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

Welcome to the Annual General Meeting of Shareholders of Covalon Technologies Ltd. Please note that the meeting is being recorded. I would like to introduce Mr. Brian Pedlar, President, Chief Executive Officer and Director. Mr. Pedlar, the floor is yours.

Thanks, Seth. Good afternoon, ladies and gentlemen, and welcome to the Annual and Special Meeting of Shareholders of Covalon Technologies Ltd. My name is Brian Pedlar. I'm the President and Chief Executive Officer of Covalon Technologies Ltd. and a member of the Board of Directors. I'm speaking to you from Covalon's offices in Mississauga, Ontario. Also in attendance are Jason Gorel, Covalon's Interim Chief Financial Officer; and Saleha Assadzada, 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 Questions feature of the TSX Trust meeting platform. Please note that there will be a slight delay in the publication of the communications received. [Operator Instructions] 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 procedure and how to ask questions will appear on your screens. The Annual and Special Meeting of Shareholders of Covalon Technologies Ltd. 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 Jennifer Che of Stikeman Elliott LLP will act as Secretary of the meeting. Saleha Assadzada will act as moderator to help with the virtual communication. To expedite the formal part of the meeting, I will move each item. And I have been advised by Dr. Val DiTizio, a shareholder in attendance today, that he will be prepared to second each of the motions. Accordingly, I will take such motions as seconded. I would ask Amy Kam of TSX Trust Company to act as scrutineer for this 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 1, 2023. 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 the 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 on February 13, 2023, to shareholders of record as at January 18, 2023, in accordance with 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 87 shareholders present in person or by proxy, representing a total of 12,696,987 shares that are entitled to vote at this meeting. That's approximately 51% of all outstanding shares. I therefore declare that a quorum is present and accordingly, the meeting is constituted for the transaction of 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. [Operator Instructions] If there's any discussion or question, the question will be read aloud. Today, we will be conducting the following orders of business: the presentation of Covalon Technologies Ltd. annual financial statements for the year ended September 30, 2022, the election of Covalon Technologies Ltd.'s directors, the appointment of Covalon Technologies Ltd.'s auditor and the approval of Covalon's 2023 omnibus long-term incentive 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 have 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 Ltd.'s audited consolidated financial statements for the year ended September 30, 2022, together with the auditor's report thereon. As these financial statements and 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 the directors. As indicated in the circular, management is nominating 7 directors for election by the shareholders. Management nominates Amir Boloor, Joseph Cordiano, Martin Goldfarb, 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 take as seconded the motion with respect to the resolution that the following persons may 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, Martin Goldfarb, 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 7 proposed qualified persons listed in the management information circular. The form of proxy for voting on the election of directors sets out each proposed nominees 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 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 take as seconded the motion. Does anyone wish to discuss 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 approve and confirm effective the corporation's Omnibus Long-Term Incentive Plan, a copy of which was attached to the corporation's management information circular dated February 1, 2023, as Exhibit 1. 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 take as seconded this motion. Does anyone wish to discuss the motion?

There are no discussions 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. [Voting]

I now declare the polls closed. Based on the preliminary scrutineer's report, I declare all motions are carried. I direct that the results of this 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 more formal business to which we must attend, I would request a motion to terminate the formal portion of the meeting. I move and take as seconded 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 you all to stay for our business presentation. [Operator Instructions] You are able to ask questions regardless of whether you registered for this call as a registered shareholder, a duly appointed proxyholder or a guest. I want to remind you that this presentation is covered by our safe harbor statement. I encourage you to read our annual financial statements, our MD&A and our other public filings. Covalon isn't just another medical device company. We have a talented team that is focused on our mission and committed to our strategic growth plan and the relentless pursuit to help the most vulnerable patients have a better chance at healing. Covalon has an incredible portfolio of assets, more than almost any company our size. And it includes our infection prevention products and technologies that help prevent patients from getting an infection while in a hospital, our amazing advanced wound care portfolio of products that help close complex wounds and our deep portfolio of patents and know-how that allow us to innovate new products for our own sales efforts and in support of some of the largest medical companies in the world that turn to us for new product development help. Because of our investment in science and our lab, we are able to offer innovative, gentler and more compassionate options for patients to heal with less infections, less pain and better outcomes. Because our product solutions are designed for patients, they are very effective, and as a result, clinicians just love them. We currently trade on the TSX Venture Exchange in Canada and on the OTCQX market in the United States. As we have previously announced, we have decided to use our strong cash position to further strengthen the company by buying back up to 5% of Covalon's shares for cancellation. To date, we have purchased approximately 1,024,000 shares for cancellation, which strengthens the value of each existing shareholders' shares. We now have approximately 24.9 million shares outstanding. And when you look at a fully diluted basis, our market value is approximately $62 million. When COVID struck in early 2020, many companies were negatively affected and had to fundamentally change their business models to survive. Fewer have been able to thrive, and many have not survived. Covalon has done well over this time. We embarked on a path to make transformative changes to Covalon in response to the changes we faced in the medical products industry. In 2021, we sold AquaGuard and transformed our balance sheet. We were excited to start 2022 following the divestiture of our AquaGuard product line with a clean balance sheet, no debt and significant cash reserves. Fiscal 2022 was a year of strengthening and transforming our company. At the start of 2022, we set a very achievable goal of putting in place the foundation required to transform Covalon and unlock value. We invested in building our sales and marketing capability to take on the challenges of winning the hearts and minds of doctors and nurses at a very different medical marketplace that existed pre-COVID. We invested in systems and infrastructure that will make our operations more efficient, our products more profitable and allow us to compete more effectively in all our markets. Covalon is in a much stronger position today than we were a year ago. We have strong cash reserves, strong working capital and no debt. We are a much more valuable company today than we were 12 months ago. We have made significant changes to Covalon in our ability to grow our top line, to improve our margins and streamline our operating expenses. Just looking at historic numbers makes it difficult to understand the substantive changes we have made. I mentioned this on the last quarterly call, and I think it bears repeating. I think the number of investors are focused on the past and haven't been able to realize just how much we have transformed over the past year to where we are today. We truly are a much more valuable company today than we were a year ago. There are some investors that have taken the time to understand what has changed with Covalon and are focused on the future. None of us can be 100% certain of the future, but there is one thing I am absolutely convinced about, as are the rest of the Covalon team. A year from now, we will be a significantly more valuable company than we are today. If you look at our trend in quarterly revenue and in our gross margin improvements, I think you will find that some of the changes we have made are beginning to show up in our financial results. Over the last 4 quarters, our revenue growth was stronger, and we expect growth to continue in 2023. We expanded our digital marketing efforts over the course of last year and this year, which have helped us to grow our brand presence both in the United States and internationally with physicians and clinicians that are focusing on reducing infections and improving patient outcomes in hospitals and community care settings. Over the course of the next year, our team is laser-focused on building brand awareness of Covalon in major hospitals that can benefit from our unique life-saving medical technologies. We invested heavily in 2022 in strengthening our sales teams with staff and capabilities to engage our customers whether digitally, virtually or in person. Today, we engage with our customers and sales leads in a much more efficient and cost-effective way than we did before, which will allow us to grow more rapidly with less investment. We set very achievable goals to expand our United States hospital customers to 400 major hospitals, capture a dominant market position of major pediatric facilities and continue to grow our distribution revenue in the United States and internationally. Our medical coatings services business continues to show strong opportunities to grow over the next several years as we add new customers looking for strong strategic partnerships to modernize their product portfolios. We set a new vision and mission for the company. With our strong product and technology portfolio, Covalon is focused on becoming the leading provider of compassionate care solutions that help patients heal faster and live better. And our mission is to provide innovative and cost-effective health care solutions that reduce pain, prevent infection and promote healing. Because of our incredible products and patented technology, Covalon is in a unique position to improve patient outcomes in ways that no other company in the market can do today. There's no question that health care systems are in crisis, and doctors and nurses are not accepting yesterday's solutions to serious clinical challenges. Why is this important? Well, uninsured hospital-acquired infection rates have increased as much as 63% in intensive care units since the onset of COVID in 2020. That's a crisis. It's a further crisis because the current standard of care products that are used to combat vascular access and surgical site infections in hospitals in the United States have been largely ineffective in helping to prevent these infections. To give you some idea and to put some of this problem in context, about 70% of hospital-acquired infections that occur every year are actually preventable. And that's preventable with the use of products like ours. There's a significant financial incentive for hospitals to find a way to reduce infections. These infections are not covered by insurance in the United States, and as a result, they cost hospitals about $28 billion a year and, unfortunately, results in about 70,000 preventable deaths every year. Because of the significant cost, the increased time required to treat infected patients and the complications that occur from products caregivers are using now, clinicians and patients are just demanding better, safer products, really a better standard of care. We are becoming that new standard of care in the markets and in the medical verticals that we compete in. But we needed to make some changes to Covalon to allow us to succeed in our mission. Throughout 2022, we established our key products in more than 70 major United States hospitals, including a dominant position in 6 of the top 10 children's hospitals in the United States. This is an impressive list of customers for any medical products company. We are off to a good start and are focused on growing our business within our existing hospitals and adding new hospital customers every quarter. We -- one of the changes that we did make is we invested in our direct sales team in 2022 that sells into hospitals. And we also strengthened our distribution channels. Whether we're talking about our ability to drive awareness of our brand to clinicians in ICUs and operating rooms within U.S. hospitals or our significant presence in pediatric facilities or our strong distribution into the United States home health care market or our international presence and brand position in over 20 countries, Covalon is stronger and better positioned today to succeed. We continue to focus our growth efforts on markets where we feel we can capture significant and meaningful market share for our products. Our patented, FDA-cleared products focus on 2 key areas: infection prevention and advanced wound healing. We believe our compassionate care products are better at protecting patients from getting BSIs, or blood stream infections; and surgical site infections, or SSIs, whether those patients are in a hospital intensive care unit or recovering at home. We help prevent medical device-related infections with our medical coatings that we put on big medical device companies' products that help keep patients safe when those products are used on them in an ICU and other clinical settings. Our advanced wound care products help patients heal who have serious wounds and have become a well-recognized brand with care providers in the United States and internationally. We just have better vascular access infection prevention solutions, period. Many of the major hospitals that are our customers today, whether in the United States or internationally, have adopted VALGuard or IV Clear as a standard of care for protecting patients. And we see the opportunity to cross-sell all of our vascular access products into our current and new customer base. We also have better surgical site infection prevention solutions. Our SurgiClear product has proven its ability to help prevent surgical site infections and help patients heal. Several major United States pediatric hospitals, including Texas Children's Hospital, have generated their own clinical data that clearly demonstrates that SurgiClear prevents infections and has better patient outcomes than their old standard of care products. We see the opportunity to expand the use of SurgiClear in current and new customers as we drive stronger brand awareness with key doctors and nurses in our target markets. As I mentioned, we also protect patients from the inside as well. We are working with several leading medical device companies to help them launch new products that help prevent infection. We see the opportunity to grow our development services by focusing on medical coating development service customers that we can develop into deep and meaningful partnerships as we help them bring advanced infection prevention products to the market. Our collagen products, which are probably our most mature technology, have been helping accelerate the closing of patient wounds for almost 20 years. We see the opportunity to grow our home health care and international markets as chronic wounds continue to be an epidemic around the world, where 1 in 4 families are dealing with a family member that suffers from a chronic wound. At the heart of Covalon is the research and development we have undertaken in our labs to develop our patented products and technologies. We are recognized and sought after by global health care companies because of our expertise in how we use science to make patients' and caregivers' lives better. We are confident that the changes we have made to Covalon will allow us to consistently achieve our objectives. We have closed the gap to become profitable and are continuing to balance our growth prospects and operating costs so we can generate greater value for Covalon. The Covalon team has worked hard. They've embraced change and are driving us forward in the right direction. We are very excited about the progress we are making, and I would like to thank the entire team for their dedication and efforts over the past year. I am also very thrilled to welcome Marty Goldfarb to our Board of Directors. Marty has an incredible experience and wealth of knowledge, and I am looking forward to working with Marty and the rest of the Board as we achieve our growth and value creation goals. The momentum we have and the certainty of purpose we have in our products and our mission will allow our company to succeed. Our recently reported quarterly results demonstrates that we are moving in the right direction with respect to investments made last year in several key business areas, including sales and marketing, operations and information technology infrastructure. We are excited about our progress in transforming Covalon into a patient-driven medical device company that's built on the relentless pursuit to help the most vulnerable patients have a better chance at healing. Now as the formal business of the meeting has now been completed, I would like to open the floor for questions. [Operator Instructions] Okay. As there don't appear to be any questions, 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 continued commitment and continued support. I look forward to speaking with as many of you as possible over the coming months as we report on our progress, and we look forward to your attendance again next year.

Thank you for attending today's meeting. You may now disconnect.