COV.V - Undervalued.

Updated: 4 days ago


Covalon Technologies Ltd. (COV.V) is a researcher, developer, and manufacturer of medical products that improve patient outcomes and save lives in the areas of advanced wound care, infection management and surgical procedures.


COV.V leverages its 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.


Coverage was initiated February 2020 with an additional note on October 2020.


News releases


Oct. 21 - Initiates Strategic Review to Enhance Shareholder Value: Board of Directors has initiated a process to explore and evaluate a range of strategic alternatives available to the Company in order to enhance shareholder value.


"In response to expressions of interest made to the Company by medical industry and private equity organizations, our Board has decided to hire advisors to assist in undertaking a Strategic Review process in order to ensure that all available alternatives to enhance value for our shareholders are being evaluated. - Brian Pedlar, Covalon's President and CEO.


These alternatives may include, but are not limited to, continuing as a standalone public company, a joint venture, or a potential sale or merger of the Company, in whole or in part, including a strategic health company or private equity firm.


MPA Morrison Park Advisors Inc. ("MPA") has been retained to act as exclusive financial advisors to the Company with respect to the Strategic Review. MPA has worked on various strategic projects for the Company since 2017.

Covalon has not established a definitive timeline to complete the Strategic Review, nor has it made any decisions related to any strategic alternative at this time. There is no assurance that any transactions will result from the Strategic Review.


Nov. 13 - Amir Boloor as Board Chair and Voting Results from Fiscal 2019 Annual and Special Meeting of Shareholders:


Jan. 28 - Announces Fiscal 2020 Year-End Results: "2020 was a strategically important year for Covalon but also one that included challenges related to COVID-19," stated Brian Pedlar, Covalon's President and CEO.


"Our revenue declined by 10% in Q4 to $5.9 million and 24% for fiscal 2020 to $25.8 million compare to fiscal 2019, due to COVID-19 impacts on our customers and our suppliers. Despite the challenges presented, which included temporary deferral of elective procedures and supply chain interruptions, we were able to minimize the impact of the revenue decline by reducing operating expenses by $3.4 million or 47% in Q4 and $11.5 million or 38% for fiscal 2020.


Outlook for 2021: We are seeing signs of improvement in product usage by our customer base in the United States and internationally even though the COVID-19 restrictions have not eased in many of the geographies in which we operate.

Mar. 1 - Announces First Quarter Fiscal 2021 Results: With cash-on-hand and amounts available under our HSBC operating bank line, we believe we have sufficient future cash flow to support our operating needs going forward.


This quarter, we engaged in approximately 10 customer development projects of various sizes with 5 medical product companies. We are very excited about these projects, including the various projects currently underway with the previously announced major contract with one of the world's largest medical device companies.


May 31 - Announce Fiscal 2021 Q2 Results.


Summary


Earnings

Three earning periods were reported in the last eight months: Q4 2020, Q1 2021 and Q2 2021 (end March 31 2021).

Year over year comparison shows that Q4 2020 and Q1 2021 revenue was relatively softer. However, since Q4 2021 revenues have been trending up culminating to $6.7M in Q2 2021 vs. 5.3M in Q2 2020. In addition, net loss has been declining with COV.V showing a small profit in both Q3 2020 and Q2 2021.


YTD results shows that cumulative revenues are similar in FY 2021 vs. FY 2020 while net loss/income swung from (5.0M) in FY 2020 to showing a small profit or break even in FY 2021. This confirms the effectiveness of the operational cost saving measures implemented by the company in the last two quarters. As for the outlook...


We are beginning to see signs of revenue recovery with our United States hospital customers and international distribution channels... This quarter, we engaged in approximately 10 medical coating customer development projects of various sizes with 3 medical product companies and we have a pipeline of new customer development projects.


Strategic Review

In October 2020, Covalon initiated a strategic review to maximize shareholder return.


"In response to expressions of interest made to the Company by medical industry and private equity organizations, our Board has decided to hire advisors to assist in undertaking a Strategic Review process in order to ensure that all available alternatives to enhance value for our shareholders are being evaluated. - Brian Pedlar, Covalon's President and CEO.


This review is still ongoing and no timeline have been given for completion. However, it was reiterated in the Q2 2021 Earning announcement that the Board of Director and Covalon's major shareholders believe that the company is...


".. significantly undervalued given its compelling combination of patented intellectual properties, technology platforms, commercialized medical product portfolio and global sales channels."


In Short

Covalon has traded between $0.92 cents and $1.89 in the past eight months. Since April 2021, the price has settled between $1.30 and $1.60 cents. Note that average daily volume tend to be low (5.500 share/day in the last 90 days).


Overall, revenues have been trending up in the last three quarters while net loss have been going down. YTD revenues are on par with FY 2021, while the net loss is considerably lower. The company has sufficient resources to fund its operations in the near term via its cash reserve and bank line with HSBC. Though, it mentioned:


Management is in continued discussions with HSBC regarding the Company's acquisition and operating banking credit facility and anticipates making changes to the banking agreement with HSBC in due course.


Specifically, under the going concern section of the Q2 2021 MD&A (also via CEO.ca) :


As of March 31, 2021, the Company did not meet certain covenants related to its Acquisition Line Facility (the “Facility”) with HSBC Bank Canada (“HSBC”), the Company’s primary secured lender. As a result, the Company was prohibited from making certain milestone payments from the Company’s Facility with HSBC under the Acquisition Note Payable (the “Acquisition Note”) entered into with the prior owners of the AquaGuard assets (the “Vendor”) that have become due.


While the Company believes that based on cash on hand and amounts available under the HSBC operating line, it has sufficient future cash flow to support its operating needs for the near future, without access to remaining funds from the Facility, the Company may not generate sufficient operating cash flows to be able to repay the Acquisition Note, should it become due and payable without refinancing this liability, or through the issuance of additional equity of the Company. No assurance can be given that any such refinancing or additional financing will be available, or that it can be obtained on terms favourable to the Company.


On March 25, 2021, the Company and the Vendor entered into a call option agreement that allows the Company to settle, at its option, on or before October 1, 2021, the US$7.5 million Acquisition Note for a payment of US$4 million and, subject to the approval of the TSX Venture Exchange (“TSX-V”), the issuance of 200,000 common share purchase warrants with an exercise price of $4.00. The exercise of the call option by the Company under the call option agreement is conditional on approval from HSBC. If the call option is not exercised and settled by October 1, 2021, then the Company remains obligated to settle the US$7.5 million Acquisition Note in accordance with its original terms.


Hence, the negotiation with HSBC are crucial in the repayment of the Acquisition Note Payable. However, the arrangement of a call option between Covalon and the Vendor suggests optimism.


The buyer of the call option has the right, but not the obligation, to buy an agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or "writer") is obliged to sell the commodity or financial instrument to the buyer if the buyer so decides. The buyer pays a fee (called a premium) for this right. The term "call" comes from the fact that the owner has the right to "call the stock away" from the seller. (Source: Wikipedia)


A $4.00 exercise price is quite a ways from the current valuation. How does Covalon get there? Impeding material catalyst? (i.e. large contract, sales of assets or the company, other ways?). Recall the strategic review...


These alternatives may include, but are not limited to, continuing as a standalone public company, a joint venture, or a potential sale or merger of the Company, in whole or in part, including a strategic health company or private equity firm.


The company also cautions: There is no assurance that any transactions will result from the Strategic Review.


Covalon is using MPA Morrison Park Advisors Inc. ("MPA") to facilitate the Strategic Review.

MPA was also the Exclusive Financial Advisor for the acquisition of AquaGard for $16M.


Other than extraordinary catalysts, the return of elective surgery is critical in determining Covalon's performance. In our last note, return to normal in elective surgery were predicted at 84 weeks in Canada and 18-24 months in the US.


A recent piece from MedTechDive confirms this timeline.


Medtechs have largely predicted a second-half recovery as vaccines become more widespread and COVID-19 cases drop. However, executives have avoided giving specific timelines due to uncertainty, especially with new variants.


Hence, we're now close to the halfway point of the lower estimates (18 months) in the US and the recent earnings performance from COV.V could be a proxy for the resumption of activity levels.


In light of the negotiations with HSBC for the Acquisition Line Facility, the disclosure of a $4.00 call option with the vendor of the Acquisition Note (pending TSXV approval) is raising eyebrows given the current share price.


This is especially relevant in the context of an ongoing strategic review and the frequent re-iteration by the company that it is significantly undervalued.


DISCLAIMER: The work included in this article is based on current events, technical charts, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements.

The content of rally is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions - rally cannot take responsibility for your investment decisions.

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