Covalon Technologies Ltd. (COV) Earnings Call Transcript & Summary

The motion is now on the floor. We will now continue with the next item of business. The next matter to be dealt with is to approve a resolution in the form set out in Appendix A to the circular to reapprove and confirm effective the corporation's amended and restated rolling stock option plan, copy of which was attached to the corporation's Management Information Circular dated October 8, 2020, as Appendix B. In order for the resolution to pass, the corporation must receive a majority of the votes cast by all shareholders at the meeting, either in person or by proxy. I move and second this motion. Does anyone wish to discuss the motion?

There is no discussion at this time.

So I now call for any registered shareholders or proxyholders who have not yet voted in the matters discussed in this meeting to please do so now. Based on the preliminary Scrutineer's report, I declare all motions carried. I direct that the results of the voting be included in the minutes of this meeting. This completes the matters of business to be conducted as set out in the notice. I now declare the polls closed. As there is no more formal business to which we must attend, I would request a motion to terminate the meeting. I move and second the motion. Does anyone wish to discuss the motion?

There is no discussion at this time.

As there is no discussion, this concludes the formal orders of business for today. On behalf of the directors and management, I would like to thank you for your support. We wish you and your families good health and a return to some kind of normalcy in the coming months. We will endeavor to do the same at Covalon. Thank you for joining us today. I invite you all to stay for our business presentation and the opportunity to ask questions. I'll now turn it over to Danny to start the management presentation.

Thanks, Brian. Next slide, please. I would like to remind everyone that the presentation today is covered by Covalon's safe harbor statement, and we disclaim any intention to update any forward-looking statements. There will be a Q&A period at the end of this presentation. Next slide, please. Next slide, please. Covalon has achieved significant diversification in its revenue base, and has expanded sales in North America with the intention to reduce the previous dependency on sales from Saudi Arabia. In 2017, the company had only 17% of revenue from the United States and had 1 customer in the Middle East who accounted for 70% of the company's total revenue. In the last 12 months, Covalon saw 82% of revenue from the United States, and there was no individual customer who accounted for more than 10% of revenue. During 2017, there was an inflection point for the company's revenue as it entered into the early commercialization phase of the growth cycle. Fiscal 2019 saw an increase in sales as the AquaGuard acquisition was completed. However, the trailing 12-month revenue has been negatively impacted by 2 main factors: the COVID-19 pandemic; and the appointment of a new distribution partner. With regards to COVID-19, like many companies, Covalon was negatively impacted by the global pandemic and the actions taken by countries, companies and individuals as a result of the virus and related uncertainty. The direct sales channel in the United States was interrupted as face-to-face sales calls became more difficult. The company has noted that accounts are not being lost, but that the types of procedures that were performed were heavily shifted away from those that utilized Covalon products and facilities were drawing down on their existing inventories, taking a wait-and-see approach. The company has seen signs of recovery in the end market use of its products and expects its revenue growth to accelerate again in fiscal 2021 and beyond. With regards to the distribution partner in Saudi Arabia. Covalon has replaced the previous distribution partner with a major European medical and health care provider. The new distribution partner will also be responsible for other countries in the GCC region. While the changeover took some time, the company has completed the transaction to transition to the new distributor and expects the related revenue to return to normal levels in fiscal 2021. The growth in the early commercialization phase has been driven primarily by the biological Collagen Matrix technology as well as the Medical Coatings technology components of the company's business. Both of these businesses are profitable on a stand-alone basis while the company continues to invest heavily in the U.S. direct sales channel as well as international markets. Next slide, please. Covalon has over 15 years of distribution relationships in the United States for wound care. In fiscal 2018, Covalon had approximately $6 million of product sales in the United States or 22% of overall revenue. This figure grew to $20 million or 59% of total revenue in fiscal 2019. The diversification efforts related to Covalon's revenue base was complemented by the acquisition of the AquaGuard assets in fiscal 2019. AquaGuard has a relationship with over 2,000 hospitals, 20 national distributors, 25 IDNs, 3 GPOs and over 20 years of historical sales in the United States. With a track record of double-digit revenue growth and valuable customer feedback related to existing and potential new product offerings, this diversification is expected to continue, thus allowing for Covalon to expand in the United States and continue with market penetration efforts currently underway. The purchase of AquaGuard was facilitated through an acquisition line of credit with HSBC Bank Canada, and the remainder was financed by the previous owner through a noninterest-bearing vendor take-back agreement that remains outstanding, but is subordinate to the banking facility at HSBC. Covalon has been selling in the Middle East for over 5 years and continues to expand the product offering and brand presence in the region. The new distribution partner is now able to fully support Covalon products with the sales team that is able to provide in-hospital support and servicing, allowing staff to be trained and educated on the benefits of Covalon products in a way that is similar to the sales approach used in the United States, where Covalon is able to directly build awareness with end users. With a stronger distribution partner, Covalon will continue to compete business on new and existing products, leveraging the strengths of our new partner. Next slide, please. As discussed on the previous slides, Covalon's revenue base has continued to diversify in terms of the number of products, number of customers and has derisked from a geopolitical perspective. In fiscal 2019, we saw the diversification related to U.S. hospital users as a result of the AquaGuard acquisition, but this also came with increased operating expenses. These expenses were related to the head count and footprint of Covalon's new assets as well as integration costs. There were professional fees, transaction expenses and other items that were necessary for a smooth transition of the business given the asset sale and changes that have occurred. As mentioned on previous earnings calls, Covalon has been focused in fiscal 2020 on reducing operating expenses and leveraging the strengths of the 2 previously separate entities. As of the third quarter ended June 2020, the company's operating expenses were down by over $8 million for the same period of 2019. While we've seen negative impacts on our sales in fiscal 2020 as a result of the COVID-19 pandemic, we anticipate these sales to normalize without the need for incurring significant additional operating expenses. Over the past 2 years, the company has derisked our revenue concentration and rightsized our operating expenses, which has set the company up for a path to recovery from the impacts of the COVID-19 pandemic and for strong and profitable growth thereafter. I would now like to turn the call over to Covalon's CEO, Brian Pedlar.

Thanks, Danny. I want to spend a few minutes talking about the current situation in these strange times and about Covalon's fundamental value proposition. I'll try to put in context the changes that have occurred since our last AGM, and highlight some areas that as investors, we don't always see about Covalon's value. Next slide, please. At its heart, Covalon is an infection prevention company that was founded on the strength of our lab. Our lab, over the years, has developed world-class technology platforms that we have leveraged to create highly competitive products and services that help protect patients from getting infections. We generate revenue by selling our products through over 30 established medical product distribution networks, with a major focus in the United States, Latin America, the Middle East and Europe. In the United States, we have our own sales team that calls on over 2,000 hospitals. We also use our Antimicrobial Medical Coating technology to develop products for other big medical companies under license and development agreements. We know from the current infection crisis that we are in that the market is huge, and health systems are behind in being able to prevent infections. Before the COVID-19 pandemic, the United States spent over $20 billion to prevent and treat infections. I'm sure that number is much higher now than in the past. Next slide, please. As Danny highlighted, our company fundamentally changed during 2019 by adding our own sales team in the United States. We closed the acquisition of AquaGuard at the beginning of 2019, and this very positive move has established a strong platform for our future growth. At the time -- at the same time we were beginning the journey to unlock the significant value that our new U.S. business provides us, we suffered a setback in our business in the Middle East. And of course, we have all been adapting to the impacts of COVID-19 and 2020 on our lives and on our businesses. As a result, our share price declined from a high of $9 to under $2. Our stock is liquid. And as a result, it responds illogically when very few trades are made with low volumes of shares. In our last press release, we stated that the entire Board of Directors and the company's major shareholders believe that Covalon is significantly undervalued given our compelling combination of patented intellectual properties, our world-class technology platforms, our commercialized medical product portfolio and our global sales channels. There is not a person who is deeply familiar with our business prospects or products or our growth opportunities that believes our share price represents the true value of Covalon. We have overcome our Middle East challenges, as Danny discussed with the appointment of our new distribution partner there, and we are seeing business in the region begin to recover to normal levels. We are also seeing our United States hospital business recover from the impact of COVID-19. We've talked a lot about the reasons for that on past management calls. And I remain cautiously optimistic about our business in the U.S. and elsewhere despite the massive increases in the COVID-19 cases that we're experiencing now. As Danny mentioned, we have also reduced our operating costs, I think, on an annual basis, somewhere around $10 million since 2019. And from an operating perspective, we are on our way back to profitability. There is no question that Covalon has significant growth opportunities with our products and our Medical Coating technology. And there's also -- it's very clear that we have significantly more growth opportunities than we can exploit under our current capital structure. Next slide, please. Our market opportunities are large. If you take a look at the total addressable market on the right-hand side, and we are only at the beginning of tapping into those markets. If you take a look at our biological Collagen Matrix, it is definitely world-class, and it targets an epidemic of diabetic wounds. We also have the world's only antimicrobial silicone adhesive IV dressing. We're fortunate, through the combination with AquaGuard, to have the #1 moisture barrier product in U.S. hospitals. And our new CovaGuard product line has the capability of continuously sanitizing your hands or surfaces for 24 hours. Our antimicrobial coating technology is well-respected by major medical companies and competes very well and generate significant value for our partners that we work with in development and licensing agreements. But given our current capital structure, we are not able to fully exploit all of these growth opportunities that our 5 platforms provide us. Next slide, please. For Covalon as a company, we are focusing organic growth in the United States and in international markets that have significant opportunities to scale to meaningful revenue levels. We are focusing our scarce resources on strengthening our existing U.S. hospital channels by doing a number of things. One of those is launching existing products that we have into our current hospital customer base. We are also realigning our sales territories and our sales approach to take advantage of the new reality of COVID-19. We're not able to visit every single customer as much as we used to in the past. There are numerous ongoing opportunities with existing and new distributors to expand our product portfolio presence in international markets as well, not in market that we're currently in do we sell every single product in our portfolio. We also have a heavy focus on education, training and supporting our nurse and doctor customers, and by providing additional clinical studies and clinical data to improve the penetration rate of our existing products into the market. And as we talked about, and Danny highlighted, we've been looking at reducing costs, including product costs and looking at in-house manufacturing as our revenues increase, so we can realize some economies of scale and improve our margins. With the right resources and capital structure, we're also in a position to look at hiring or acquiring additional capabilities and channels, such as more sales specialists that already have relationships with clinicians and experience selling products just like ours. And another area that's very important for the types of products and technologies that Covalon has is additional clinical specialists. Those are registered nurses generally with sales experience and clinical experience in the areas of vascular access, surgical and infection prevention. Their presence on a -- in customer engagements can help drive even stronger conversion rates and recurring revenue through customers in all our geographies, and also shrinking our sales territories with the addition of new sales personnel to maximize customer face time. We've also taken advantage of the impact of COVID-19 by launching some new products into the U.S. market. CovaClear, VALGuard and a new generation of our IV Clear product and of course, CovaGuard to name a few. There's also additional near-term new product opportunities with identified and committed customers. Those are customers who've committed to purchase the products already that we expect to launch in the next 3 to 6 months, and those are ColActive gel, Collagen gel and a Collagen powder. We also have the opportunity to unlock value through strategic initiatives that can provide the capital for us to accelerate value for shareholders. We have more product opportunities than we can maximize on our own, even with our use of third-party distributors and licensing to large medical companies. In response -- in -- we did announce this several weeks ago, in response to expressions of interest made to us by medical industry and private equity organizations, our Board decided to hire advisers to assist in undertaking a strategic review process in order to ensure that all available alternatives are being evaluated to enhance value for our shareholders. As this process is undertaking, our team remains focused on continuing to execute our growth strategy, promoting our lifesaving products to our medical industry customers and providing meaningful growth opportunities to our staff as well. As I said before, the entire Board of Directors and the company's major shareholders believe that Covalon is significantly undervalued, given its assets and opportunities in the market. Unlocking value during the strategic review process will help us to accelerate growth, enable us to focus on the areas of our business that have the most upside opportunity. Next slide, please. As I mentioned, at the heart of Covalon is its lab. Our lab and our technological team, which includes our scientists, our quality control team, our product development team and our regulatory team are very talented and dedicated. They have won the respect of many of the largest medical companies that have engaged us to develop antimicrobial products for them. And we have large medical companies that have committed tens of millions of dollars to license arrangements and development agreements with us as a result of the strength of our intellectual property and of our very capable team. Earning this credibility takes time, and we have been able to leverage this into a very lucrative arrangement with a Fortune 500 medical company that we announced in 2018 that has yet to be reflected in our financial results and in the value of Covalon. Our team has also risen to the challenges of creating and launching an incredible portfolio of products that we sell through our distribution channels. Next slide, please. Our products have demonstrated competitive advantages through clinical use and improved patient outcomes. This is the goal of prescription products, like ours, which is to improve patient outcomes. We compete with very large companies, many of whom have access to considerable more resources than us. 3M is a major competitor of ours. As I mentioned before, AquaGuard is a #1 brand moisture barrier in the United States market. That said, there's still about -- based on our estimates, about 70% of the market that is unexploited yet, even though we have a #1 brand position. CovaGuard has a very strong opportunity as well in the market as is our Medical Coatings. Our products have demonstrated improved patient outcomes, and we win against the market-leading brands when we compete with them. Next slide, please. Patients and their families really do love Covalon's products because they improve their course of treatment and improve their outcomes. And these are just a sampling of the -- a few of the comments that we receive on an ongoing basis. We know that our products work because our patients tell us this all the time. Next slide, please. I am proud of the fact that we have such a strong value proposition for patients that they go out of their way to tell us how a simple dressing that protects them from getting an infection and does not hurt them when it's changed has sincerely helped them in their recovery. These are just, as I said, a sample of the feedback we receive on an ongoing basis. Next slide, please. Clinicians also love our products. Protection from infection and reducing skin damage from dressings matters to these patients and their families. It also matters greatly to clinicians, not only for the economic impacts that our products help -- that help facilities avoid, like treating infections and dealing with the complications associated with skin damage, but also for the simple reason that clinicians have enough to worry about in dealing with the conditions that put the patients in the hospital in the first place. This -- the platform that's shown in the middle of this slide is our antimicrobial silicone adhesive platform. And I just want to reiterate that we are the only silicone adhesive-based IV dressing, and we're the only company in the world that I'm aware of with 2 antimicrobials embedded into a silicon adhesive, and believe me it matters to these patients on the right-hand side of that slide. Next slide, please. SurgiClear is another great example of the upside potential of our products that we still have the opportunity to launch into our sales channel, particularly in the United States. We have over a dozen leading U.S. and Canadian children's hospitals that have pursued us to become early adopters of SurgiClear because the dressing works. The feedback we receive on the impact of our product -- that our product has in reducing infections as well as the clinician satisfaction is a strong value -- a strong validation that our products are world-class. We have not yet launched SurgiClear officially through our sales channel. We are planning to do that through our U.S. team over the course of the next 12 to 18 months as hospital operations find equilibrium in managing COVID-19 as well as the needed surgeries where these products are used. Now I have to warn you the next set of images may be disturbing to many who are not familiar with the types of cases that our products are used on. If that feels like maybe it's you, I suggest that you cover up the left-hand side of the screen, if you are at all disturbed by medical pictures. Next slide, please. It's hard to show a before and after with an antimicrobial product like SurgiClear or IV Clear because they're usually meant to prevent an infection, so it's hard to see something that you prevent from happening. But here, you can see at the top-left, a picture of a 48 year old male with an infected diabetic foot ulcer that has been present for about 12 months, and he's had 3 operations already without an improvement. After 5 weeks of treatment with our ColActive Plus Ag product, the ulcer was healed as seen on the top-right. Now the bottom-left picture, which is a gruesome-looking foot, is a patient who had already had actually their right foot amputated for a similar diabetic foot ulcer. The left foot that's shown as an infected plantar ulcer, which was likely headed for amputation as well. After numerous treatments with ColActive Transfer, the plantar ulcer healed to a superficial status, as you can see on the right-hand side. There are thousands of patients every year that have similar stories. Our products really do work. And they change people's lives, and that's important. Next slide, please. This is our management team. I would like to take this opportunity to not only thank the management team, but also on their behalf, thank the entire dedicated staff at Covalon for their tremendous efforts in responding to the past 9 months of COVID-19. They have worked around the clock to adapt, to launch new products, to reach out to customers and to gain the respect and trust of our clinicians and clinical customers in the field. I would also like to thank our Board for its continued support of the management team through this pandemic. Next slide, please. So in summary, some highlights. Covalon truly does have a world-class development lab. We have deep and game-changing intellectual property, and we have highly competitive products. We are recognized by medical companies as a major player in infection control technology. As we talked about and Danny talked about, we've derisked our revenue and we've increased our channel into the United States, which continues to be the largest health care market on the planet. I believe there's still massive upside with our new products and our new sales force in the U.S. And I think we have the team that is highly focused on trying to create significant value for shareholders. I'm looking forward to talking to you about our progress on unlocking value over time in our next shareholders meeting, which probably is not coming up -- which is coming up not that long from now. We will now have an opportunity to ask questions. [Operator Instructions] We will answer as many questions as time permits. When asking your question, please state your name, the entity you represent, if any, and confirm that you are a registered shareholder or duly appointed proxyholder. Please limit your questions to topics relating to today's subject matter and keep your questions short and to the point. If for some reason, we -- you were not able to answer -- ask a question or we don't have an opportunity to answer your question, I really encourage you to reach out to me directly, and I'd be happy to address that on a one-on-one discussion. It does not appear that there are any questions. So hopefully, that means that -- hopefully, it doesn't mean that you have a question but are not able to ask it. So on behalf of management, our Board of Directors and our employees, I would like to take the opportunity to thank everyone for attending the meeting today. I would like to thank all of our shareholders for their commitment and continued support and continued interest in Covalon. As I said, I look forward to speaking with as many of you as possible over the coming months and reporting on our progress. We look forward to your attendance again at our next meeting. Thank you.