COV.V - Valuation.


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 notes on October 2020 and June 2021.


News releases


July 2 - Voting Results from Fiscal 2020 Annual and Special Meeting of Shareholders


July 29 - Sale of its AquaGuard® Product Line for US$30 Million or Approximately CDN$38 Million: 1) Purchase and sale agreement executed with TIDI Products, LLC as buyer; 2) Transaction improves Covalon's balance sheet to an estimated net cash position of CDN$24 million share after repayment of all outstanding debt; 3) The sale results in a net gain, prior to transaction expenses, of approximately CDN$20 million what Covalon paid for the AquaGuard business approximately 3 years ago; 4) AquaGuard's customers and distribution partners are expected to benefit from TIDI's current extensive market reach, bringing AquaGuard to more patients and more hospitals; 5) Covalon will now focus on accelerating the growth of its three core patented platforms of infection prevention products, in addition to other technologies developed by Covalon's advanced medical laboratory.


Covalon used net the proceeds from the sale to fully satisfy its indebtedness to its senior lender, HSBC Bank Canada ("HSBC"), and the credit facility with HSBC has now been terminated. Covalon will explore putting in place a new credit facility that reflects the Company's improved balance sheet and financial position.


Covalon also extinguished US$7,552,300 of secured indebtedness owed to Cenorin, LLC under a promissory note dated as of October 1, 2018, as amended, by making a cash payment of US$4,000,000 to Cenorin and issuing to Cenorin 200,000 warrants for the purchase of common shares in the capital of Covalon. Each Warrant entitles the holder to acquire a common share of Covalon at a price of CDN$4.00 for a period of five years. ears ago.


Aug. 30 - Announces Fiscal 2021 Q3 Results


Sep. 24 - Announces Retirement of Board Member: Dr. Myrna Francis is retiring as a member of the Board of Directors of the Company, effective September 24th, 2021, due to new professional commitments.


Dec. 13 - Strong Year End and Fourth Quarter Results for Fiscal 2021:


During the year ended September 30, 2021 the Company completed the AquaGuard Sale, as discussed above. The 2021 figures include only results from continuing operations.


The fiscal 2020 and 2019 results are as reported in the respective annual financial statements and include AquaGuard related revenue and expenses that would have been classified as discontinued operations in the current fiscal year.


Dec. 24 - Announces CFO Transition: Danny Brannagan, Covalon's Chief Financial Officer, will be stepping down.


Jan. 14 - Appointment of Interim CFO: Jason F. Gorel as its interim Chief Financial Officer.


Feb 16 - Announces Conference Call to Discuss First Quarter Fiscal 2022 Financial Results: Will release Q1 Fiscal 2022 on Tuesday March 1st, 2022, before markets open. Conference call and webcast will be held on at 9:00am EST.



Summary


AquaGuard® Sale

The sale of AquaGuard® product line for CAD$38M was one of the most salient event of the period. The transaction was the result of the previously reported Strategic Review that the company undertook in the past year.


The proceed of the sales put Covalon on better financial footing and allowed payment and closing of its credit facility with HSBC. In addition, it enabled the company to fufill its financial obligations with Cenorin, LLC by making a US$4M cash payment and issuing 200,000 warrants at CAD$4.00.


Appointment

Jason F. Gorel was appointed as an interim CFO after the departure of Danny Brannagan.


Earnings

The sale of AquaGuard® led Covalon to re-state their earnings for FY2021 which now include only continuing operations while the comparative periods (FY 2020 and FY 2019) include both continuing and discontinued operations.



The above earnings results are limited but exploring both previously stated and re-stated earnings can be helpful.


Overall, FY2021 revenue exceeded FY2020 with Aquagard (28M) and without it (19.5M). In addition, Covalon was profitable in FY2021 even after excluding Aquagard sale (0.41M) in contrast to a Net Loss (6.95M) in FY2020.


More importantly, Covalon ended FY2021 with 22.9M in Cash due to the Aquagard sale.


Warrants

As of September 30, 2021, Covalon had 2.9M warrant outstanding with a weighted average exercise price of $2.14.


In short

Covalon's share price has fluctuated between $1.40 and $3.10. The sale of AquaGuard® and the earnings results were the main drivers for the increase. Today's closing price of $2.23 is situated between the Pivot ($2.39) and S1 ($2.16).


However, Covalon continues to suffer from very low daily trading volume. This is likely due to the absence of news releases between earnings, as well as, little transparency around innovation due to competitive reasons.


The sale of AquaGuard®, instead of the whole company, is the result of the Strategic Review. It suggests that the principal shareholders believe that Covalon continues to be undervalued. To re-iterate, two principal shareholders own about 48% of the common shares; Abe Schwartz (32%) and The Goldfarb Corporation (16%).


  • The transaction materially improves Covalon's balance sheet to an estimated net cash position of approximately CDN$24 million or CDN$0.93 per share after repayment of all outstanding debt

  • Covalon will now focus on accelerating the growth of its three core patented platforms of infection prevention products, including Collagen Dressings, Antimicrobial Silicone Adhesive Dressings and Advanced Medical Coatings, in addition to other technologies developed by Covalon's advanced medical laboratory

The market will certainly be looking for progress in this area on the next upcoming earning calls. Also, comparing the share price prior to the AquaGuard® Sale, reflects that the incremental value has somewhat been priced in now.


The challenge for Covalon going forward is to keep scaling revenues and net income to further increase valuation.


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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