Covalon Technologies Ltd.

My name is Lara, 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. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, too. Alternatively, you can submit type questions via the webcast. If at any time during this call you require immediate assistance, please press star zero for the operator. At this time, I would like to turn the conference over to Mr. Brian Pedler, President and Chief Executive Officer, and Mr. Jason Gorel, Interim Chief Financial Officer. Please go ahead, Mr. Pedler and Mr. Gorel.

Thanks, Lara. 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 the 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 Kovalon's third quarter ended June 30, 2023. There will be an opportunity for you to ask questions at the end of the call. Before we begin the discussion, I would like to remind participants that this call and webcast are covered by Kovalon'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 beliefs, 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 Kovalon in our public securities filings, actual events may differ materially from current expectations. Kovalon 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, Kovalon 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 plans that we are executing on in 2023 and provide some context to our Q3 2023 financial results, as well as talk about some of our growth objectives underway this year and beyond. Then we will take your questions either through the phone or via the message function on the webcast. Covalon isn't just another medical device company. Unlike most companies of our size, Covalon has an incredible portfolio of assets, including our infection prevention products and technologies that help prevent patients from getting an infection while in hospital, our amazing advanced wound care portfolio products that help close complex wounds, and our deep portfolio of patents and know-how that allow us to innovate new products, for our own sales efforts and in support of some very large companies. And of course, we have a very talented team that is focused on our mission and committed to our strategic growth plan. I can't overemphasize the value of our team's ability to innovate new technology and products to help clinicians solve problems. This creates confidence, in our customers that our products are clinically better. With our strong product and technology portfolio, Covalon is focused on providing our customers and their patients with cost-effective products that reduce pain, prevent infection, and promote healing. With nearly 7 million Americans living with a chronic wound right now, and hospitals around the world struggling with rising infection rates, current standard of care products are failing to prevent hospital-acquired infections and heal chronic wounds. Uninsured hospital-acquired infections in the United States have increased as much as 63% in intensive care units over the past few years, and healthcare providers are just demanding better products, products like ours. Our strategy is very simple. We believe that innovative, compassionate care products like ours, if delivered efficiently to the people that need them, will displace current standard of care products in hospitals and in home care settings because those products result in better clinical outcomes and better clinician-patient interactions at a lower cost. Our products are loved by doctors and nurses and patients. And many leading hospitals in the United States use Covalon. Our customers are very confident about Covalon. They are confident our products are better and more effective for their patients. And we are focused on becoming a leading provider of compassionate care solutions that help patients heal faster and live better. On our last few calls, I focused on the things that we had deliberately planned to invest in and change to transform Kovalon and the progress we've made so far in fiscal 2023 in achieving our objectives. Over the first nine months of fiscal 2023, we have demonstrated that Kovalon is 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 a strong distribution into the United States home health care market, or our international presence and brand position in over 20 countries, Covaland is stronger and better positioned to succeed. As an investor, it is very easy to focus on the past and miss the signs that highlight just how much we have transformed this year. And we'll continue that transformation in the future. Taking a look at our revenue growth over the past six quarters helps to illustrate the progress we are making this year compared to last year. We are beginning to see the results of the changes we've made in our company impact our Q3 and fiscal year to date performance. As I said, we're in a much stronger position in our key markets compared to last year, and we are seeing the results of investments we made positively impacting us this year. We are setting ourselves up for success next year as well. None of us can be 100% certain of the future, but there's one thing I am 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. I am pleased to report that revenue so far this fiscal year is up 54% to $19.7 million and Q3 revenue is up 39% to $6.3 million. Gross margin for the quarter has improved to 57% compared to last year's Q3 gross margin of 47%. Our previous investments in added leadership, sales, marketing, and operations, along with our focused approach to key revenue markets, have strengthened Kovalon. We incurred a loss of $502,000 this past quarter compared to last year's Q3 loss of $1.6 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 the first nine months of fiscal 2023 towards achieving our goals. We finished the quarter with $9.2 million of cash on our balance sheet and no debt. We anticipate being able to maintain a strong cash position as we continue to fund our working capital and operations for the foreseeable future. Product revenue is driving substantially all of the growth of the company. Over the past year, the company has transformed its strategy to focus on growing our United States and international infection prevention and wound care businesses by building technology and brand awareness with clinicians and customers. This is being accomplished through our portfolio of consumable medical device dressings that are sold to hospitals, long-term care facilities, clinics, and home healthcare providers directly by our sales team and through distribution partners. Historically, we have also offered services to large medical companies utilizing our medical coding technology, which represents approximately 3% of our revenue this quarter. This portion of Kovalon's business is resource intensive. and is not in line with the company's focus on manufacturing and selling consumable medical devices. As a result, the company has decided to transition away from focusing on medical coding projects and instead focus our business strategy on the company's core business verticals. Contributing to the decision to shift away from the medical coding business is the fact that our largest development services customer has been unable to meet its internal deadlines over the past several years. This has resulted in unpredictable revenues, unpredictable staffing requirements, and significant increased costs for Kovalon for staff and facilities to support that business. This has also prevented us from properly scaling our development services business. As a result of these negative impacts on us, We spent a considerable amount of effort over the past year to renegotiate with the customer so as to be fairly reimbursed for our efforts by the customer. In response, the company was notified that this customer has determined not to proceed with its medical coding projects for now. And accordingly, we do not anticipate continuing to derive development services revenue under the current projects. The United States accounted for 70% of our revenue so far this fiscal year. Q3 revenue in the United States increased by 75% to $4.5 million, driven mostly by increased college and sales. International revenue is $1.8 million and was down slightly by about 8% as a result of the timing of deliveries under competitive contracts awarded to us in the Middle East. On a year to date basis, international revenue is up about 43%. This year, we are continuing to invest in our sales and marketing efforts to grow our customer base in the United States and to strengthen our brand worldwide. We have proven that our products and our brand can consistently compete and win competitive contracts against much larger companies. Gross margins have improved in the first nine months of fiscal 2023. Gross margin for this past quarter was 57% compared to 47% for the same period of the prior year. As part of our customer-focused initiatives, we've 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 Kovalon's in-house manufacturing capabilities. The full positive impact of 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. Operating costs from continuing operations for this past quarter increased 13% over the same quarter last year. Our team is executing on deliberate and well-planned strategic activities to reposition Kovalon to be able to unlock value from our life-saving patented products and technology by investing in our people, our commercial capabilities and our infrastructure. We invested in 2022 in strengthening our sales teams with staff and capabilities to engage our customers, whether digitally, virtually, or in person. Today, we engage with our customers and sales leads in a much more efficient and cost-effective way than we did before, which will allow us to continue to grow more rapidly with less investment. Strategic priorities for this fiscal year, 2023, include a continued focus on strengthening our core business areas with respect to people and processes. We are confident that the changes we have made to Kovalon will allow us to consistently achieve our objectives. We have been aggressively pursuing key hospitals in the United States, aggressively pursuing growth of our college and business, and competing and winning contracts for our products internationally. 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 Covalon and achieve our targets. The momentum we have, the certainty of purpose we have in our products and mission will allow our company to succeed. Some of the best hospitals in the world have selected Covalon to help them reduce infections and give their patients a better chance to heal. Our growing hospital customer base and our results from the first nine months of our fiscal 2023 demonstrates that we are moving in the right direction with respect to investments made last year in several key business areas, and that includes sales and marketing, operations and IT infrastructure. We are excited about the progress in transforming Covalon into a patient-driven medical device company built on the relentless pursuit to help the most vulnerable patients have a better chance at healing. Our customers are very confident that our products and our technology are better and safer for their patients. Many investors I talk to are also very confident that our ability to innovate new products creates significant value for Covalon. And, of course, the team at Komalon is very confident that we are on the path to achieving our strategic goals.

I would now like to open the line for questions.

I ask that you keep to one question at a time and a follow-up, and there will be lots of time to get back into the queue to ask more.

Thank you. Over to you, Lara.

Thank you, sir. We will now open the floor for questions. As a reminder, if you would like to ask a question at this time, simply press star, then the number 1 on your telephone keypad. Again, that's star, then the number 1 on your telephone keypad. If you would like to withdraw your question, please press star 2. Alternatively, you can submit typed questions via the webcast.

Please stand by while we compile the Q&A roster. Your first question comes from the line of Jason Sinenski from Chapter 12 Capital.

Please go ahead.

Hey Brian, good morning. Hi Jason. Just on the decision to wind down the coding side of the business, is there any additional color you can provide there? Like was that business losing money at this point?

We had one large contract that was dominating our resources. It certainly, we had some of our best people on the projects. For our side, and this is always a struggle in working with other large companies, we work with their development team. Our side did a fantastic job. We hit our objectives during the project. Our customer's side of the team did not. created a lot of investment in facilities and people to support that customer. And quite honestly, our team is now available, some of our best people, to focus on our own innovation for our own customer base, products that we can bring through our channels. And so from that perspective, I think the outcome of having those people focus on creating innovation for us was a big driver as well in that decision. This arrangement had a timeline to it where the products, had they hit the market in the timeframe that it was originally contemplated, it would have created the opportunity for us to scale our coding business. It just isn't scalable at 3% of our overall revenue.

Okay. That's helpful. And I guess maybe just one follow-up. So on the large device coding project, I guess can you help me sort of understand whether this is sort of for sure dead or not? I guess what kind of work was sort of needing to be done at this point on your end and their end in order to get the product to market and if something changes down the road, how easy is it to restart this project?

It's a

I think we chose our wording carefully in the press release and during my comments to really be factually accurate on what we have been told by our customer around their intentions. And so is there a possibility that the projects get revived? That's possible. We are not sitting around waiting for them. If they did come back, there's absolutely great value in our coding technology and it's relatively easy for us to restart, but we're focusing on driving the business forward using the resources we have and the facilities we have to improve our margins on our products that are driving our growth. You know, we've been pretty clear on the status as we understand it today. And if that changes, absolutely, we'll update you on changes either way.

Okay. Thanks, Brian.

Thanks, Jason. Appreciate it.

Thank you. As a reminder, if you would like to ask a question at this time, simply press star, then the number one on your telephone keypad.

Please stand by while we compile for additional questions.

There seems to be no further questions from the phone line at this time. I'd now like to turn the call back over to Mr. Pedler and Mr. Gorel for any webcast questions.

Thanks, Laura. We do have a webcast question asking whether the company intends to start another share repurchase program. That's absolutely something we've talked about at the board level. I can tell you to a person on the board, everybody believes that the cobalt shares are not reflecting the current value of the company particularly in light of the fact we have you know 54% growth year-over-year of revenue and you know improving margins and improving bottom line so it's absolutely something that we've talked about and you know I I will say that you know we will announce a share repurchase program as we put it in place. I don't see any other questions coming through on the webcast, so I'd like to just wrap up by saying that I am absolutely confident in the fundamental changes we've made to Kovalon over the past year and the progress we've made to date. And I believe that this will, over time, demonstrate the significant value that we all believe exists in our company. Hard work continues. We are a much more valuable company today than we were a year ago. I'm very excited about some of the things that are happening within Kovalon right now, as is the rest of the team. And I can absolutely, without a shadow of a doubt, believe that a year from now we are going to be a significantly more valuable company than we are today. I really look forward to our next call and updating you on the progress we've made. Thank you for joining us this morning.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day. Thank you, sir.