Mr. Brian Pedlar reports

COVALON ANNOUNCES SECOND QUARTER RESULTS FOR FISCAL 2023

Covalon Technologies Ltd. has released its second quarter fiscal 2023 results.

Brian Pedlar, Covalon's president and chief executive officer, said: "I am pleased to announce another strong financial quarter for Covalon. Revenue for the three months ended March 31, 2023, increased 120 per cent to $7.2-million versus prior year and we've also seen improvements to our gross margins during the quarter. We are in a much stronger position in our key markets compared to last year, and we are seeing the results of investments made in 2022 continue to positively impact us in 2023. With our strong product and technology portfolio, Covalon is focused on becoming the leading provider of compassionate care solutions that help patients heal faster and live better. We are on track with our growth plan, and we have made strong progress in the first half of 2023 towards reaching our goals.

"Our efforts to grow our customer base in the United States and strengthening our brand worldwide have led to significant growth in revenue over the first six months of this fiscal year. Revenue for the first six months was up 63 per cent to $13.4-million compared to 2022. We have, and continue to engage, with major hospitals in the United States that are evaluating our infection prevention products in their intensive care units. We have seen positive impacts in our product sales through our distributors in the United States, increased orders from our international channels and stronger services revenue from our medical coating projects. We anticipate continued growth in revenue this year, compared to fiscal 2022.

"Gross margins were significantly improved in the first six months of 2023. As part of the company's customer focus initiatives, we improved our supply chain operations and invested in upgrading both business systems and infrastructure. Additional ongoing investments to allow us to better serve customers and drive growth in key markets going forward include expanding Covalon's in-house manufacturing capabilities and medical coating services. The full positive impact on our margins from our supply chain improvement initiatives are expected to be further realized over time.

"We continue to align our operating costs to growth prospects, as we see the results of our improved sales and marketing initiatives and as we realize the benefits of our efforts to transform our supply chain. Operating costs from continuing operations for the quarter ended March 31, 2023, increased over the same period last year. In 2022, our team executed on deliberate and well-planned strategic decisions to reposition Covalon to be able to unlock value from our life-saving, patented products and technology by investing in our people, our commercial capabilities and our infrastructure. We are confident that the changes we have made to Covalon will allow us to consistently achieve our objectives.

"The momentum we have, and the certainty of purpose we have in our products and mission, will allow Covalon to succeed. This quarter demonstrates that we are moving in the right direction with respect to investments made last year in several key business areas, including sales and marketing, operations, and IT infrastructure. We are excited about our progress in transforming Covalon into a patient-driven medical device company, built on the relentless pursuit to help the most vulnerable patients have a better chance at healing," concluded Mr. Pedlar.

Conference call scheduled

A conference call and webcast to discuss Covalon's Q2 fiscal 2023 financial results will be held Thursday, May 25, 2023, at 9 a.m. EDT.

To listen and participate in the conference call, please dial:

North American toll-free: 1-888-396-8049

Local (Toronto): 416-764-8646

Conference ID: 23773049

Participants will be able to ask questions of company management during the question-and-answer portion of the conference call either by asking them on the call or by submitting them using the chat function on the webcast.

A recording of the call will be available on Covalon's website under news and events on the investors tab.

Q2 fiscal 2023 and year-to-date financial results

Total revenue for the three months ended March 31, 2023, increased 120 per cent to $7.2-million compared with $3.3-million for the same period of the prior year. Total revenue for the six months ended March 31, 2023, increased 63 per cent to $13.4-million compared with $8.2-million for the same period of the prior year.

Product revenue for the three-month period ended March 31, 2023, increased 105 per cent to $6.1-million compared with $3-million for the same period of the prior year. Product revenue in U.S. and international markets was up $3.2-million due to stronger customer demand for the company's collagen dressing and IV Clear product lines. Product revenue for the six months ended March 31, 2023, increased 52 per cent to $11.4-million compared with $7.5-million for the same period of the prior year. Product revenue in U.S. and international markets was up $3.1-million due to stronger customer demand for the company's collagen dressing and IV Clear product lines.

Development and consulting services revenue for the three-month period ended March 31, 2023, increased by 375 per cent to $1.1-million, compared with $200,000 for the same period of the prior year. During the quarter, Covalon engaged in 11 customer development projects of various sizes with approximately three medical product companies that included the various projects under way associated with the previously announced major contract with one of the world's largest medical device companies that licensed Covalon's proprietary medical coating technologies. Development and consulting services revenue for the six months ended March 31, 2023, increased by 210 per cent to $1.9-million, compared with $600,000 for the same period of the prior year. During the six months ended March 31, 2023, Covalon engaged in 19 customer development projects of various sizes with approximately five medical product companies.

Licensing and royalty fees for the six months ended March 31, 2023, were $200,000, compared with $100,000 for the six months ended March 31, 2022. The timing of this revenue will vary depending on length and timing of projects and discussions with customers.

Gross margin for the three-month period ended March 31, 2023, increased to 58 per cent compared with 53 per cent in the same period for the prior year. During the three months ended March 31, 2023, the company released inventory provisions of $200,000 as a result of changes in obsolescence estimates, as compared with an inventory provision expense of $70,000 being recorded during the three months ended March 31, 2022. The gross margin is significantly influenced by source of revenue and by the relative mix of products sold in any given financial period.

Gross margin for the six months ended March 31, 2023, increased to 59 per cent compared with 49 per cent in the same period for the prior year. During the six months ended March 31, 2023, the company recorded inventory provision reversals resulting in a gain of $200,000 as a result of changes in obsolescence estimates, as compared with an inventory provision expense of $800,000 being recorded during the six months ended March 31, 2022.

Operating expenses for the three months ended March 31, 2023, increased $700,000 to $4.9-million, compared with $4.2-million for the prior year's comparative period. Approximately $600,000 relates to increased sales and marketing activities primarily due to an increase in sales and marketing staffing levels, and approximately $100,000 in increases in operations expenses is primarily due to increased wages related to staffing for in-house collagen. These increases are partially offset by approximately $80,000 in reduced research and development activities compared with the comparable period.

Operating expenses for the six months ended March 31, 2023, increased $1.4-million to $8.9-million, compared with $7.6-million for the prior year's comparative period. Approximately $1.5-million relates to increased sales and marketing activities primarily due to an increase in sales and marketing staffing levels. These increases are partially offset by approximately $100,000 in reduced operations expenses primarily due to reduced facility expense as a result of credits received in respect of prior-year property tax reassessments, and approximately $100,000 in reduced research and development expenses due primarily to reduced activities compared with the comparable period.

Net loss for the three months ended March 31, 2023, was $700,000 or three cents per share, compared with a net loss of $2.5-million or nine cents per share for the three months ended March 31, 2022. Net loss for the six months ended March 31, 2023, was $1.1-million or four cents per share, compared with a net loss of $4-million or 15 cents per share for the six months ended March 31, 2022.

Adjusted gross margin for the three-month period ended March 31, 2023, was 56 per cent compared with 56 per cent for the same period of the prior year. Adjusted gross margin for the six months ended March 31, 2023, decreased to 58 per cent compared with 60 per cent for the same period of the prior year. Gross margin is highly influenced by the mix of collagen-based dressings, silicone-based dressings, medical coating services, passive dressings and related service revenues generated in the periods. Gross margin fluctuates as a result of the mix of products sold in any given quarter, or year, by product type and geography.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss for the three months ended March 31, 2023, was $500,000, compared with an adjusted EBITDA loss of $2.2-million for the three months ended March 31, 2022. Adjusted EBITDA loss for the six months ended March 31, 2023, was $400,000, compared with an adjusted EBITDA loss of $2.5-million for the six months ended March 31, 2022.

Business outside of direct sales in the United States primarily comprises distributing bulk shipments of product, which result in lumpy or uneven revenue recognition quarter-to-quarter, depending on when bulk orders are placed, shipped to distributors and delivered to hospitals. As is typical with many companies, including many in the health care field, Covalon's lumpy revenue model makes it difficult to accurately estimate revenue recognition in any given quarter or quarter-to-quarter.

Statement of operations

The attached unaudited table presents Covalon's consolidated statements of operations for the three- and six-month periods ended March 31, 2023, and 2022.

About Covalon Technologies Ltd.

Covalon Technologies 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 prevention and medical device coatings, the company offers innovative, gentler and more compassionate options for patients to heal with less infections, less pain and better outcomes. Covalon's solutions are designed for patients and made for care providers. Covalon 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 licence contracts. The company is listed on the TSX Venture Exchange, having the symbol COV, and trades on the OTCQX Market under the symbol CVALF.

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