Estimated financial results and provisional recognition of contribution in kind value according to IFRS in financial statements
Current report No.: 11/2023
Preparation date: April 21, 2023
Legal basis: Article 17(1) of the MAR Regulation – confidential information.
The Management of Medicalgorithmics S.A., based in Warsaw, presents the draft selected financial results for 2022, both on a stand-alone and consolidated basis, with comparable data for 2021, as well as provisional recognition of the contribution of Kardiolytics Inc. (“Kardiolytics”) in accordance with IFRS requirements.
The Management reminds and emphasizes that the consolidated results for 2022, starting from the report for the first half of 2022, are adjusted by removing the current results and comparable data of Medi-Lynx and recognizing them as discontinued operations, in accordance with the appropriate IFRS requirements, including IFRS 5.
To better illustrate the impact of this change on the Company’s and its capital group’s (“Group”) results, the Management also presents revenues, direct costs, and profit on sales for the 4th and 3rd quarters of 2022 in the attached PDF to this report.
Consolidated revenues of Medicalgorithmics increased by 30% YoY to PLN 62.7 million. EBIT amounted to PLN 17.2 million compared to a loss of PLN 9.6 million in the previous year. The estimated EBITDA increased to PLN 21.2 million compared to a loss of PLN 5.4 million in the previous year, and the net loss, including non-cash financial costs related to the sold company in the United States, decreased to PLN 30.5 million from PLN 171.0 million a year earlier.
On a standalone basis, Medicalgorithmics’ revenues increased by 31% YoY to PLN 60.7 million from PLN 46.2 million in 2021. Profit on sales amounted to PLN 17.9 million, which was 47% higher than the previous year, while the net loss, including non-cash costs related to the sold company in USA, decreased to PLN 29.5 million compared to PLN 172.4 million a year earlier.
The Company acquired 100% of Kardiolytics’ shares through a Transaction on November 8, 2022, which involved the issuance of 4,976,384 shares at an issuance price of PLN 44.27 per share in exchange for a cash contribution of PLN 13.8 million and a contribution of 100% of Kardiolytics’ shares valued at USD 44,890,589 by the auditing firm Baker Tilly TPA, equivalent to PLN 206.5 million (“Transaction”), according to the current report no. 66/2022 dated November 16, 2022. The changes to the Company’s articles of association related to the issuance and increase of equity were registered by the District Court on November 29, 2022, in accordance with the current report no. 67/2022 dated November 29, 2022.
The Management informs that, after conducting an analysis regarding the recognition of the value of Kardiolytics’ contribution in the financial statements, with the support of the Supervisory Board, external advisors, and after discussions with the auditor during the audit of the 2022 financial statements, it has decided to recognize the value of Kardiolytics in accordance with the most conservative and rigorous interpretation of IFRS and IAS, and the accounting resulting from the valuation is non-cash in nature.
As a result, in the stand alone financial statements of the Company, the value of Kardiolytics’ contribution was finally recognized at PLN 49.9 million, which is equal to the value of 4.9 million shares of the Company acquired by Biofund in the Transaction at the closing price of Medicalgorithmics’ shares on November 8, 2022, at PLN 12.82 per share, i.e., PLN 63.7 million, reduced by Biofund’s cash contribution of PLN 13.8 million. The difference between the valuation of the contribution in the Transaction and the valuation adopted in accordance with IAS in the stand-alone financial statements was recognized as non-cash capital adjustment to premium from the issuance of shares. According to paragraph 69 of IAS 13 “Fair Value Measurement,” the quoted price in an active market provides the most reliable evidence of the fair value of financial instruments. As a result, the amount of PLN 219.4 million initially recognized in equity as a premium in accordance with the valuation of the contribution by the valuation auditor in accordance with the requirements of the Polish Commercial Companies Code, was adjusted in the accounting records by PLN 156.5 million. This amount represents the difference between the valuation of Kardiolytics’ contribution established in the Transaction of PLN 206.5 million and the value established in accordance with the requirements of IAS of PLN 49.9 million.
According to the knowledge of the Management supported by the opinion of the Baker Tilly Company advisor and discussions with the auditor during the ongoing audit, this is the only permissible way of accounting for the acquisition of Kardiolytics in the Issuer’s stand-alone financial statements, as the MSSF does not provide any other way of settling the acquisition of Kardiolytics. The valuations adopted in the stand-alone financial statements in accordance with MSSF are final.
In the opinion of the Management, various factors influenced the share price of the Company adopted to determine the value of shares in the subsidiary, including: the liquidity of shares on the GPW market, investors’ assessment of changes in the liquidity situation of the Company after the Transaction, and limited market knowledge of Kardiolytics.
In the consolidated financial statements in accordance with point 45 of MSSF 3, the Company applied provisional settlement of the contribution in kind and has to make the final settlement within 12 months from the date of the Transaction, i.e., until November 2023. As at the date of preparing the consolidated financial statements for 2022, the accounting settlement of the acquisition has not been completed, which means that these values may change. The acquisition of Kardiolytics is subject to the purchase method in accordance with MSSF 3 “Business Combinations”.
During the analysis, various scenarios of possible technological development, as well as parameters used for valuation, were taken into account. Additionally, during the preparation of financial statements for 2022, the Company decided to engage an advisor to determine the fair value of acquired assets and assumed liabilities, especially intangible and legal values in the form of the VCAST technology developed by Kardiolytics. The Management received a valuation of the technology prepared by Baker Tilly TPA, indicating the value of the assets at PLN 139.2 million. This valuation was based on consistent assumptions as in the valuation prepared for the purpose of determining the value of Kardiolytics in the Transaction. However, for the purpose of preparing the provisional settlement of the transaction, the most conservative approach was applied with respect to the analyzed scope of parameters used for valuation, also after discussions with the Company’s auditor during the ongoing audit. As a result, the estimated and provisionally adopted value of the technology amounted to PLN 41.2 million, the net assets value amounted to PLN 31.8 million, and the value of the goodwill amounted to PLN 18.2 million. This value will be subject to verification and final settlement in future periods after deciding on the final approach to the valuation of the asset.
The Company states that both the consolidated financial statements of the Group and the stand-alone financial statements of the Company are subject to verification by an independent auditor as part of the audit of the financial statements for 2022, and therefore the possibility of changes to the indicated amounts or their presentation cannot be excluded. In the event of significant changes, the Company will inform separately with current reports.
Adjustments to the value of Kardiolytics’ contribution and equity resulting from the adopted approach in both stand-alone and consolidated financial statements are non-cash accounting entries in accordance with the provisions of IFRS. These changes do not affect cash flows or result from the evaluation of the status of the VCAST artificial intelligence technology development in Kardiolytics or its potential. These assumptions remain unchanged with the valuations adopted for Transaction purposes. Management confirms that the VCAST project in Kardiolytics is progressing according to the assumptions outlined in the presentation attached to the current report No. 58/2022, dated October 17, 2022. This is further confirmed by Kardiolytics obtaining another patent for VCAST technology, as noted in current report No. 10/2023, dated April 3, 2023.