Covalon Technologies Ltd.

Good morning ladies and gentlemen and welcome to Covalent Q1 Space Call 2023 conference call and webcast. My name is Sergio and I will be your conference operator today. As a reminder, today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session and instructions will be provided at that time. Now, I would like to turn the conference over to Mr. Ryan Petler, President and Chief Executive Officer, and Mr. Jason Gorel, Interim Chief Financial Officer. Please go ahead. You may begin your conference.

Thanks, Sergio. Good morning, fellow investors, and thank you for joining us on this call. Salia Asadzada from Kovalon is helping to coordinate the conference call and webcast today and will now provide us with some instructions.

Thank you, Brian. Good morning, everyone. My name is Salia Asadzada, and I am the Executive Assistant to Kovalon's Chief Executive Officer. I would like to thank everyone for taking the time this morning to attend our conference call. We will be discussing the financial statements, MD&A, and press release related to Kovalan's first quarter ended December 31st, 2022. There will be an opportunity for you to ask questions at the end of our call. Before we begin the discussion, I would like to remind participants that this call and webcast are covered by Kovalan's Safe Harbor Statement. Certain statements included on this conference call may be considered forward-looking. Such statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from those implied by our statements. And therefore, these statements should not be taken as guarantees of future performance or results. All forward-looking statements are based on management's current relief, assumptions, and information currently available to us and related to anticipated financial performance business prospects, partnership opportunities, strategies, regulatory developments, market acceptance, and future commitments, among other things. Participants on this conference call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this conference call. Due to risks and uncertainties, including those identified by COVID-19 in our public securities filings, Actual events may differ materially from current expectations. Covalent disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In the management's discussion and analysis, press release, and this call, Covalent has provided non-IFRS measures that are meant to provide further understanding of our results by helping to highlight trends and assist in comparing different periods. The adjusted gross margin and adjusted EBITDA are terms that do not have any standardized meaning and may not be comparable to other companies. These measures are not meant to replace the similar IFRS measures, and any adjusting items may recur in the future. I will now turn the call back over to Brian Pedlar, Covalent's President and Chief Executive Officer.

Thanks, Salya. I'll provide some context to our strategic plan that we are executing on in 2023 and provide some context to our Q1 2023 financial results. Just to remind people, we have a September 30th year end, so our first quarter of 2023 ended December 31st, 2022. And then we'll take your questions either through the phone line or via the message function on the webcast. So Covalon isn't just another medical device company. We have an incredible portfolio of assets, including our infection prevention products and technologies that help prevent patients from getting an infection while in the hospital, our amazing wound care portfolio of products that help close complex wounds, our deep portfolio of assets of patents and know-how that allow us to innovate new products for our own sales efforts and in support of some of the largest medical companies in the world that turn to us for new product development help. And we have a talented team that is focused on our mission and committed to our strategic growth path. With our strong product and technology portfolio, Koblon is focused on becoming the leading provider of compassionate care solutions that help patients heal faster and live better. Last call, I focused on the things that we had deliberately planned to invest in and change in 2022 to transform Kovalon. We are a much more valuable company today than we were a year ago. Whether we are talking about our ability to drive awareness of our brand to clinicians in US hospitals, our significant presence in pediatric facilities, or our strong distribution into the United States home health care market, as well as our international presence and brand position in over 20 countries, Covalon is stronger and better positioned to succeed. I think a number of investors are focused on the past and haven't been able to realize just how we have transformed over the past year to where we are today. Truly, we are a much more valuable company today than we were a year ago. There are some investors, however, who have taken the time to understand what has changed with Kovalon, and they are focused on the future. None of us can be 100% certain of the future, but there's one thing that I am absolutely convinced about, as are the rest of the Kovalon team. A year from now, we will be a significantly more valuable company than we are today. We are beginning to see the results of our changes in our Q1 performance. We are in a much stronger position in our key markets compared to last year, and we are seeing the results of investments we made in 2022 positively impacting us in 2023. I am truly pleased to report that revenue for the first quarter of fiscal 2023 increased 25% to $6.2 million. and our gross margin was 60% compared to last year's Q1 gross margin of 46%. Our previous investments in added leadership, sales, marketing, and operations, along with our very focused approach to our key revenue markets, have strengthened COBLA. We incurred a loss of $380,000 this past quarter compared to last year's Q1 loss of $1.5 million. I anticipate that we can continue to improve our operating results in coming quarters and improve our bottom line as we grow. We are on track with our growth plan and we have already made strong progress in 2023 towards reaching our goals. We finished the quarter with $14.1 million of cash on our balance sheet and no debt. This was similar to our position at the end of September 2022. We anticipate being able to maintain a strong cash position as we continue to fund our working capital and operations. Both product revenue and development and services revenue were up this past quarter compared to last year's first quarter. We continue to focus our growth efforts on markets where we feel we can capture significant and meaningful market share for our products. whether that is within the United States hospitals and home health care or internationally in the Middle East and Latin America. That also includes focusing on medical coding development services customers that we can develop into deep and meaningful partnerships as we help them bring advanced infection prevention products to the market. The United States accounted for approximately 63% of our revenue this quarter. International revenue was up 71% to $2.3 million as a result of deliveries under competitive contracts awarded to Covalon in Latin America and the Middle East. This year, we are continuing to invest in our sales and marketing efforts to grow our customer base in the United States and strengthen our brand worldwide. Our sales and marketing teams started fiscal 2023 with a very focused sales and marketing strategy based on the planning investments we made in 2022. We have seen positive impacts in our product sales to hospitals and through our distributors in the United States. We've seen increased orders from our international channels and stronger services revenue from our medical coding projects. We have proven that our products and our brand can consistently compete and win competitive contracts against much larger companies. We anticipate continued growth in revenue this year. Gross margins were significantly improved in the first quarter of 2023. Gross margin for this past quarter was 60%. compared to 46% for the same period of the prior year. As part of our customer-focused initiatives, we improved our supply chain operations and invested in upgrading both business systems and infrastructure. Additional ongoing investments to allow us to better serve customers and drive growth in key markets going forward include expanding our in-house manufacturing capabilities, and our medical coding services capabilities. The full positive impact on our margins from our supply chain improvement initiatives are expected to be further realized over time. We continue to align our operating costs to growth prospects. As we see the results of our improved sales and marketing initiatives, and as we fully realize the benefits of our efforts to transform our supply chain. Our operating costs from continuing operations for this past quarter increased over the same quarter last year. In 2022, our team executed on delivered and well-planned strategic decisions to reposition Kovalon to be able to unlock value from our lifesaving patented products and technology by investing in our people,

our commercial capabilities, and our infrastructure.

In 2022, we strengthened our sales teams with staff and capabilities to engage our customers, whether digitally, virtually, or in person. Today, we engage with our customers and clinicians and sales leads in a much more efficient and cost-effective way than we did before. This allows us to grow more rapidly with less investment. Strategic priorities for this fiscal year for 2023 include a focus on strengthening core business areas with respect to people and processes. We are confident that the changes we have made to Koblon will allow us to consistently achieve our objectives. We have closed the gap to becoming profitable and are continuing to balance our growth prospects and operating costs so we can generate greater value for COBOLON. The momentum we have and the certainty of purpose we have in our products and mission will allow our company to succeed. This quarter demonstrates that we are moving in the right direction with respect to investments made last year. We are excited about our progress in transforming COBOLON into a patient-driven medical device company built on the relentless pursuit to help the most vulnerable patients have a better chance at healing. I would now like to open the line for questions. I ask that you try to keep to one question at a time, and there will be lots of time to get back into the queue to ask more. Thanks, and over to you, Sergio, for the question portion.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one. If you want to withdraw your question, please press star two. Your questions will be pulled in the order they are received. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Arnold Schell from Nissan Investor. Please go ahead.

Yeah, thanks. I just want to understand the Product revenue, I'm not sure I understand it properly. As far as I can see, product revenue for the quarter was up about $750,000, and product revenue internationally was up about $950,000. Does that mean that product revenue in the U.S. was down $200,000 from the first quarter last year?

Not, no. We show product revenue and then our geographic revenue is all revenue. So it's not as easy to come up with that. But we're pretty much in line. I think our product revenue was in line for both U.S. and in international. We are up in international revenue. We are up in the United States about 8%. So our product revenue, I think, is up a little bit. It's always dependent upon some of the larger shipments in the United States right now that go out to our distributor channel. So we have a a handful of large distributors that tend to order in large run quantities in the United States, particularly for our home health care market. And so those can still be a bit lumpy. But we're on track with our plan. So I'm really confident in our U.S. business. And we also did really well internationally this quarter. So I think it's all going in the right direction.

Okay. Thank you.

Thanks, Arnold. Thank you. As a reminder, should you have a question, please press star one. Okay.

It appears that we have a question online, so I'll jump to that. One question that's come in is, what is the anticipated timeline for the medical coding opportunities to turn to products on the market. We did announce in 2018 a large contract with one of the world's largest medical device companies where we are working with them to take some of their product portfolio and create antimicrobial versions of those products that will go into the market under their name. but with our antimicrobial technology on it. We have several projects on the go. I think we talked about working on nine separate projects this past quarter with approximately four medical device companies. The large project we do anticipate within the next 12 to 18 months for that product to go through the regulatory process, and we're working very closely with our large partner in order to help keep them on their timeline. So from that perspective, the project's going well. We have some smaller opportunities as well with companies that may very well hit the market sooner. So I think we're seeing a lot of promise in our medical coatings division. We have one other question that's come in online that is about our gross margins and whether our gross margins are going to be consistent with our first quarter. Yes, we definitely believe that the gross margins this quarter are more reflective of what our gross margin should be going forward. There's a number of the investment initiatives that we undertook last year and continue to do in order to position ourselves to improve our margins. And so there's several of those that are yet to show up in our gross margins on our products. We do anticipate the opportunity to improve our margins as the quarters go by. I do anticipate that our gross margin would look very similar to the gross margin from our quarter. We have another online question, which is, will we consider another normal course issuer bid after the current one ends? That's something that we'll talk about at the board level and assess where we are. We certainly feel that continuing with the normal course issuer bid that we have underway to buy back shares is a good use of some of our excess cash. We're in a strong cash position, and we believe that taking shares off the market helps improve the value for all investors at this stage. I have another question very similar to that one. Yes, it's asking whether we are still purchasing shares in the open market. and any prospect of US research. We are continuing to buy shares in the market and will continue to do so. We will reassess as we come out of our blackout period as a board to determine whether we want to make any changes to our automatic share purchase plan that's in place. But we do intend to continue that and continue to acquire shares on a prudent basis. As far as U.S. research, we've got a lot of interest by U.S. investors and a lot of interest by firms that recognize that the value of the intellectual property, the products, and our distribution and sales capabilities and where we've gotten that quite frankly so far with our hospital business, and our home health care business in the United States is a pretty special position to be in. And so there's definite interest. Looking forward to seeing some of those firms and individuals that I've been engaging with turn into some research that can benefit other shareholders and helping to understand COBRAM. So I have a question about pediatric hospitals and the numbers. I think it's around 42 pediatric hospitals that we're in, which represents about 20% of the major pediatric hospitals that we're targeting. And so that's quite an accomplishment in a short period of time for us. We continue to engage with hospitals on an ongoing basis. We have a really strong sales funnel. We have a really talented team in the field, and we're seeing a lot of interest in the products that we have. I can't tell you the thrill our team has when engaging with clinicians, when they recognize what it means to use a Covalon product versus one of our competitors and how that benefits both patients and the clinicians. in their ability to really focus on the core reasons why their patients are in the hospital in the first place. There's a question about when do I think we will be able to provide revenue guidance. Historically as a company, we have not provided revenue guidance. I know it is in some respects helpful for investors when we do, But we're still in a phase of growth where we want to make sure that we have our head down and we're focused on making the right business decisions and not trying to focus on simply hitting targets that we put out. We have our own internal targets that we focus on and we're very laser beam focused on hitting those. And I can tell you the team, our commercial team is very on top of our revenue, our forecasts and our customer base. So that's something that we'll talk about as a board and determine the right point to provide more forward looking information to investors. Sergio, I don't know if you want to just remind people how to ask questions on the phone if they want to do so.

Sure. If you want to ask a question, please press star 1.

If you want to withdraw your question, please press star 2. There are no further questions at this time, you may proceed.

Great.

Thank you. Again, thank you fellow investors for joining me on the call today. I could tell you I'm really excited about where Kovalon is positioned. We've put in a lot of work in order to get ourselves and our base of operations to the point where we can continue our growth plan and continue to execute on our strategic plan. I am very confident that the progress that we see so far in q1 can continue and that we will be able to demonstrate the value that i truly believe exists within cobalt that has yet to be recognized in our share price and in our market valuation the hard work continues the team is very focused and again i i would like to reiterate that we are a much more valuable company today than we were a year ago And I'm convinced now more than ever that a year from now, we will be significantly more valuable still than we are today. I look forward to discussing progress on the next call.

Thank you, and please have a great day.

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.