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

Good afternoon, ladies and gentlemen, and welcome to the Fiscal 2021 Annual and Special Meeting of Shareholders of Covalon Technologies Limited. My name is Brian Pedlar. I'm the President and Chief Executive Officer of Covalon Technologies Limited and a Member of the Board of Directors. I am speaking to you today from Covalon's offices in Mississauga. Also in attendance are Jason Gorel, Covalon's Interim Chief Financial Officer; and Emily Hill, Executive Assistant to the CEO. As this meeting is being held virtually via live webcast, it is necessary to set out a few rules for the orderly conduct of the meeting. Questions with regard to a motion can be submitted by a registered shareholder or duly appointed proxyholder using the instant messaging service of the Lumi platform. Please note that there will be a slight delay in the publication of the communications received. When asking a question, please indicate your name and which entity you represent, if any. Only questions regarding procedural matters or directly related to the motions before the meeting may be addressed during the meeting. Other unrelated questions will only be addressed during the question period at the end of the meeting. Voting on all matters today will be conducted by a single electronic poll. Registered shareholders and duly appointed proxyholders may vote on each business item at any point during the meeting. Only registered shareholders and duly appointed proxyholders of the Corporation are permitted to participate in the voting. Instructions on the voting procedures and how to ask questions will appear on your screens. The annual and special meeting of shareholders of Covalon Technologies Limited will now come to order. With the consent of the meeting and in accordance with the bylaws of the Corporation, I will preside as Chair with respect to the meeting, and Laura Levine of Stikeman Elliott will act as Secretary of the meeting. Emily Hill will act as Moderator to help with the virtual communication. To expedite the formal part of the meeting, I move and second all motions. I would ask Oliver Keung of TSX Trust Company to act as Scrutineer for the meeting. The purpose of today's meeting was set out in the notice of Annual and Special Meeting of Shareholders and the Management Information Circular dated February 4, 2022. I do not propose to read the notice. However, copies of the meeting materials are available under the Corporation's profile on the SEDAR website. I direct that a copy of the notice of meeting be attached to the minutes of this meeting. I have been advised that the notice, calling this meeting together with the management, proxy circular and the form of proxy were mailed to shareholders of record as of January 19, 2022 on February 24, 2022. In accordance with the applicable law, a copy was also mailed to each of the Corporation's Directors and to its Auditor. TSX Trust Company has provided Proof of Service of such mailing, and I direct that a copy of such proof of service be attached to the minutes of this meeting. According to registrations, the Scrutineer has advised me that there are a total of 88 shareholders present in-person or by proxy, representing a total of 11,323,626 shares that are entitled to vote at this meeting. That's about 43.7% of the outstanding shares. I therefore declare that the quorum is present, and accordingly, the meeting is constituted for the transaction business. Registered shareholders and duly appointed proxyholders attending this meeting may address the meeting when there is a call to discuss a motion before the meeting. Should you like to address the Chair on a motion, please type your question or comment into the message section once it opens during the discussion period. If there is any discussion or question, the question will be read aloud. Today, we will be conducting the following orders of business. Presentation of Covalon Technologies Limited's annual financial statements for the year ended September 30, 2021. The election of Covalon Technologies Limited's Directors. The appointment of Covalon Technologies Limited's Auditor. And the reapproval and confirming effective of Covalon's 2019 amended and restated stock option plan. As previously noted, we will conduct the votes on these matters by a single electronic poll. On a poll, every shareholder entitled to vote on the matter has one vote in respect of each share entitled to be voted on the matter and held by that shareholder. The poll will be open for all resolutions at the same time. This will allow you to choose to vote on each resolution immediately or wait until the conclusion of the discussion on each resolution prior to casting your vote. If you've already submitted your vote by proxy, you should not vote during the meeting unless you wish to change your vote. I now declare the polls open. I now declare that this meeting is regularly called and properly constituted for the transaction of business. The first formal item of business is the presentation of Covalon Technologies Limited's audited consolidated financial statements for the year ended September 30, 2021, together with the auditor's report thereon. As these financial statements in this report were previously provided, I would not propose to review them as part of the formal part of the meeting. After the formal part of the meeting has been completed and the various presentations made, we will be pleased to respond to any questions shareholders may have on these financial statements. We now move to the next point on today's agenda. The next matter to be dealt with is the election of directors. As indicated in the circular, management is nominating 6 directors for election by the shareholders. Management nominates Amir Boloor, Joseph Cordiano, Dr. Samantha Nutt, Brian Pedlar, Abe Schwartz and Ron Smith. Each of the persons nominated has confirmed that he or she is prepared to serve as a director. Each of them qualifies as a director under the provisions of the Business Corporations Act of Ontario. Are there any further nominations?

There are no further nominations.

As there are no further nominations, I declare the nominations closed. I move and second the motion with respect to the resolution that the following persons be and they are hereby elected directors of the Corporation to hold office until the next annual meeting of the shareholders of the Corporation or until their respective successors are duly appointed. Amir Boloor, Joseph Cordiano, Samantha Nutt, Brian Pedlar, Abe Schwartz and Ron Smith. Is there any discussion on the motion?

There is no discussion at this time.

As there is no discussion, the motion is now on the floor. The Business Corporations Act of Ontario requires that the Board of Directors be elected. Proxies have been solicited for each of the 6 proposed qualified persons listed in the management information circular. The form of proxy for voting on the election of directors sets out each proposed nominee separately and allows shareholders to vote for each director individually. As mentioned at the beginning of this meeting, voting today will be conducted by a single electronic poll. You may choose to vote on each resolution immediately or wait until the conclusion of the discussion on each resolution prior to casting your vote. We will now continue with the next item of business. The next matter to be dealt with is the appointment of PricewaterhouseCoopers LLP Chartered Accountants to serve as auditor of the Corporation until the close of the next annual meeting of the shareholders or until its successor is duly appointed and to authorize the directors of the Corporation to fix the remuneration of the auditor. I move and second the motion. Does anyone wish to discuss on the motion?

There is no discussion at this time.

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, a 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.

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. I now declare the polls closed. Based on the preliminary Scrutineers' report, I declare all motions are 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. As there is no 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. Thank you for joining us today. I invite all of you to stay for our business presentation. Please feel free to submit questions using the messaging feature at any point during the presentation. You're able to ask questions regardless of whether you registered for this call as a registered shareholder, a duly appointed proxyholder or as a guest. I would like to remind all participants that we are covered by our forward-looking statements and non-GAAP financial information, and this will be similar to any of our other conference calls. To start off, I just want to make sure and reiterate that we as an organization are really driven by innovation. It's important I think for shareholders to understand the business behind the numbers of Covalon. We solve real clinical problems that cost the healthcare providers significant dollars every year. Taking a look at the picture here, this is a real patient, who a mother sent in a picture and a statement about one of our products, IV Clear. These are the kinds of impacts that we have on patients throughout the United States and the rest of the world as clinicians use our products on patients. Clinicians love our products and so do the patients. So I think that's a very important aspect of Covalon. I do want to review some of our fiscal highlights of 2021, and this presentation will also be available on our website. So I don't propose to go through in significant detail all of the items, but please feel free to look at the presentation as well after the meeting. We ended fiscal 2021 in a very strong position financially. Revenue was up. We had a strong fourth quarter from continuing operations. And we ended with a very strong cash position for the year. And just to remind shareholders, we did transact and divest our AquaGuard business in July 2021. And also, I wanted to remind shareholders that our year-end is September 30. So that was -- during the course of 2021, AquaGuard was shown as a discontinued operation. So when I'm talking about revenue, I'm talking about our performance for 2021 and into our fiscal 2022. I'm almost mostly talking about our continuing operations. I think by almost any metric that you can look at on our financial performance for 2021, we were a massive improvement over fiscal 2020. To better highlight some of the moving parts that we had in 2020 and 2021 due to things like government subsidies, which a lot of companies took a benefit from, we've presented adjusted gross margins and adjusted EBITDA, which are meant to be to add some clarity and supplemental information to our IFRS reporting. So please treat it in that respect. It's not meant to replace it. It's just meant to help, tell -- give another metric within which to monitor the company. Taking a look at our revenue growth from continuing operations, if we sort of -- if we take a look at 2019, we did, obviously, into 2020 had an impact on continuing operations, partly due to COVID, but also due to other business factors. But what I really am excited about is how the company has been able to recover and perform going forward into -- in the last 12 months, it is based upon our quarter ended December 31. So think of it as calendar 2021. Like most companies, we were impacted by COVID. We saw some good recovery of revenue. But I would remind shareholders that growth is not always linear quarter-to-quarter for us, there is an element of lumpiness. But on an annual basis, I'm really pleased with our growth profile and our growth prospects going forward. All the market indicators supporting our revenue streams, unfortunately, infection rates in hospitals and chronic wound rates are on the rise. And to that end, we did actually launched 2 new products in 2021, which we do anticipate seeing contributions in 2022 and beyond into 2023 in revenue. Going a little deeper in revenue, I just wanted to break down -- and this comes from our segmented disclosures in our financials, our revenue by geographic market. And I think you can see that we recovered quite quickly in 2021 in the United States and have seen some continued growth, if you look on the last 12-month basis. In the Middle East, we're beginning to see some recovery and growth. We did transition to a new distribution partner in 2020 that contributed to the fact that we had lower revenue in that year versus prior. But we are seeing that growth come back, and we've got a really strong partner now in the Middle East. The rest of the world hasn't grown to the same extent as our U.S. and Middle East business, but I do see a lot of key indicators of growth opportunities for us in the rest of the world markets. As we take a look at our gross margins, and we have -- again, we've provided some adjusted gross margin in our disclosures, both in our MD&A and in our press releases to help investors make sense of some of the moving parts. During 2020 and 2021, we did take advantage of the opportunity to redirect product into markets where we were seeing growth. And sometimes that meant we had to repackage that product with an appropriate label for that particular market. And as such, that's what we call the rework costs. That added incremental more cost and reduced our margin, but was a lot more cost-effective than remanufacturing new product. So when you sort of do the puts and takes on our -- at our margin level, we see that our margin -- our gross margin was sitting around 52% to 55% and appears to be going in the right direction once we sort of remove some of those one-time items that have caused some charges through our cost of sales that are not otherwise reflective of what we think the business will look like going forward. We have experienced some cost increases in our supply chain, like most companies have. And we've managed those. We've managed to mitigate many of those and look to focus on some of our higher margin products. I think we're confident that we have a lot of our supply chain challenges under control as much as any company can during today's climate. As we look at operating costs, operating costs dipped down and fell in 2021 and have risen a little bit. As we talked about at our quarter end, we did retain some sales and marketing talent as well as some operational expenses that in our fiscal 2021 were related to discontinued ops, discontinued operations, and that's where they were captured. But as we redeployed those people on our continuing operations business, they moved over there. So our costs increased a little bit. We're going to continue to invest in sales and marketing resources, staff and initiatives in order to fuel our future growth where we see those -- that opportunity to grow. And taking a look at our balance sheet, I think this is a very interesting picture for us. There's a major improvement in our balance sheet from 2020 -- from our fiscal 2020 until 2021 and up to today. We repaid all of our debt, we reduced our overall liabilities significantly, and about 67% of our current assets are -- is in cash. And we ended the year and continue to have about CAD 25 million of cash on our balance sheet. And so from that perspective, I'd say we're in a very, very strong financial position when you look at our balance sheet. Healthcare providers are under a lot of pressure and stress, not only because of COVID, and we hear about that in the news every day, but also the unintended consequences and impacts of COVID on the health system, whether that be a rise in infections that are happening in ICUs as they relate to catheters in people's bloodstreams or whether that's surgical site infections as the backlog of surgeries begins to be tackled, and there's a lot of pressure in order to move people through the surgical suites very quickly. Clinicians do not have the resources to manage outcomes of products that cause complications, but pure and simple, and they are looking for better solutions. And it's become extremely apparent. And that comes out in all of our discussions on a daily basis with clinicians and with our distribution partners. There seems to be a fundamental change in how clinicians engage with the products that they use and the companies that supply them. And status quo seems to no longer be good enough. That is a very strong benefit for Covalon. We take a look at one of the areas that we have a very strong product portfolio in, and that's advanced wound care for chronic wounds. A big driver of the chronic wounds are things like diabetes, cancer patients, senior citizens, veterans, all kinds of people end up with a chronic wound. It's incredible the number that exists. And just to think, one in 4 families has a family member with a chronic wound. That's a pretty shocking statistic. From a Covalon perspective, we have an extremely clinically-effective product in helping close chronic wounds. We are very well positioned to take advantage of some growth drivers. We continue to see a lot of opportunity for our collagen dressings in the United States. We launched Collagen Powder in 2021, and we anticipate that contributing to revenue in 2022 and beyond. And we also see our collagen contracts winning back some business in the Middle East. And over the course of the next several years, we do see an opportunity to return to what I would call pre-COVID-19 levels. Now I have to warn you the next couple of slides do contain real life cases of diabetic foot ulcers. So if you're a bit squeamish, please look away now. I'll tell you when you can look back. This is -- I know wound care is not a pretty industry when it comes to really looking at the benefit that our products have on patients, but the benefit is actually tremendous. The top image is a typical diabetic foot ulcer that is on its way to being a serious problem. That was treated with our ColActive Plus product. And after 5 weeks it's healed and that patient didn't have further complications from that wound. The bottom one is a little bit more severe. This is a patient that was actually scheduled for amputation. It was a 64-year-old male who unfortunately was also diabetic and had a wound that got progressively worse. Once treatment was started, it took 6 months and it actually saved this individual's foot from amputation, which is a tremendous impact on this patient's life to be able to continue to have use of their foot. Here's another example of a 54-year-old male who has diabetes, who had diabetic ulcers on the bottom of his feet, top on his toes and as well as the in-stem. They were there for 28 days or more. When he finally went to get treatment at one of the wound care clinics that uses our ColActive Plus product. Fortunately, he did. The wound was getting worse over time. The wound was cleaned, dressed with our ColActive Plus product. And a little over 30 days later, the wound is healed and closed over and it's a great result. This happens every day. It's happening as we speak right now. There's millions of our dressings used on patients every year for this exact purpose. And so our products are really affecting the lives of our patients in a really positive way. Another area where Covalon has I think a growth opportunity is in the area of infection prevention, specifically around bloodstream infections related to catheters and surgical site infections. And infection rates for catheter-related bloodstream infections unfortunately is up about 67% in ICUs compared to pre-COVID times. Each infection of a bloodstream infection costs a minimum of CAD 26,000 to treat. And unfortunately, in the United States, that's paid for by hospitals. So it's uninsured infections. And so there's an extreme need for hospitals to try to reduce infections because it's money out of their pocket to treat that infection if a patient does get one while they're in their facility. Surgical site infections are following the same trend, I believe, as elective procedure backlog is being tackled. I suspect we're going to be seeing a continued rise in surgical site infections. We have some fantastic technologies to try to help clinicians prevent these infections. We have the world's only dual antimicrobial silicone IV dressing. This is really differentiated technology. It's easier to use, it's more effective and it doesn't cause complications like skin damage which can lead to further opportunities for infection. We also have the world's only dual antimicrobial surgical site dressing. And you can see from this patient, this is a neonatal pediatric patient that had open heart surgery, and that open heart surgery is being covered by our SurgiClear product. Key hospitals in real-life situations are able to have adopted our technology, have found that it helps them reduce infections. They've created data and they're beginning to publish it. That's a pretty strong testament and support of our technology. They are trusting our products on their most vulnerable patients. I think we have a really clear advantage with this platform of technology in IV Clear and in SurgiClear in the marketplace, and we're just beginning to tap into those facilities that can really benefit from the use of our products. Another product that we launched this past year in 2021 is the world's only vascular access line-to-line connection barrier. There's lots of products used to try to prevent contamination of line connections on patients, none of them are actually made for that purpose. This is the only one in the market currently that is made to help protect those lines from contamination. And it's being used right now in some key hospitals in the United States, and we're seeing lots of interest in this technology. Why is our antimicrobial silicone so important? Well, if you take a look at this slide, on the top, you'll see when you pull off a silicone adhesive, it's very gentle on the skin. If you look at the left, top left. Compare it to typical adhesives, whether that's from 3M or other companies, they tend to bond to skin and creates skin damage. And so that creates a situation where you create an opportunity for additional infection. The patients on the right, they have enough to deal with. If you just look at those patients. There's enough for clinicians and their parents to deal with without having additional complications from using a medical device that actually causes damage while it's trying to help. And it's not only clinicians that are benefiting from this. We get letters from patients that take the time to write us, to tell us about their experience using our products and how much it made a difference to them in their treatment. So whether it's pediatrics or whether it's an adult population, we see patients benefiting just as much as clinicians. Now at the heart of Covalon is our lab and our ability to innovate. But innovation doesn't start with us necessarily at the lab bench, it begins at the bed side. We are really solving real clinical problems for clinicians. We have great relationships part of our engagement with our clinicians that use our products are engaging with them to get their feedback to understand how our products help and where they can be improved. And from that perspective, we've been able to develop some really strong product portfolio. I just want to give you one example of a customer profile from Texas Children's Hospital. It's the #1 pediatric cardiology and heart surgery hospital in the United States, and it's a massive facility. It's a good -- Texas Children's Hospital is a good example of how clinicians rely on our infection prevention solutions to improve the treatment and outcomes for their patients on an ongoing basis. They started with wanting to reduce surgical site infections in their heart unit. And we engaged with them and they trialed our SurgiClear product. They spent an extensive amount of time trialing the product, generating data, and they -- to the point where they were so pleased with SurgiClear that it became standard practice in their heart unit. So every patient that goes through their pediatric heart surgery unit that has open heart surgery has a SurgiClear dressing placed upon them post-surgical. So it became standard practice. That led to the opportunity as we engage with them to talk about VALGuard, a product that we just launched in 2021. And I believe they evaluated VALGuard and I suspect they will adopt VALGuard throughout their facility as well. That's created another discussion around our IV Clear product. Again, another product to help in the fight against bloodstream infection. So here's a great example of how we work with a key facility and the key clinicians to help solve real clinical problems. And the benefit, not only for the patients, but the benefit for Covalon is the opportunity to open up the door to the Texas Medical Center as an example, which is -- which Texas Children Hospital is part of, which is a massive facility. And so creating credibility with key clinicians, with very vulnerable patients, gives us the opportunity to expand through these healthcare systems in the U.S. And internationally as we succeed in helping them in the fight to protect patients from infection. Another way as an organization we help protect patients is from the inside out, and that's through our medical coating side of the business. There's an incredible number of organizations we've worked with that are aware of us and look at Covalon as a real credible player in the infection prevention business. Having engaged with big medical companies, having them trust their well-known brands, market-leading brands of catheters and other devices that go into patients to be coated with our antimicrobial medical device coating technology is a real credibility statement for us. And clinicians know these products, use these products. And as these products that come out of our medical coating relationships, when they hit the market, again, that will begin to reinforce the credibility that we have as a real strong player in helping solve infection-related issues at the clinical level. There's some great growth drivers for 2022 and beyond. I've talked about this several times. We have a very large project that we are within 24 months of those products hitting the market and the royalty streams beginning for Covalon. So our growth I see coming from not only development, the start of our royalty streams, but also manufacturing coating services where there is opportunity for organizations to have us effectively take their existing product, put our coating on it under a manufacturing services agreement and send it back to them. We have very strong intellectual property and we have very deep relationships in this area. And we are working today on products that will begin to hit the market over the next 24 months up to 7 years from now. None of our success whether it's our success in 2021 or beyond would be possible without the team at Covalon. We have a good, strong leadership team, but even more importantly, the entire Covalon team. They've worked very hard. They've been very dedicated through all the challenges that we have faced and all the victories that we've had and the victories that we see on the horizon. I'd like to put a very heartfelt thank you out to our team. We've -- I think we've built a solid foundation for future growth. There's still a lot for us to do, and the team is working very hard. That hard work will continue. In closing, I'd just like to say, I think we're positioned very well. We have very strong IP, really clinically-relevant products that clinicians and patients love. We're recognized by key hospitals as a good partner to work with to help solve their infection issues. We're recognized by big medical companies who want to differentiate their product portfolios. I think we're financially very solid today. We've got significant cash reserves, and we've got massive upside. The markets that we're in and the opportunities for our products are big, whether that's in the United States or internationally. With that, I'd now like to open the floor to questions. Just to remind everybody that anyone who would like to ask a question, please use the instant messaging feature of the Lumi platform to do so. I'll answer as many questions as time permits. If you're a registered guest, please include your name and entity you represent, if any, along with your questions. We'll now pause for a brief moment to allow the questions to start coming in.

Our first question is from [ Jason Siminski ] who asks, can you provide some color on the CAD 700,000 of inventory write-downs in the latest quarter? Which product line was impacted.

[ Jason ], thanks for the question. It was some different -- a couple of different products. There was some raw materials and finished product around our CovaGuard hand sanitizers as well as a few provisions that were made for product where the dating on the product moved beyond the date where we can sell that particular inventory in some of our markets. Just to give you some examples, in some markets and some tenders in particular that we're in, the products need a minimum of 80% of their shelf life. And so -- and many of those markets also require special packaging. And so it becomes difficult to repurpose and resell some of that inventory. And that's -- those are the drivers. I do consider it more of a one-time charge. I don't foresee us having provisions of that size going forward. But again, we're very aware of the need to manage our working capital.

Next question comes from [ Jake McRobbie ], who asks, how many hospitals currently purchase Covalon antimicrobial dressings?

[ Jake ], there's -- they fall in just sort of 2 categories. I'd say there's hospitals that are purchasing on a very, very regular basis. And then there were facilities that buy on an infrequent basis. So we probably have in total about 200 facilities that are buying our products. It's probably the 80-20 rule applies, where we have 10% to 20% of those that are buying on a regular basis that have adopted our products as part of their protocols. And others that are using them where perhaps they haven't done a full conversion over to us versus the competition, and that's in the United States. Internationally, there's hundreds more facilities as well that use our products. And then, of course, on our wound care side, in the wound care business, there's lots of different clinics. And much of that business on the wound care side is delivered through home healthcare. And so there's literally hundreds of thousands of patients benefiting from the use of our products every year.

Our next question comes from a private investor, who asks, what are you going to do with the CAD 25 million in cash?

It's a good question. We don't have plans to go and spend the money. We will use some capital to fuel growth going forward. And obviously, we'll opportunistically look at ways to deploy that capital to create further shareholder value. And there's many mechanisms under which we could do that, opportunistic acquisitions. There's been discussion in the past. I've had questions about whether we are going to do a share buyback. But at this point, I think we have a very strong balance sheet. We have significant cash reserves. I think it's somewhere around CAD 0.95 or CAD 0.96 per share in cash, and that's a pretty strong cash position to be in. So I think to the extent we do invest any capital, it will be to fuel further growth of our business.

Our next question comes from [ Jason Siminski ], who asks, can you elaborate on your decision to in-source collagen manufacturing? How much capital was spent?

[ Jason ], good question. So the business rationale behind that was -- and I think we talked about this in our Q1 MD&A. In 2020, we had like a lot of companies that had some supply chain issues. We had a contract manufacturer that was making collagen and there were significant challenges, one of them obviously was COVID. Every time there was a COVID outbreak, facilities would have to pause, be clean and shut down, staff go home. And so that affected some of our production. That combined with the fact that we began to see significant growth, particularly in the United States as well as internationally, we decided to have a second source of manufacturing and that we would do that in-house. And so we do that here in Mississauga in our, what we affectionately call, our East Gate facility. And there was not a large amount of capital spent to get the facility up and running. We really were very prudent with our investment in equipment, much of which we had already on hand. And so we were able to get that off the ground with minimal investment. And it's been a very positive step for us and it gives us the ability to react very quickly to opportunities that involve growth around our collagen business. So I think it was a very solid move for us. And I do see the opportunity for us to expand that should it make financial sense going forward.

Our next question is actually a comment from Dr. Ian Brindle, who says, great to see the ease of removal of dressings without pulling, tearing and [ microtomous ].

Thanks, Dr. Brindle. Certainly, one of the key areas and key differentiators for our IV dressings and our surgical dressings is the fact that they are very gentle on the skin. They do not cause additional damage. It doesn't sound like a lot when you think about what does an adhesive do to skin. But imagine if you were one of those patients that I showed and you get a dressing change every day or a couple of times a week for 9 months, they can create some significant issues to the point where sometimes it requires the clinicians to remove the line or the patient is unable to go in for further therapy or transplant because of the risk of infection. And so there's a lot of value in having products that don't cause additional damage while they're there to help a patient get better.

Our next question comes from [ Jake McRobbie ], who asks, it is my understanding that Medicare publishes a list of the poorest performing hospitals for healthcare-acquired infections. Does Covalon sales team use this list to prospect sales leads for IV Clear, SurgiClear, VALGuard, et cetera?

[ Jake ], yes, you are correct. They do publish poor-performing hospitals. In fact, what they also do is they penalize them if they have high infection rates so they don't get the Medicare reimbursement and it gets capitated at a certain level. So there's massive and not only the shame of being at the bottom of the list, but also there's economic penalties if you have high infection rates. We absolutely use these lists. Oftentimes though, these are not the big leading facilities. So we do use these lists. We do engage with those facilities. We also have a lot of big facilities like Texas Children's, like Seattle Children's Hospital, like Boston Children's, the Children's Hospital in Philadelphia and many others that have engaged with us because they understand that we have unique products that can help them in their infection prevention bundles to reduce instances of infection that our products are better often on patients and easier for clinicians to do their job in monitoring and managing those patients when they use our products. And so we actually get a lot of benefit from those who have really strong infection prevention protocols because they want the best and the most effective products for their patients. We also go after those who are struggling.

Our next question comes from a private investor, who asks, are you looking to do any acquisitions to accelerate your growth?

A good question. No, we have the capital. We get -- right now, as an organization, we have enough products. We have more -- so we don't need to go out and look for products to fill our sales bag. If there was an acquisition that we would look at, it would be to accelerate our growth and market access in the United States. But right now, I see with our product set, with the strides we are making, with facilities in the U.S., the heads we are turning, being able to go into huge teaching facilities that are leading-edge infection prevention organizations and help them get better outcomes for their patients with our products, that's also creating a lot of opportunity for us. But there's no question that inorganic growth through acquisition is an area where we always as an organization have our ears open for any opportunities that could accelerate shareholder growth.

Similar or opposite end of the spectrum for the next question, which is, is there any further interest in someone buying Covalon from the strategic process that you've had?

Great question. We -- as most people know, we did transact and divest our AquaGuard product for 3x what we paid for it back in 2018, very positive economic opportunity for us. During that strategic process, there's a lot of interest in Covalon and there continues to be a lot of interest in our technology platforms. I showed you the slides that where I said we have the world's only -- we have 3 world's only products. Those are creating a lot of attention as is our collagen, which is clinically very strong in helping patients' chronic wounds heal. And so there is a lot of interest there. We continue to engage. I continue to have discussions on an ongoing basis with organizations that are interested in our -- in Covalon and in our technology. So should those proceed to a point where there's an opportunity, we'll absolutely keep shareholders informed of any new developments on that front, but I really appreciate that question.

Our next question comes from [ Jason Siminski ], who asks, what is the outlook for the Middle East business? What will it take to return to 2019 revenue levels of CAD 8 million to CAD 9 million.

I think we talked -- Jason, it's a great question. We haven't put out guidance exactly on where we will end up. But I think I have made the statement that we've secured additional contracts for 2022 and 2023 around -- in the Middle East around the products that we've been battling in the market there for market share. And so I do see growth that will take us over time back up to the levels that were there pre-COVID. It's not going to happen right away, but I do see some pretty strong growth coming at us in the future. So I think there's an opportunity for us to continue to grow certainly from where we are today.

Our next question comes from [ Jake McRobbie ], who asks, given the advantages for sensitive skin, is it fair to say that adoption of silicone adhesives has been primarily with adolescents patients to date? Is adoption with adult patients expected to be more limited?

[ Jake ], great question. Let me answer that in 2 ways. We've got lots of traction in the pediatric market for a couple of reasons. One is because those are very, very vulnerable patients and they need a product that will help in infection prevention. Also for the fact that the existing products are not conducive to newborn skin, which is tends to be fragile. But there's an interesting dynamic when you look at vascular access in surgical, most of the adhesives used there are still acrylic adhesives. If you were to look at wound care, I'd say, 90% of the wound care market has moved away from acrylic adhesives and uses silicone adhesives. That change has not happened in the areas of vascular access and surgical dressings, partly because of the players that dominate that space, their technology is acrylic adhesive-based and not silicone adhesive-based. So we see the opportunity to be on the leading edge of that conversion as it happens. But to date, we've gone and focused on the areas where we can be significant, where we can have significant market share and we can make the biggest difference, and that happens to be right now in the pediatric facilities. We have -- we're in an incredible number of the top 20 pediatric facilities in the United States right now. And so there's lots of opportunity. And I think you saw some of those pictures of the adults that have benefited from our products. It's not -- it's very applicable to an adult population. It just happens that a lot of the facilities on the leading edge of trying to find solutions have been the pediatric facilities.

Our next question comes from [ Jason Siminski ], who asks, what are the milestones still to be hit on the large device coating contracts before it comes to market? And what could derail the launch?

Great question. So the milestones for -- and we previously announced that there's license fees in the amount of $5 million that gets paid on a combination of or split over 2 milestones. One is the successful granting of FDA acceptance for the first product into the market. And the next is the first commercial sale. And so the FDA is always a risk factor in getting any medical product to market. But we've been working at this project with our large medical device partner since before our announcement in 2018. And so there's been lots of work involved, and I'm pretty confident in our ability to get over the goal line. So I'm really excited about the next 24 months.

There are no further questions at this time.

Thank you very much ladies and gentlemen for joining us today. I really appreciate all of your questions. It's a pleasure to talk to you about Covalon. As you know, I could talk for hours about the business. Thank you for being shareholders. And thank you to the Covalon team for the significant amount of work that's gone into getting us this far. We know there's a lot more work to do and we're really eager and excited about what's in front of us. Thank you, and I look forward to updating you on the next call.