Covalon Technologies Ltd

XTSX:COV

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Covalon's Fiscal 2020 Q2 Financial Results Conference Call. My name is Colin, and I'll be your conference operator today. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Brian Pedlar, Chief Executive Officer; and Mr. Danny Brannagan, Chief Financial Officer. Please go ahead, Mr. Pedlar and Mr. Brannagan.

[Danny Brannagan, Chief Financial Officer]

Thank you, Colin. 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 Second Quarter ended March 31, 2020. There will be an opportunity for you to ask questions at the end of the 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 second quarter ended March 31, 2020, Covalon's total revenue was $5.3 million, with net loss of approximately $3.9 million or $0.15 per share. This compares to the prior year's second quarter, which saw a total revenue of $13.3 million and a net loss of approximately $200,000 or $0.01 per share. Operating expenses decreased for the second quarter to $6.5 million compared to $9.4 million for the same period in the prior year. The overall gross margin for the second quarter was 53% compared to 69% in the second quarter of the prior year. For the 6 months ended March 31, 2020, Covalon's total revenue was $13.2 million, with a net loss of approximately $5 million or $0.20 per share. This compares to the prior year's comparative period, which saw a total revenue of $20.5 million and a net loss of $2.1 million. Operating expenses decreased to $12.3 million compared to $15.5 million in 2019. The overall gross margin for the 6 months decreased to 58% compared to 67% in 2019. 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 Q2 results for fiscal 2020. Good morning, fellow investors, and thank you for joining Danny and I on this call. Like businesses everywhere in the world, Covalon has been dealing with and managing the impact of COVID-19 on our operations. We've been negatively impacted by the COVID-19 pandemic, and it's evident, I think, in our March 31 results. But more importantly, in response, the entire Covalon team has been working very hard to lessen the impact of COVID-19 on our business and to aggressively pursue opportunities to generate new business. We have been very focused on engaging with our current customers and on generating new sales. We have focused heavily on reducing our costs, and we have successfully applied to available government programs in Canada and the United States, some of which we've previously announced. But most importantly, we've gone on offense. And we've introduced new technologies that could help, we believe, the world deal with the COVID-19 pandemic, and I am very pleased with our progress on all of these fronts. I think as the world emerges from COVID-19, I have no doubt that Covalon will emerge as well as a stronger and much more valuable company because of our unique and highly respected infection control technologies that I believe are going to be in even greater demand than ever. I am already seeing signs of this recovery. In response to COVID-19, we rapidly developed our CovaGuard platform technology, and we announced several products that are currently being introduced into global markets. The CovaGuard Hand Sanitizers and Antimicrobial Sprays are amazing technology, and that has very fast and effective, immediate kill of viruses, bacteria and other pathogens and also continues to protect hands and surfaces for days. The process to launch these products would normally require a minimum of 18 months. Because of the urgency of COVID-19, the Covalon team worked around the clock to launch our products in record time. And I'm certainly very proud of what the team has been able to accomplish. We faced -- absolutely faced challenges in getting our products to market, and we are now actively engaged in developing distribution into several channels within the United States, Canada and numerous other countries. The response to CovaGuard has been very positive, and we expect those channels will positively impact our fourth quarter ended September 30, 2020, and beyond. The United States is a major focus for us as a company, and we've been working to grow our business in the U.S. over the past several years. Heading into the quarter ended March 31, 2020, our revenue in the United States was up 17% year-over-year and represented growth in both our sales to hospitals and our advanced wound care distribution channel. Unfortunately, that progress was interrupted during the quarter ended March 31, as sales in the United States declined 33% compared to the prior year second quarter. The decline in the U.S. represents a temporary delay in orders and revenue. And the big question is how long is that delay? Well, new information is coming out all the time. So it is hard to predict with certainty. But right now, it looks like the business will be affected over a couple of quarters, and we're beginning to see signs of recovery. Why did this happen to our products? Because of the need to dedicate significant resources to manage COVID-19, many medical facilities in the United States as well as around the world, suspended virtually all of their elective procedures. In the United States, I believe some sources are indicating that elective procedures were down by as much as 70%. We have seen this in Canada, the U.S. and almost every other country we sell into. A significant number of our products are consumed during elective and other procedures at hospitals and clinics and other medical institutions that were materially impacted by quarantine measures undertaken at these facilities. So this temporary slowdown in the ordering and usage of certain of our products is anticipated to continue until hospitals and health care facilities are able to resume elective procedures that use our products. Now as restrictions have been put in place related to COVID-19 on hospitals and those who are able to enter hospitals, our U.S. sales force has had to adapt and modify their approach. Depending on the institution, this has resulted in limited access or virtual communication only. Our sales force is doing its best to adapt to these challenges in order to engage customers. And as I said, we are beginning to see that elective procedures increase, quarantine measures undertaken at our customer facilities lessened. And the demand for certain of our product lines beginning to increase, though I can tell you they're not yet back to normal levels. There's no question that over the past year, we suffered a difficult setback in our Saudi Arabian business. We achieved a victory in beating out some major medical companies to win back-to-back contracts in the Middle East that gave our products significant credibility, and we were managing our efforts in the market based on the projections we were led to believe we're underlying those contracts. As we talked about last year on calls and in press releases, we discovered that the Covalon sales executive in charge of the region was working behind the scenes with our then distributor in Saudi Arabia for their best interest and not Covalon's. We took steps over the past year to recover our business in the Middle East. And as we previously announced, the projections for the value of those underlying contracts were not coming to fruition or predictable. Since those announcements, we worked hard to identify a new strong distribution partner in the Middle East that is a multinational medical company headquartered in Europe. I believe they will represent Covalon's products very well in the region and help us rebuild our presence in the Middle East market. We were in the process of transferring our contracts to our new distributor in the region when COVID-19 delayed this process. As a result, there were no major shipments under the Middle East contracts recognized in revenue during the quarter ended March 31. Prior to COVID-19, we initiated steps to significantly reduce our operating expenses, and this continues as COVID-19 has hit and has continued to affect our business. We have reduced operating expenses before onetime charges by 46% compared to the second quarter last year. We are continuing to reduce operating expenses, headcount and discretionary spending in an effort to return Covalon to profitability. I believe we are well on our way to doing so. I believe investors in Covalon have a truly unique opportunity to realize significant upside on what I consider a very undervalued health care asset, which is Covalon. The uncertainty of the impact of COVID-19 on the stock market, on the global economy and our setback last year in the Middle East has not helped our share price to recover to where it should be. I am 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. We are an infection management company with world-class technology and very, very talented people. I am firmly convinced that protecting ourselves from bacteria and viruses is a focus area for all companies inside the medical industry and outside, and we have a very strong portfolio of products and technologies that help protect people inside hospitals and in their communities. I would like to now open the line for questions. I ask that you keep your questions to one at a time. There will be lots of time to get back into the queue to ask more. Thank you. Over to you, Colin.

[Operator]

[Operator Instructions] So your first question comes from Trevor Holsinger of Aspen Wealth.

[Trevor Holsinger, President & Founder]

Can you touch on the coating technology progress you're making and in light of the large contract you signed in 2018 and any milestones or additional payments and the progress there and the impact of COVID on that progress of those products?

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

Sure. And Trevor, you're -- just for everybody's benefit, you're referring to what we call our OEM business that falls under our services revenue line in our financials. And we perform projects with major medical companies to help make antimicrobial products for them to fill out their product lines using our technology on their products. We did sign a very large contract that we had previously announced. That project has been moving forward very well. The large partner that we've been working with, obviously, was affected like every company has been in trying to ensure that they keep their employees safe. And so the project slowed down a little bit through this initial COVID-19 period. Many of our customers in that area have been trying to limit access to their labs and keep their employees safe. And so that has slowed the project slightly, but very much on track otherwise, I think we continue to have a very strong relationship. We also have a number of other -- at any given time, we have a half dozen projects that -- to a dozen projects that we are working on, some very small, some beginning to grow. So that work has continued. We did not stop on our side. Our folks continue to work in the lab and -- using multiple shifts so we could distance ourselves, and we continue to do that. So from our side, it's been business as usual, but it has slowed on some of our customer sides, and that's impacted the progress of a couple of the projects. Thanks for that question, Trevor.

[Operator]

Your next question comes from [ Arnold Shell ], a private investor.

[Unknown Attendee]

Yes. Could you tell us what the sales of the hand sanitizer have been?

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

Thanks for the question, Arnold. I'm not prepared to go into the detailed numbers. And we'll include those as we sell in our financials, but I can tell you that as I've said, we've begun to enter the market in a number of countries. Our focus has been on trying to get into larger contracts with organizations where we can have continued revenue. And as well, we obviously -- I think most people are aware, we've been selling on our website that we set up as well. But the main focus is distribution relationships through our existing channels and many, many new channels that have come up as a result of our announcements around CovaGuard. So stay tuned, Arnold, I think I'd be -- I'm really looking forward to updating you as the progress continues on that front.

[Operator]

Your next question comes from [ Howard Patrick ], private investor.

[Unknown Attendee]

My question is with regard to the sort of inventory of finished goods, which is showing as about $7.8 million. How much of that inventory relates to the Saudi contract? That's one part of it. Can this inventory -- is it specifically for the Saudis? Or can it be sold to other parties? And the other question is, how long has the finished goods inventory been around? And is there a best buy date on any of the products that you have in inventory? Because there are obviously active ingredients in the products to combat the infections.

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

Yes. Howard, thanks. Those are great questions. So let me start at the end and work back. So our products typically have a shelf life of anywhere from 2 to 5 years. So from that perspective, I think we -- the vast majority of our products have significant shelf life remaining. We tend to [Audio Gap] and make products for customer orders. But some of [Audio Gap] we do get orders that come in, and we need to fill them quickly in this business because these products are used on patients. Once you have a customer that's using your product, the worse possible thing is to run out because that means that the doctor will go and write a prescription for someone else's product, and then you have to fight to get that account back. So we typically try to ensure that we do not run short of product in any of our key product areas. I think there's a fair amount of inventory related to the contracts in the Middle East, but it's certainly not all of what's there. We have a number of distribution areas that we focus on. Those products are used in other channels. So same products that are sold in the United States, in Europe, in other parts of Middle East and Asia and in Latin America. They're all the same. So there's opportunities to move those around as needed. So from that perspective, I don't see an issue in us getting stuck with inventory that we can't move. There's always a little bit in every company of things that you need to keep because you need a full portfolio, and they may not move as fast as other products. But I think from that perspective, it's an area where I think we're in -- I don't -- I think we can manage through any of our inventory. And my hope is to see that number reduce over time. And so we get a little bit more efficient in our ordering patterns and a little bit more predictable, so we can keep less and less inventory on hand. But thanks, that's a great question.

[Operator]

[Operator Instructions] We've got another question here from Howard Patrick.

[Unknown Attendee]

With regard to the transfer of contracts, has that progressed to the point that they've -- the new people have been appointed, they could actually start selling the product to your existing customers?

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

Yes. Good question, Howard. The -- so we have appointed our new European partner to represent us in the region. The -- but the transfer process is convoluted, has to go through many levels of government approval. And everything from -- we need to, on our side, to get documents notarized at embassies and send them over there. So all of those processes that were relatively efficient in the past due to COVID-19 are difficult because you can't go. So that was really the driver of things slowing down. Our agents -- our relationship is in place with our new partners. So they're working actively right now in the market. And we continue to move contracts and I think we're at the very end stages of that happening. So I'm really quite pleased with the progress in that market. But again, we're treating the Middle East as upside in our business. And I think it's a -- I think we've made the right move to appoint our new partner. And we'll work with them to try to grow that business back. So again, thanks. Thank you. I'll just end off with -- this is a bit of a repeat. But look, I think as we emerge from COVID-19, I just wanted to reiterate that I have no doubt that Covalon will emerge as a stronger and much more valuable company because of our unique and highly respected infection control technologies that I believe will be in greater demand than ever. And that's with medical companies who we've seen lots of inquiries about our technology. We've added a new platform with the CovaGuard technology. That has long-standing opportunities for us as a company and the ability for us to iterate a number of products off of that platform and as well our existing products that as hospitals get back to the new normal I believe they're going to be more and more focused on protecting patients as they come through their doors. And I think we're positioned very well in that respect. So thank you very much for your participation on the call, and I look forward to our next opportunity to chat. Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.