Cost of revenue consists primarily of direct labor expended in the manufacturing of products and the delivery of services, the cost of raw materials and finished goods, and other overhead costs attributable to the manufacture of products or delivery of services.
Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of salaries and related employee benefits, sales commissions, stock-based compensation, insurance expense, professional service fees, information technology expenses and other administrative expenses.
Depreciation of property and equipment. Depreciation of property and equipment consists primarily of manufacturing equipment and information technology assets expensed over their useful lives.
Amortization of right-of-use assets. The right-of-use asset is a lessee's right to use an asset and is amortized over the life of the lease.
Amortization of acquired intangible assets. Amortization of acquired intangible assets reflects the amortization of intangible assets such as trademarks, non-compete agreement, intellectual property and customer base.
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Interest expense. Interest expenses consists primarily of the interest charged in connection with the line of credit facility, the term note, and the finance leases.
Foreign exchange gains and losses. Foreign exchange gains and losses result from the currency fluctuations as the Company's operations are primarily in the United States in US dollars, and its reporting currency used throughout this transition report is in Canadian dollars.
Change in fair value of earn-out and contingent consideration. The change in fair value of earn-out and contingent consideration represents the change in earned and potential future obligations that are contingent on an acquired entity's business achieving certain milestones.
Transaction-related expenses. Transaction-related expenses include legal, financial, audit, US and Canadian regulatory expenses and other fees incurred in connection with the Change of Business transaction, the multiple 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.
Income tax provision. 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.
RESULTS OF OPERATIONS
Revenue
| Ten Months Ended December 31, | Change | |||||||||||
| 2022 | 2021 | $ | % | |||||||||
| Revenue | $ | 33,594,786 | $ | 12,603,397 | $ | 20,991,389 | 167% | |||||
Revenue increased by $21.0 million, or 167%, for the ten months ended December 31, 2022, compared to the ten months ended December 31, 2021. Sales increased $7.8 as a result of acquisitions made within the 10 months ended December 31, 2022, and by $12.8 million as a result of acquisitions made in the prior period that has a full 10 months’ sales in in the period ended December 31, 2022. A favorable impact related to changes in foreign exchange rates increased sales by $0.6 million and was offset by a reduction of $0.2 million in other income that was generated prior to the change in business transaction.
Cost of revenue
| Ten months ended December 31, | Change | |||||||||||
| 2022 | 2021 | $ | % | |||||||||
| Cost of revenue: | ||||||||||||
| Direct service personnel | $ | 5,264,246 | $ | 1,583,476- | $ | 3,680,770 | 232% | |||||
| Direct material costs | $ | 16,836,194 | $ | 6,973,422- | $ | 9,862,772 | 141% | |||||
| Other direct costs | $ | 933,954 | $ | 361,565- | $ | 572,389 | 158% | |||||
| Total cost of revenue |
23,034,394 |
8,918,463 | 14,115,931 | 158% | ||||||||
Total cost of revenue increased by $14.1 million, or 158%, for the ten months ended December 31, 2022, compared to the ten months ended December 31, 2021. The increase was primarily due to an increase in the sales volume.
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Operating expenses
| Ten months ended December 31, | Change | |||||||||||
| 2022 | 2021 | $ | % | |||||||||
| Operating expenses: | ||||||||||||
| Selling, general and administrative | $ | 11,403,359 | $ | 4,216,121 | $ | 7,187,238 | 170% | |||||
| Depreciation of property and equipment | 253,490 | 154,354 | 99,136 | 64% | ||||||||
| Amortization of right-of-use assets | 617,653 | 135,813 | 481,840 | 355% | ||||||||
| Amortization of intangible assets | 937,276 | 341,307 | 595,969 | 175% | ||||||||
| Total operating expenses | $ | 13,211,778 | $ | 4,847,595 | $ | 8,364,183 | 173% | |||||
Selling, general and administrative increased by $7.2 million, or 170%, for the ten months ended December 31, 2022, compared to the ten months ended December 31, 2021. The increase was primarily due to acquired businesses within the ten months ending December 31, 2022, and a full ten months of expenses as compared to fewer months in the prior year for businesses acquired in the ten months ended December 31, 2021.
Depreciation of property and equipment increased by $0.1 million, or 64%, for the ten months ended December 31, 2022, compared to the ten months ended December 31, 2021. The increase was primarily due to addition of assets from acquired businesses within the ten months ending December 31, 2022, and a full ten months of expenses as compared to fewer months in the prior year for businesses acquired in the ten months ended December 31, 2021.
Amortization of right-of-use assets increased by $0.5 million, or 355%, for the ten months ended December 31, 2022, compared to the ten months ended December 31, 2021. The increase was primarily due to the addition of building leases results from acquired businesses within the ten months ending December 31, 2022, and a full ten months of expenses as compared to fewer months in the prior year for businesses acquired in the ten months ended December 31, 2021.
Amortization of intangible assets increased by $0.6 million, or 175%, for the ten months ended December 31, 2022, compared to the ten months ended December 31, 2021. The increase was primarily due to addition of assets resulting from acquired businesses within the ten months ending December 31, 2022, and a full ten months of expenses as compared to fewer months in the prior year for businesses acquired in the ten months ended December 31, 2021.
Interest and other income and (expense)
| Ten months ended December 31, | Change | |||||||||||
| 2022 | 2021 | $ | % | |||||||||
| Interest expense | (590,470 | ) | (305,672 | ) | (284,798 | ) | 93% | |||||
|
Foreign exchange (loss) gain |
(190,385 | ) | 20,487 | (210,872 | ) |
-% |
||||||
| Gain on debt settlement | - | 15,538 | (15,538 | ) | -% | |||||||
| Change in fair value of earn-out consideration | (2,451,600 | ) | - | (2,451,600 | ) | -% | ||||||
| Change in fair value of contingent consideration | (10,269,375 | ) | - | (10,269,375 | ) | -% | ||||||
| Transaction costs | (2,877,365 | ) | (2,726,405 | ) | (150,960 | ) | 6% | |||||
Interest expense increased by $0.3 million, or 93%, for the ten months ended December 31, 2022, compared to the ten months ended December 31, 2021. The increase was primarily due to additional lease liabilities related to acquired businesses within the ten months ending December 31, 2022, and a full ten months of expenses as compared to fewer months in the prior year for businesses acquired in the ten months ended December 31, 2021.
Foreign exchange loss increased by $0.2 million for the ten months ended December 31, 2022, compared to the ten months ended December 31, 2021. The increased loss is the result of a stronger United States Dollar compared to the Canadian Dollar.
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Gain on debt settlement decreased by $0.0 million for the ten months ended December 31, 2022, compared to the ten months ended December 31, 2021. There was no gain on any debt settled in the ten months ended December 31, 2022.
Change in fair value of earn-out consideration increased by $2.5 million for the ten months ended December 31, 2022, compared to the ten months ended December 31, 2021. The increase is due to the change in the stock price from May 21, 2021 (the date of the purchase) to May 31, 2022 (the date of the commencement of the earnout period).
Change in fair value of contingent consideration increased by $10.3 million for the ten months ended December 31, 2022, compared to the ten months ended December 31, 2021. The increase is due to changes in the likelihood of the acquisitions hitting certain earnout milestones and changes in the stock price for the stock component of the earnout payments.
Transaction costs increased by $0.2 million for the ten months ended December 31, 2022, compared to the ten months ended December 31, 2021. The increase was driven by costs associated with acquisitions, potential acquisitions and US and Canadian regulatory activity.
Income Tax Provision
| Ten months ended December 31, | Change | |||||||||||
| 2022 | 2021 | $ | % | |||||||||
| Income tax benefit (provision) | $ |
3,134,176 |
$ | (2,000 | ) | $ |
3,136,176 |
-% | ||||
The Income tax benefit increased by $3.2 million for the ten months ended December 31, 2022, compared to the ten months ended December 31, 2021. The increase is due to the utilization of losses against deferred tax liabilities.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash and cash equivalents, our line of credit facility, and cash from operations. Our liquidity and capital structure are evaluated regularly within the context of our annual operating and strategic planning process. We consider the liquidity necessary to fund our operations, which includes working capital needs. Our future capital requirements will depend on many factors including our rate of revenue growth, property and equipment to expand manufacturing capacity, the timing and extent of spending to support development efforts, the expansion of sales and administrative activities, the timing of introductions of new products and enhancements to existing products, and the satisfaction of earn-outs and other contingent liabilities related to acquisitions.
As current borrowing sources become due, we may be required to access the capital markets for additional funding. If we are required to access the debt markets, we expect to be able to secure reasonable borrowing rates. As part of our liquidity strategy, we will continue to monitor our current level of spending and cash use as well as our ability to secure additional credit facilities, term loans, or other similar arrangements in light of our spending levels and general financial market conditions.
Cash and cash equivalents were $1.9 million and $4.5 million as of December 31, 2022, and December 31, 2021, respectively.
Summary of Cash Flows
The following is a summary of our cash provide by (used in) operating, investing and financing activities, the effect of exchange rate changes on cash and cash equivalents, and the net change in cash and cash equivalents:
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| Ten Months ended December 31, 2022 |
December 31, 2021 | |||||
| Net cash used in operating activities | $ | (219,313 | ) | $ | (3,310,047 | ) |
| Net cash used in investing activities | (5,597,102 | ) | (4,607,528 | ) | ||
| Net cash used in financing activities | (220,161 | ) | (658,697 | ) | ||
| Net decrease in cash and cash equivalents | $(6,036,576 | ) | $(8,576,272 | ) |
Operating Activities
We used net cash of $0.2 million for operating activities for the ten months ended December 31, 2022. This cash flow was primarily used to ensure continued operation of the Company and capital raising expenses.
Investing Activities
We used net cash of $5.7 million for investing activities for the ten months ended December 31, 2022. This decrease in cash flow reflects the funds used net to acquire DaMar for $4.3 million, to acquire Mio-Guard for $0.6 million, the acquisition of intellectual property for $0.2 million, and the acquisition of property and equipment of $0.8 million. Net cash used for investing activities was offset by cash received upon the acquisition of DaMar for $0.2 million.
Financing Activities
We used net cash of $0.2 million for financing activities for the ten months ended December 31, 2022. The use of cash was for repayment of debt of $0.8 million and lease payments of $0.6 million. Net cash used in financing activities was offset by cash proceeds from the exercise of broker warrants of $0.2 million and net proceeds received from the ALG agreement of $1.0 million.
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.
Debt and Commitments
Our contractual obligations as of December 31, 2022, include debt of $0.8 million, a line of credit facility of $5.2 million, and lease obligations of $6.8 million reflecting the minimum commitments for our office and warehouse spaces. See Notes 11 and 12 to our audited consolidated financial statements included elsewhere in this transitional report for more information on our debt and lease obligations, respectively, including the scheduled maturities and timing of cash payments related to these obligations.
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There are obligations as of December 31, 2022, for future earnout consideration associated with completed acquisitions. As of December 31, 2022, these obligations are estimated to be settled with $7.9 million in stock and $7.6 million in cash payments. The Simbex earnout is due to be paid with issued stock and cash in the month of April 2023. The cash portion amounts to $4.5 million, and if not paid when due accrues interest at a rate of 8% per annum until paid in full. See Note 4 to our audited consolidated financial statements included elsewhere in this transitional report for more information regarding acquisitions.
On March 15, 2023, the Company entered into a stock purchase agreement providing for the acquisition of Biodex Medical Systems, Inc., which consists principally of the Biodex Physical Medicine business. The purchase agreement provides that the Company shall purchase all of the capital stock of Biodex in consideration for a total of $8 million in cash, minus indebtedness, transaction expenses and plus or minus a working capital adjustment, payable as follows: (i) a closing payment to the Sellers of $1,000,000 in cash, and (ii) three installment payments totaling $7 million, plus or minus the post-closing adjustment, as follows: $2 million on July 1, 2023, $3 million on October 1, 2023, plus or minus the Post-Closing Adjustment, and $2 million on January 1, 2024. The payment of the installment payments is guaranteed by the Company and is secured by the pledge of the Biodex capital stock as security to Seller, pursuant to the terms of a promissory note.
The Company is currently in the process of potentially raising funds through a debt financing and a subsequent public offering in the United States. As the Company’s funding activities are ongoing, there can be no assurances that the Company will be able to secure funding on terms that are acceptable to the Company or at all. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. While management has developed and is in process to implement plans that management believes could alleviate in the future the substantial doubt that was raised, management concluded at the date of the issuance of the financial statements that substantial doubt exists as those plans are not completely within the control of management.
Off-Balance Sheet Arrangements
As of December 31, 2022, we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, including those related 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. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumption conditions.
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See Note 3 to our consolidated financial statements included elsewhere in this transition report for additional details regarding the accounting policies we believe to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Recent Accounting Pronouncements
See Note 3 to our consolidated financial statements included elsewhere in this transition report for additional details regarding recent accounting pronouncements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential economic loss arising from adverse changes in market rates and prices, such as interest rates, foreign exchange rates, raw material and other commodity prices.
Currency Risk. Our operating results and financial position are reported in Canadian dollars. The majority of our financial transactions are denominated in the U.S. dollar. The reported results of our operations are subject to currency transaction risks. We have no hedging agreements in place with respect to foreign exchange rates. We have not entered into any agreements or purchased any instruments to hedge possible currency risks at this time.
Interest Rate Risk. Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Cash and cash equivalents bear interest at market rates. As of December 31, 2022, our cash and cash equivalents were $1,928,464, as compared to $8,057,100 and $4,466,230 as of February 28, 2022, and December 31, 2021, respectively. Our financial debts have variable fixed rates of interest and as a result, the Company is exposed to interest rate risk on the line of credit ($5,162,711) short-term debt ($195,489) and long-term debt ($574,515) which could negatively impact the Company's cash position and result of operations in future periods should interest rates rise.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
SALONA GLOBAL MEDICAL DEVICE CORPORATION
Consolidated Financial Statements
Contents
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Salona Global Medical Device Corporation
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Salona Global Medical Device Corporation and its subsidiaries (the "Company") as of December 31, 2022 and February 28, 2022, the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for the ten-month period ended December 31, 2022 and for the year ended February 28, 2022, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and February 28, 2022, and the results of its operations and its cash flows for the ten-month period ended December 31, 2022 and for the year ended February 28, 2022, in conformity with accounting principles generally accepted in the United States of America.
Material Uncertainty Related to Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred recurring losses from operations, has negative cash flows from operating activities, and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 2. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
|
SRCO Professional Corporation 5828 We have served as the Company’s auditor since 2020 |
/s/ SRCO Professional Corporation
|
F-1
| SALONA GLOBAL MEDICAL DEVICE CORPORATION Consolidated Balance Sheets As of December 31, 2022 (audited), February 28, 2022 (audited), and December 31, 2021 (unaudited) (in Canadian Dollars, unless specified otherwise) |
| Note | December 31, 2022 | February 28, 2022 | December 31, 2021 | |||||||||
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents | 16 | $ | 1,928,464 | $ | 8,057,100 | $ | 4,466,230 | |||||
| Accounts receivable, net | 5 | 6,353,275 | 6,595,668 | 6,104,978 | ||||||||
| Inventories, net | 7 | 8,102,626 | 4,969,439 | 5,032,905 | ||||||||
| Prepaid expenses and other receivables | 216,489 | 412,794 | 102,500 | |||||||||
| Total current assets | 16,600,854 | 20,035,001 | 15,706,613 | |||||||||
| Security deposit | 12 | 566,198 | 484,975 | 484,211 | ||||||||
| Long-term accounts receivable | 5 | 189,616 | - | - | ||||||||
| Long-term deposits and other receivables | 441,025 | - | - | |||||||||
| Property and equipment, net | 8 | 3,399,898 | 1,460,175 | 1,494,038 | ||||||||
| Right-of-use assets, net | 12 | 7,781,300 | 3,941,840 | 3,993,321 | ||||||||
| Intangible assets, net | 9 | 9,376,162 | 6,926,582 | 7,033,623 | ||||||||
| Goodwill | 4 | 13,695,194 | 9,833,039 | 14,831,243 | ||||||||
| Total assets | $ | 52,050,247 | $ | 42,681,612 | $ | 43,543,049 | ||||||
| Liabilities and Stockholders' Equity | ||||||||||||
| Liabilities | ||||||||||||
| Line of credit | 11 | 5,162,711 | 5,497,249 | 5,052,402 | ||||||||
| Accounts payable and accrued liabilities | 10 | 6,641,181 | 3,679,396 | 2,849,122 | ||||||||
| Current portion of debt | 11 | 195,489 | 174,361 | 168,953 | ||||||||
| Current portion of lease liability | 12 | 847,253 | 245,257 | 218,830 | ||||||||
| Other liabilities | 10 | 1,807,702 | 562,262 | 1,034,541 | ||||||||
| Obligation for payment of earn-out consideration | 4 | 15,506,531 | 12,997,846 | 18,851,549 | ||||||||
| Total current liabilities | 30,160,867 | 23,156,371 | 28,175,397 | |||||||||
| Debt, net of current portion | 11 | 574,515 | 681,758 | 713,534 | ||||||||
| Lease liability, net of current portion | 12 | 5,983,333 | 3,934,431 | 3,992,361 | ||||||||
| Deferred tax liability | 17 | - | 1,755,889 | 1,900,556 | ||||||||
| Total liabilities | $ | 36,718,715 | $ | 29,528,449 | $ | 34,781,848 | ||||||
| Stockholders' equity | ||||||||||||
| Common stock; no par value, unlimited shares authorized; 53,707,780 shares issued and outstanding as of December 31, 2022 (February 28, 2022: 52,539,162; December 31, 2021: 44,790,162) | 13 | 38,767,442 | 38,046,097 | 36,552,873 | ||||||||
| Class A shares; no par value, unlimited shares authorized; 3,403,925 shares issued and outstanding as of December 31, 2022 (February 28, 2022: 1,355,425; December 31, 2021: 1,355,425) | 13 | 1,800,064 | 480,479 | 480,479 | ||||||||
| Class A shares to be issued: 19,019,000 as of December 31, 2022 (February 28, 2022: nil; December 31, 2021: nil) | 13 | 14,264,250 | - | - | ||||||||
| Additional paid-in-capital | 13 | 8,072,610 | 6,985,107 | 4,334,251 | ||||||||
| Accumulated other comprehensive income | 1,688,452 | 1,006,361 | 547,173 | |||||||||
| Deficit | $ | (49,261,286 | ) | $ | (33,364,881 | ) | $ | (33,153,575 | ) | |||
| Total stockholders' equity | $ | 15,331,532 | $ | 13,153,163 | $ | 8,761,201 | ||||||
| Total liabilities and stockholders' equity | $ | 52,050,247 | $ | 42,681,612 | $ | 43,543,049 | ||||||
| Contingencies (Note 18) | ||||||||||||
| Subsequent events (Note 19) |
The accompanying notes are an integral part of these consolidated financial statements.
F-2
SALONA GLOBAL MEDICAL DEVICE CORPORATION
Consolidated Statements of Operations and Comprehensive Loss
For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022
(audited)
(in Canadian Dollars, unless specified otherwise)
| For the 10 months ended | For the year ended |
|||||||||
| Note | December 31, 2022 | December 31, 2021 | February 28, 2022 | |||||||
| Revenue | 6 | $ | 33,594,786 | $ | 12,603,397 | $ | 18,312,269 | |||
| Cost of revenue | ||||||||||
| Direct service personnel | 5,264,246 | 1,583,476 | 2,494,162 | |||||||
| Direct material costs | 16,836,194 | 6,973,422 | 9,297,653 | |||||||
| Other direct costs | 933,954 | 361,565 | 558,387 | |||||||
| Total cost of revenue | 23,034,394 | 8,918,463 | 12,350,202 | |||||||
| Gross margin | 10,560,392 | 3,684,934 | 5,962,067 | |||||||
| Operating expenses | ||||||||||
| Selling, general, and administrative | 11,403,359 | 4,216,121 | 5,728,247 | |||||||
| Depreciation of property and equipment | 8 | 253,490 | 154,354 | 200,622 | ||||||
| Amortization of right-of-use assets | 12 | 617,653 | 135,813 | 192,796 | ||||||
| Amortization of intangible assets | 9 | 937,276 | 341,307 | 448,348 | ||||||
| Total operating expenses | 13,211,778 | 4,847,595 | 6,570,013 | |||||||
| Loss from operations | (2,651,386 | ) | (1,162,661 | ) | (607,946 | ) | ||||
| Interest expense | (590,470 | ) | (305,672 | ) | (388,065 | ) | ||||
| Foreign currency exchange (loss) gain | (190,385 | ) | 20,487 | 16,392 | ||||||
| Gain on debt settlement | - | 15,538 | 15,538 | |||||||
| Change in fair value of earn-out consideration | 4 | (2,451,600 | ) | - | - | |||||
| Change in fair value of contingent consideration | 4 | (10,269,375 | ) | - | 5,853,701 | |||||
| Provision for impairment | 4 | - | - | (5,520,522 | ) | |||||
| Transaction costs | 15 | (2,877,365 | ) | (2,726,405 | ) | (3,842,734 | ) | |||
| Net loss before taxes | (19,030,581 | ) | (4,158,713 | ) | (4,473,636 | ) | ||||
| Provision for income taxes | 17 | 3,134,176 | (2,000 | ) | 101,617 | |||||
| Net loss | $ | (15,896,405 | ) | $ | (4,160,713 | ) | $ | (4,372,019 | ) | |
| Other comprehensive loss | ||||||||||
| Foreign currency translation gain (loss) | 682,091 | (396,147 | ) | 63,041 | ||||||
| Comprehensive loss | $ | (15,214,314 | ) | $ | (4,556,860 | ) | $ | (4,308,978 | ) | |
| Net loss per share | ||||||||||
| Basic and diluted | (0.29 | ) | (0.10 | ) | (0.10 | ) | ||||
| Weighted average number of common stock and Class A shares outstanding | 54,841,014 | 42,812,245 | 43,627,051 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
SALONA GLOBAL MEDICAL DEVICE CORPORATION
Consolidated Statements of Stockholder’s Equity
For the ten months ended December 31, 2022 (audited), and 2021 (unaudited) and for the year ended February 28, 2022
(audited)
(in Canadian Dollars, unless specified otherwise)
| Common stock | Class A Shares | Class A shares to be issued |
Additional paid-in- capital $ |
Accumulated other comprehensive income $ |
||||||||||||||||||||||||||
| Number | Amount $ | Number | Amount $ |
Number | Amount $ | Deficit $ | Total $ | |||||||||||||||||||||||
|
Balance - February 28, 2021
|
|
33,813,308
|
|
|
31,065,513
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,625,762
|
|
|
943,320
|
|
|
(28,992,862
|
)
|
|
6,641,733
|
|
|
Stock based compensation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
903,947
|
|
|
-
|
|
|
-
|
|
|
903,947
|
|
|
Shares exchanged to Class A Shares
|
|
(1,355,425
|
)
|
|
(480,479
|
)
|
|
1,355,425
|
|
|
480,479
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Shares for debt settlement
|
|
737,000
|
|
|
94,999
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
94,999
|
|
|
Shares issued on financing, net
|
|
9,990,237
|
|
|
5,300,490
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,300,490
|
|
|
Shares issued on exercise of options
|
|
1,605,042
|
|
|
572,350
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(195,458
|
)
|
|
-
|
|
|
-
|
|
|
376,892
|
|
|
Foreign currency translation loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(396,147
|
)
|
|
-
|
|
|
(396,147
|
)
|
|
Net loss for the period
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,160,713
|
)
|
|
(4,160,713
|
)
|
|
Balance - December 31, 2021
|
|
44,790,162
|
|
|
36,552,873
|
|
|
1,355,425
|
|
|
480,479
|
|
|
-
|
|
|
-
|
|
|
4,334,251
|
|
|
547,173
|
|
|
(33,153,575
|
)
|
|
8,761,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - February 28, 2021
|
|
33,813,308
|
|
|
31,065,513
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,625,762
|
|
|
943,320
|
|
|
(28,992,862
|
)
|
|
6,641,733
|
|
|
Stock based compensation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,196,361
|
|
|
-
|
|
|
-
|
|
|
1,196,361
|
|
|
Shares exchanged to Class A Shares
|
|
(1,355,425
|
)
|
|
(480,479
|
)
|
|
1,355,425
|
|
|
480,479
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Shares for debt settlement
|
|
737,000
|
|
|
94,999
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
94,999
|
|
|
Shares issued on financing, net
|
|
17,739,237
|
|
|
7,734,631
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,077,577
|
|
|
-
|
|
|
-
|
|
|
9,812,208
|
|
|
Shares issued on exercise of options
|
|
1,605,042
|
|
|
572,350
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(195,458
|
)
|
|
-
|
|
|
-
|
|
|
376,892
|
|
|
Share issuance costs on financing
|
|
-
|
|
|
(940,917
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
280,865
|
|
|
-
|
|
|
-
|
|
|
(660,052
|
)
|
|
Foreign currency translation gain
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
63,041
|
|
|
-
|
|
|
63,041
|
|
|
Net loss for the period
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,372,019
|
)
|
|
(4,372,019
|
)
|
|
Balance - February 28, 2022
|
|
52,539,162
|
|
|
38,046,097
|
|
|
1,355,425
|
|
|
480,479
|
|
|
-
|
|
|
-
|
|
|
6,985,107
|
|
|
1,006,361
|
|
|
(33,364,881
|
)
|
|
13,153,163
|
|
|
Share based compensation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,278,915
|
|
|
-
|
|
|
-
|
|
|
1,278,915
|
|
|
Shares issued on exercise of options
|
|
28,154
|
|
|
8,426
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,097
|
)
|
|
-
|
|
|
-
|
|
|
5,329
|
|
|
Shares issued on exercise of broker warrants
|
|
454,817
|
|
|
229,598
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(13,645
|
)
|
|
-
|
|
|
-
|
|
|
215,953
|
|
|
Shares for debt settlement
|
|
260,921
|
|
|
201,401
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
201,401
|
|
|
Shares issued on financing, net
|
|
281,726
|
|
|
174,670
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(174,670
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Shares to be issued related to acquisition of SDP
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
19,162,000
|
|
|
14,371,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14,371,500
|
|
|
Shares issued related to acquisition of SDP
|
|
-
|
|
|
-
|
|
|
143,000
|
|
|
107,250
|
|
|
(143,000
|
)
|
|
(107,250
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Class A shares exchanged for common shares
|
|
143,000
|
|
|
107,250
|
|
|
(143,000
|
)
|
|
(107,250
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Shares issued related to ALG agreement
|
|
-
|
|
|
-
|
|
|
2,048,500
|
|
|
1,319,585
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,319,585
|
|
|
Foreign currency translation gain
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
682,091
|
|
|
-
|
|
|
682,091
|
|
|
Net loss for the period
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(15,896,405
|
)
|
|
(15,896,405
|
)
|
|
Balance - December 31, 2022
|
|
53,707,780
|
|
|
38,767,442
|
|
|
3,403,925
|
|
|
1,800,064
|
|
|
19,019,000
|
|
|
14,264,250
|
|
|
8,072,610
|
|
|
1,688,452
|
|
|
(49,261,286
|
)
|
|
15,331,532
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
SALONA GLOBAL MEDICAL DEVICE CORPORATION
Consolidated Statements of Cash Flows
For the ten months ended December 31, 2022 (audited), and 2021(unaudited), and for the year ended February 28, 2022
(audited)
(in Canadian Dollars, unless specified otherwise)
| For the ten months ended | For the year ended | |||||||||
| Note | December 31, 2022 | December 31, 2021 | February 28, 2022 | |||||||
| Operating activities | ||||||||||
| Net loss | $ | (15,896,405 | ) | $ | (4,160,713 | ) | $ | (4,372,019 | ) | |
| Non-cash items: | ||||||||||
| Depreciation and amortization | 8,9,12 | 1,808,419 | 631,474 | 841,766 | ||||||
| Interest accretion on lease liability | 12 | 248,127 | 114,600 | 202,844 | ||||||
| Realized gain on sale of marketable securities | 6 | - | (10,086 | ) | (10,107 | ) | ||||
| Gain on share for debt settlement | - | 15,538 | 15,538 | |||||||
| Stock based compensation | 1,278,915 | 903,947 | 1,196,361 | |||||||
| Forgiveness of debt, net | - | (918,047 | ) | (918,361 | ) | |||||
| Change in fair value of contingent consideration | 4 | 10,269,375 | - | (5,853,701 | ) | |||||
| Change in fair value of earn-out consideration | 4 | 2,451,600 | - | - | ||||||
| Provision for impairment | 4 | - | - | 5,520,522 | ||||||
| Change in fair value of marketable securities | - | (6,867 | ) | (6,881 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||||
| Accounts receivable | 6 | 1,662,114 | (1,584,089 | ) | (2,065,879 | ) | ||||
| Deferred income tax recovery | 17 | (3,176,134 | ) | - | (113,639 | ) | ||||
| Prepaid expenses and other receivables | (36,505 | ) | 388,676 | 82,104 | ||||||
| Inventories | (1,782,778 | ) | 177,437 | 248,445 | ||||||
| Accounts payable and accrued liabilities | 1,878,879 | 689,614 | 1,516,369 | |||||||
| Other liabilities | 1,075,080 | 479,545 | 12,759 | |||||||
| Net cash used in operating activities | (219,313 | ) | (3,310,047 | ) | (3,703,879 | ) | ||||
| Investing activities | ||||||||||
| Cash received on acquisition of SDP | 4 | - | 255 | 255 | ||||||
| Cash received on acquisition of Simbex | 4 | - | 632,697 | 632,697 | ||||||
| Cash received on acquisition of Mio-Guard | 4 | 3,363 | - | - | ||||||
| Cash received on acquisition of DaMar | 4 | 199,982 | - | - | ||||||
| Proceeds on sale of marketable securities | - | 496,526 | 496,526 | |||||||
| Acquisition of property and equipment | 8 | (639,471 | ) | (45,247 | ) | (55,259 | ) | |||
| Acquisition of intellectual property | 9 | (243,201 | ) | - | - | |||||
| Acquisition of Mio-Guard | 4 | (572,400 | ) | - | - | |||||
| Acquisition of DaMar | 4 | (4,345,375 | ) | - | - | |||||
| Acquisition of Simbex, LLC | 4 | - | (5,691,759 | ) | (5,691,759 | ) | ||||
| Net cash used in investing activities | (5,597,102 | ) | (4,607,528 | ) | (4,617,540 | ) | ||||
F-5
SALONA GLOBAL MEDICAL DEVICE CORPORATION
Consolidated Statements of Cash FlowsFor the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022
(audited)
(in Canadian Dollars, unless specified otherwise)
| Financing activities | ||||||||||
| Repayment of long-term debt, net | 11 | (138,946 | ) | (2,235,151 | ) | (2,263,306 | ) | |||
| Proceeds from term loan, net | 11 | - | 939,375 | 939,696 | ||||||
| Repayment of line of credit, net | 11 | (680,196 | ) | 1,115,425 | 1,549,929 | |||||
| Proceeds from issuance of shares | - | - | 4,261,950 | |||||||
| Proceeds from exercise of broker warrants | 13 | 215,953 | - | - | ||||||
| Net proceeds received from ALG agreement | 4 | 985,950 | - | - | ||||||
| Share issuance costs | - | (660,052 | ) | (660,052 | ) | |||||
| Proceeds from exercise of stock options | 14 | 5,329 | 376,892 | 376,892 | ||||||
| Lease payments | 12 | (608,251 | ) | (195,186 | ) | (269,954 | ) | |||
| Net cash (used in) provided by financing activities | (220,161 | ) | (658,697 | ) | 3,935,155 | |||||
| Effect of foreign exchange rates on cash | (92,060 | ) | 536,360 | (62,778 | ) | |||||
| Decrease in cash and cash equivalents | (6,036,576 | ) | (8,576,272 | ) | (4,386,264 | ) | ||||
| Cash and cash equivalents | 8,057,100 | 12,506,142 | 12,506,142 | |||||||
| Cash and cash equivalents | $ | 1,928,464 | $ | 4,466,230 | 8,057,100 | |||||
| Supplementary information: | ||||||||||
| Interest paid | 342,343 | 191,072 | 388,065 | |||||||
| Income taxes paid | 41,958 | 2,000 | 12,022 | |||||||
| Common stock issued for debt | 201,401 | 94,999 | 94,999 |
The accompanying notes are an integral part of these consolidated financial statements.
F-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 focused on human performance and rehabilitative solutions. 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 common shares trade on the TSXV under the symbol "SGMD." The registered office is Suite 200E - 1515A Bayview Avenue, East York, Ontario and the headquarters are located at 6160 Innovation Way, Carlsbad, California, 92009.
On December 21, 2020, the Company consolidated its issued and outstanding common shares based on 7.37 post-consolidation common shares for 10 pre-consolidation common shares (the "Consolidation"). These shares were retroactively restated on the consolidated statements of stockholders' equity.
On May 21, 2021, the Company acquired South Dakota Partners Inc. ("SDP").
On September 30, 2021, the Company acquired Simbex, LLC ("Simbex").
On November 28, 2021, the Company launched a new U.S. sales subsidiary called ALG Health Plus, LLC ("Health Plus").
On March 11, 2022, the Company acquired Mio-Guard, LLC ("Mio-Guard").
On September 23, 2022, the Company acquired DaMar Plastics Manufacturing Inc. ("DaMar").
On December 14, 2022, the Board of Directors of the Company approved a change to its fiscal year from February 28 to December 31. The Company's fiscal year now begins on January 1 and ends on December 31 of each year, starting on January 1, 2023. The required ten-month transition period of March 1, 2022, to December 31, 2022, is included in the Company's consolidated financial statements. For comparative purposes, the Company’s unaudited consolidated statements of operations and comprehensive loss, statements of stockholders’ equity, balance sheet, and statements of cash flow for the ten-months ended December 31, 2021, are also presented.
F-7
For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022 (audited)
(in Canadian Dollars, unless specified otherwise)2. Basis of presentation
The accompanying consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP").
Functional and presentation currency
These 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 subsidiaries Inspira Financial Company, Inspira SaaS Billing, Inc., 1077863 B.C., Ltd, Simbex, LLC, ALG Health Plus, LLC, SDP, DaMar Plastics Manufacturing, Inc. and Mio-Guard, LLC and the wholly owned holding company subsidiaries noted below is US dollars.
Going Concern
The Company evaluated whether there are any conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date the consolidated financial statements are issued. The Company has incurred recurring losses from operations, has negative cash flows from operating activities, and has an accumulated deficit as of December 31, 2022. The Company believes that its cash and other available resources may not be sufficient to meet its operating needs and the payment of obligations related to various business acquisitions as they come due within one year after the date the consolidated financial statements are issued.
To alleviate these conditions, the Company is currently in the process of potentially raising funds through a debt financing and a subsequent public offering in the United States. As the Company’s funding activities are ongoing, there can be no assurances that the Company will be able to secure funding on terms that are acceptable to the Company or at all. These conditions, along with the matters noted above, raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. While management has developed and is in process to implement plans that management believes could alleviate in the future the substantial doubt that was raised, management concluded at the date of the issuance of the financial statements that substantial doubt exists as those plans are not completely within the control of management. These consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and consolidated balance sheets classifications that would be necessary if the Company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.
3. Significant accounting policies
a) Basis of consolidation
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"), DaMar Plastics Manufacturing Inc. ("DaMar"), and 1077863 B.C., Ltd.. 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, Simbex Acquisition Parent Corporation, Mio-Tech Parent LLC, and DaMar Acquisition Corporation. The Company owns 100% of all its subsidiaries. Intercompany balances and transactions are eliminated upon consolidation.
b) Basis of measurement
The 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 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 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, valuation allowance for deferred tax assets, the purchase price accounting of the businesses that the Company has acquired, including the acquisition date fair value of the identifiable assets and liabilities acquired, the fair value of contingent consideration as well as the associated remeasurement of earnouts, and assessment of going concern. 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 December 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 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.
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 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 December 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, DaMar, and Mio-Guard acquisitions, that would be required to be presented on the 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.
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, DaMar, 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 "unearned customer deposits," and "unearned revenues."
For sales contracts with terms of more than one year, the Company recognizes any significant financing component as revenue over the contractual period using the effective interest method, and the associated interest income is reflected accordingly on the consolidated statements of operations and comprehensive loss and included in other income.
Provisions for discounts, returns and other adjustments are provided for the period in which 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 selling, general, and administrative expenses on the consolidated statements of operations and comprehensive loss.
h) Cash and cash equivalents
Cash and cash equivalents comprise of 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.
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, plastic, hardware, fasteners, and purchased sports medicine products 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.
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
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:
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 consolidated balance sheets and are expensed on a straight-line basis over the lease term in the consolidated statement of operations and comprehensive loss. The Company determines the lease term by agreement with the 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.
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 | 5 years |
| Non-competes | 5 years |
| Intellectual Property | 5 years |
| Customer Base | 15 years |
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 be performed as of December 31, 2023.
n) Impairment for Long-Lived Assets
The Company applies the provisions of ASC Topic 360, Property, Plant, and Equipment, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. ASC 360 requires impairment losses to be recorded on long-lived assets, including right-of-use assets, used in operations 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. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Based on its review at December 31, 2022 and February 28, 2022, the Company believes there was no impairment of its long-lived assets.
o) 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 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.
p) 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 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.
q) 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 December 31, 2022.
r) 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 consolidated balance sheet.
s) 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 affects 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.
t) 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 consolidated balance sheet date thereafter. Changes in the estimated fair value of such warrants are recognized as a non-cash gain or loss on the consolidated statements of operations and comprehensive loss.
For the period ended December 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. The 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.
u) 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.
v) Recently issued pronouncements
In September 2022, the FASB issued Accounting Standards Update (ASU) No. 2022-04 that requires additional qualitative and quantitative disclosures surrounding supplier finance programs intended to help investors better consider the effect of these programs on a company's working capital, liquidity, and cash flows over time. This update is effective for fiscal years beginning after December 15, 2022, including interim periods, except for the disclosure of roll forward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the impact this update will have on its disclosures in future consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03 Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”), which (1) clarifies the guidance in ASC 820 on the fair value measurement of an equity security that is subject to a contractual sale restriction and (2) requires specific disclosures related to such an equity security. Under current guidance, stakeholders have observed diversity in practice related to whether contractual sale restrictions should be considered in the measurement of the fair value of equity securities that are subject to such restrictions. On the basis of interpretations of existing guidance and the current illustrative example in ASC 820-10-55-52 of a restriction on the sale of an equity instrument, some entities use a discount for contractual sale restrictions when measuring fair value, while others view the application of such a discount to be inconsistent with the principles of ASC 820. To reduce the diversity in practice and increase the comparability of reported financial information, ASU 2022-03 clarifies this guidance and amends the illustrative example. ASU No. 2022-03 is effective for fiscal years beginning after December 15, 2023, with early adoption permitted.
The Company is in the process of determining the impact the adoption will have on its consolidated financial statements as well as whether to early adopt the new guidance.
In March 2022, the FASB issued ASU No. 2022-02, Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance on troubled debt restructurings for creditors in ASC Topic 310 and amends the guidance on "vintage disclosures" to require disclosure of current-period gross write-offs by year of origination. ASU 2022-02 also updates the requirements related to accounting for credit losses under ASC Topic 326 and adds enhanced disclosures for creditors with respect to loan re-financings and restructurings for borrowers experiencing financial difficulty. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the extent of the impact of this ASU, but do not expect the adoption of this standard to have a significant impact on its consolidated financial statements.
In October 2021 FASB, issued 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 has elected to early adopt this standard. However, it did not have a material impact on the Company's 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 December 15, 2022, 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 consolidated financial statements as well as whether to early adopt the new guidance.
In March 2020, the FASB issued ASU No. 2020-04 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, could be applied through December 31, 2022. In December 2022, the FASB issued No 2022-06 extending the sunset date of the relief provided under ASU No. 2020-04 to December 31, 2024. The ASU has not impacted the 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, 2024.
Management does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying 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 19,162,000 non-voting class "A" shares of common stock valued at $12,340,570 subject to earn-out adjustments, including revenue shortfall adjustment and adjusted net assets adjustments. The Company assumed all of the assets and liabilities of SDP.
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 | $ | 255 | |
| Security deposit | 461,066 | ||
| Accounts receivable | 2,763,621 | ||
| Inventories | 4,958,833 | ||
| Prepaid expenses | 21,651 | ||
| Property and equipment | 1,409,421 | ||
| Right-of-use assets | 2,343,947 | ||
| Intangible assets | 2,199,444 | ||
| Goodwill | 9,090,357 | ||
| Accounts payable | (821,244 | ) | |
| Accrued expenses | (201,733 | ) | |
| Customer deposits | (221,290 | ) | |
| Line of credit | (3,732,414 | ) | |
| Debt | (2,971,350 | ) | |
| Lease liability | (2,498,095 | ) | |
| Deferred tax liability | (557,559 | ) | |
| Other liabilities | (163,130 | ) | |
| Total adjusted purchase price | 12,081,780 |
F-17
For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022 (audited)
(in Canadian Dollars, unless specified otherwise)| Goodwill | $ | 9,090,357 | |
| Tradename - Trademarks | 341,929 | ||
| Intellectual Property | 320,823 | ||
| Customer Base | 1,266,405 | ||
| Non-Competes | 270,287 | ||
| Total identifiable intangible assets including goodwill | $ | 11,289,801 |
The table below summarizes the value of the total consideration given in the transaction:
| Stock (Parent Special Stock) | 12,340,570 | ||
| Floor Guarantee/Contingent Liability | 1,139,910 | ||
| Earn-out /Contingent Consideration (Revenue) | (21,924 | ) | |
| Earn-out /Contingent Consideration (Net Assets) | (1,376,776 | ) | |
| Total Consideration | $ | 12,081,780 |
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 19,162,000 non-voting "Class A" shares of common stock. As such, this obligation has been removed from the liability section of the consolidated balance sheet as a contingent liability (as shown on the February 28, 2022, Consolidated Balance Sheet) and has been moved to the equity section as Class A shares to be issued. As of May 31, 2022, the date of issuance, the fair value of the 19,162,000 shares was $14,371,500 (fair value as of February 28, 2022, was $11,919,900), of which 143,000 were issued at a value of $107,250. The change in fair value of $2,451,600 has been reflected as an expense on the consolidated statements of operations and comprehensive loss.
On December 31, 2022, and February 28, 2022, respectively, the Company reviewed its assessment of the fair value of goodwill from the SDP acquisition and noted no impairment to Goodwill.
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 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, LLC entered into an exclusive supply agreement with ALG.
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 identified assets acquired, the customer list, has nominal value based on future cash flows which are dependent on a future, yet-to-be established business, and therefore no value has been assigned to it.
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 December 31, 2022, as a result of new arrangements, the fair value of the contingent consideration liability is estimated to be $298,183.
F-18
For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022 (audited)
(in Canadian Dollars, unless specified otherwise)On November 21, 2022, 1,048,500 Class A shares were issued to two key individuals at ALG at a fair market price of $0.61 per share for achieving certain EBITDA milestones. On November 28, 2022, 1,000,000 Class A shares were issued to one key individual at ALG at a fair market price of $0.68 per share for achieving a revenue milestone as described in the agreement. $693,365 in cash was provided as consideration for these shares.
F-19
For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022 (audited)
(in Canadian Dollars, unless specified otherwise)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 $5,691,759 cash as well as issuing 6,383,954 shares of non-voting class "A" common stock valued at $6,769,769 subject to earn-out adjustments, including revenue shortfall adjustment and adjusted net assets adjustments. The Company assumed all the assets and liabilities of Simbex.
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 as follows:
| Cash | $ | 632,697 | |
| Accounts Receivable | 1,402,315 | ||
| Work-in-process | 301,180 | ||
| Prepaid expenses | 34,992 | ||
| Property and equipment | 122,916 | ||
| Other receivables | 6,395 | ||
| Intangible Assets | 5,175,486 | ||
| Goodwill | 6,263,204 | ||
| Accounts payable and accrued liabilities | (33,560 | ) | |
| Accrued expenses | (1,095 | ) | |
| Unearned revenue | (131,016 | ) | |
| Deferred tax liability | (1,311,986 | ) | |
| Total adjusted purchase price | $ | 12,461,528 |
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 | $ | 6,263,204 | |
| Tradename - Trademarks | 933,865 | ||
| Customer Base | 3,648,148 | ||
| Non-Competes | 593,473 | ||
| Total identifiable intangible assets including goodwill | $ | 11,438,690 |
The table below summarizes the value of the total consideration given in the transaction:
| Cash | $ | 4,428,900 | |
| Working Capital Adjustment | 1,262,859 | ||
| Value of Escrowed Stock | 126,540 | ||
| Value of Earnout / Contingent Consideration | 6,643,229 | ||
| Total Consideration | $ | 12,461,528 |
F-20
For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022 (audited)
(in Canadian Dollars, unless specified otherwise)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 sellers of Simbex that are contingent on Simbex's business achieving certain milestones. Certain Simbex management was retained post-acquisition and will receive a portion of the potential future earnout payments if earned. The fair value of the contingent consideration liability of $6,769,769 was recognized on the acquisition date and was measured using unobservable (Level 3) inputs. As of December 31, 2022, the fair value of the contingent consideration liability is $7,288,123 (February 28, 2022, $1,077,946). The contingent consideration liability consists of $4,415,344 and $2,872,779 of cash and stock earn-out payments, respectively. The increase in the contingent consideration liability from February 28, 2022, has been taken as an expense on the consolidated statements of operations and comprehensive loss.
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 $5,520,522. As of December 31, 2022, there was no further goodwill impairment and thus, no additional goodwill has been impaired. The fair value of goodwill was calculated by estimating the present value of future cash flows adjusted for redundant assets, working capital, and cost of disposal. The impairment of goodwill and adjustments to contingent consideration represent management's best estimates at the time. Contingent consideration remains an estimate until the consideration is paid in line with the previously published purchase agreements relating to the Company's acquisitions. Goodwill represents an estimate of the future value of the business based on acquisition data and always represents management's best estimate due to the variable nature of future performance.
Mio-Guard LLC ("Mio-Guard")
On March 11, 2022, the Company acquired 100% of the units of Mio-Guard for consideration which is comprised of the following:
| Cash | $ | 572,400 | |
| 1,300,000 Class B units issued at closing | 702,000 | ||
| Quarterly Earnout payments (Maximum of 2,700,000 Class B Units) | 1,166,464 | ||
| Total Consideration | $ | 2,440,864 |
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 as follows:
F-21
For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022 (audited)
(in Canadian Dollars, unless specified otherwise)| Cash | $ | 3,363 | |
| Accounts receivable | 531,602 | ||
| Inventory | 498,897 | ||
| Property and equipment | 73,445 | ||
| Right-of-use assets | 476,955 | ||
| Intangible assets and goodwill | 2,329,018 | ||
| Accounts payable | (764,225 | ) | |
| Due to related parties | (2,307 | ) | |
| Lease liability | (471,926 | ) | |
| Deferred tax liability | (233,958 | ) | |
| Total adjusted purchase price | $ | 2,440,864 |
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) | $ | 1,143,514 | |
| Tradename | 356,160 | ||
| Customer Relationships | 774,648 | ||
| Non-Competes | 54,696 | ||
| Total identifiable intangible assets including goodwill | $ | 2,329,018 |
The contingent consideration liability represents potential future earnout payments to the sellers of Mio-Guard that are contingent on Mio-Guard's business achieving certain milestones. Certain Mio-Guard management was retained post-acquisition and will receive a portion of the potential future earnout payments as earned. The fair value of the contingent consideration liability of $1,166,465 was recognized on the acquisition date and was measured using unobservable (Level 3) inputs. As of December 31, 2022, the fair value of the contingent consideration liability is $1,446,250. The change in the fair value of the contingent consideration liability from the date of acquisition has been taken as an expense on the consolidated statements of operations and comprehensive loss.
Since acquisition, Mio-Guard has generated $5,593,308 of revenue and has generated net earnings before tax of $203,536. These amounts are included in the consolidated statements of operations and comprehensive loss. If the combination had taken place at the beginning of the transition period, Mio-Guard's revenue for the ten-months ended December 31, 2022, would have been $5,658,611 and profit before tax would have been $216,744. If the combination had taken place at the beginning of the transition period, consolidated revenues for the ten-months ended December 31, 2022, would have been $33,660,089 and consolidated losses before tax would have been ($19,017,373). The pro forma unaudited results include estimates and assumptions which management believes are reasonable. These assumptions include an adjustment to operating income for one-time transactional costs that would not have occurred without the acquisition of Mio-Guard. Additionally, the pro forma results do not include any cost savings or other effects of the planned integration of these entities and may not be fully indicative of the results that would have occurred if the business combination had been in effect on the dates indicated.
On December 31, 2022, the Company reviewed its assessment of the fair value of goodwill from the Mio-Guard acquisition and noted no impairment to Goodwill.
DaMar Plastics Manufacturing, Inc. ("DaMar")
On September 23, 2022, the Company acquired 100% of the shares of DaMar for a consideration which comprised of cash, and special parent stock at closing, and future contingent consideration during the earnout period.
F-22
For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022 (audited)
(in Canadian Dollars, unless specified otherwise)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 as follows:
F-23
For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022 (audited)
(in Canadian Dollars, unless specified otherwise)| Cash | $ | 4,071,000 | |
| Working capital adjustment | 274,375 | ||
| Stock (in Salona Global Buyer exchangeable for Class A shares in the Company) | 967,650 | ||
| Value of earnout/contingent consideration | 2,656,635 | ||
| Total Consideration | $ | 7,969,660 |
The Working Capital Adjustment comprises $20,000 of adjustments for finalization of current assets and liabilities adjusted to closing date balances.
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 | $ | 199,982 | |
| Accounts receivable | 731,640 | ||
| Inventory | 791,552 | ||
| Property and equipment | 1,390,121 | ||
| Right-of-use assets | 3,061,590 | ||
| Prepaid and other | 158,696 | ||
| Intangible assets and goodwill | 4,677,092 | ||
| Accounts payable and other assumed liabilities | (177,232 | ) | |
| Other liabilities | (3,972 | ) | |
| Unearned revenues | (104,401 | ) | |
| Lease liability | (1,568,820 | ) | |
| Deferred tax liability | (1,186,588 | ) | |
| Total adjusted purchase price | $ | 7,969,660 |
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) | $ | 2,718,941 | |
| Tradename | 169,625 | ||
| Customer Relationships | 1,316,290 | ||
| Non-Competes | 472,236 | ||
| Total identifiable intangible assets including goodwill | $ | 4,677,092 |
The contingent consideration liability represents potential future earnout payments to the sellers of DaMar that are contingent on DaMar’s business achieving certain milestones. Certain DaMar management was retained post-acquisition and will receive a portion of the potential future earnout payments if earned. The fair value of the contingent consideration liability of $3,624,286 was recognized on the acquisition date and was measured using unobservable (Level 3) inputs. As of December 31, 2022, the fair value of the contingent consideration liability is $6,473,975. The change in the fair value of the contingent consideration liability from the date of acquisition, has been taken as an expense on the consolidated statements of operations and comprehensive loss.
Since acquisition, DaMar has generated $2,170,971 of revenue and has generated net earnings before tax of $92,457. These amounts are included in the consolidated statements of operations and comprehensive loss. If the combination had taken place at the beginning of the transition period, DaMar’s revenue for the ten-months ended December 31, 2022, would have been $6,458,926 and profit before tax would have been $968,002. If the combination had taken place at the beginning of the transition period, consolidated revenues for the ten-months ended December 31, 2022, would have been $37,882,741 and consolidated losses before tax would have been ($18,155,036). The pro forma unaudited results include estimates and assumptions which management believes are reasonable. These assumptions include an adjustment to operating income for one-time transactional costs that would not have occurred without the acquisition of DaMar. Additionally, the pro forma results do not include any cost savings or other effects of the planned integration of these entities and may not be fully indicative of the results that would have occurred if the business combination had been in effect on the dates indicated.
On December 31, 2022, the Company reviewed its assessment of the fair value of goodwill from the DaMar acquisition and noted no impairment to Goodwill.
F-25
For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022 (audited)
(in Canadian Dollars, unless specified otherwise)5. Accounts receivable
| December 31, 2022 | February 28, 2022 | December 31, 2021 (unaudited) |
|||||||
| Trade accounts receivable | $ | 6,426,616 | $ | 6,416,055 | $ | 6,104,978 | |||
| Allowance for doubtful accounts | (73,341 | ) | (54,150 | ) | - | ||||
| Other receivables | - | 233,763 | - | ||||||
| Long-term accounts receivable | 189,616 | - | - | ||||||
| Total accounts receivable | $ | 6,542,891 | $ | 6,595,668 | $ | 6,104,978 |
Other receivables consist of reimbursable costs from multiple customers of SDP and taxes receivable.
During the ten months ended December 31, 2022, SDP had three customers accounting for 83% (February 28, 2022 - two customers accounting for 78%) of revenues and as of December 31, 2022, those three customers accounted for 88% (February 28, 2022, 84%) of accounts receivable, which is a material concentration of risks. During December 31, 2022, SDP's revenue makes up 49% of total revenues.
During the ten months ended December 31, 2022, Simbex had three customers which accounted for 57% (February 28, 2022, three customers accounted for 66%) of accounts receivable. During the ten months ended December 31, 2022, Simbex's revenue makes up 27% of total revenues.
6. Disaggregation of revenues
| Ten months ended | For the year ended | ||||||||
| December 31, 2022 | December 31, 2021 (unaudited) |
February 28, 2022 | |||||||
| Sales | $ | 33,593,945 | $ | 12,408,913 | $ | 18,020,924 | |||
| Interest, fees, and other recovered | 841 | 8,984 | 157,511 | ||||||
| Fees and other | - | - | 96,414 | ||||||
| Total operating revenues | 33,594,786 | 12,417,897 | 18,274,849 | ||||||
| Investment income | - | 11,366 | 20,432 | ||||||
| Gain on sale of marketable securities | - | 10,086 | 10,107 | ||||||
| Change in fair value of marketable securities | - | 6,867 | 6,881 | ||||||
| Other income | - | 157,181 | - | ||||||
| Total revenue | $ | 33,594,786 | $ | 12,603,397 | $ | 18,312,269 | |||
During the ten months ended December 31, 2022, $24,449,504 of the sales revenue was earned from "point-in-time" revenue ($9,993,730 for the ten months ended December 31, 2021) and $9,145,282 of the sales revenue was earned "over-a-period" of time ($2,415,183 for the ten months ended December 31, 2021).
During the ten months ended December 31, 2022, $24,449,504 of the sales revenue was earned from "point-in-time" revenue ($9,993,730 for the ten months ended December 31, 2021 (unaudited), and $13,367,408 for the year ended February 28, 2022) and $9,145,282 of the sales revenue was earned "over-a-period" of time ($2,415,183 for the ten months ended December 31, 2021(unaudited), and $4,653,516 for the year ended February 28, 2022).
F-26
For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022 (audited)
(in Canadian Dollars, unless specified otherwise)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 trading goods.
| December 31, 2022 | February 28, 2022 | December 31, 2021 (unaudited) |
|||||||
| Raw materials | $ | 6,414,482 | $ | 4,640,896 | $ | 4,751,438 | |||
| Work in progress | 771,507 | 259,235 | 234,787 | ||||||
| Finished goods | 170,198 | 69,308 | 46,680 | ||||||
| Trading goods | 746,439 | - | - | ||||||
| Total | $ | 8,102,626 | $ | 4,969,439 | $ | 5,032,905 |
The inventory total reflects an inventory provision for obsolete raw materials of $392,776 ($nil for ten-months ended December 31, 2021(unaudited), and $nil for the year ended February 28, 2022).
8. Property and equipment
| Cost | February 28, 2022 |
Acquired on March 11, 2022 |
Acquired on September 23, 2022 |
Total | Additions | Disposal | Translation | December 31, 2022 |
||||||||||||||||
| Machinery and equipment | $ | 1,444,616 | $ | - | $ | 1,387,142 | $ | 2,831,758 | $ | 447,342 | $ | - | $ | 92,061 | $ | 3,371,161 | ||||||||
| Computer equipment and software | 73,728 | 45,848 | - | 119,576 | 144,573 | - | 7,882 | 272,031 | ||||||||||||||||
| Furniture and fixtures | 10,235 | 27,597 | - | 37,832 | 23,370 | - | 2,470 | 63,672 | ||||||||||||||||
| Land improvements | - | - | - | - | 24,186 | - | - | 24,186 | ||||||||||||||||
| Leasehold improvements | 134,516 | - | 2,979 | 137,495 | - | - | 8,956 | 146,451 | ||||||||||||||||
| Total | $ | 1,663,095 | $ | 73,445 | $ | 1,390,121 | $ | 3,126,661 | $ | 639,471 | $ | - | $ | 111,369 | $ | 3,877,501 | ||||||||
| Accumulated depreciation | February 28, 2022 |
Acquired on March 11, 2022 |
Acquired on September 23, 2022 |
Total | Additions | Disposal | Translation | December 31, 2022 |
||||||||||||||||
| Machinery and equipment | $ | 178,244 | - | $ | - | $ | 178,244 | $ | 215,025 | $ | - | $ | 18,385 | $ | 411,654 | |||||||||
| Computer equipment and software | 15,269 | - | - | 15,269 | 21,165 | - | 1,658 | 38,092 | ||||||||||||||||
| Furniture and fixtures | 1,292 | - | - | 1,292 | 1,446 | - | 130 | 2,868 | ||||||||||||||||
| Land improvements | - | - | - | - | 1,174 | 35 | 1,209 | |||||||||||||||||
| Leasehold improvements | 8,115 | - | - | 8,115 | 14,680 | - | 985 | 23,780 | ||||||||||||||||
| Total | $ | 202,920 | $ | - | $ | - | $ | 202,920 | $ | 253,490 | $ | - | $ | 21,193 | $ | 477,603 | ||||||||
| Net Book Value | 3,399,898 |
Cost |
Acquired on May 21, 2021 and September 30, 2021 |
Additions |
Disposal |
Translation |
February 28, 2022 |
||||||||||
| Machinery and equipment | $ | 1,319,687 | $ | 55,259 | $ | - | $ | 69,670 | $ | 1,444,616 | |||||
| Computer equipment and software | 70,029 | - | - | 3,699 | 73,728 | ||||||||||
| Furniture and fixtures | 9,721 | - | - | 514 | 10,235 | ||||||||||
| Leasehold improvements | 132,900 | - | - | 1,616 | 134,516 | ||||||||||
| Total | $ | 1,532,337 | $ | 55,259 | $ | - | $ | 75,499 | $ | 1,663,095 | |||||
Accumulated amortization |
May 21, 2021 and September 30, 2021 |
Additions | Disposal | Translation | February 28, 2022 |
||||||||||
| Machinery and equipment | $ | - | $ | 176,226 | $ | - | $ | 2,018 | $ | 178,244 | |||||
| Computer equipment and software | - | 15,096 | - | 173 | 15,269 | ||||||||||
| Furniture and fixtures | - | 1,277 | - | 15 | 1,292 | ||||||||||
| Leasehold improvements | - | 8,023 | - | 92 | 8,115 | ||||||||||
| Total | $ | - | $ | 200,622 | $ | - | $ | 2,298 | $ | 202,920 | |||||
| Net Book Value | $ | 1,532,337 | $ | 1,460,175 | |||||||||||
Cost |
Acquired on May 21, 2021 and September 30, 2021 |
Additions | Disposal | Translation | December 31, 2021 (unaudited) |
||||||||||
| Machinery and equipment | $ | 1,319,687 | $ | 45,247 | $ | - | $ | 67,483 | $ | 1,432,417 | |||||
| Computer equipment and software | 70,029 | - | - | 3,584 | 73,613 | ||||||||||
| Furniture and fixtures | 9,721 | - | - | 498 | 10,219 | ||||||||||
| Leasehold improvements | 132,900 | - | - | 1,405 | 134,305 | ||||||||||
| Total | $ | 1,532,337 | $ | 45,247 | $ | - | $ | 72,970 | $ | 1,650,554 | |||||
Accumulated amortization |
May 21, 2021 and September 30, 2021 |
Additions | Disposal | Translation | December 31, 2021 (unaudited) |
||||||||||
| Machinery and equipment | $ | - | $ | 136,374 | $ | - | $ | 1,910 | $ | 138,284 | |||||
| Computer equipment and software | - | 11,785 | - | 165 | 11,950 | ||||||||||
| Furniture and fixtures | - | 997 | - | 14 | 1,011 | ||||||||||
| Leasehold improvements | - | 5,198 | - | 73 | 5,271 | ||||||||||
| Total | $ | - | $ | 154,354 | $ | - | $ | 2,162 | $ | 156,516 | |||||
| Net Book Value | $ | 1,532,337 | $ | 1,494,038 |
F-27
For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022 (audited)
(in Canadian Dollars, unless specified otherwise)9. Intangible assets
| Cost | February 28, 2022 |
Acquired on March 11, 2022 |
Acquired on September 23, 2022 |
Total | Additions | Disposal | December 31, 2022 | ||||||||||||||
| Tradename - Trademarks | $ | 1,275,794 | $ | 356,160 | 169,625 | $ | 1,801,579 | $ | - | $ | - | $ | 1,801,579 | ||||||||
| Intellectual Property | 320,823 | - | - | 320,823 | 243,201 | - | 564,024 | ||||||||||||||
| Customer Base | 4,914,553 | 774,648 | 1,316,290 | 7,005,491 | - | - | 7,005,491 | ||||||||||||||
| Non-Completes | 863,760 | 54,696 | 472,236 | 1,390,692 | - | - | 1,390,692 | ||||||||||||||
| Total | $ | 7,374,930 | $ | 1,185,504 | $ | 1,958,151 | $ | 10,518,585 | $ | 243,201 | $ | - | $ | 10,761,786 |
| Accumulated amortization | February 28, 2022 |
Acquired on March 11, 2022 |
Acquired on September 23, 2022 |
Total | Additions | Disposal | December 31, 2022 | ||||||||||||||
| Tradename - Trademarks | $ | 133,260 | $ | - | $ | - | $ | 133,260 | $ | 293,916 | $ | - | $ | 427,176 | |||||||
| Intellectual Property | 51,968 | - | - | 51,968 | 99,410 | - | 151,378 | ||||||||||||||
| Customer Base | 169,783 | - | - | 169,783 | 356,142 | - | 525,925 | ||||||||||||||
| Non-Completes | 93,337 | - | - | 93,337 | 187,808 | - | 281,145 | ||||||||||||||
| Total | $ | 448,348 | $ | - | $ | - | $ | 448,348 | $ | 937,276 | $ | - | $ | 1,385,624 | |||||||
| Net Book Value | $ | 6,926,582 | $ | 9,376,162 |
| Acquired on | ||||||||||||
| May 21 and | ||||||||||||
| September 30, | February 28, | |||||||||||
| Cost | 2021 | Additions | Disposal | 2022 | ||||||||
| Tradename - Trademarks | $ | 1,275,794 | $ | - | $ | - | $ | 1,275,794 | ||||
| Intellectual Property | 320,823 | - | - | 320,823 | ||||||||
| Customer Base | 4,914,553 | - | - | 4,914,553 | ||||||||
| Non-Competes | 863,760 | - | - | 863,760 | ||||||||
| Total | $ | 7,374,930 | $ | - | $ | - | $ | 7,374,930 |
| Accumulated amortization | May 21, and September 30, 2021 |
Additions | Disposal | February 28, 2022 |
||||||||
| Tradename - Trademarks | $ | - | $ | 133,260 | $ | - | $ | 133,260 | ||||
| Intellectual Property | - | 51,968 | - | 51,968 | ||||||||
| Customer Base | - | 169,783 | - | 169,783 | ||||||||
| Non-Competes | - | 93,337 | - | 93,337 | ||||||||
| Total | $ | - | 448,348 | $ | - | $ | 448,348 | |||||
| Net Book Value | $ | 7,374,930 | 6,926,582 |
| Cost | Acquired on May 21 and September 30, 2021 |
Additions | Disposal | December 31, 2021 (unaudited) |
||||||||
| Tradename - Trademarks | $ | 1,275,794 | $ | - | $ | - | $ | 1,275,794 | ||||
| Intellectual Property | 320,823 | - | - | 320,823 | ||||||||
| Customer Base | 4,914,553 | - | - | 4,914,553 | ||||||||
| Non-Competes | 863,760 | - | - | 863,760 | ||||||||
| Total | $ | 7,374,930 | $ | - | $ | - | $ | 7,374,930 |
| Accumulated amortization | May 21, and September 30, 2021 |
Additions | Disposal | December 31, 2021 (unaudited) |
||||||||
| Tradename - Trademarks | $ | - | $ | 91,174 | $ | - | $ | 91,174 | ||||
| Intellectual Property | - | 69,642 | - | 69,642 | ||||||||
| Customer Base | - | 115,765 | - | 115,765 | ||||||||
| Non-Competes | - | 64,726 | - | 64,726 | ||||||||
| Total | $ | - | 341,307 | $ | - | $ | 341,307 | |||||
| Net Book Value | $ | 7,374,930 | 7,033,623 |
10. Accounts payable, accrued liabilities and other liabilities
| December 31, 2022 | February 28, 2022 | December 31, 2021 (unaudited) |
|||||||
| Accounts payable | $ | 5,269,323 | $ | 2,862,694 | $ | 2,667,469 | |||
| Accrued liabilities | 1,371,858 | 816,702 | 181,653 | ||||||
| Other liabilities | 1,807,702 | 562,262 | 1,034,541 | ||||||
| Total | $ | 8,448,883 | $ | 4,241,658 | $ | 3,883,663 |
Other liabilities include unearned customer deposits and unearned revenues totalling $1,549,729 ($810,838 for the ten-months ended December 31, 2021(unaudited), and $426,609 for the year ended February 28, 2022).
F-28
For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022 (audited)
(in Canadian Dollars, unless specified otherwise)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$5,400,000 with a maturity on August 1, 2023. Borrowings' bear interest at 4% or prime +0.75% per annum, whichever is greater, and any accrued unpaid interest is due on a monthly basis. The balance is secured by its entire $6,743,084 (US $4,978,651) of inventory and $3,259,586 (US $2,406,664) of accounts receivable of SDP and not the Parent or any other subsidiary. As of December 31, 2022, the balance outstanding under the agreement was $5,162,711 (US $3,811,807) (February 28, 2022 - $5,497,249 (US$4,329,224).
In accordance with the agreement, the Company is subject to a financial covenant. The balance of the line of credit may not exceed the lesser of US $5,400,000 or the sum of 90% of accounts receivable, 50% of raw materials, 60% of finished inventory (up to US $2,500,000) and an amortizing borrowing base of $400,000 (which shall be reduced $16,667 each month), which must be met on a monthly basis. Additionally, the Company cannot make any loans, advances, or intercompany transfers of cash flow at any time. Since the execution of the debt line on June 9, 2021, to December 31, 2022, the Company was in compliance with the financial covenant.
| Debt | |||
| Balance, February 28, 2022 | $ | 856,119 | |
| Additions | - | ||
| Principal repayments | (138,946 | ) | |
| Translation | 52,831 | ||
| Balance, December 31, 2022 | 770,004 | ||
| Less: current portion | (195,489 | ) | |
| Long-term portion | $ | 574,515 |
As of December 31, 2022, the Company's total debt is $770,004 (February 28, 2022 - $856,119), of which $195,489 is considered current (February 28, 2022, $174,361) and $574,515 is considered long-term (February 28, 2022, $681,758).
Term Note
On June 9, 2021, the Company borrowed $1,015,800 (US$750,000) with a financial institution, Crestmark. The loan is secured by a loan and security agreement and may not exceed 92% of the net book value of SDP's machinery and equipment, which on December 31, 2022, was $1,314,192. The debt accrues interest at 2.75% in excess of Wall Street Journal Prime rate with a minimum of 6% per annum with monthly payments of principal and interest in the amount of $19,062 (US$14,500) beginning on the first day of the first full month following the initial funding and maturing on June 1, 2024. As of December 31, 2022, the balance of the note was $770,004 (US$568,520).
F-29
For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022 (audited)
(in Canadian Dollars, unless specified otherwise)12. Leases
Set out below are the carrying amount of right of use assets and the movements during the period:
| Right-of-use assets | |||
| Balance, February 28, 2022 | $ | 3,941,840 | |
| Acquired | 4,001,998 | ||
| Amortization | (617,653 | ) | |
| Impact of modification | 177,893 | ||
| Translation | 277,222 | ||
| Balance, December 31, 2022 | $ | 7,781,300 |
| Lease liability | Current | Long-term | |||||||||
| Balance, February 28, 2022 | $ | 4,179,688 | $ | 245,257 | $ | 3,934,431 | |||||
| Acquired | 2,533,593 | ||||||||||
| Interest lease expense | 248,127 | ||||||||||
| Lease payments | (608,251 | ) | |||||||||
| Impact of modification | 177,893 | ||||||||||
| Translation | 299,536 | ||||||||||
| Balance, December 31, 2022 | $ | 6,830,586 | $ | 847,253 | $ | 5,983,333 | |||||
Future minimum lease payments payable are as follows:
| Twelve months ending December 31, 2023 | $ | 1,228,778 | |
| Twelve months ending December 31, 2024 | 1,271,447 | ||
| Twelve months ending December 31, 2025 | 1,316,015 | ||
| Twelve months ending December 31, 2026 | 1,087,345 | ||
| Twelve months ending December 31, 2027 | 604,763 | ||
| 2028 and thereafter | 3,545,733 | ||
| Total future minimum lease payments | 9,054,081 | ||
| Less: Interest on lease liabilities | (2,223,495 | ) | |
| Total present value of minimum lease payments | 6,830,586 | ||
| Less: current portion | 847,253 | ||
| Non-current portion | $ | 5,983,333 |
As of December 31, 2022, the weighted average remaining lease terms were 9.32 years (February 28, 2022 - 13.3 years) and the weighted average discount rate was 6.15% (February 28, 2022 - 5.46%).
In October 2018, SDP sold its facility in Clear Lake, South Dakota for $2,955,925 (US$2,182,461). In connection with the sale, SDP entered into a lease agreement for the facility with an initial lease term of 15 years for a base annual rent of $328,776 (US$190,965), with four extension options of five years each. The base rental amount increases annually on the first day of the lease year at the lesser of 2% or 1.25 times the change in the price index, as defined. Per the lease agreement, the Company delivered a letter of credit in the amount of $517,286 (US$381,930), to be renewed annually for the duration of the lease agreement. The letter of credit is secured by a guaranteed investment certificate, which is recorded as a security deposit on the consolidated balance sheet.
On October 1, 2021, Simbex 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 $206,971 (US$157,440), with an option to extend for five years. The base rental amount increases annually on the first day of the lease year based on the change in the rolling average of the cost-of-living index for the prior six reporting periods. Per the lease agreement, the Company is also responsible to pay a prorated share of the building overhead monthly as additional rent. The annual amount for this additional rent is $122,801 (US $93,413).
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 $25,966 (US$19,752), with extension options of 6 months each. The base rental amount increases annually on a case-by-case basis. The Company has elected the practical expedient permitted under ASC 842 not to account, as insignificant. Inspira Financial Company terminated this lease on September 30, 2022.
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 $105,352 (US $80,140). The lease began on October 1, 2022, with an initial lease term of 4 years and 2 months, which will end on November 30, 2026. The initial lease agreement includes an option to renew for an additional 5 years. The base rental amount increases annually as per the base rent schedule included in the lease agreement.
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 5 years for a base annual rent of $112,603 (US$85,656). The base rental amount increases annually on the first day of the lease year at the lesser of 2.27% or 1.25 times the change in the price index, as defined.
On July 1, 2012, DaMar entered into a lease agreement for an industrial and office space located in El Cajon, CA with an initial lease term of 7 years. The lease was automatically extended for an additional 7 years on July 1, 2019, for a base annual rent of $431,231 (US$328,032). The lease is currently set to terminate on June 30, 2026. The base rental amount increases annually on the first day of the lease year by 3% of the proceeding month’s lease payment as defined in the agreement.
13. Stockholders' Equity
a. Share capital
Unlimited voting common shares without par value
Unlimited non-voting convertible Class A shares without par value
Issuances
As of December 31, 2022, and February 28, 2022, the Company had 53,707,780 and 52,539,162 common shares outstanding, respectively, with a value of $38,767,442 and $38,046,097, respectively.
As of December 31, 2022, and February 28, 2022, the Company had 3,403,925 and 1,355,425 Class A shares outstanding, respectively, with a value of $1,800,064 and $480,479, respectively.
On September 6, 2020, the Company entered into a share for debt agreement, pursuant to which it issued an aggregate of 737,000 shares of common stock in satisfaction of $114,498 (US$88,000) of indebtedness owed to a service provider. The 737,000 shares of common stock were valued at $94,999 based on the share price on May 21, 2021, the date of issuance. A gain of $15,538 was recognized on the settlement of this debt.
On October 22, 2020, 28,154 common shares were issued on the exercise of 28,154 stock options for proceeds of $5,348 at an exercise price of $0.19 per share. The options had a fair value of $4,323.
On May 20, 2021, 1,492,425 shares of common stock were issued on the exercise of 1,492,425 stock options. 608,025 of the stock options were exercised at price of $0.19 per share and 884,400 of the stock options were exercised at $0.27 per share for total proceeds of $355,500.
On May 20, 2021, pursuant to a share exchange agreement, an aggregate of 1,355,425 shares of common stock with a value of $480,479 were exchanged for 1,355,425 Class A shares.
On May 21, 2021, 9,990,237 shares of common stock and 2,121,232 share purchase warrants to purchase 2,121,232 shares were issued in connection with the financing closed on December 21, 2020, for a total of $5,550,258 in proceeds. 7,869,005 of the shares of common stock were issued at an approximate price of $0.48 per common share and 2,121,232 of the shares of common stock were issued at an approximate price of $0.85 per share. Each warrant has an exercise price of $1.25 per share, which can be exercised until December 18, 2022. The total fair value of the warrants was estimated on the date of the grant to be $13,685 at a price of $0.01 per unit. The fair value was determined using the Black- Scholes option pricing model with the following assumptions: expected volatility of 80%; expected dividend yield of 0%; risk-free interest rate of 0.33%; stock price of $0.16; and expected life of 2 years.
Additionally, as part of the financing, the Company incurred share issuance costs totaling $256,993, which included paying cash of $249,768 and issuing 1,119,906 broker warrants as finders' commissions. Each broker warrant entitles the holder to acquire one common share until December 18, 2022. 876,231 of the broker warrants have an approximate exercise price of $0.47 and 243,675 of the broker warrants have an approximate exercise price of $0.85 per share. The total fair value of the 876,231 broker warrants was estimated on the date of the grant to be $23,118 at a price of $0.03 per unit. The total fair value of the 243,675 broker warrants was estimated on the date of the grant to be $2,918 with a price of $0.01 per unit. These fair values were determined using the Black- Scholes option pricing model with the following assumptions: expected volatility of 80%; expected dividend yield of 0%; risk-free interest rate of 0.33%; stock price of $0.16; and expected life of 2 years.
On August 20, 2021, 112,617 shares of common stock were issued on the exercise of 112,617 stock options at an exercise price of $0.19 per share. Proceeds received from this exercise totaled $21,392.
On November 11, 2021, 199,804 share purchase warrants to purchase 199,804 shares was issued. Each warrant has an exercise price of $0.86 per share, which can be exercised until November 11, 2023. The fair value of the warrants was estimated on the date of the grant at $0.70 per unit using the Black- Scholes option pricing model with the following assumptions: expected volatility of 183%; expected dividend yield of 0%; risk-free interest rate of 1%; stock price of $0.87; and expected life of 2 years.
On February 15, 2022, 7,749,000 shares of common stock and 7,749,000 share purchase warrants to purchase 7,749,000 shares were issued in connection with financing for a total of $4,261,950 in proceeds. The 7,749,000 shares of common stock were issued at a price of $0.55 per common share. Each warrant has an exercise price of $0.70 which can be exercised for 36 months. The total fair value of the warrants was estimated on the date of the grant to be $3,591,369 at a price of $0.46 per unit using the Black- Scholes option pricing model with the following assumptions: expected volatility of 192%; expected dividend yield of 0%; risk-free interest rate of 1.7%; stock price of $0.52; and expected life of 3 years.
Additionally, as part of the financing, the Company incurred share issuance costs totaling $665,113, which included paying cash of $410,284 and issuing 542,431 broker warrants as finders' commissions. Each broker warrant entitles the holder to acquire one common at an exercise price of $0.55 for a 36-month period. The total fair value of the broker warrants was estimated on the date of the grant to be $254,829 at a price of $0.47 per unit using the Black- Scholes option pricing model with the following assumptions: expected volatility of 192%; expected dividend yield of 0%; risk-free interest rate of 1.7%; stock price of $0.52; and expected life of 3 years.
On May 4, 2022, 454,817 shares of common stock were issued on the exercise of 454,817 broker share purchase warrants at an exercise price of $0.4749 per share. Proceeds received from this exercise totaled $215,953.
On May 25, 2022, 28,154 shares of common stock were issued on the exercise of 28,154 stock options at an exercise price of $0.19 per share. Proceeds received from this exercise totaled $5,329.
On May 31, 2022, 143,000 Class A shares were issued to former owner of SDP at a fair market price of $0.75 per share These shares were issued upon completion of SDP's earn-out period. No cash was required to be received as consideration for these shares. Immediately following the issuance, the 143,000 Class A shares were exchanged for 143,000 common shares of the Company.
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 on the date of issuance.
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 281,726 additional common shares. On September 14, 2022, these 281,726 common shares were issued for a fair value of $174,670 based on a share price on the date of issuance.
In connection with the acquisition of ALG Health’s customer lists, sales orders and supply agreements and related sales channel and intellectual property assets on November 29, 2021, Class A shares are to be issued based on achieving certain EBITDA and revenue milestones. On November 21, 2022, 1,048,500 Class A shares were issued to two key individuals at ALG at a fair market price of $0.61 per share for achieving certain EBITDA milestones. No cash was required to be received as consideration for these shares. On November 28, 2022, 1,000,000 Class A shares were issued to one key individual at ALG at a fair market price of $0.68 per share for achieving a revenue milestone as described in the agreement. $693,365 in cash was given as consideration for these shares.
Shares to be issued
On May 31, 2022, SDP concluded its earn-out period and achieved its milestones allowing SDP to receive its full earn-out compensation of 19,162,000 Class A shares (as described in detail in Note 4). These shares will be allocated to the previous owners of SDP based on their percentage of ownership on the date of sale. As of May 31, 2022, the fair value of the shares to be issued is $14,371,500.
As of December 31, 2022, 143,000 Class A shares have been issued to one previous owner of SDP and 19,019,000 Class A shares are to be issued.
b. Stock 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 as of December 31, 2022, are as follows:
| Grant date | Exercise price | Number of options | Number of vested options | Weighted average remaining life (years) |
||||||||
| March 28, 2014 | 2.13 | 5,103 | 5,103 | 1.24 | ||||||||
| September 23, 2019 | 0.19 | 28,155 | - | 1.73 | ||||||||
| May 29, 2020 | 0.27 | 73,700 | 73,700 | 2.41 | ||||||||
| August 18, 2020 | 0.19 | 73,700 | 49,133 | 7.63 | ||||||||
| June 8, 2021 | 0.99 | 663,300 | 221,100 | 3.42 | ||||||||
| June 8, 2021 | 0.86 | 1,444,520 | 481,507 | 3.42 | ||||||||
| June 8, 2021 | 0.86 | 225,000 | 225,000 | 3.42 | ||||||||
| July 7, 2021 | 1.39 | 400,000 | 133,333 | 3.63 | ||||||||
| December 6, 2021 | 0.65 | 1,094,110 | 290,413 | 3.93 | ||||||||
| January 19, 2022 | 0.65 | 150,000 | - | 4.05 | ||||||||
| March 9, 2022 | 0.54 | 240,000 | - | 4.19 | ||||||||
| April 13, 2022 | 0.78 | 236,700 | - | 4.28 | ||||||||
| April 26, 2022 | 0.90 | 150,000 | - | 4.32 | ||||||||
| July 18, 2022 | 0.79 | 308,650 | - | 4.55 | ||||||||
| August 29, 2022 | 0.69 | 400,000 | - | 4.66 | ||||||||
| December 12, 2022 | 0.50 | 190,000 | - | 4.95 | ||||||||
| Total | 0.81 | 5,672,938 | 1,479,289 | 3.87 |
A summary of the Company's changes to stock options are as follows:
| Number of options | Weighted average exercise price |
|||||
| Balance as of February 28, 2021 | 2,793,380 | 0.27 | ||||
| Options exercised | (1,605,042 | ) | 0.23 | |||
| Options expired | (1,345,746 | ) | ||||
| Options issued | 4,284,440 | 0.73 | ||||
| Balance as of December 31, 2021 (unaudited) | 4,127,032 | 0.76 | ||||
| Balance as of February 28, 2022 | 4,277,032 | 0.78 | ||||
| Options exercised | (28,154 | ) | 0.19 | |||
| Options expired | (101,290 | ) | ||||
| Options issued | 1,525,350 | 0.12 | ||||
| Balance as of December 31, 2022 | 5,672,938 | 0.81 |
The Company recognized $1,278,915 of stock-based compensation for the ten-month ended December 31, 2022 ($1,196,361 for the year ended February 28, 2022).
On May 29, 2020, the Company issued 884,400 options to two directors, which were fully vested, and exercised during the year ended February 28, 2022, and 73,700 options to an employee of the Company. The options are exercisable for a period of five years at an exercise price of $0.27 per option. The fair value of the options was estimated on the date of the grant at $0.12 per option using the Black- Scholes option pricing model with the following assumptions: expected volatility of 115%; expected dividend yield of 0%; risk-free interest rate of 0.40%; stock price of $0.16; and expected life of 3 years.
On August 18, 2020, the Company issued 608,025 options to two directors, which were fully vested, and exercised during the year ended February 28, 2022, and 73,700 options to an employee of the Company. The options are exercisable for a period of ten years at an exercise price of $0.19 per option. The fair value of the options was estimated on the date of the grant at $0.12 per option using the Black-Scholes option pricing model with the following assumptions: expected volatility of 115%; expected dividend yield of 0%; risk- free interest rate of 0.40%; stock price of $0.16; and expected life of 3 years.
On June 8, 2021, the Company issued 663,300 options to an officer of the Company. The options are exercisable for a period of five years at an exercise price of $0.99 per option. The fair value of the options was estimated on the date of the grant at $0.58 per option using the Black-Scholes option pricing model with the following assumptions: expected volatility of 100%; expected dividend yield of 0%; risk-free interest rate of 0.88%; stock price of $0.80; and expected life of 5 years.
On June 8, 2021, the Company issued 1,672,990 options to four directors, and 250,000 options to two employees of the Company in total. The options are exercisable for a period of five years at an exercise price of $0.86 per option. The fair value of the options was estimated on the date of the grant at $0.59 per option using the Black-Scholes option pricing model with the following assumptions: expected volatility of 100%; expected dividend yield of 0%; risk-free interest rate of 0.88%; stock price of $0.80; and expected life of 5 years.
On July 7, 2021, the Company issued 250,000 options to one director and 150,000 options to an employee of the Company, which were fully vested. The options are exercisable for a period of five years at an exercise price of $1.39 per option. The fair value of the options was estimated on the date of the grant at $0.64 per option using the Black-Scholes option pricing model with the following assumptions: expected volatility of 190%; expected dividend yield of 0%; risk-free interest rate of 1.94%; stock price of $0.94; and expected life of 5 years.
On December 6, 2021, the Company issued 100,000 options to one officer, 250,000 options to one director, 150,000 options to an employee of the Company, and 798,150 options to forty-one employees of Simbex in total. The options are exercisable for a period of five years at an exercise price of $0.65 per option. The fair value of the options was estimated on the date of the grant at $0.63 per option using the Black-Scholes option pricing model with the following assumptions: expected volatility of 193%; expected dividend yield of 0%; risk-free interest rate of 1.38%; stock price of $0.65; and expected life of 5 years.
On January 19, 2022, the Company issued 150,000 options to an officer of the Company. The options are exercisable for a period of five years at an exercise price of $0.65 per option. The fair value of the options was estimated on the date of the grant at $0.63 per option using the Black-Scholes option pricing model with the following assumptions: expected volatility of 192%; expected dividend yield of 0%; risk-free interest rate of 1.68%; stock price of $0.65; and expected life of 5 years.
On March 9, 2022, the Company issued 240,000 options to ten employees of SDP. The options vest over three years and are exercisable for a period of five years at an exercise price of $0.54 per option. The fair value of the options was estimated on the date of the grant at $0.53 per option using the Black-Scholes option pricing model with the following assumptions: expected volatility of 201%; expected dividend yield of 0%; risk-free interest rate of 1.50%; stock price of $0.54; and expected life of 5 years.
On April 13, 2022, the Company issued 236,700 options to an officer of the Company. The options vest over three years and are exercisable for a period of five years at an exercise price of $0.78 per option. The fair value of the options was estimated on the date of the grant at $0.77 per option using the Black-Scholes option pricing model with the following assumptions: expected volatility of 210%; expected dividend yield of 0%; risk-free interest rate of 1.54%; stock price of $0.78; and expected life of 5 years.
On April 26, 2022, the Company issued 350,000 options to two employees of the Company. The options vest over three years and are exercisable for a period of five years at an exercise price of $0.90 per option. The fair value of the options was estimated on the date of the grant at $0.86 per option using the Black-Scholes option pricing model with the following assumptions: expected volatility of 214%; expected dividend yield of 0%; risk-free interest rate of 2.58%; stock price of $0.87; and expected life of 5 years.
On July 18, 2022, the Company issued 100,000 options to one employee of SDP, 58,650 options to eleven employees of Simbex, and 150,000 options to two outside consultants of the Company. The options vest over three years and are exercisable for a period of five years at an exercise price of $0.79 per option. The fair value of the options was estimated on the date of the grant at $0.78 per option using the Black-Scholes option pricing model with the following assumptions: expected volatility of 214%; expected dividend yield of 0%; risk-free interest rate of 1.21%; stock price of $0.79; and expected life of 5 years.
On August 29, 2022, the Company issued 200,000 options to an officer of the Company. The options vest over three years and are exercisable for a period of five years at an exercise price of $0.69 per option. The fair value of the options was estimated on the date of the grant at $0.67 per option using the Black-Scholes option pricing model with the following assumptions: expected volatility of 209%; expected dividend yield of 0%; risk-free interest rate of 1.40%; stock price of $0.68; and expected life of 5 years.
On December 12, 2022, the Company issued 190,000 options to two employees of the Company. The options vest over three years and are exercisable for a period of five years at an exercise price of $0.50 per option. The fair value of the options was estimated on the date of the grant at $0.49 per option using the Black-Scholes option pricing model with the following assumptions: expected volatility of 204%; expected dividend yield of 0%; risk-free interest rate of 2.98%; stock price of $0.50; and expected life of 5 years.
c. Warrants
The outstanding warrants on December 31, 2022, are as follows:
| Grant date | Exercise price |
Number of warrants |
Number of vested warrants |
Weighted Avg Remaining Life (years) |
||||||||
| November 11, 2021 | 0.86 | 199,804 | 199,804 | 0.86 | ||||||||
| February 15, 2022 | 0.55 | 542,431 | 542,431 | 2.13 | ||||||||
| February 15, 2022 | 0.70 | 7,749,000 | 7,749,000 | 2.13 | ||||||||
| Total | $ | 0.70 | 8,491,235 | 8,491,235 | 2.10 |
A summary of the Company's warrants are as follows:
| Number of warrants | Weighted average exercise price | |||||
| Balance as of February 28, 2021 | - | - | ||||
| Warrants exercised | - | - | ||||
| Warrants issued as part of finance deal | 2,321,036 | 0.23 | ||||
| Warrants issued as broker warrants | 1,119,906 | 0.06 | ||||
| Balance as of December 31, 2021 (unaudited) | 3,440,942 | 0.29 | ||||
| Balance as of February 28, 2022 | 11,732,373 | 0.79 | ||||
| Warrants exercised and forfeited | (3,241,138 | ) | (0.09 | ) | ||
| Warrants issued as part of finance deal | - | - | ||||
| Warrants issued as broker warrants | - | - | ||||
| Balance as of December 31, 2022 | 8,491,235 | 0.70 |
14. Related party transactions
The Company's transactions with related parties were carried out on normal commercial terms and in the course of the Company's business. Other than disclosed elsewhere in the Company's consolidated financial statements, related party transactions are as follows.
During the ten month periods ended December 31, 2021 and 2022, and for the period ended February 28, 2022, we paid to Advanced Strategic Associates, LLC (“Advanced”), a company owned and controlled by Michael Dalsin, a beneficial holder of more than 5% of our Common Shares, and Michael Dalsin individually an amount of $1,405,023 (US $1,114,500) and $168,197 (US $132,635), respectively, for an aggregate amount of $1,573,220 (US $1,247,135). The consideration for Advanced and Mr. Dalsin providing services is related to acquisition structuring, due diligence, capital structuring, and corporate transactional advisory services. Aggregate compensation for the ten month periods ended December 31, 2022 and 2021 of $227,002 (US $172,678) and $866,905 (US $693,358) respectively. The compensation for the period ended February 28, 2022 includes $866,905 (US $693,358) for the ten months ended December 31, 2021 plus an additional payment in the following two months for due diligence, financial structuring and regulatory services of $479,312 (US $381,099), with the sum totaling $1,346,217 (US $1,074,457). This expense was included within transaction costs.
During the ten month periods ended December 31, 2021 and 2022, and for the period ended February 28, 2022, we paid to Marquette Partners, Inc. (“Marquette”), a company owned and controlled by Roger Greene, a beneficial holder of more than 5% of our Common Shares, and Roger Greene individually an amount of $349,879 (US $276,000) and $151,445 (US $118,241), respectively, for an aggregate amount of $501,324 (US $394,241). The consideration for Marquette and Mr. Greene providing advisory services related to strategic business acquisitions. Compensation for the ten-month periods ended December 31, 2022, and 2021 of $157,056 (US $119,471) and $330,048 (US $263,975) respectively. The compensation for the period ended February 28, 2022, includes $330,048 (US $263,975) for the ten months ended December 31, 2021, plus an additional payment in the following two months for services of $14,219 (US $10,795), with the sum totaling $344,268 (US $274,770). This expense was included within transaction costs.
During the ten month periods ended December 31, 2021 and 2022, and for the period ended February 28, 2022, we paid to Hedgehog Financial Corporation (“Hedgehog”), a company owned and controlled by Andrew Cross, the son of Leslie Cross, our Chairman of the Board and former Interim Chief Executive Officer, and an employee, an aggregate sum of $394,206 (US $311,675) in consideration for Hedgehog providing services related to acquisitions, due diligence, accounting, finance and other corporate support services. Compensation for the ten-month periods ended December 31, 2022, and 2021 of $78,876 (US $60,000) and $279,244 (US $223,341) respectively. The compensation for the period ended February 28, 2022, includes $279,244 (US $223,341) for the ten months ended December 31, 2021, plus an additional payment in the following two months for services of $36,086 (US $28,334), with the sum totaling $315,330 (US $251,675). This expense was included within transaction costs.
The Company incurred substantial 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:
| For the ten months ended | For the year ended | ||||||||
| December 31, 2022 | December 31, 2021 (unaudited) | February 28, 2022 | |||||||
| Consulting and professional fees | 1,645,028 | 1,761,919 | 2,715,001 | ||||||
| General expenses | 1,232,337 | 964,486 | 1,127,733 | ||||||
| Transaction costs | 2,877,365 | 2,726,405 | 3,842,734 | ||||||
16. Cash and cash equivalents
Cash represents bank deposits at reputable banking institutions. 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 or amortized cost, as applicable, consist of holdings in a money market fund and in treasury bills. As of December 31, 2022, there are no cash equivalents presented on the balance sheet (February 28, 2022, and December 31, 2021 (unaudited) - $nil).
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For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022 (audited)
(in Canadian Dollars, unless specified otherwise)17. Income taxes
As of December 31, 2022, the Company has US non-capital loss carry-forwards of approximately $12,107,017 ($9,053,765 as of February 28, 2022), which can be used to reduce taxable income of future years. The benefit from the non-capital loss carry-forward balance has not been recorded in the consolidated financial statements. These losses expire from 2035 to 2042.
As of December 31, 2022, the Company has Canadian non-capital loss carry-forwards of approximately $4,300,831 ($8,096,327 as of February 28, 2022), which can be used to reduce taxable income of future years. The benefit from the non-capital loss carry-forward balance has not been recorded in the consolidated financial statements. These losses expire from 2032 to 2042.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A full valuation allowance is established against all net deferred tax assets as of December 31, 2022, and February 28, 2022, based on estimates of recoverability. While the Company has optimistic plans for its business strategy, it determined that such a valuation allowance was necessary given the current and expected near term losses and the uncertainty with respect to its ability to generate sufficient profits from its business model.
The following table summarizes the components of deferred tax:
| Deferred Tax Assets | December 31, 2022 | February 28, 2022 | ||||
| Finance Lease Liabilities | $ | 1,775,952 | $ | - | ||
| Finance costs | 165,922 | - | ||||
| Reserves | 41,787 | - | ||||
| Operating tax losses carried forward - US | 3,148,084 | 4,481,137 | ||||
| Operating tax losses carried forward - Canada | 1,161,224 | - | ||||
| Intangible assets | (570,642 | ) | - | |||
| Other | 451 | 507,758 | ||||
| Valuation Allowance | (2,857,799 | ) | (4,988,895 | ) | ||
| Subtotal of Assets | 2,864,979 | - | ||||
| Deferred Tax Liabilities | ||||||
| Property, plant and equipment | $ | (841,841 | ) | $ | ||
| Right of use assets | (2,023,138 | ) | ||||
| Intangible Assets | (1,755,889 | ) | ||||
| Subtotal of Liabilities | (2,864,979 | ) | (1,755,889 | ) | ||
| Net deferred tax liability | $ | - | $ | (1,755,889 | ) | |
| Movement in net deferred tax liabilities: | ||||||
| Balance at the beginning of the period / year | $ | (1,755,889 | ) | $ | -- | |
| Recognized in profit/loss | 3,176,134 | 113,639 | ||||
| Goodwill | (1,420,245 | ) | (1,869,528 | ) | ||
| Balance at the end of the period / year | $ | -- | $ | (1,755,889 | ) |
The Company's provision for (recovery of) income taxes differs from the amount that is computed by applying the combined Federal and state statutory income tax rate of 26.00% (February 28, 2022 - 25.35%) in the United States to the Company's net loss before income taxes as follows:
| December 31, 2022 | February 28, 2022 | |||||
| Net Loss before recovery of income taxes | $ | (19,030,581 | ) | $ | (4,473,636 | ) |
| Expected income tax (recovery) | (4,947,951 | ) | (1,134,067 | ) | ||
| Tax rate changes and other adjustments | (60,726 | ) | 1,287,727 | |||
| Share based compensation and non-deductible expenses | 3,644,410 | 1,508,951 | ||||
| Adjustments in respect of prior periods | (620,011 | ) | - | |||
| Utilization of losses not previously recognized | (1,755,889 | ) | - | |||
| Change in tax benefits not recognized | 605,991 | (1,764,228 | ) | |||
| Income tax (recovery) | $ | (3,134,176 | ) | $ | (101,617 | ) |
| The Company's income tax (recovery) is allocated as follows: | ||||||
| Current tax (recovery) expense | $ | 41,958 | $ | 12,022 | ||
| Deferred tax (recovery) expense | (3,176,134 | ) | (113,639 | ) | ||
| $ | (3,134,176 | ) | $ | (101,617 | ) |
Deferred tax assets and liabilities have been offset where they relate to income taxes levied by the same taxation authority and the Company has the legal right and intent to offset.
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For the ten months ended December 31, 2022 (audited), and 2021 (unaudited), and for the year ended February 28, 2022 (audited)
(in Canadian Dollars, unless specified otherwise)18. Contingencies
From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of December 31, 2022, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company's operations. There are also no proceedings in which any of the Company's directors, officers or affiliates is an adverse party or has a material interest adverse to the Company's interest.
Outside of the line of credit and debt disclosed in Note 11, the Company does not have any other financial commitments or contingencies.
19. Subsequent events
On January 10, 2023, 104,850 Class A shares were exchanged for 104,850 common shares in the Company at a price of $0.44 per share. No cash was received as part of this issuance.
On January 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 to US$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.
On February 7, 2023, 432,150 Class A shares were issued to one key individual at ALG at a fair market price of $0.69 per share for achieving a revenue milestone as described in the agreement. $298,183 in cash was given as consideration for these shares.
On February 7, 2023, 172,421 Class A shares were issued to one key individual at ALG at a fair market price of $0.69 per share for achieving a revenue milestone as described in the agreement. No cash was given as consideration for these shares.
On February 21, 2023, 1,275,770 Class A shares were issued to former owner of SDP at a price of $0.75 per share. These shares were issued upon completion of SDP's earn-out period. No cash was required to be received as consideration for these shares.
On February 23, 2023, 11,481,890 Class A shares were issued to former owner of SDP at a price of $0.75 per share. These shares were issued upon completion of SDP's earn-out period. No cash was required to be received as consideration for these shares.
On March 15, 2023, the Company entered into a stock purchase agreement providing for the acquisition of all of the capital stock of Biodex Medical Systems, Inc. ("Biodex"), which consists principally of the Biodex Physical Medicine business. The Purchase Agreement replaces the previously disclosed asset purchase agreement covering the same business that was first announced on November 29, 2022. The Company expects to close the Acquisition on April 3, 2023. The purchase agreement provides that the Company shall purchase all of the capital stock of Biodex in consideration for a total of $8 million in cash, minus indebtedness, transaction expenses and plus or minus a working capital adjustment, payable as follows: (i) a closing payment to the Sellers of $1,000,000 in cash, and (ii) three installment payments to the totaling $7 million, plus or minus the post-closing adjustment, as follows: $2 million on July 1, 2023, $3 million on October 1, 2023, plus or minus the Post-Closing Adjustment, and $2 million on January 1, 2024. The payment of the is guaranteed by the Company and is secured by the pledge of the Biodex capital stock as security to Seller, pursuant to the terms of a promissory note.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report, management performed, with the participation of our principal executive officer and principal financial officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures.
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Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2022, our disclosure controls and procedures (a) are ineffective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Deficiencies existed in the design or operation of our disclosure controls and procedures due to the rapid growth through acquisition which has made it impractical to implement and evaluate disclosure controls quickly enough at newly acquired operations. The Company continues to evaluate and implement procedures as deemed appropriate to remediate these deficiencies.
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Management's Annual Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company’s management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the Company's internal control over financial reporting as of the end of the period covered by this report. The Company’s management evaluation the internal control over financial reporting was based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
Our internal control over financial reporting includes those policies and procedures that:
• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls system are met. Because of the inherent limitations in all controls systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Under the supervision and with the participation of management, we assessed the effectiveness of our internal control over financial reporting based on the criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company’s evaluation under the criteria in Internal Control — Integrated Framework (2013), we concluded that our internal control over financial reporting was not effective as of December 31, 2022 based on such criteria.
Deficiencies existed in the design or operation of our internal control over financial reporting that adversely affected our internal controls. The rapid growth through acquisition has made it impractical to implement and evaluate internal controls quickly enough at newly acquired operations, and as a result, there is a lack of segregation of duties throughout our accounting group as a result of our limited resources and staff, and the lack of written documentation of our internal control policies and procedures.
The Company continues to evaluate and implement procedures as deemed appropriate to remediate these weaknesses. In addition, the Company intends to undertake the remediation measures, to include updating the documentation of its internal control processes, including formal risk assessment of its financial reporting processes; and the implementation of procedures pursuant to which the Company can ensure segregation of duties and hire additional resources to ensure appropriate review and oversight.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following table sets forth the individuals who are our directors and executive officers and their respective positions as of March 31, 2023.
| Name | Age | Position |
| Leslie Cross | 72 | Executive Chairman of the Board and Director |
| Luke Faulstick | 59 | Chief Executive Officer and Director |
| Dennis Nelson | 50 | Chief Financial Officer; Principal Accounting Officer |
| Joseph G. Martinez | 65 | Sr. Vice President, Legal & Compliance, General Counsel and Secretary |
| Ken Kashkin, M.D. | 71 | Director |
| Kyle Wilks | 46 | Director |
Leslie Cross - Chairman of the Board, Former Interim Chief Executive Officer and Former Corporate Secretary
Mr. Cross is currently the Chairman of the Board and a Director of the Company. Mr. Cross was appointed Director effective on September 16, 2020, and Executive Chairman effective on July 18, 2022. From September 16, 2020, to July 18, 2022, Mr. Cross was Interim Chief Executive Officer of the Company and from May 21, 2021, to March 31, 2023, he was Secretary. From 1990 to 2010, Mr. Cross held the positions of President and Chief Executive Officer of DJO Global, Inc. (NYSE:DJO), a manufacturer and worldwide distributor of electrotherapy products for pain therapy and rehabilitation, clinical devices for the treatment of patients in physical therapy clinics, knee, hip and shoulder implant products, and orthopedic rehabilitation products, including rigid knee bracing, orthopedic soft goods, cold therapy systems, vascular systems and bone growth stimulation devices. Mr. Cross is the former chairman of the board of directors and former Chief Executive Officer of Alphatec Spine Inc. (NASDAQ: ATEC), a medical device company that provides physician-inspired solutions for patients with spinal disorders, positions he held from 2011 to 2017. Mr. Cross has also served since 2012 on the board of directors of Prosomnus Sleep Technologies, providing sleep apnea solutions to dental practices in the United States and Canada. Mr. Cross contributes executive leadership experience from his extensive service at both DJO Global, Inc. and Alphatec Spine Inc., where he oversaw a wide range of corporate functions including corporate communications, community affairs, government relations, human resources, enterprise services, strategic and operational planning, and retirement plans. The Board also benefits from Mr. Cross's expertise developed over the course of his career in the medical device sector as well as insights from his public company experience in governance, leadership, and strategy. Mr. Cross makes valuable contributions to the Board based on his extensive director-level and executive-management experience, domestic and international business development experience in a wide range of medical device categories and contributions to growing several organizations across the manufacturing and medical device arenas.
Luke Faulstick - Chief Executive Officer of the Company and Director
Luke Faulstick was appointed as Chief Executive Officer of the Company effective as of July 18, 2022, and was elected a Director on September 23, 2022. Prior to his appointment as CEO, Mr. Faulstick served as the Chief Operating and Integration Officer of the Company since April 13, 2022. Since 2012, Mr. Faulstick served as the President of the Company's wholly owned subsidiary and manufacturing unit, South Dakota Partners, Inc. ("SDP") which was acquired by the Company in May 2021, where he led organic growth and acquisitions to increase revenues. In his executive career, Mr. Faulstick has held leadership positions at DJO Global Inc. (EVP/COO); Tyco Healthcare (General Manager); Graphic Controls (General Manager); Mitsubishi Consumer Electronics (Plant Manager); and Eastman Kodak. He previously served on the boards of Alphatec Spine (NASDAQ: ATEC) and Orthofix (NASDAQ: OFIX). Mr. Faulstick studied at both Michigan State University and Rochester Institute of Technology.
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Dennis Nelson, Chief Financial Officer and Principal Accounting Officer
Dennis Nelson was appointed CFO of Salona Global, effective August 29, 2022. Mr. Nelson has had a wide range of industry experience including medical device, aerospace manufacturing and consumer products. Prior to Mr. Nelson's appointment, he was the Corporate Controller of Manscaped Holdings LLC, a consumer products company based in San Diego, California, from August 2021 until August 2022. From June 2018 until October 2020, Mr. Nelson was the Chief Financial Officer for Senior Aerospace Jet Products and Senior Aerospace Ketema, aerospace manufacturing companies based in San Diego, California. From March 2011 until April 2017, Mr. Nelson held various financial positions, including Principal Financial Officer and Interim CFO, of Alphatec Spine, Inc., a medical technology company trading on the NASDAQ. Mr. Nelson is a CPA in the State of California with a BA in Business Economics and a concentration in accounting from University of California, Santa Barbara.
Joseph G. Martinez, Esq. - Senior Vice President, Legal & Compliance, General Counsel and Secretary
Joseph G. Martinez, Esq. was appointed as Senior Vice President, Legal & Compliance, General Counsel and Secretary of the Company on March 31, 2023. Prior to this, Mr. Martinez served as Senior Counsel of the Company from January 15, 2023, and as a legal consultant to the Company from September 2022 to January 15, 2023. Prior to joining the Company, Mr. Martinez was Senior Vice President and General Counsel of DJO Global, Inc. (“DJO”), a $1.5 billion orthopedic medical device business, from January 2020 to April 2022. Prior to this, Mr. Martinez held the role of Sr. V.P. and Associate General Counsel of DJO from November 2006 to December 2019. From May 2005 to November 2006, Mr. Martinez was Of Counsel at the San Diego, CA law firm of Procopio, Cory, Hargreaves & Savitch LLP, advising businesses on corporate transactional and securities matters. From July 1998 to May 2005, Mr. Martinez was Sr. V.P. & General Counsel of JMAR Technologies, Inc., a NASDAQ listed laser and semiconductor technology company. From May 1986 to July 1998, Mr. Martinez was an Associate and later a Partner in the Business Department of the Los Angeles-based law firm of Parker, Milliken, Clark, O’Hara & Samuelian. Mr. Martinez has a Bachelor of Arts degree with a major in Genetics from U.C. Berkeley, a Master of Business Administration degree from U.C. Berkeley, and a Juris Doctor degree from U.C. Davis. Mr. Martinez is admitted to the State Bar of California.
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Ken Kashkin, M.D. - Director
Kenneth Kashkin. M.D. has been a director of the Company since September 2020. Dr. Kashkin trained and served on the faculties of the University of California, Los Angeles (UCLA) and Yale University School of Medicine followed by a career as a healthcare business senior executive and biotechnology investor. In 2017, Dr. Kashkin co-founded K2 Biotechnology Ventures, engaged in developing and commercializing portfolios of university and medical center innovations in partnership with venture capital, health care corporations and philanthropic health care foundation partners. From 2014 to 2020, Dr. Kashkin served as the Chief Operating Officer and Head of Therapeutics for Chromocell Corporation where he coordinated a series of organizational changes to improve cost structures as well as oversaw the negotiation of key license and research agreements for emerging therapeutics. From 2011 to 2014, Dr. Kashkin served as the President & CEO of Catholic Health Initiatives (CHI, now CommonSpirit Health), Institute for Research and Innovation (CIRI) where he was responsible for CHI's Centers for Translational Research, Clinical Research, Healthcare Innovation (Venture Arm of CHI). Prior to that, from 2008 to 2011, Dr. Kashkin held the position of Vice President, Research & Development, Intravenous Therapies (IVT) at Baxter Healthcare Corporation. Dr. Kashkin's experience as a professor at Yale University and UCLA School of Medicine and leadership of R&D life science companies commercializing novel medical technologies will make him an expert board member in evaluating the value of proposed acquisition targets and their portfolios of medical products. Dr. Kashkin's years of expertise in the financial management of health sciences organization operations benefit the Company.
Kyle Wilks - Director
Mr. Kyle L. Wilks has been a director of the Company since September 2020. Mr. Wilks graduated from the United States Naval Academy, Annapolis, MD with a Bachelor of Science Degree in Mathematics. Mr. Wilks spent seven years as a naval officer with multiple combat tours, eventually ending his time in uniform as a professor of leadership and naval science at the U.S. Naval Academy. Post military, Mr. Wilks worked as an Executive Director for a private equity group focusing on mid-market healthcare companies prior to his senior manager roles within Baxter International and Shire plc. From 2009 to 2015, Mr. Wilks headed numerous fractionation divisions at Baxter International and acted as liaison for its foreign regulatory agencies of Pharmaceuticals and Medical Devices Agency (PMDA) and Therapeutic Goods Administration (TGA). From 2015 to 2019, Mr. Wilks headed the manufacturing process of Shire plc's AHF-M therapy and acted as the Los Angeles, California, site representative for worldwide production. Beyond daily production accountability requirements, Mr. Wilks managed the AHF-M department during routine regulatory audits by the Food and Drug Administration (FDA) and European Medicines Agency (EMA) and eventually oversaw the manufacturing of numerous plasma-derived rare disease therapies. Mr. Wilks's management experience in medical device manufacturing and in private equity enable him to provide valuable insights to the Board, including the areas of compliance, management and compensation-specific issues.
The Articles of the Company (the "Articles") filed under the British Columbia Business Corporations Act, as amended, including the regulations promulgated thereunder (the "BCBCA"), provide that our Board of Directors shall consist of at least three directors and that each director shall hold office until the close of the next annual general meeting of our shareholders, or until his or her successor is duly elected or appointed, unless his or her office is earlier vacated. Our Board of Directors currently consists of four directors, of whom two are considered to be independent persons. See Item 13-"Certain Relationships and Related Transactions, and Director Independence - Director Independence" for details on the independence of our directors. The Articles provide that the directors may, from time to time, appoint such officers as the directors determine. The directors may, at any time, terminate any such appointment.
Conflicts of Interest
Certain of our directors and officers will be engaged in, and will continue to engage in, other business activities on their own behalf and on behalf of other companies and, as a result of these and other activities, such directors and officers may become subject to conflicts of interest. Our independent members of the Board will review any such transactions and report to the Audit Committee of the Board.
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The BCBCA provides that in the event that a director has a material interest in a contract or proposed contract or agreement that is material to an issuer, the director shall disclose his interest in such contract or agreement and shall refrain from voting on any matter in respect of such contract or agreement, subject to and in accordance with the BCBCA. To the extent that conflicts of interest arise, such conflicts will be resolved in accordance with the provisions of the BCBCA.
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Significant Employees
There are no other significant employees than those already discussed herein.
Family Relationships
Except as disclosed below in Item 13 “Certain Relationships and Related Transactions and Director Independence,” there are no family relationships among the directors or executive officers of the Company.
Arrangements between Officers and Directors
To the Company’s knowledge, there are no arrangements or understandings between any of our officers or directors and any other person pursuant to which such officer or director was selected to serve as an officer or director of the Company.
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Non-Competition Agreement
Luke Faulstick, our Chief Executive Officer, is party to a Restrictive Covenants Agreement with the Company entered into in connection with the acquisition of SDP. Pursuant to this agreement, Mr. Faulstick is restricted until May 21, 2024 from engaging in, owning or providing any financial assistance to, or provide any managerial, marketing or other advice or assistance to, any contract manufacturing business specializing in PCBA manufacturing for medical devices and other markets, or offering other services that include final assembly, packaging, kitting, distribution and repair in the United States. This agreement also restricts Mr. Faulstick from a) inducing any employees or consultants of the Company to leave the employ or engagement of the Company or otherwise interfere with relationship with the Company, b) hire or engage any person who was an employee on the date of the agreement or within one year prior to the agreement, or c) solicit any customer, supplier or other business to cease or refrain from doing business with the Company.
Corporate Governance
Director Independence - The directors have determined that Dr. Ken Kashkin and Kyle Wilks, two of our four current members of the Board, are independent as such term is defined in Canada's National Instrument 58-101 - Disclosure of Corporate Governance Practices ("NI 58-101") and in Rule 5605 of the Nasdaq Stock Market.
Board Leadership - The Board operates through the leadership of a Chairman and three committees of the Board, each made up of a majority of independent directors.
Position Descriptions - The Board has not adopted a written description for the Chairman of the Board and the Chairman of each Board committee. The Chairman of the Board is responsible for the administration, development and efficient operation of the Board. The Chairman assists in overseeing the operational aspects involved in managing the Company. In addition, the Chairman ensures that the Board adequately discharges its mandate and that the Board's responsibilities and lines of delineation between the Board and management are well understood by the directors. The Chairman of each committee is appointed to manage his or her respective committee. Each committee Chairman must ensure that the committee adequately discharges its mandate pursuant to its charter. Committee Chairmen must report regularly to the Board on the business of their committee. The Board has not developed a written position description for the Chief Executive Officer. The Board expects the Chief Executive Officer and the Company's senior management team to be responsible for the management of the Company's strategic and operational agenda and for the execution of the decisions of the Board and its committees.
Orientation and Continuing Education - While the Company does not currently have a formal orientation and education program for new members of the Board, the Company provides such orientation and education on an ad hoc and informal basis. The Company's Corporate Governance & Nominating Committee ("CG&N") is responsible for coordinating the continuing education programs for directors in order to maintain or enhance their skills and abilities as directors, as well as ensuring that their knowledge and understanding of the Company and its business remains current. Directors are encouraged to communicate with management, auditors and technical consultants; and to keep themselves current with industry trends and developments and changes in legislation with management's assistance. Directors have full access to the Company's records.
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Ethical Business Conduct - The directors maintain that the Company must conduct and be seen to conduct its business dealings in accordance with all applicable laws and the highest ethical standards. The Company's reputation for honesty and integrity amongst its shareholders and other stakeholders is key to the success of its business. No employee or director will be permitted to achieve results through violation of laws or regulations, or through unscrupulous dealings. Any director with a conflict of interest or who is capable of being perceived as being in conflict of interest with respect to the Company must abstain from discussion and voting by the Board or any committee of the Board on any motion to recommend or approve the relevant agreement or transaction. The Board must comply with the conflict of interest provisions of the BCBCA.
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Assessments - The CG&N Committee, in consultation with the Chairman of the Board, is responsible for ensuring that an appropriate system is in place to evaluate the effectiveness of the Board, the Board committees and individual directors, with a view to ensuring that they are fulfilling their respective responsibilities and duties and working effectively together as a unit. The CG&N Committee informally monitors director performance throughout the year (noting particularly any directors who have had a change in their primary job responsibilities or who have assumed additional directorships since their last assessment) to ensure that the Board, the Board committees and individual directors are performing effectively. From time to time the CG&N Committee may also choose to complete a formal assessment process consisting of completion of a written survey by each member of the Board, on request, conducting one-on-one discussions in order to assess such matters as the composition of the Board, the conduct of and agendas for meetings of the Board and its committees, and the role and impact of the Board. The results of such surveys and interviews will then be summarized to identify strengths, opportunities and further suggestions with respect to each area of discussion and the Chairman of the Board is to report on such a summary to the CG&N Committee and to the rest of the Board.
Term of Office - Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our Board and hold office until removed by the Board.
Board Committees
Audit Committee - Canada's National Instrument 52-110 - Audit Committees ("NI 52-110") requires the Company, as a venture issuer, to disclose annually in its circular certain information concerning the constitution of its Audit Committee and its relationship with its independent auditor. The Company's Audit Committee is governed by an audit committee charter and is comprised of three directors, Kyle Wilks, Dr. Ken Kashkin and Leslie Cross. Each member of the Audit Committee is financially literate, as such term is defined in NI 52-110, and two members (Kyle Wilks and Dr. Kashkin), are independent, as such term is defined in NI 52-110 and in the BCBCA. Kyle Wilks serves as Chairman of the Audit Committee. The Audit Committee was established on September 16, 2020. As a "venture issuer" as defined in NI 52-110 the Company is relying on the exemption contained in Section 6.1 of NI 52- 110, which exempts the Company from the requirements of Part 3 (Composition of the Audit Committee) and Part 5 (Reporting Obligations) of NI 52-110.
Corporate Governance and Nominating Committee - The CG&N Committee is a standing committee appointed by the Board and is governed by a charter. The members of the CG&N Committee are: Kyle Wilks (Chairman) and Dr. Ken Kashkin, both of whom are independent, as such term is defined in NI 52-110. The CG&N Committee was established on September 16, 2020. The CG&N Committee will act on behalf of and subject to the direction of the Board in all matters pertaining to corporate governance issues, new director nominees, as well as the size and composition of the Board and Board committees. The CG&N Committee is responsible for: developing and enforcing policy in the area of corporate governance and the practices of the Board in light of the Company's particular circumstances, the changing needs of investors and the Company, and changes in corporate governance guidelines; preparing and recommending to the Board annually a statement of corporate governance practices to be included in the Company's information circular and ensure that such disclosure is complete and provided in accordance with the regulatory requirements; monitoring developments in the area of corporate governance and the practices of the Board and advising the Board accordingly; developing, implementing and maintaining appropriate policies with respect to disclosure, confidentiality and insider trading; adopting a process for determining what competencies and skills the Board as a whole should have, and applying this result to the recruitment process for new directors; in consultation with the Chairman of the Board and the Chief Executive Officer, identifying individuals qualified to become new Board members and recommend to the Board the new director nominees for the next annual meeting of shareholders; recognizing that shareholding by directors is appropriate in aligning director and shareholder interests; annually reviewing credentials of existing Board members to assess suitability for re-election; establishing procedures for, and approving and ensuring provision of, an appropriate orientation and education program for new recruits to the Board and continuing education for Board members; considering and, if thought fit (and after obtaining the consent of the Chairman of the Board, which consent may not be unreasonably withheld), approving requests from individual directors for an engagement of special outside advisors at the expense of the Company; and reviewing, on a periodic basis, the size and composition of the Board and Board committees and make appropriate recommendations to the Board.
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Compensation Committee - The members of the Compensation Committee are: Kyle Wilks (Chairman) and Leslie Cross. Kyle Wilks is independent, as such term is defined in NI 52-110. The Board has adopted a written charter for the Compensation Committee setting out its responsibilities for compensation matters. The Compensation Committee was established on September 16, 2020. It is responsible for administering the Company's executive compensation program, which, prior to its establishment, was previously administered by the Board.
The Compensation Committee assists the Board in discharging the directors' oversight responsibilities relating to the compensation and retention of key senior management employees, and in particular the Chief Executive Officer. In determining the total compensation of any member of senior management, the Compensation Committee will consider all elements of compensation in total rather than one element in isolation. The Compensation Committee is also responsible for examining the competitive positioning of total compensation and the mix of fixed, incentive and share-based compensation.
Pursuant to the charter of the Compensation Committee, the Compensation Committee is responsible for assisting the Board in fulfilling its oversight responsibilities with respect to: setting policies for senior officers' compensation; reviewing and approving and then recommending to the Board salary, bonus, and other benefits, direct or indirect, and any change-of-control packages of the Chief Executive Officer; considering the recommendations of the Chief Executive Officer and setting the terms and conditions of employment including, approving the salary, bonus, and other benefits, direct or indirect, and any change-of-control packages, of the key executives of the Company; undertaking an annual review of the Chief Executive Officer goals for the coming year and reviewing progress in achieving those goals; reviewing compensation of the Board on at least an annual basis; overseeing the administration of the Company's compensation plans, including stock option plans, compensation plans for outside directors, and such other compensation plans or structures as are adopted by the Company from time to time; reviewing and approving executive compensation disclosure to be made in the proxy circular prepared in connection with each annual meeting of shareholders of the Company; and undertaking on behalf of the Board such other compensation initiatives as may be necessary or desirable to contribute to the success of the Company and enhance shareholder value.
Shareholder Communications to the Board
Shareholders who are interested in communicating directly with members of the Board, or the Board as a group, may do so by writing directly to the individual Board member c/o Secretary, Salona Global Medical Device Corporation, 6160 Innovation Way, Carlsbad, California 92009. The Company's Secretary will forward communications directly to the appropriate Board member. If the correspondence is not addressed to the particular member, the communication will be forwarded to a Board member to bring to the attention of the Board. The Company's Secretary will review all communications before forwarding them to the appropriate Board member.
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ITEM 11. EXECUTIVE COMPENSATION.
Set forth below is the information regarding the compensation paid, distributed or accrued by us for the ten month transition period ended December 31, 2022 and the ten months ended December 31, 2021 to every individual who served as Chief Executive Officer (principal executive officer) during the ten month transition period ended December 31, 2022 (Messrs. Cross and Faulstick), the two other most highly compensated executive officers serving at the end of the ten month transition period ended December 31, 2022 (Mr. Nelson), and up to two additional individuals for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer of the Company at the end of the last completed such period (Ms. Polesky-Meyrowitz) and whose compensation exceeded $100,000 (the "Named Executive Officers"). This section provides information in accordance with the scaled SEC disclosure rules available to "smaller reporting companies" and "emerging growth companies."
Summary Compensation Table
| Name and principal position |
Period | Salary ($) |
Option Awards(1) ($) |
All Other Compensation ($) |
Total Compensation ($) |
| Leslie Cross Chairman of the Board; Former Interim Chief Executive Officer (2) |
Ten-months ended December 31, 2022 | 105,168 | -- | -- | 105,168 |
| Fiscal year ended February 28, 2022 | 101,237 | 792,275 | 38,095 | 931,607 | |
| Luke Faulstick Chief Executive Officer (3) |
Ten-months ended December 31, 2022 |
331,403 | 181,371 | 32,044 (6) | 544,818 |
|
Fiscal year ended February 28, 2022 |
250,586 | 656,964 | 22,772 | 930,322 | |
| Melissa Polesky-Meyrowitz Former Chief Financial Officer (5) |
Ten-months ended December 31, 2022 |
223,482 | -- | 19,686 (7) | 243,168 |
|
Fiscal year ended February 28, 2022 |
91,152 | 195,000 | 3,270 | 289,422 | |
| Dennis Nelson Chief Financial Officer (4) |
Ten-months ended December 31, 2022 |
126,530 | 133,458 | -- | 259,988 |
|
Fiscal year ended February 28, 2022 |
N/A | N/A | N/A | N/A |
_______________
Notes:
(1) The amounts reported in this column reflect aggregate grant date fair value computed in accordance with ASC Topic 718, Compensation-Stock Compensation, using the Black-Scholes options pricing model. For more detail on the assumptions used in the calculation of these amounts, see Note 13 to our consolidated financial statements for the transition period ended December 31, 2022, and December 31, 2021, which are included elsewhere in this Transition Report.
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(2) Mr. Cross served as Interim Chief Executive Officer from September 16, 2020, to July 18, 2022. The amounts in the Salary column for the ten-months ended December 31, 2022, reflect payment of $42,067 for Mr. Cross’ services as an employee and officer of the Company and $63,101 for his services as a director. The amounts in the Salary column for the ten-months ended December 31, 2021, reflect payment of $81,019 for Mr. Cross’ services as an employee.
(3) Mr. Faulstick was appointed Chief Operating Officer on April 13, 2022. He was appointed Chief Executive Officer on July 18, 2022.
(4) Mr. Nelson was appointed Chief Financial Officer on August 29, 2022.
(5) Ms. Polesky-Meyrowitz was appointed Chief Financial Officer on January 12, 2022, and served in that position until August 29, 2022.
(6) Other compensation includes $11,184 of employer 401(k) contributions, $1,034 of employer paid dental insurance premiums, $14,716 of employer paid health insurance premiums, and $481 of employer paid group life insurance premiums.
(7) Other compensation includes $1,906 of employer 401(k) contributions, and $17,780 of employer paid health insurance premiums.
Executive Compensation
Overview
During the ten-month transition period ended December 31, 2022, and the ten-month period ended December 31, 2021, the Company's executive compensation program was administered by the Board and the Compensation Committee. The Compensation Committee was established, and its charter adopted on September 16, 2020. The Company's executive compensation program has the objective of attracting and retaining a qualified and cohesive group of executives, motivating team performance and the aligning of the interests of executives with the interests of shareholders through a package of compensation that is simple and easy to understand and implement. Compensation under the program was designed to achieve both current and longer-term goals of the Company and to optimize returns to shareholders. In addition, in order to further align the interests of executives with the interests of shareholders, the Company has implemented share ownership incentives through the grant of stock options.
In determining the total compensation of any member of senior management, the directors of the Company consider all elements of compensation in total rather than one element in isolation. The directors of the Company also examine the competitive positioning of total compensation and the mix of fixed, incentive and share-based compensation.
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Base Salary
While there is no official set of benchmarks that the Company relies on and there is not a defined list of issuers that the Company uses as a benchmark, the Company makes itself aware of, and is cognizant of, how comparable issuers in its business compensate their executives. The base salary for each executive officer is reviewed and established near the end of the fiscal year. Base salaries are established taking into consideration the executive officer's personal performance and seniority, comparability within industry norms, and contribution to the Company's growth and profitability. The Company believes that a competitive base salary is an imperative element of any compensation program that is designed to attract talented and experienced executives.
Bonus Framework
At the discretion of the Board, and, if applicable, at the recommendation of management, executives are provided with annual cash incentive bonuses based on annual financial performance. Also at its discretion, the Board may tie annual cash bonuses to the achievement of other financial and non-financial goals.
Group Benefits
The Company offers a group benefits plan, which includes medical benefits. The benefits plan is available to all full-time employees who choose to enroll, including officers of the Company.
Perquisites and Personal Benefits
While the Company reimburses its Named Executive Officers for expenses incurred in the course of performing their duties as executive officers of the Company, the Company did not provide any compensation that would be considered a perquisite or personal benefit to its Named Executive Officers.
Option-Based Awards
An important part of the Company's compensation program is to offer the opportunity and incentive for executives and staff to own the Company's common shares. The directors of the Company believe that ownership of the Company's shares will align the interests of executives and future staff with the interests of shareholders.
Stock options are not granted on a regular schedule but rather as the compensation is reviewed by the directors of the Company from time to time. When reviewing stock option grants, consideration is given to the total compensation package of the executives and staff and a weighting of appropriate incentives groupings at the senior, mid and junior levels of the staff, including past grants. At the time of any stock option grant, consideration is also given to the available stock option pool remaining for new positions being contemplated by the Company.
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Stock options may be granted under the 2021 Amended and Restated Stock Option Plan, which was adopted on May 21, 2021 (the "2021 Option Plan"). Pursuant to the 2021 Option Plan, the Board may from time to time, in its discretion and in accordance with the TSXV requirements, grant to directors, officers and employees of the Company as well as "Management Company Employees" and "Consultants" (as such terms are defined in Policy 4.4 of the TSXV, as amended from time to time), non-transferable options to purchase common shares, provided that the number of common shares reserved for issuance will not exceed 8,935,509 common shares unless disinterested shareholder approval is obtained, exercisable for a period of up to ten (10) years from the date of the grant. The number of common shares reserved for issuance to any individual director or officer of the Company will not exceed 5% of the issued and outstanding common shares (2% in the case of optionees providing investor relations services to the Company) unless disinterested shareholder approval is obtained. Options granted pursuant to the 2021 Option Plan are non-assignable, except by means of a will or pursuant to the laws of descent and distribution.
Under the 2021 Plan, the options may be exercised no later than 90 days following the date the optionee ceases to be a director, officer or consultant of the Company. However, if the employment of an employee or consultant is terminated for cause or as a result of an order of any regulatory body, no option held by such optionee may be exercised following the date upon which termination occurred.
The Company has granted stock options to its Named Executive Officers, as follows:
On June 8, 2021, the Company granted 921,250 options to purchase common shares to Leslie Cross following his appointment as interim Chief Executive Officer and Chairman of the Board.
The Company granted 663,300 options to purchase common shares to Luke Faulstick following his appointment as the Chief Operating Officer of the Company.
On December 6, 2021, the Company granted 150,000 options to purchase common shares to Melissa Polesky-Meyrowitz as agreed upon in her employment agreement. Ms. Polesky-Meyrowitz was not an executive officer at this time.
On January 12, 2022, the Company granted 150,000 options to purchase common shares to Melissa Polesky-Meyrowitz following her appointment as Chief Financial Officer of the Company.
On August 29, 2022, the Company granted 200,000 options to purchase common shares to Dennis Nelson following his appointment as Chief Financial Officer of the Company.
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Employment Agreements
Except for the employment letter with Mr. Faulstick described below, the Company does not have any employment or consulting agreements with any Named Executive Officers. In September 2020, the Company entered into an employment letter with Luke Faulstick to serve as Chief Operating Officer of the Company. The employment letter provides for at-will employment and provides that Mr. Faulstick is entitled to receive an annual salary of $250,586 (US $200,000) from SDP, which may be increased to $394,380 (US $300,000) during the first year after the completion of the acquisition of SDP by the Company (which was completed on May 21, 2021), and with future salary to be set by the Board of Directors. [In April 2022, Mr. Faulstick’s employment transitioned from SDP to the Company when he was appointed Chief Integration Officer and Chief Operating Officer of the Company.]
Outstanding Equity Awards at Fiscal Year-End
The following table presents information regarding outstanding equity awards held by our Named Executive Officers as of December 31, 2022.
| Option Awards | ||||
| Name | Number of securities underlying unexercised options (#) exercisable (1) |
Number of securities underlying unexercised options (#) unexercisable (2) |
Option exercise price ($) |
Option expiration date |
| Leslie Cross | 307,083 | 614,167 | $0.86 | June 1, 2026 |
| Luke Faulstick | 221,100 | 442,200 | $0.99 | June 1, 2026 |
| - | 236,700 | $0.54 | April 13, 2027 | |
| Melissa Polesky-Meyrowitz | 50,000 | 100,000 | $0.65 | December 6, 2026 |
| 50,000 | 100,000 | $0.65 | January 12, 2027 | |
| Dennis Nelson | - | 200,000 | $0.69 | August 29, 2027 |
Notes:
(1) These amounts reflect the number of shares underlying the stock options that are vested and exercisable pursuant to the options granted on June 1, 2021, to Mr. Cross, on June 1, 2021, to Mr. Faulstick, on December 6, 2021, and January 12, 2022, to Ms. Polesky-Meyrowitz.
(2) These amounts reflect the number of shares underlying the stock options that are not vested and not exercisable which were granted on June 1, 2021, to Mr. Cross, on June 1, 2021, and April 13, 2022, to Mr. Faulstick, on December 6, 2021, and January 12, 2022, to Ms. Polesky-Meyrowitz, and on August 29, 2022, to Mr. Nelson. One-third of the original options vest on the following dates: Mr. Cross’ and Mr. Faulstick’s 2021 options: June 1, 2023, and June 1, 2024; Ms. Polesky-Meyrowitz's 2021 options: December 6, 2023, and December 6, 2024; Ms. Polesky-Meyrowitz's 2022 options: January 12, 2024, and January 12, 2025; Mr. Nelson’s options: August 29, 2023, August 29, 2024 and August 29, 2025.
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Pension Plan Benefits
The Company does not have a pension plan, defined benefit plan, defined contribution plan or deferred compensation plan that provides for payments or benefits to the Officers at, following, or in connection with retirement.
Termination and Change of Control Benefits
As at December 31, 2022, the Company had not entered into any contract, agreement, plan or arrangement that provides for payments to a Named Executive Officer at, following or in connection with any termination (whether voluntary, involuntary or constructive), resignation, retirement, a change in control of the Company or a change in a Named Executive Officer's responsibilities, except that Mr. Faulstick's employment agreement with the Company provides that, in the event Mr. Faulstick is terminated without "cause," he will be entitled to a termination payment in the amount of $98,595 (US $75,000).
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Director Compensation
In September, 2022, the Board of Directors approved the payment of $2,500 per month in directors fees to Messrs. Kashkin and Wilks. The Company typically compensates directors for services rendered in a combination of cash payments and by granting stock options to purchase the Company's common shares.
The following table sets forth all compensation provided to each of the directors of the Company (other than Mr. Cross, who is a Named Executive Officer, whose disclosure with respect to compensation is set forth in the Summary Compensation Table above) for the ten-month period ended December 31, 2022:
| Name | Fees earned or paid in cash (1) ($) |
Share- based awards ($) |
Option awards(2) ($) |
Non-equity incentive plan compensation ($) |
All other compensation ($) |
Total ($) |
|
|
||||||
| Ken Kashkin(3) |
32,865 |
- |
- |
- |
- |
32,865 |
| Kyle Wilks(4) |
32,865 |
- |
- |
- |
- |
32,865 |
_______________________
Notes:
(1) In recognition that no directors fees had been paid to Messrs. Kashkin and Wilks since January 1, 2021, in September, 2022, the Board of Directors approved payment of $78,876 in directors fees to each of Messrs. Kashkin and Wilks for their services as directors back to January 1, 2021. Of the $78,876, $32,865 is attributable to the ten months ended December 31, 2022.
(2) As of December 31, 2022, Dr. Kashkin had 228,470 stock options outstanding (grant date fair values: June 2021 grant: $135,407, and Mr. Wilks had 794,800 stock options outstanding (grant date fair value: June 2021 grant: $174,718, July 2021 grant: $336,447, and December 2021 grant: $157,703).
(3) Mr. Kashkin was appointed as a director of the Company on September 16, 2020.
(4) Mr. Wilks was appointed as a director of the Company on September 16, 2020.
Pension Plan Benefits for Directors
The Company does not have a pension plan, defined benefit plan, defined contribution plan or deferred compensation plan that provides for payments or benefits to the directors at, following, or in connection with retirement.
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Equity Compensation Plan Information
On May 21, 2021, the Company adopted the 2021 Amended and Restated Stock Option Plan (the "2021 Option Plan"), which amended and restated its 2015 Stock Option Plan to change from a rolling stock option plan to a fixed stock option plan, and fixed the number of common shares issuable under the plan at 8,935,509, and amending the plan to include provisions relating to the grant of options to a person who is a citizen or resident of the United States, in accordance with the requirements of Section 409A of the United States Internal Revenue Code of 1986, as amended.
The granting of awards under the 2021 Option Plan is intended to promote our interests and our shareholders' interest by aiding us in attracting and retaining persons capable of assuring our future success, to offer such persons incentives to put forth maximum efforts for the success of our business and to compensate such persons through various stock and cash-based arrangements and provide them with opportunities for stock ownership in Salona, thereby aligning the interests of such persons with our shareholders. Eligible participants under the 2021 Option Plan include non-employee directors, officers (including the named executive officers), employees, consultants, independent contractors and advisors of Salona and its subsidiaries. The 2021 Option Plan is administered by the Compensation Committee, or such other committee appointed by our board of directors.
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Pursuant to the 2021 Option Plan, we may issue equity-based compensation (denominated in common shares) in the form of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares, performance units and dividend equivalent awards to eligible participants. The Compensation Committee or its permitted delegates has the power and discretionary authority to determine the amount, terms and conditions of the 2021 Option Plan awards, including, without limitation, (i) the exercise price of any stock options or stock appreciation rights, (ii) the method of payment for shares purchased pursuant to any award, (iii) the method for satisfying any tax withholding obligation arising in connection with any award, including by net exercise or the withholding or delivery of shares, (iv) the timing, terms and conditions of the exercisability, vesting or payout of any award or any shares acquired pursuant thereto, (v) the performance criteria, if any, applicable to any award and the extent to which such performance criteria have been attained, (vi) the time of the expiration of any award, (vii) the effect of the participant's termination of service on any of the foregoing, and (viii) all other terms, conditions and restrictions applicable to any award or shares acquired pursuant thereto as our Board of Directors shall consider to be appropriate and not inconsistent with the terms of the 2021 Option Plan.
The following table sets forth securities authorized for issuance under the 2021 Option Plan as of December 31, 2022.
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants, and rights |
Weighted-average exercise price of outstanding options, warrants, and rights |
Number of securities remaining available for future issuance under equity compensation plans |
||||||
| Equity compensation plans approved by security holders | 5,672,938 | $ | 0.81 |
3,262,571 |
|||||
| Equity compensation plans not approved by security holders |
- |
- |
- |
||||||
| Total | 5,672,938 |
0.81 |
3,262,571 |
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There are no assurances that the Company Options described above will be exercised in whole or in part. There are no options outstanding or being granted to insiders other than as detailed above.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information with respect to the beneficial ownership of our common shares as of March 21, 2023:
• each of our executive officers and directors;
• all of our executive officers and directors as a group; and
• each person known to us to own beneficially more than 5% of our common shares.
Beneficial ownership is determined according to the rules of the SEC, which generally provide that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power over that security, including options and warrants that are currently exercisable or exercisable within 60 days of the date of this Annual Report. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all common shares beneficially owned by them. The percentage ownership of each individual or entity is based on 54,151,708 common shares outstanding as of March 21, 2023. Unless otherwise indicated, the address for each director and executive officer is c/o Salona Global Medical Device Corporation, 6160 Innovation Way, Carlsbad, CA 92009.
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| Name and Address of Beneficial Owner | Amount and nature of beneficial ownership |
Percent of Class% |
||||
| Directors, Executive Officers | ||||||
| Luke Faulstick, Chief Operating Officer |
668,500 (1) |
1.23% |
||||
| Dennis Nelson, Chief Financial Officer | 0 | 0 | ||||
|
Melissa Polesky-Meyrowitz, former Chief Financial Officer |
100,000 (2) |
* | ||||
|
Leslie Cross, Chairman of the Board |
1,044,083 (3) |
1.92% |
||||
| Ken Kashkin, MD, Director |
123,626 (4) |
* | ||||
| Kyle Wilks, Director |
264,932 (5) |
* | ||||
| All Directors and Executive Officers as a Group (4 Individuals) |
2,201,141 (6) |
3.99% |
||||
| Five Percent Holders: | ||||||
| GundyCo. TR MMCAP International Inc. SPC 199 Bay Street Toronto, ON M5L 1G9 |
3,635,000 |
6.71% |
||||
| Michael Dalsin |
5,347,227 (7) |
9.74% |
||||
| Roger Greene |
4,955,746 (8) |
9.05% |
__________________
Notes:
* Less than 1%
(1) Includes options for 300,000 Common Shares which are exercisable or will become exercisable in 60 days. Also includes 20,841 Common Shares that are presently issuable upon conversion of 20,841 shares of Class A Common Stock, but excludes 5,720,104 Common Shares that would be issuable on conversion of an additional 5,720,104 shares of Class A Common Stock, but are subject to a limit on conversion if the holder owns more than 368,500 Common Shares at any given time. Mr. Faulstick is a 50% owner of GAP Partners which owns these Class A Common Shares and he is attributed with 50% of the Class A Common Shares owned by GAP Partners.
(2) Includes options for 307,083 Common Shares which are exercisable or will become exercisable in 60 days. Excludes 842,000 Common Shares that would be issuable following exchange of SDP acquisition subsidiary shares for 842,000 shares of Class A Common Stock which would be convertible for 842,000 Common Shares, but are subject to a limit on conversion if the holder owns more than 368,500 Common Shares at any given time.
(3) Consists of options for 100,000 Common Shares which are exercisable or will be exercisable in 60 days.
(4) Includes options for 76,156 Common Shares which are exercisable or will become exercisable in 60 days.
(5) Consists of options for 264,932 Common Shares which are exercisable or will become exercisable in 60 days.
(6) Includes options for 1,069,012 Common Shares which are exercisable or will be exercisable in 60 days, and 20,841 Common Shares that are presently issuable upon conversion of 20,841 shares of Class A Common Stock.
(7) Includes 755,425 Common Shares that are presently issuable upon conversion of 755,425 shares of Class A Common Stock.
(8) Includes 600,000 Common Shares that are presently issuable upon conversion of 600,000 shares of Class A Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
During the course of our fiscal years ended February 28, 2022 and December 31, 2022 (the “Two Fiscal Year Period”), other than employment and executive and director compensation matters described under "Executive Compensation" and "Director Compensation" and the transactions described below, there have been no related party transactions.
Transactions with Related Persons
During the Two Fiscal Year Periods, we paid to Advanced Strategic Associates, LLC (“Advanced”), a company owned and controlled by Michael Dalsin, a beneficial holder of more than 5% of our Common Shares, and to Michael Dalsin individually an amount of US $1,114,500 and US $132,635, respectively, for an aggregate amount of US $1,247,135 in consideration for services related to acquisition structuring, due diligence, capital structuring, and corporate transactional advisory services.
During the fiscal year ended February 28, 2022, we paid Marquette Partners, Inc. (“Marquette”), a company owned and controlled by Roger Greene, a beneficial holder of more than 5% of our Common Shares, an aggregate sum of US $274,770 in consideration for Marquette providing advisory services related to strategic business acquisitions.
During the Two Fiscal Year Periods, Andrew Cross (“A Cross”), the son of Leslie Cross, our Chairman of the Board and former Interim Chief Executive Officer, was employed by the Company as Director of Business Development. During his employment term, we paid Andrew Cross an aggregate sum of US $229,925.
During the Two Fiscal Year Periods, we paid Hedgehog Financial Corporation (“Hedgehog”), a company owned and controlled by Andrew Cross, an aggregate sum of US $311,675 in consideration for Hedgehog providing services related to acquisitions, due diligence, accounting, finance and other corporate support services. As of January 2023, neither Hedgehog nor Andrew Cross are providing services to the Company.
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Conflicts of Interest
There are potential conflicts of interest to which our directors and executive officers may be subject in connection with the operations of the Company. In particular, certain of the directors and executive officers may be involved in managerial or director positions with issuers or businesses whose operations may, from time to time, be in direct competition with those of the Company or with entities which may, from time to time, provide financing to, or make equity investments in, competitors of the Company.
Conflicts, if any, will be subject to the procedures and remedies available under the BCBCA. The BCBCA provides that in the event that a director has an interest in a contract or proposed contract or agreement, the director shall disclose his interest in such contract or agreement and shall refrain from voting on any matter in respect of such contract or agreement unless otherwise provided by the BCBCA.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
SRCO Professional Corporation, an independent registered public accounting firm ("SRCO"), billed the Company the following fees for the 10-month transition period ended December 31, 2022, and for the fiscal year ended February 28, 2022:
|
For the Ten Months Ended |
For the Ten Months Ended |
|||||
| Audit fees(1) | $ | 87,765 | $ |
113,265 |
||
| Audit related fees | - | - | ||||
| Tax fees | - | - | ||||
| All other fees | - | - | ||||
| Total fees | $ | 87,765 | $ |
113,265 |
________________
(1) Audit Fees - These are fees for professional services performed by SRCO in connection with the audit of annual financial statements of the Company and its subsidiaries. This category also includes reviews of registration statements and services normally provided in connection with statutory and regulatory filings or engagements.
These services are actively monitored (as to both spending level and work content) by the Audit Committee to maintain the appropriate objectivity andz independence in SRCO's core work, which is the audit of the Company's consolidated financial statement. The Audit Committee pre-approves each engagement of the Company's principal accountants for audit and non-audit related services and associated projected fees in advance of such engagement.
Services Provided by SRCO
All services rendered by SRCO are permissible under applicable laws and regulations and were pre-approved by the Audit Committee, or by the Chairman of the Audit Committee by delegated authority as required by law. The fees paid to SRCO for services are described in the above table.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements
See Part II, Item 8, "Financial Statements and Supplementary Data" for Financial Statements included with this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
All other schedules have been omitted because the required information is not applicable, or the information is included in the consolidated financial statements or the Notes thereto.
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(a)(3) Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as part of this Annual Report.
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| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | |||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | |||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | |||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X |
____________________
ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Luke Faulstick
Chief Executive Officer
Date: March 31, 2023
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant and in their capacities and on the dates indicated.
| Name and Signature | Title | Date | |
| /s/ Luke Faulstick | Chief Executive Officer (Principal Executive Officer) | March 31, 2023 | |
| Luke Faulstick | |||
| /s/ Dennis Nelson | Chief Financial Officer and Principal Accounting Officer (Principal Financial Officer) | March 31, 2023 | |
| Dennis Nelson | |||
| /s/ Leslie H. Cross | Executive Chairman of the Board; Director | March 31, 2023 | |
| Leslie H. Cross | |||
| /s/ Kyle Wilks | Director | March 31, 2023 | |
| Kyle Wilks | |||
| /s/ Dr. Ken Kashkin | Director | March 31, 2023 | |
| Dr. Ken Kashkin |
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