Covalon Technologies Ltd.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
March 31, 2024
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MANAGEMENT'S DISCUSSION & ANALYSIS
For the three months ended March 31, 2024
May 29, 2024
The following discussion of Covalon Technologies Ltd.'s ("Covalon" or the "Company") financial condition and results of operations should be read in conjunction with our audited statements for the year ended September 30, 2023, and with our unaudited condensed consolidated interim financial statements for the three and six months ended March 31, 2024. Additional information on Covalon Technologies Ltd., can be obtained on SEDAR PLUS at www.sedarplus.ca, as well as the Company's website at www.covalon.com. Unless otherwise indicated, all references to the terms "we", "us", "our", "Covalon" and "Company" refer to Covalon Technologies Ltd. and its subsidiaries. In this management discussion and analysis document ("MD&A"), financial information for the three and six months ended March 31, 2024 and 2023 is based on the unaudited condensed consolidated interim financial statements of the Company, which were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ("IFRS Accounting Standards") and are presented in Canadian dollars unless otherwise specified. The accounting policies adopted are consistent with those of the previous financial year end.
In accordance with its terms of reference, the Audit Committee of the Company's Board of Directors reviews the contents of the MD&A and recommends its approval to the Board of Directors. The Board of Directors approved this MD&A on May 28, 2024. Disclosure contained in this document is current to that date, unless otherwise noted.
AquaGuard Sale
The financial information related to the AquaGuard product line is reported in the prior period as discontinued operations. Certain prior period financial information on the condensed consolidated interim statements of cash flows pertain to the AquaGuard product line and are presented as discontinued operations and has therefore been excluded from continuing operations for all periods presented in this MD&A. This MD&A reflects only the results of continuing operations, unless otherwise noted.
Management's Responsibility for Financial Reporting
The unaudited condensed consolidated interim financial statements and MD&A have been prepared by management, who, when necessary, have made informed judgments and estimates of the outcome of events and transactions with due consideration given to materiality. Management acknowledges its responsibility for the fairness, integrity, and objectivity of all information provided in the unaudited condensed consolidated interim financial statements and in the MD&A. As a means of fulfilling its responsibility, Management relies on the Company's system of internal controls. This system has been established to ensure, within reasonable limits, that assets are safeguarded, transactions are properly recorded and are executed with Management's authorization, and that the accounting records provide a solid foundation from which to prepare the unaudited condensed consolidated interim financial statements and the MD&A. The Board of Directors carries out its responsibility for the unaudited condensed consolidated interim financial statements principally through its Audit Committee. This committee meets periodically, reviews the scope of the external audit, the adequacy of the systems of internal control and
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the appropriateness of financial reporting, and then makes its recommendations to the Board of Directors. Based on those recommendations, the Board of Directors approves the unaudited condensed consolidated interim financial statements and the MD&A.
Non-GAAP Financial Measures
This MD&A refers to certain non-GAAP measures. These measures are not recognized or defined measures under IFRS Accounting Standards, do not have standardized meaning prescribed by IFRS Accounting Standards and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional financial information to complement those IFRS Accounting Standards measures by providing further understanding of our results of operations from management's perspective. Accordingly, these measures should not be considered in isolation or as a substitute for analysis of our financial information reported under IFRS Accounting Standards. The non- GAAP financial measures, adjustments, and reasons for adjustments should be carefully evaluated as these measures have limitations as analytical tools and should not be used in substitution for an analysis of the Company's results under IFRS Accounting Standards. We use non-GAAP measures including "Working Capital", "Adjusted Gross Margin", and "Adjusted EBITDA" to provide investors with supplemental measures of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS Accounting Standards measures. We believe that investors, securities analysts, and other interested parties frequently use non-GAAP measures in the evaluation of issuers. Management also uses non-GAAP measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts, and to determine components of management compensation. For definitions and reconciliations of these non- GAAP measures to the relevant reported measures, please see "Definitions and Reconciliations of Non- GAAP Financial Measures".
Forward-Looking Statements
This MD&A contains forward-looking statements which reflect the Company's current expectations regarding future events. The forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "estimate", "expect", "intend" and statements that an event or result "may", "will", "should", "could", or "might" occur or be achieved and other similar expressions. More specifically, this MD&A contains forward-looking statements which include, but are not limited to statements regarding: the Company's corporate strategy and strategic objectives and the availability of external financing to fund the Company's ongoing liabilities and commitments. These forward-looking statements involve risks and uncertainties, including the ability of the Company to maintain operations in the U.S., estimates related to future operating expenses, the volatility of the Company's stock price, the difficulty in predicting product approvals, acceptance of and demands for new products, the impact of the products and pricing strategies of competitors, delays in developing and launching new products, the regulatory environment, fluctuations in operating results, and other risks, any of which could cause results, performance, or achievements to differ materially from the results discussed or implied in the forward-looking statements. Many risks are inherent in the industry; others are more specific to the Company. Investors should consult the "Risks and Uncertainties" section of this MD&A as well as the Company's ongoing quarterly filings for additional information on risks and uncertainties relating to these
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forward-looking statements. Investors should not place undue reliance on any forward-looking statements. Management assumes no obligation to update or alter any forward-looking statements whether as a result of new information, further events, or otherwise.
Nature of Our Business
Covalon Technologies Ltd. (the "Company" or "Covalon") (TSXV: COV) (OTCQX: CVALF) is a patient- driven medical device company, built on the relentless pursuit to help the most vulnerable patients have a better chance at healing. Through a strong portfolio of patented technologies and solutions for advanced wound care, infection risk reduction, and medical device coatings, we offer innovative, gentle, and compassionate options for patients. Our solutions are designed for patients but made for those delivering the care. They are designed to support the most vulnerable patient populations, by improving the standard of care and patient experience in pediatric and acute care hospitals, long-term care settings and home healthcare visits.
For more than 20 years, we have successfully delivered vascular access, advanced wound care, perioperative care, and customized medical device coating solutions to patients throughout the U.S., Canada, Latin America and the Middle East. We leverage our patented medical technology platforms and expertise in two ways: (i) by developing products that are sold under Covalon's name; and (ii) by developing and commercializing medical products for other medical companies under development and license contracts. We are becoming the standard of care for major pediatric and acute care hospitals in the United States and around the world because healing shouldn't hurt.
Covalon-branded products are sold directly and through independent distributors to various health care providers such as hospitals, wound care centers, burn centers, extended/alternate care facilities, acute care facilities, home health care agencies, and physicians' offices. Many of our products require regulatory clearances and are sold on a prescription basis in the United States, Canada, the Middle East, Asia, Latin America, and a number of other international countries.
Covalon's products are regulated by various government agencies in the countries in which the products are distributed and/or manufactured. As warranted, Covalon will put forward submissions to regulatory bodies for their feedback and/or approval. There are risks associated with such filings - please see pages 21 - 23 in the "Risks and Uncertainties" section below.
Over the past year the Company has transformed its strategy to focus on growing its United States and international infection control and wound care businesses by building technology and brand awareness with clinicians and customers
Covalon currently has three proprietary platform technologies that have the potential to be developed into a number of medical devices and products: (i) Collagen matrix; (ii) Antimicrobial silicone adhesive; and
-
Medical coatings. These platform technologies are protected by patents, patent applications and patents pending, patented and proprietary manufacturing processes, trade secrets, brands, trademarks, and trade names.
Collagen Matrix Platform: The Company's patented collagen matrix platform is used to manufacture a
family of products that treat chronic and infected wounds, including diabetic ulcers (including diabetic
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foot ulcers), pressure ulcers, venous ulcers (including venous leg ulcers), donor and graft sites, traumatic wounds healing by secondary intention, dehisced surgical wounds, and first and second-degree burns. Antimicrobial Silicone Adhesive Platform: Covalon's patented antimicrobial silicone adhesive platform is the basis for a family of pre-surgical,post-surgical and vascular access product solutions that are designed to kill 99.99% or more of bacteria or yeast that comes into contact with the antimicrobial silicone. The Company's Antimicrobial silicone adhesive platform is unique because the silicone adhesive contains both silver and chlorhexidine.
Medical Coating Platforms: Covalon has several medical coating technologies that are branded as CovaCoat, CovaCoat with API, Centaur, CovaGuard, and SD-168. Covalon's patented coating technology underlying CovaCoat, CovaCoat with API, and Centaur are based on a proprietary "grafting from" process which utilizes photo-polymerization to create active grafting sites where new polymer chains are initiated and propagated from the surface of an existing medical device.
Our Products
We have approximately 21 families of medical devices and approximately 150 separate SKUs, many of which are derived from our platform technologies. Availability of the Company's products for sale will differ by country/region. Our full list of products include the following:
Advanced Wound Care Dressings | ||
ColActive Plus | Collagen matrix dressing | |
ColActive Plus Ag | Collagen matrix dressing with silver | |
ColActive Transfer | Wound contact layer | |
CovaWound Silicone | Self-adherent soft silicone foam dressing | |
CovaWound Silicone with Border | Self-adherent soft silicone foam dressing with border | |
CovaWound Silicone Sacrum | Self-adherent soft silicone foam dressing with border for | |
use on the sacrum | ||
CovaWound Silicone Heel | Self-adherent soft silicone foam dressing with border for | |
use on the heel | ||
CovaWound Foam | Non-adherent foam dressing | |
CovaWound Foam with Border | Non-adherent foam dressing with adhesive border | |
CovaWound Alginate | Alginate dressing | |
CovaWound Alginate Ag | Alginate dressing with silver | |
CovaWound Super Absorbent | Soft hydrophilic wound contact layer with super | |
absorbent polymer core | ||
CovaWound Hydrocolloid | Absorbent hydrocolloid matrix dressing | |
CovaView Transparent IV Dressing | Transparent IV vascular access dressing | |
Surgical and Peri-Operative Products | ||
SurgiClear | Antimicrobial clear silicone adhesive post-surgical | |
dressing with chlorhexidine and silver | ||
MediClear Pre-Op | Antimicrobial silicone film for pre-operative skin | |
MediClear Post-Op Absorb | Self-adherent silicone dressing with absorbent pad | |
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MediClear Scar
Self-adherent silicone dressing for scar care
Infection Management Products
IV Clear
CovaClear IV
VALGuard
Antimicrobial clear silicone adhesive vascular access dressing with chlorhexidine and silver
Clear silicone adhesive vascular access dressing
Helps protect line-to-line connections, luer locks, & access ports from environmental contamination.
Our Product Pipeline
The Company continues to leverage its strong research and development capabilities and talented technical staff to continuously add to our product pipeline. Covalon utilizes an internal development team to invent and commercialize new products, as well as continuously investigating in-licensing opportunities for intellectual property that can be commercialized by the Company into successful products. The Company believes that a number of the technologies and product prototypes have significantly large market opportunities once they have been cleared by the relevant regulatory authorities.
Our Business Model
The Company distributes products under the Covalon brand name through multiple channels to market, including through third-party distribution networks and directly through the Company's direct sales force. The Company also sells certain of its products through private label arrangements with other medical device companies, licenses certain of its technologies, and provides services through an OEM business model (as described below) to realize value in the marketplace.
Currently the Company has a small direct sales force in the United States that sells directly into pediatric and acute care hospitals and associated institutions. The Company has set up distribution relationships with a number of companies in North America, the Middle East, Latin America, and Asia.
In addition to our direct sales efforts into hospitals and our United States and international distributor networks, Covalon also utilizes an OEM revenue model based on selling or licensing our technologies to large medical companies. Some medical companies and distributors license our technologies for incorporation into their own product offerings, which they sell to healthcare providers under their own brand names. Referred to by the industry as an OEM sales model (original equipment manufacturer), this approach assigns the major cost of selling to our customers, who are able to penetrate the market with a large sales force in geographical locations where Covalon does not have staff or offices. Our revenue streams are typically generated from product sales, services, technology licensing fees, and royalties from the sale or commercialization of products.
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Financial Performance During the Three Months Ended March 31, 2024: (all figures are in $CAD)
Three months ended | Six months ended | ||||||
2024 | March 31, | 2024 | March 31, | ||||
2023 | 2023 | ||||||
Revenue | $8,388,022 | $12,963,789 | |||||
Product | $6,105,694 | $11,350,958 | |||||
Development and consulting services | - | 1,108,466 | 56,358 | 1,926,812 | |||
Licensing and royalty fees | 25,588 | 30,434 | 56,520 | 152,229 | |||
Total revenue | 8,413,610 | 7,244,594 | 13,076,667 | 13,429,999 | |||
Cost of sales | 3,101,103 | 3,072,566 | 4,917,668 | 5,563,139 | |||
Gross profit before operating expenses | 5,312,507 | 4,172,028 | 8,158,999 | 7,866,860 | |||
Operating expenses | 423,239 | 1,053,952 | |||||
Operations | 542,755 | 750,634 | |||||
Research and development activities | 450,510 | 279,491 | 761,921 | 565,466 | |||
Sales, marketing and agency fees | 1,262,960 | 2,209,894 | 2,909,263 | 4,239,830 | |||
General and administrative | 1,690,995 | 1,861,677 | 3,422,620 | 3,388,572 | |||
3,827,704 | 4,893,817 | 8,147,756 | 8,944,502 | ||||
Finance expenses (income) | 22,340 | (23,708) | 12,376 | 1,260 | |||
Gain on finance lease receivable | - | - | (610,008) | - | |||
Net income (loss) | $1,460,418 | $(698,081) | $608,875 | $(1,078,902) | |||
Other comprehensive income (loss) | |||||||
Amount that may be reclassified to profit or loss | |||||||
Foreign currency translation adjustment - | 576,178 | (246,523) | 188,905 | (263,308) | |||
continued operations | |||||||
Total comprehensive income (loss) | $2,036,596 | $(944,604) | $797,780 | $(1,342,210) | |||
Income (loss) per common share | |||||||
Basic income (loss) per share | $0.06 | $(0.03) | $0.02 | $(0.04) | |||
Diluted income (loss) per share | $0.06 | $(0.03) | $0.02 | $(0.04) |
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Revenue and Gross Margin
Total revenue for the three months ended March 31, 2024 increased 16% to $8,413,610 compared to $7,244,594 for the same period of the prior year. Product revenue for the three month period ended March 31, 2024 increased 37% to $8,388,022 compared to $6,105,694 for the same period in the prior year due to stronger customer demand for the Company's collagen dressing and expansion of the Company's products within US Hospitals.
Development and consulting services revenue for the three-month period ended March 31, 2024 was nil, compared to $1,108,466 for the same period of the prior year. This reflects the Company's decision to prioritize focus on its US product business.
Licensing and royalty fees for the three months ended March 31, 2024 were $25,588, compared to $30,434 for the same period of the prior year. The timing of this revenue will vary depending on length and timing of projects and discussions with customers.
Revenue fluctuates from quarter to quarter depending on the composition of contractual arrangements entered into in each quarter, the timing of product shipments, and completion of services in any period.
Gross margin for the three-month period ended March 31, 2024 increased to 63% compared to 58% in the same period for the prior year. During the three months ended March 31, 2024, the Company recorded inventory provisions of $674,866 due to changes in obsolescence estimates. In contrast, during the same period in 2023, a release from inventory provision totaling $158,724 was recorded. Gross margin fluctuates as a result of the mix of products sold in any given quarter, or year, by product type and geography.
Total revenue for the six months ended March 31, 2024 decreased 3% to $13,076,667 compared to $13,429,999 for the same period of the prior year. Product revenue for the six months ended March 31, 2024 increased 14% to $12,963,789 compared to $11,350,958 for the same period of the prior year.
Development and consulting services revenue for the six months ended March 31, 2024 decreased by 97% to $56,640, compared to $1,926,812 for the same period of the prior year. Revenue from development and consulting services varies based on opportunities and the length of the sales cycle for given projects. The Company continues to anticipate no material revenues associated with our development and consulting services for the current year.
Licensing and royalty fees for the six months ended March 31, 2024, were $56,238, compared to $152,229 for the six months ended March 31, 2023. The timing of this revenue will vary depending on the length and timing of projects and discussions with customers.
Gross Margin for the six months ended March 31, 2024, increased to 62% compared to 59% in the same period for the prior year. During the six months ended March 31, 2024, the Company recorded an inventory provision of $482,095 as a result of changes in obsolescence estimates, as compared to a release
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in inventory provision of $158,724 being recorded during the six months ended March 31, 2023. Gross margin fluctuates as a result of the mix of products sold in any given quarter, or year, by product type and geography.
Operating Expenses
Operating expenses for the three months ended March 31, 2024, decreased $1,066,113 to $3,827,704, compared to $4,893,817 for the prior year's comparative period. Approximately $946,934 relates to decreased sales and marketing expenses primarily due to the reduction of sales and marketing staffing levels.
The Operations department covers expenses related to Quality Control, Quality Assurance, Production, and Regulatory activities. Operations expenses decreased to $423,239 in the current quarter from $542,755 in the comparable period, primarily due to a decrease in facility operating expenses with the partial sublease of our US warehouse location and higher manufacturing activity levels, which has resulted in a higher absorption of costs to inventory in the current quarter comparted to the prior year.
Research and development expenses increased to $450,510 in the current quarter from $279,491 in the comparable period mainly as a result of increased product development costs.
Sales and marketing expenses decreased 43% to $1,262,960 in the current quarter from $2,209,894 in the comparable period, due primarily to reduced sales and marketing staffing levels with corresponding travel expenses.
General and administrative expenses decreased to $1,690,995 in the current quarter from $1,861,677 in the comparable period. The decrease in expenses is primarily due to reductions in spending on professional services and staff costs.
Wages, benefits, and consulting fees (for all departments) include a non-cash expense related to stock- based compensation. During the three months ended March 31, 2024, stock-based compensation was $81,464 compared to $173,150 in the prior year. This expense is a reflection of the number of options and DSU's outstanding and their respective fair values for accounting purposes.
Operating expenses for the six months ended March 31, 2024 decreased $796,746 to $8,147,756 compared to $8,944,502 for the prior year's comparative period. Approximately $1,330,567 relates to the decreased sales and marketing expenses primarily due to the decrease in sales and marketing staffing levels. These decreases are offset by approximately $499,773 in increased expenses for operations and research and development activities related to increased staffing for in-house collagen manufacturing and product development.
Operations expenses increased $303,318 in the six months ended March 31, 2024 to $1,053,952 from $750,634 in the comparable period, primarily due to additional staffing levels for the in-house collagen manufacturing.
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Research and development expenses increased to $761,921 in the current quarter from $565,466 in the comparable period mainly as a result of increased product development costs.
Sales and marketing costs decreased 31% to $2,909,263 during the six months ended March 31, 2024 from $4,239,830 in the comparable period, due primarily to reduced sales and marketing staffing levels with the corresponding travel expenses.
General and administrative expenses during the six months ended March 31, 2024 were $3,422,620 which was comparable to $3,388,572 in the prior period.
Wages, benefits, and consulting fees (for all departments) include a non-cash expense related to stock options that the Company had previously granted. During the six months ended March 31, 2024, stock- based compensation was $197,393 compared to $329,457 in the prior year. These expenses are a reflection of the number of options and DSU's outstanding and their respective fair values for accounting purposes.
Related Party Transactions
The following is a summary of the Company's compensation to key management personnel:
Three months | Six months | |||
ended March 31 | ended March 31, | |||
2024 | 2023 | 2024 | 2023 | |
Compensation and short-term employee benefits | $400,716 | $300,956 | $715,751 | $589,411 |
Share based payment expense | 199,865 | 26,024 | 256,056 | 46,776 |
600,581 | 326,980 | 971,807 | 636,187 |
The Company had previously accrued $667,969 for termination benefits related to a former senior management team member during the last fiscal year. The amount continues to represent management's best estimate of the termination benefits owed. On April 5, 2024, this former senior executive filed a claim for wrongful dismissal. An additional amount of $1,832,031 has been claimed, which the Company has not accrued for and believes to be unwarranted. There can be no assurance as to the final outcome of the claim and termination benefits owed.
During the year end September 30, 2013, a non-interest-bearing loan of $50,000 was made to a key employee. As of March 31, 2024, $10,000 of this loan remained outstanding.
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Covalon Technologies Ltd. published this content on 29 May 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 29 May 2024 11:17:09 UTC.