Covalon Technologies Ltd

XTSX:COV

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to Covalon's Fiscal 2020 Q1 Financial Results Conference Call. As a reminder, today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Brian Pedlar, President and Chief Executive Officer; and Danny Brannagan, Chief Financial Officer. Please go ahead, Mr. Pedlar and Mr. Brannagan.

[Danny Brannagan, Chief Financial Officer]

Thank you, Denise. My name is Danny Brannagan. And as Covalon's Chief Financial Officer, I would like to thank everyone for taking the time this morning to attend our conference call. We will be discussing the financial statements, MD&A and press release related to Covalon's fiscal 2020 first quarter ended December 31, 2019. There will be an opportunity for you to ask questions at the end of our call. Before we begin the discussion, I would like to remind participants that this call is covered by Covalon's safe harbor statement. Certain statements included on this conference call may be considered forward-looking. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements to be materially different from those implied by our statements. And therefore, these statements should not be taken as guarantees of future performance or results. All forward-looking statements are based on management's current beliefs, assumptions and information currently available to us and related to anticipated financial performance, business prospects, partnership opportunities, strategies, regulatory developments, market acceptance and future commitments, among other things. Participants on this conference call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this conference call. Due to risks and uncertainties, including those identified by Covalon in its public securities filings, actual events may differ materially from current expectations. Covalon disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For the first quarter ended December 31, 2019, Covalon's total revenue was $7.9 million, with a net loss of approximately $1.2 million or $0.05 per share. This compares to the prior year's first quarter, which saw a total revenue of approximately $7.3 million and a net loss of approximately $2 million or $0.09 per share. Operating expenses decreased for the first quarter to $5.8 million compared to $6.2 million for the same period of the prior year. The overall gross margin for the first quarter was 61% compared to 63% in the prior year. The revenue breakdown in this quarter was 81% United States, 12% Middle East and 7% other. I would now like to turn the call over to Covalon's CEO, Brian Pedlar.

[Brian E. Pedlar, President, CEO & Director]

Thanks, Danny, for the review of our Q1 results. Good morning, fellow investors, and thank you for joining Danny and I on this call. To start off with -- I am pleased with our first quarter performance, and we are on track in executing on our plan for 2020. The entire Covalon team is working diligently to increase our sales, to drive additional operational efficiencies into the company and to work on our technological and product advances in response to changes that occurred to our Middle East business in 2019. I think we are adapting as quickly as possible, and I think we're making really good progress. Our lifesaving products continue to be well received by medical practitioners and patients alike, and this is very important for the success of Covalon. At the fundamental level, the patients and clinicians love our products. At the same time, we're continuing to advance our technology and our product portfolio, and we have an exciting product pipeline under development. Now I do plan to make shareholders more aware of these achievements during 2020 as they unfold. As Danny talked about, these revenues -- this quarter's revenue was heavily influenced by our success in the United States, which accounted for about 81% of revenue in the first quarter. This is up a little bit from last year, which I think was about 76% in the same quarter last year. Now more importantly, our revenue in the U.S. was up about 17% compared to last year. And this represents growth in both of our sales directly into hospitals through our U.S. sales force and the sales of our ColActive Plus collagen product in our advanced wound care distribution channel. We are continuing to build the awareness of our infection prevention products, like IV Clear and others, in our new 1,900 U.S. hospital and medical center customer base. This is an important change for Covalon that occurred last year. And going forward, I think it's going to have a big influence on Covalon's opportunities in the future. Now turning to the Middle East. Our business contributed about $900,000 to revenue, and this was down from the first quarter last year by about $700,000. It is still very difficult for us to predict the volume and the timing of business in Saudi Arabia, and it doesn't take much to pick up the paper and continuously read about the regional uncertainty that is happening in that market. As a result, we are continuing to plan as if all shipments in business to Saudi Arabia are upsides and not part of our base operating plan, and we talked about this on the last couple of calls. We are taking steps to strengthen our business in the region, and I look forward to providing further updates as they occur on our successes in strengthening our Saudi Arabian business. I want to turn now to an area where I think many companies have already talked about, and everyone is very much aware, about the negative impacts of coronavirus or COVID-19 on the supply chains of companies, on their workforces and on their customers. And I've got to say right upfront that I think Covalon is less affected than many of our competitors in our industry. Fortunately, for us, the majority of what I will call our infection prevention products, which account for a large portion of our revenue, which includes IV Clear, AquaGuard and as well our ColActive Plus family of products, SurgiClear, et cetera, are manufactured in the United States. And because of this, we do not really anticipate impact on the supply chain of those products because of COVID-19. Now there are some products that we do offer that are affected, and that's under our CovaWound line of advanced wound care products. They are manufactured in China, and we have experienced some delays in shipments. But largely, we've been able to satisfy most business from inventory, not all, but most. To give you some example of the relative business that we generate from our CovaWound line, that accounted for about 8% of our revenue in fiscal 2019.So our manufacturer in China has started up production again. And we are evaluating how long it will be before they can return to normal business to process all of their manufacturing orders and get back to business as usual. And we will continue to assess the impact that a potentially prolonged pandemic of COVID-19 may have on us. But right now, I think we're in a relatively good position. COVID-19 also actually provides Covalon with an opportunity to help protect health care workers and the public from contracting COVID-19 and other viral and bacterial infections. We know that our technology in the past has been shown to be very highly effective at killing and deactivating bacteria and viruses similar to COVID-19. And we are actively working on a technology that we believe may help reduce the spread of COVID-19 and other viruses. And again, I look forward to discussing this technology with fellow shareholders in the next several weeks. I believe investors in Covalon have a truly unique opportunity to realize significant upside on what myself and many other long-term investors at Covalon believe is an undervalued health care asset, and that is Covalon. Our setback that we experienced in the Middle East last year contributed massively to depressing the price of our stock from as high as $9 to under $2. The uncertainty of the impact of COVID-19 on the stock market and the global economy has certainly not helped our share price to recover to where it should be today. And the ongoing political issues and regional uncertainty in the Middle East has -- continues to contribute to our current share price. As I've said in the past, and I'll say again, I am very, very confident that the fundamental improvements that we have made to Covalon over the past year will, over time, demonstrate the significant unrealized value for Covalon shareholders that I believe currently exists in our company. In the last call, I went through in a lot of detail talking about some things that I believe are underpinnings of that. But I could tell you that we are just at the beginning of our growth as a result of those key changes, so much so that I think fiscal 2020 and 2021, I expect us to generate meaningful growth in our key markets. So I'd like to now open the line for questions. I ask that you keep to one question at a time, and there will be lots of time to get back into the queue to ask more. And so I'll turn it back over to you, Denise.

[Operator]

[Operator Instructions] Your first question comes from Tony Kamin with Eastwood Partners.

[Unknown]

If -- I wanted to ask a question in terms of -- if your primary market in terms of revenue now is the U.S., where do you think you are in terms of the stage of the awareness of your product and product line? And where your penetration is now versus where you think it should be? And what you're doing to kind of get further market share?

[Brian E. Pedlar, President, CEO & Director]

Tony, thanks for the question. So let me answer that in a couple of ways. Let me talk first about the products that we sell in the U.S. So we're driven by 2 main product areas, one is our AquaGuard product and the second is our ColActive Plus collagen wound dressing. And we've got a number of products that we are just at the very early stages of introducing into our sales team. So as far as AquaGuard is concerned, we've got a customer base of about 1,900 facilities, hospitals, clinics, long-term care centers, GPOs, IDNs in the United States that are current customers of ours. And I think we're very well penetrated from that perspective in the market for AquaGuard. However, we find that there's still lots of growth within that -- those hospital customers of ours. So we're certainly not completely converted, where every single patient shower in those facilities is using our product. So there's lots of upside potential there, and there's lots of other facilities for us to go and penetrate. For our collagen dressing, I think we have a pretty good business. That's been growing steadily over time. And I can -- I foresee it continuing to do that. We have a good, strong distribution channel. And that's just been very positive for us and I think will continue to grow. Where I see the big upside is around introducing additional products through our sales channel, and we're just at the very beginning of that. And that's IV Clear, SurgiClear and a number of other products in our pipeline. The upside on that is massive. So I see a lot of opportunity for us to grow, and that's one of the reasons that we went out and made the acquisition last year of the AquaGuard team and now have the U.S. sales force. So thanks, Tony, for the question.

[Operator]

[Operator Instructions] Your next question comes from Tony Kamin with Eastwood Partners.

[Unknown]

So Brian, the next question, in terms of the -- with your whole focus on infection -- infectious protection, and in regard to sort of, obviously, the whole focus on coronavirus now, it would just seem logically that there's a whole bunch of ways you can kind of extend your -- again, going back to my first question, extend your awareness around that and actually provide meaningful products that would be protective. But not specifically because I know you said you were going to speak about what the product is for the next few weeks. But when you think about how you can kind of take what you do, which is all of a sudden now so central to everyone's focus, how do you think about what Covalon can do to kind of capture more market share and awareness on that broader front of protection?

[Brian E. Pedlar, President, CEO & Director]

Tony, a good question. We -- I look at the technology and the skill sets in Covalon, I mean we've spent the last 20-plus years figuring out how to kill bacteria and viruses and protect patients that are in clinical settings within hospitals and even at home, and also to help heal tissue. And so that -- you're absolutely right. We've been working very hard around the clock on -- looking at ways that we can adapt our technology to address protecting patients from coronavirus. As you alluded to, and as I talked about it, I do -- we do plan to make some announcements around that in the next several weeks. But there is no question, our expertise is being sought out by major medical companies that are looking -- as they recognize that the world has turned to figure out how to protect themselves, patients, clinicians from infection. COVID-19 happens to be a respiratory-transmitted illness. There's lots of other -- we're all aware of antimicrobial-resistant bacteria that are becoming epidemics in hospitals, that not only patients, the numbers are staggering as far as people being infected and being exposed to this bacteria within hospitals, but also for clinicians working in those settings, is a real problem. And when we look at our technology, we've got technology that helps protect patients when catheters and other devices are inserted into their bodies. We have technology that protects patients' skin and when things are inserted through patients' skin, either a surgical scalpel or an IV catheter. We have dressings that will protect and solutions that will protect from infection entering the body that way. And with -- I think with the announcement that we intend to make in a few weeks, hopefully, we'll have another technology that can help protect people against viruses like COVID-19. So I see -- unfortunately, I see this as a big opportunity for Covalon. We have an incredible portfolio of technology targeted at protecting people from the very things that we find in the news every day today. So I see this as a big opportunity.

[Operator]

Your next question comes from [ Sal Vitaros ] with -- an investor.

[Unknown Attendee]

Just a quick question, further discussion on revenue growth. We continue to hear about the revenue growth going forward and revenue potential that we do have and the significant growth that we see in '20 and '21. I guess I have a basic question that says, can Covalon achieve the revenue growth in 2020 that would at least meet 2019's revenue of $34 million or exceed that? So do we have the potential to do that?

[Brian E. Pedlar, President, CEO & Director]

Yes, [ Sal ]. So the short answer is, absolutely, we do. But we are not in a position right now where we're going to provide guidance on what that might be. But there's no question, we've got an incredible amount of tailwind, so to speak, to use an overused analogy. We talked -- I talked about 17% growth in the United States, last year's first quarter to this year's first quarter, and that's a positive accomplishment. We were down in Middle East. Our business is lumpy. So quarter-to-quarter, really hard to gauge exactly what the growth prospects are. But when you look at our business, absolutely, we've got an incredible amount. I think we're just beginning in the United States in our -- with our direct sales team. They're a fantastic group, very talented, an incredible sales process, and I see a lot of upside opportunity. I have to caution you, it's -- selling into hospitals takes a long time. It's not an overnight process. But once in, it's hard to get displaced. I see lots of opportunity within Latin America. The growth percentage is phenomenal this quarter versus last year at the same time, but the dollar amount is still very low. But it's showing some growth there that we anticipated. And I think -- Latin America, I think we'll do very well this year. Other markets continue -- we continue to focus on, and I think we'll grow in those as well. So yes, I believe we have a really strong opportunity to grow the top line, and also prudently manage the bottom line for the business. So we live within our means. Thanks very much, Sal, for the question.

[Operator]

Your next question comes from [ Paul Lucat ] with -- a private investor.

[Unknown Attendee]

Brian, I saw a couple of months ago that Covalon Europe had produced a white paper in association with the Welsh Wound Innovation Centre for CovaWound Alginate, and it's encouraging to see that you're working with prospective customers to develop the -- through these studies. I was just wondering if you could comment more on how many of these white papers -- do you have case studies to support your whole CovaWound product line now? How many of those relationships do you have? And are they helping generate sales?

[Brian E. Pedlar, President, CEO & Director]

Yes. Great question, [ Paul ]. And I know you always do a lot of due diligence in looking through every everything that we post on social media. So I appreciate you asking about it. We do have a broad portfolio of products, and we try to build as much clinical evidence as we can across the broad portfolios. We have an awful lot around the products that have been in the market for the last decade. So those -- by default, we've got strong clinical evidence on ColActive Plus. We've got some strong evidence on some of our newer products as well, like IV Clear and SurgiClear. And of course, CovaWound line is a good line of products for us, and we're -- we have the Welsh Wound study, that white paper that came out on the use of alginates. We have a number of other clinical initiatives and clinical studies in the works. Again, we intend to talk about those coming up. I think we have a number that are being presented and published over the next several months. And these things can take a while. But yes, I think we've got some really good products and really strong user-driven evidence to support them, and we've got a number in the works. So stay tuned. I expect we will be talking about those studies in the coming months that are currently being worked on. And some of them are quite exciting. And I think you'll find them as interesting, more interesting than the Welsh Wound's Alginate study.

[Operator]

[Operator Instructions] Your next question comes from Tony Kamin, Eastwood Partners.

[Unknown]

Brian, your last answer really intrigued me. I wanted to follow-up on it on potential sort of extensions to deal with some of the current issues that are going on. So the question is do you have the ability on some of your products to potentially take them direct to consumer or through a partner channel? From a regulatory standpoint or a cost of goods standpoint, is there a way to kind of make some of these available to consumers? You can see with masks, for example, how the demand has just been incredible. So I wondered if any of that is applicable to your product lines potentially?

[Brian E. Pedlar, President, CEO & Director]

Yes. Good question, Tony. Absolutely. As we sit here as a company and all -- and every CEO looks at their business and looks at opportunities to enter new lucrative channels. And from my perspective, when I look at what Covalon has, we've historically -- we historically started out working with just big medical companies developing products for them. And we turned them to developing and selling our own products into the market, in addition to working with big medical companies. And most of those products, historically, have gone through the prescription medical product channels and had to go into hospitals and clinics and be used by clinicians. But we have a number of our products that actually have clearance to also be sold directly to patients through pharmacies and through what I would call the over-the-counter market. And so from that perspective, that's very exciting for us because I think that's a whole new dynamic. AquaGuard is a great product for that because a lot more showers happen outside the hospital than inside. And so getting -- partnering up and entering those distribution channels that take AquaGuard, that would take a product like our scar reduction product, MediClear Scar. Our MediClear presurgical product is available to go over the counter and several others that we have. So I see that as a big upside opportunity for us. We're probably not going to make material headroads on that pathway that will affect our revenue and profits in 2020. But beyond that, I see that as a great opportunity for us. And it's one of the strategies we have in looking at what different channels can we bring our products and technology through that have the most impact to help save people's lives. And that's one area of the market that I think is very much open to us as a company. And I look forward to moving us in that direction as well in addition to the channels that we're in. So I see that -- let me just take the time now to close off, and I really appreciate all the great questions. Look, I wanted to repeat my opinion that I've stated before. I think Covalon is in a massively stronger position today than we were 12 or 24 months ago. Our revenue is more diversified. I think we have a stronger presence in the largest medical market in the world, the United States. I think we've begun to open up new and lucrative channels for our wound -- for our world-class products and technologies. And I think it's very clear that the true value of Covalon is not even remotely reflected on our current market capitalization. And I really look forward to updating you on some of the developments that I've talked about today and others as they arise in the near future. Thank you very much for joining Danny and I this morning.

[Operator]

This concludes today's conference call. You may now disconnect.