Covalon Technologies Ltd

XTSX:COV

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Covalon's Q4 and Year-End Fiscal 2021 Conference Call. My name is Kelsey, and I will be your conference operator today. As a reminder, today's conference is being recorded. [Operator Instructions] At this time, I would now like to turn the conference call over to Ms. Pedlar, President and Chief Executive Officer; and Mr. Danny Brannagan, Chief Financial Officer. Please go ahead, Mr. Pedlar and Mr. Brannagan. Just one moment, please. You may now proceed, Mr. Brian Pedlar and Mr. Danny Brannagan.

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

It's Brian Pedlar. Sorry, we had our line dropped. Danny, go ahead.

[Danny Brannagan, Chief Financial Officer]

Thank you, Kelsey. Apologies for the delay there. 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 fourth quarter and year ended September 30, 2021. 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, 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 the 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.In the management discussion and analysis, press release and this call Covalon has provided non-IFRS measures that are meant to provide further understanding of our results by helping to highlight trends and assist in comparing different periods. The adjusted gross margin and adjusted EBITDA are terms that do not have any standardized meaning and may not be comparable to other companies. These measures are not meant to replace the similar IFRS measures and any adjusting items may occur in the future.During the year ended September 30, 2021, Covalon sold the AquaGuard product line to an arm's length party for $37.8 million. The transaction included the sale of moisture barrier products sold under the AquaGuard brand, certain trademarks and intellectual property related customer contracts and the manufacturing assets to support the AquaGuard brand. As a result, the revenue and expenses associated with the AquaGuard operations before the date of the transaction are included in discontinued operations for the current and comparative periods. The discontinued operations also includes the gain on the sale of AquaGuard and the gain on debt extinguishment. Related to the transaction, there is $2.5 million in escrow that assuming no claims will be released 50% in July 2020 and the remainder in September 2022 -- sorry, that's July 2022 and September 2022.As of the year-end, Covalon had over $25 million of cash and cash in escrow and 0 debt on the balance sheet. For the year ended September 30, 2021, Covalon's total revenue from ongoing operations increased by 45% to $19.6 million from $13.5 million in the prior year. This increase was primarily driven by an increase in product sales. Continuing operations includes the revenue from our core businesses of collagen, medical coding and antimicrobial silicone adhesive dressings. In fiscal 2021, product revenue increased 56% to $17.7 million compared to $11.3 million for the same period of the prior year. Product revenue in the United States increased by 61% or $4.1 million and in the Middle East by 91% or $2.1 million.Development and consulting service revenue for fiscal 2021 decreased 15% to $1.7 million compared to $2 million in the prior year. Revenue from development and consulting services will vary based on opportunities and length of sales cycles for given projects. Licensing and royalty fees were consistent with the prior year at $0.2 million. The timing of this revenue may vary based on the length of timing and nature of projects or discussions with customers.For the year ended September 30, 2021, the gross margin increased to 50% compared to 34% in the prior year. Both periods include inventory allowance provisions and rework costs with -- and these are associated with selling the products. The adjusted gross margin, which excludes inventory provisions and depreciation, increased to 53% compared to 52% in the prior year.Operating expenses for the year ended September 30, 2021, decreased 26% to $8.9 million from $12 million in the prior fiscal year. Covalon has realized this decrease from a reduction in headcount, changes in foreign exchange and reduced discretionary expenses. For the fiscal year, Covalon had a net income from continuing operations of $0.4 million, which was an increase of $8.2 million from the prior year. Covalon's total net income was $23.5 million, which represents an increase of $30.4 million over the prior fiscal year.Adjusted EBITDA, as defined in the management discussion and analysis, increased by $4.8 million to $1.3 million compared to the prior year's loss of $3.5 million. For the fourth quarter ended September 30, 2021, Covalon's total revenue increased by 125% to $6.6 million from $3 million in the prior year's fourth quarter. Similar to the year, this increase was driven by product sales, which increased by $3.5 million to $6 million from $2.5 million in the comparative period. Product sales in the United States increased by $2.1 million to $4 million, an increase in the Middle East by $1.3 million to $1.6 million for the quarter. The gross margin for the fourth quarter increased to 46% from 6% in the prior year. Consistent with the fiscal year, these items are impacted by inventory provisions and rework costs. The adjusted gross margin for the quarter was 51% compared to 55% in the comparative period. The margins will be impacted by product mix and temporary supply chain cost increases. The operating expenses during the fourth quarter decreased 20% to $1.9 million from $2.4 million in the comparative period with the decrease being driven by a reduction in headcount, changes in foreign exchange and reduced discretionary expenses.For the fourth quarter ended September 30, 2021, the net income from continuing operations was $1 million compared to a net loss of $2.3 million in the prior year's fourth quarter. Total net income for the quarter was $22.4 million compared to a loss of $2.2 million, and this increase was predominantly related to the sale of AquaGuard. Adjusted EBITDA for the quarter ended September 30 increased to $1.8 million compared to a loss of $1 million in the prior year. Again, Covalon finished the year with no debt, a strong cash position and a profit from continuing operations for both the quarter and the year ended September 30, 2021.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 Q4 and our year-end results for fiscal 2021. Good morning follow investors. Thanks for joining Danny and I on this call.I'm very pleased to report that we ended the year with a net profit of $23.5 million, which is a $0.91 per share after including the net income from the sale of our AquaGuard operations. We ended the year profitable with a 45% revenue growth year-over-year from continuing operations. Our cost management initiatives and strong growth in product revenue has led to the $8.2 million year-over-year improvement in our net income and a $4.8 million year-over-year improvement in adjusted EBITDA, all from our continuing operations this year. This positions us really well going into fiscal 2022. I'm also delighted with our performance in the quarter with $6.6 million of revenue from continuing operations.Our fourth quarter was profitable with a net income of $1 million, as Danny mentioned, which is about $0.04 per share from continuing operations. But most significantly, we finished the year with $25.5 million of cash on our balance sheet and no debt. To put that in perspective, that's about $0.99 per share of cash, almost roughly not just shy of 40% of our market cap is held in cash. Look, I'm really proud of our team's efforts over the past 18 months to steer us clear of COVID-19 challenges and our team's contributions to our successful turnaround.I would like to thank each and every member of the Covalon team for their dedication and hard work this past year. This year was a big success because our team adapted, worked unbelievable hours and accomplished an incredible amount over the year. Thank you, Covalon team. Result of that hard work is that Covalon is truly a different company today than we were just a few short months ago. We are much stronger today, both financially and operationally, and we have many more levers at our disposal to fuel further growth. We are indeed transformed.Covalon at its heart is an infection prevention company that was founded on the strength of our lab. And over the years, we have developed patented technology platforms that we have leveraged to create highly competitive products and services that help health care providers, doctors and nurses to protect patients from getting infections and to help heal their wounds. Our collagen platform is probably our most mature product family and has been helping to fight infected wounds and heal diabetic foot ulcers since probably around 2005. Revenue from increased college and product sales in the United States has contributed significantly to our growth in 2021. As health systems around the world are adjusting to the impact of COVID-19, we are seeing increased demand for our collagen products, and we have secured additional competitive contracts in the Middle East that will impact 2022 and 2023. So whether patients suffering from a chronic wound, recovering from a surgery or undergoing treatment that requires vascular insertions, both clinicians and patients benefit from our family of FDA-approved products and technology that really were designed to reduce complications during those treatments.Our second platform technology, which is our antimicrobial silicone adhesive technology, we -- that has been -- that we've leveraged to create a family of vascular access and surgical dressings that protect patients from infection also help avoid those complications that occur during treatments. We've seen growth in the Middle East in 2021, which was largely driven by increased IV Clear sales. And we have much like collagen, we've secured additional competitive contracts for delivery in 2022 and 2023. So following the divestiture of our AquaGuard product line, we have refocused our U.S. sales efforts on IV Clear and their new VALGuard product that protects vascular access lines from external contamination. Both IV Clear and VALGuard are used in acute care facilities and also for outpatients as well. We've established a very loyal base of customers in the United States in hospitals and alternative pair clinics, and we are seeing rapidly growing interest in our products.That corresponds with recent data that has been referenced by the CDC reports that the instances of bloodstream infections while patients are in a hospital ICU and those patients are undergoing various treatments. The infection rates have risen a shockingly 67% in 2020 compared to 2019. Now both VALGuard and IV Clear solve serious problems that the market-leading products, which are used in most ICUs or intensive care units cannot solve. As clinicians recognize the benefits of our products over what they are currently using, we are growing our customer base, even in facilities that are contracted with our competitors, such as 3M. We now have a base of about 200 facilities buying IV Clear or VALGuard, and our sales leads continue to grow in the U.S. as awareness of our products and their clinical benefit spreads.We have a very strong reputation within the medical device industry as leaders in antimicrobial technology. As a result, many large medical device companies work with us on various sized projects to help them develop versions of their existing products that can kill bacteria by hiring Covalon to apply our patented medical coatings to their medical devices. Even though COVID-19 distracted many medical device companies from pursuing additional innovation, we continue to engage in medical coating customer development projects of various sizes with a growing customer base of medical product companies in 2021. We have a strong pipeline of new customer development projects, and we are really excited about the future revenue potential of these new projects.So I just want to talk for a couple of minutes about growth. We are positioned extremely well to further accelerate the growth of our biological collagen and our antimicrobial products that have been contributing to revenue growth this past fiscal year. Our core business of collagen and antimicrobial silicone adhesive dressings continues to experience growth in the United States and internationally. As I mentioned, we have one additional competitive contracts, and we're seeing increases in orders placed by our distribution partners. And we also have more visibility into the next 12 months of business because our partners are placing orders well in advance. We take a look at our biological collagen platform. One interesting opportunity for us is -- highlights the power of our lab is in 2021, we launched Collagen Powder. And we do anticipate that, that product line will begin to contribute to revenue in 2022. If we take a look at antimicrobial silicon platform as well. We have a product called SurgiClear that we have a campaign to launch into hospitals and ambulatory surgical centers in the U.S. in 2022. And we're going to launch that based on what I think is pretty strong clinical evidence and some really key reference accounts. Under our medical coating platform, in 2018, we announced a large medical coating license agreement. And based on where we are today in the projects, we're about 24 months away from the beginning of royalties under those agreements.We also have other growth opportunities. We intend to invest in sales and marketing resources to help drive our revenue growth during 2022. We're also continuously talking about expanding the partnerships that we have with our key distribution partners, whether that's in the United States or internationally. And as well as our development partners under our medical coating opportunities. But all of those, I think, can help us penetrate meaningful markets. And of course, we opportunistically look at M&A opportunities that can help accelerate our U.S. market growth. And we certainly have the resources now to entertain some of those opportunities.I don't believe that the value of our highly advanced technology platforms and their related growth opportunities have been fully reflected in the value of Covalon. I believe that each of these platforms has more value individually than our non-core AquaGuard product line that we sold for $38 million. By combining the value of our $25 million of cash, our clean balance sheet and the potential of our 3 highly sought-after products and technology platforms, it's clear to me that Covalon will generate significantly more value for our shareholders over the coming quarters. While we will no doubt face challenges in the future and not everything is in our control, I can say for certain that our team at Covalon is working harder than ever to grow our business and continue the positive progress we've made to date.I would now like to open the line for questions. I ask that you keep to 1 question and 1 follow-up, and there will be lots of time to get back into the queue. Thanks, and Kelsey over to you.

[Operator]

[Operator Instructions] Your first question comes from [ Arnold Shell ] from Private Investor.

[Unknown Attendee]

Yes, Brian, congratulations on the quarter and the year. Can you tell me what's happening in Europe and Latin America?

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

Sure, Arnold. So Europe, we have a small team that has been in place for a few years selling into hospitals in the U.K. and engaging with distribution partners in Europe. U.K. has been pretty heavily hit. A lot of wound care happens at the acute care level, hospital level in the U.K. And so COVID has made it difficult for some of those opportunities and contracts that we want to convert. That said, we do see that the -- that there's a base of business there. But really, the growth in both Latin America and Europe has been flat, a little up year-over-year. Latin America gain has been relatively heavily hit by COVID-19, and we do see lots of opportunity for growth within the European -- or sorry, the Latin American market, particularly Mexico, which has been slow to come online for us, but I think we're making some strong progress. So I'm still very encouraged with those markets. They are just a little slower than anticipated in 2021. And we'll keep our eye on that in 2022. But so far, I think we're well positioned for growth in both of those markets.

[Operator]

Arnold, did you have a follow-up with your question?

[Unknown Attendee]

No.

[Operator]

[Operator Instructions] At this time, there are no further questions. You may please proceed.

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

Okay. Thanks very much fellow investors for joining Danny and I this morning. We're very encouraged by how we ended fiscal 2021 and very encouraged by our progress to date in 2022. We look forward to updating you as we have more good news to share over the next several months and quarters. Thanks for joining us, and have a great morning.

[Operator]

Ladies and gentlemen, this concludes your conference call for today, we thank very much for participating and ask that you please disconnect your lines.