Covalon Technologies Ltd.

Good morning, ladies and gentlemen, and welcome to Kavalon's Q1 Cisco 2025 conference call and webcast. My name is Ludie, 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 speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, you can submit your type question via the webcast. Alternatively, if you would like to ask a question over the telephone, simply press a star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star two. 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. Brent Ashton, Chief Executive Officer and Ms. Katie Martinovich, Interim Chief Financial Officer. Please go ahead, Mr. Ashton and Ms. Martinovich.

Hi, thanks, Ludie. And good morning to all of you on the call today. We really appreciate you connecting in. Katie Martinovich, our Interim Chief Financial Officer, has joined me on the call here. And Salia Azadada from Kavalon is also helping to coordinate the conference call and the webcast today. Salia will now provide us with some instructions.

Thank you, Brent. Good morning, everyone. My name is Salia Azadada and I am the Executive Assistant to Kavalon's Chief Executive Officer. I would like to thank everyone for taking the time this morning to attend our conference call. Before we begin the discussion, I would like to remind participants that this call and webcast are covered by Kavalon's Safe Harbor Statement. Please read the Safe Harbor Statement on this slide. I will now turn the call back over to Brent Ashton, Kavalon's Chief Executive Officer.

Hey, thanks so much, Salia. Great to be able to speak with all of you today. During today's call, I'll be discussing the following. First, I'm going to start with a story about Jessica, a patient with a really challenging medical condition whose life was changed by a heart attack. I'm really excited for the opportunities here. Fourth, I'll cover any potential wrap-up. We will prioritize the questions via the web interface. As we're going along here, please feel free to type your questions in. Next slide. Really starting where for us it all begins, right, with the patient side of things. I'd really like to introduce you here to Jessica. Jessica was a firefighter medic, so really no stranger to healthcare. She has a medical condition that required a catheter to be inserted into her body in order to receive life-saving nutrition. This is known as parenteral nutrition. Every year, there are several hundred thousand patients like Jessica that rely on this medical intervention. With the IV line in her body, known as a Hickman catheter, and the need to secure that Hickman to her body, Jessica had suffered from numerous complications, including bloodstream infections and allergies and irritation to the adhesives from her more standard IV securement dressings. These reactions were actually severe enough to put her central line at risk, which was a requirement for her to receive that life-saving nutrition. So finding a technology that accomplished the job of securing her IV line while also protecting against infection and without damaging her skin or causing pain was an absolute must for Jessica. And when she was introduced to Covalent's IV clear, it was a total game changer. It ultimately saved her skin, allowed her to avoid further infections, and ultimately really helped her maintain her life-saving access to nutrition. And it went a long way towards improving her overall quality of life. More and more patients like Jessica every day are relying on innovative products like Covalent's IV clear or CovaClear when the -year-old plus standard of care with traditional Acrylate adhesives doesn't work for their needs. The clinicians that treat these patients are increasingly relying on Covalent IV dressings with our patented gentle to skin silicone adhesive technology to help their patients avoid the serious complications that can often result from the traditional standard of care. Jessica is an amazing, remarkable person who has overcome so much. She hasn't let her challenges slow her down, and she actually advocates tirelessly for the only foundation, and that foundation educates patients and families that rely on parenteral nutrition. Covalent firmly believes that it's not just patients like Jessica who deserve to have dressings that prevent the skin trauma, pain, and infections, but really all patients, regardless of their age or condition, should not be needlessly forced to endure that skin trauma, that pain, and those complications in order to receive their medical treatment. One day this will become the gold standard, and Covalent is extremely proud to lead this change in improving health care outcomes. So with that as a backdrop to our purpose and our motivation, we'll now switch gears and talk about Q1. Today, we're reporting our fourth consecutive quarter of strong -on-year growth and positive net income and EBITDA. We've had a solid -on-year revenue growth, really a function of strong work across all our team members to accelerate the company. -on-year revenue was strong at a little over $8 million, which works out to about 75% growth over a year ago, and we've now delivered four straight quarters with more than $7 million of revenue. And in fact, it's the first time in Covalent's history that we've achieved four straight quarters with more than $7 million in revenue. We had solid adjusted EBITDA growth over the prior year at $1.5 million, and that was a $2.9 million improvement over a year ago. And then looking at that adjusted EBITDA over a slightly longer timeframe, our trail in 12 months came in at $7.8 million, which is almost $12 million more than the preceding 12 months that ended December 31, 2023. So a significant step up in profitability for the company. And then shifting to some strategic and operational highlights, in the past two weeks, we've been very fortunate to be named as both a TSX Ventures Exchange Top 50 Company as well as an OTC QX Best 50 Company, recognizing our outstanding performance in 2024. Great recognition for Covalent and the work we have done, and really a huge thank you to all of our investors on the call today for your strong support as we've turned Covalent around here in the past year. We also received word from the U.S. Patent and Trade Office that our latest patent application for our Valgard product has been accepted. This new patent fully encompasses all the features of the current product, and we expect it will be published in the next two to three months. And then keeping with the Valgard theme, very exciting news on the commercial front. We recently secured system-wide approval for use of Valgard at one of the largest integrated delivery networks, or IDNs for short, in the U.S. This health system has more than 50 individual hospitals under its wings, and this approval is key to enable deeper penetration of the system. We'll cover this in more detail in a few minutes. So going a little deeper on some key financial metrics, looking at the growth piece, our primary area of focus in the lion's share of our revenue is our U.S. Medical consumables business. And here we posted $7 million of revenue, which was a 74% increase from a year ago. Strong -on-year growth from both pieces here, the U.S. Advanced Wound Care business, our collagen business, as well as the U.S. Vascular Access and Surgical business. That's the business that has our Valgard product, as well as the Covalent IV Clear that we talked about with Jessica. So we've been very consistent in our investor messaging that we have visibility to a very significant multi-year growth opportunity at Covalent, but that the growth isn't going to be completely linear. And so even though our Q1 revenue was a significant increase over the prior year, it was a sequential -on-quarter decline. And that was connected to a slight sequential slowdown in our U.S. Advanced Wound Care business due to some normalization in channel inventory. We do expect this slowdown to reverse in the second half of fiscal 2025, and that's supported by conversations and forecasts that we've received from our customers. It is worth noting here that we did see strong sequential -on-quarter growth in our U.S. Vascular Access and Surgical Consumables business, which was up more than 20% versus Q4 2024, and we still see strong signs of continued growth acceleration there. With the revenue growth overall, gross profit also grew at a similar rate of about 75% compared to a year ago. Our gross margin for the quarter was 61.2%, which is in line with our performance from the past several quarters. Operating expenses at $3.7 million were down quite a bit from a year ago, largely attributable to the restructuring that we did on the sales and marketing front a year's time ago. And it was slightly below where they've been the past several quarters, demonstrating a really strong judicious use of the company's spending investments. Our EPS clocked in at $0.04 per share, which is up $0.07 from a year ago, and continuing our trend, 4 straight quarters of positive EPS after 9 straight quarters with negative earnings per share. And wrapping up with cash, another strong quarter of cash generation. We ended with $17.5 million in cash, more than double where we were at a year ago, and we ended up with about $750,000 more than three months ago. We continue to have zero debt, so a very strong balance sheet. And moving to the next slide, we want to continue to provide visibility and transparency to our U.S. vascular access and surgical consumables business, which is an important area of growth focus for Covilland, and it's the business that we have the greatest -to-end control over. We continue to be a strong partner to the best of the best children's hospitals in the U.S., demonstrated by eight of those top ten best hospitals, partnering and trusting Covilland to help them deliver the best possible patient outcomes. Broadening out our focus, though, to include all hospitals, children's, acute care, adult hospitals, et cetera, with our significant focus on this business and three key priorities, you know, with the new fiscal year here, for the first two metrics you see, we take a look at our top 50 customers from last fiscal year, so from 2024. And then against that comparison set, our first priority is to retain all the business that we fought really hard to win. Done. 100% retention of all 50. Second priority is to grow those accounts, either by adding new products that they weren't previously purchasing or by growing the volume of existing products in the account. Here, solid performance of almost 40% growth over a year ago. So well above the overall market growth right here in the mid-single digits. Third priority, add new. And here we added more than 20 new hospitals to our roster in Q1, which is a really good start to the year. For context, in all of last year, we added 66 new hospital customers. So through three months this year, we're already about a third of the way to surpassing our strong 2024 additions. And then transitioning to the third part that I told you I'd walk you through today. Last quarter, I showed the slide and talked at a high level around some of the actions we were taking to advance the company on these four fronts. This quarter, I'd like to go a little deeper around the commercial advancement side of things, and in So these elements represent, that you see on the screen here, represent a number of key actions and efforts that will be key to our commercial success in 2025 and beyond. You know, we've initiated work on all four of these. The top row are further along and have already yielded wins and benefits. The bottom two are a little more early stage, and we have high expectations for those as well. So first, around the expansion to IDN level selling. We've had a lot of growth in our U.S. vascular access and surgical business. In 2024, we grew this at more than 40%. And historically, we've achieved that strong growth largely on a standalone hospital basis, one hospital at a time. But as we drive this business to scale, we need to advance from individual hospitals to be able to engage in win at the integrated delivery network level, IDN level. These are large health systems with dozens of individual hospitals under their ownership. And this requires a different selling model, different skills, different messaging, and higher level relationships. And as I alluded to earlier, we've actually secured our first win on this front with Valgard being approved for system wide usage at one of the top five IDNs in the U.S. We also have Valgard, IVClear, and Surgiclear products under trial and consideration for similar approvals at two other large IDNs. These system wide approvals don't guarantee you the business at the individual hospitals that form the IDN, but it's a huge key enabler to success at each of them. It opens doors and accelerates the sales process. Shifting gears to our partnership with relevant scientific organizations and their annual meetings. These are groups like the Association for Vascular Access and the Association for Pediatric, Hematology, Oncology Nurses, and those types of associations. Over the past year, we've seen strong success at these meetings. Numerically, in 2024, we generated more than double the leads at these events compared to 2023. But what I also think is important about these meetings are the quality of the conversations that you're able to have. Our team and I always love to meet with customers at their facility. Absolutely the best way to get a 360 degree view of the world that our customers live in. But our customers, their nurses, their doctors, infection preventionists, they're incredibly busy treating patients and dealing with the dozens of emergencies that pop up each day. So those conversations can be a little rushed or a little scattered. At these scientific meetings, our customers don't have to worry about the minute to minute stresses with their patients. And so the conversations can go a little deeper. On top of this, you know, our engagement with these associations also is going a little deeper and very exciting things on that front. The third piece here is around expanding AI driven content and engagement. So Cobolon is leveraging AI powered tools and other novel technologies to generate and personalize content and optimize customer engagement. The technology here is evolving so quickly. And there are so many different ways that AI and other technologies can and are helping us accelerate our growth and reach customers with greater efficiencies. We see really strong potential use for these advanced technologies and we're actively working to accelerate our work in this area. And last but not least, we've been developing a gentle to skin demand generation campaign to increase the adoption of our life changing silicone adhesive based technologies. These are one of the ones was what we covered it up front here with Jessica on Ivy clear. One focused element of this campaign is to highlight the challenges associated with the typical the standard of care. These accrelated he says for vulnerable patients with fragile skin or allergies and then beyond to broader patient populations and really direct customers and whatnot to our gentler silicone based solutions as the superior choice. Bottom line, as I said before, Colvin, we don't think anyone should have to incur unnecessary pain or suffering when undergoing medical procedures. So hopefully this gives you a little more depth of what we're doing on the commercial side to drive increased demand for our amazing solutions. So to wrap up today's call so that we can take some questions. A quick summary. Covalent is making a huge difference in the lives of patients helped, of course, by the clinicians who are choosing to use our life saving and life changing products. 2025 is often exciting start strong growth elements as well as a growing list of recent accomplishments and highlights that strengthen our company. And we have high confidence that the efforts were executing on the commercial side and beyond are going to yield really strong outcomes for this company and allow us to realize the multi year growth opportunity in front of us. And with that, we'll now transition to Q and a for questions. We'll start with questions that are typed into the Q and a feature here online. We're going to do things a little bit differently in the past. We'll take about a 30 second pause to allow me to drink some water here and hydrate and then we'll just dig into the questions going down the list. We're not going to review questions and try to group them like we did in the past. So just be aware that we may answer a question, but then come back to it with a slight add on a few questions later, or even just acknowledge the question and that we kind of answered that before. So give me a few seconds here to open up the question window and take a drink of water and we'll get started. Okay, we're going to go ahead here. Our first question, and I'll apologize in advance if I don't pronounce people's names correctly here, but we have Steve I and hope and sees question is, will the company consider stock repurchases again in the future? And then will the company list on a US exchange? And so, you know, at a high level, I'd say that our cash position gives us some really good flexibility as we explore various avenues for accelerating growth, whether organically or through M&A. It's also allowing us to make investments in capex to reduce our manufacturing costs. To your question on the stock repurchase, that could be a use of cash. At this point, we don't have any committed plans for share buybacks. We do really like the flexibility that our strong balance sheet, you know, over $17 million in cash and no debt, that strong balance sheet affords us. And then on the US exchange question. Yeah, I mean, that's that's something that could be done in the future at this point. No committed plans to do so. So thanks, Steve. The next question is from Dwayne McMullen. Congratulations on your success and continuing to execute the strategy. You now have over $17 million in cash and with positive cash flow, this will continue to grow. What do you plan to do with this large and growing amount of cash? Great question and kind of to the lead in here. We I think that was just answered right now. Nothing really to add there. Next question is from Arnold Shell. Revenue is not just down from last quarter. It's the lowest revenue of the last four quarters and seems to be stuck at $8 to $9 million. Why is that? This is the last quarter that you can compare to the previous regime. Going forward, it looks like the key figures will be at best flat from the previous year. Yeah, so, you know, on the revenue side, I think you're correct. We've talked about kind of the sequential slowdown. And from a revenue standpoint, we're just really excited about the future and the efforts we're taking on both the commercial front that I highlighted today. You know, when we think about these businesses, you know, I think it's worth noting that over the last three years, these businesses have had really strong growth rates. You know, both the college in business and the US vascular access and surgical consumables business have had three-year cangers in excess of I think it's in excess of 30%. So for sure, it's been strong. We have a lot of committed plans and how we're going to grow the company. We highlighted some of those today. But we've also said that that growth is not going to be linear. And so while we do see that multi-year journey of strong growth outcomes, you know, that's where we're at today and where we're going to. So I hope that answers the question. And we'll move to we have a question from Jerome Uzosiri around capitalizing on the opportunity to buy back shares, particularly while the company is profitable cash generative debt free. And per the previous answer, certainly a consideration for the future. But we do really like that flexibility that comes from having a super strong balance sheet that could be is being used to develop both capex could be used for M&A or other purposes. But yeah, the shared buyback continues to be an option. I'm going to take a pause here to kind of scroll through and take a drink. So just give me 15 seconds here. So the next question is from Alpha Capital as. 26 last year and 21 so far this year. Do you see an increase in sales per hospital? And I'd say the question is a couple of things there. Overall, yes, right. When we first land a hospital, that tends to be a certain amount of revenue. And then our goal for the metrics we've shared with you is to expand that grow that existing base. So over time, we absolutely do see an increase in sales per hospital. Next question is from Arnold Shell, and that is what's our exposure on tariffs? And so on the tariff side of things, for sure, it's a very hot topic. And, you know, we're continuing to monitor. We do have, you know, we do have a playbook that we're executing. So I guess the best best way to answer this would be at this time, you know, the extent of our exposure does remain a little uncertain because the tariffs and their scope are still evolving. We stand by the comment we made last quarter that, you know, if the full extent of the reported 25% across the board tariff is implemented, we would see just a couple hundred basis points of cost of goods sold impact here in our fiscal year 2025. And that assumes no mitigation. We've already taken some steps to to kind of prevent against supply chain disruption and potential price inflation on raw materials. So we expanded our safety stocks. And then there's a lot of mitigation steps we could take as well. And then our last question here that I see is from Zach Treese. Can you please speak to your subleases in the Seattle facility and the latest developments? I'll make a comment that I'll defer to Katie because I think she has more of the specifics. But yeah, we did have a couple of subleases in the Seattle facility. Unfortunately, one of those dropped. And so we had to and we put a note of that financial statements. Katie, do you want to jump in and provide a little more clarity?

Yes, thank you, Brent. So we have been working hard. We've actually engaged with our broker again, and they are actually currently working to find another sublease so that we can continue to sublease the facility and the portion that we are not using. We still do have one sublease. And that is there until the end of the lease, our term of lease, which is April of 2026.

Thanks, Katie. That is all the questions I show. I don't know. Wait a sec. I'll hit the refresh button, see if that changes anything. Yep, that's all the questions I show. I don't know if the operator sees any other ones. But I guess at this point, if there's any questions that people would like to voice in via the conference call, we'd be happy to take those now as well.

Thank you, Brent. So again, if you do wish to ask an audio question, please press star one on your telephone keypad. If you would like to withdraw your question, you may do so by pressing star two. We do have our first question coming from the line of Andre Odean with Research Capital. Please go ahead.

Hi, Brent and Katie. Just a nice quarter. As you get more familiar with your business, can you discuss if you're starting to see a seasonal pattern? Like, if you look at Q1, it used to be a weaker quarter, and now it was stronger than we expected. Maybe you could just talk a little bit about that. Thanks.

Yeah, thanks so much, Andre. It's a great question. And when I think of seasonality, I think that really comes into play more when you've got a business that's historically growing kind of at or below the market growth rate. So if you've got like a 5% growth business, well, then you'll probably see a little seasonality in the US due to the high deductible health insurance plans. So tends to be a little more demand towards the back half of the year, a little less demand at the front half. But, you know, when you've got businesses that are growing, you know, 30, 40 or 50% each year, like our, you know, both of our US medical consumables businesses, the college and business historically over the last three years. Obviously, as we noted that when we're seeing a little bit of inventory rebalancing, but the US vascular access and surgical consumables business, you know, continues to show that strong growth there. It kind of comes out in the wash a little bit more. So yes, in the businesses that we're the most directing, we do see, you know, more patients, you know, in the ICU around flu season and whatnot. But to be honest, it really doesn't show up in the analytics just because we're going that business so quickly. Thanks, Andre.

Okay, thanks. And just could you also just provide a little bit more clarity in terms of the college and channel inventory in terms of what's happening there and a little bit more than what was in the release?

Yeah, for sure. So in a high growth environment, right, it can be tricky for our partners to accurately predict future demand. Like, is it going to be 50% growth or 75% growth over the year prior and obviously, you know, that being a big part of our US business, you can see we had some really strong growth last year. And so it's very different than a business that kind of similar to the last question, very different than a business that grows at like market growth rates of 5%. So inevitably, there's going to be periods where too much was ordered and you have excess inventory that needs to bleed off. And there'll be some periods where not enough was ordered, which can lead to temporary back orders or lost business. And a lot of the time, the latter can lead to the former. And that's the case here. So we do have, you know, through conversations and forecasts, we know that we have confidence from those that the second half of our fiscal year here will be stronger with that business than the first half. And then really, you know, it's full court, it's our job to work with our partners to do everything we can to accelerate the sellout and create even more demand for our amazing product there. So working with them on that. Thanks, Andre.

Okay, that's great. That's just one last one I had. Sure. So, Mr. You added 21 new hospitals this quarter, which is, you know, quite significant. Do you expect that trend to continue for the rest of the year and how do you see hospital based acquisitions for? Yeah,

I mean, we have, we certainly have high expectations for that to continue to grow. We added 66 hospitals last year, off to a good start this year. If you do the math right, Q4 was a little, little softer on that. You know, I think we added six or seven in Q4. And so it can bounce around. And some of it's just around timing. You know, we put a lot of effort here in Q1 to, you know, we have a sales pipeline. And so we put a lot of effort in to, to really get those, those late stage pipeline hospitals across the finish line in Q1. And so, yeah, we have high expectations, but it can bounce up, number can bounce around a little bit, just based on timing and whatnot.

Okay, that's great. Thanks. Thanks, Brian.

Thanks, Andre. That was a good, we'll play off the exciting win last night. That was a good hat-trick of questions from you. So thank you.

And once again, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from the line of Dave Kelbler. Please go ahead.

Good morning, Brent. Just wondering if you can give an update on the coding business.

Yes. Yeah. So on, on, on that front, we, we, we, as we talked about last quarter, right, we don't see that as a strong part of our future business. And so we are looking at different ways to monetize the asset there and the know-how. Nothing to report on today, but it is an area that, that we are, you know, working with a partner on and, and trying to see a, a conclusion to that pathway forward, but nothing to report on today.

And last question. How do you, where do you see the company going? Are you going to be a high growth company or are you just going to be a steady growth company, maybe, you know, eventually buying back shares or even potentially paying a dividend?

Yeah, I mean, we, we kind of talked about the share buyback and a dividend would be another use of the cash, you know, we have high, high expectations for the growth of the company. And, and that's really the laser focus of what we're doing right now. We think across, you know, the, the primary areas of focus around the U S collagen, excuse me, and the, and the U S vascular access and surgical consumables business that there's a ton of opportunities. We'll talk at the annual general meeting about some of the clinical tailwinds that we think can, can really boost our business and some things we're doing to, to ride those winds to success. And so, yeah, we have very high expectations on our growth. As we've said, it's a multi-year journey. It's not going to be completely linear, but we're very excited for the future opportunity there. Thank you. Moving, we had a question come in on online as well. So this is Don Angelo Volpe. And his question is, can you provide some additional color on steps available to the company to help mitigate the impact of tariffs? And so I can tell you kind of what we've done and then some other, other things that remain options to mitigate, you know, potential disruptions. We've increased our purchase goods safety stock in some key areas to ensure supply continuity and pricing stability. This, this helps us kind of manage lead times effectively and avoid unexpected shortages. We haven't seen that, but you know, this strikes me as if the tariffs come in and we see various ordering patterns, you know, it could create some kind of supply chain effects across all industries actually. And so we were fortunate. We've got a strong balance sheet. And so we have, we've increased kind of safety stock on our key supplies. We're certainly balancing this approach carefully to avoid excess carrying costs. We're also, you know, remaining agile in our kind of procurement plans. We're, you know, producing at a high rate to make sure that we, we export product into the U.S. in a timely manner. And those are some of the things we've done. There's other things that are kind of in the playbook around pricing and whatnot. And we'll see how kind of the market reacts there and look to look to see what the right path forward is. So hope that helps down, Angelo. That's the last, still the last of the online receive questions. Any other questions from the phone line?

Yeah, and we don't have any further questions at this time. You may continue.

Perfect. Well, listen, really appreciate the questions from this group. I really hope each of you have a great rest of your day here and a plug for our next time to communicate will be around the annual general meeting. And we'll be providing, as I said, a little more, a little more color on some of the things that we're really excited about and look forward to seeing you then. So with that, have a great day. Happy Friday, and I hope everyone enjoys your weekend.

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining me now.