Mr. Brian Pedlar reports

COVALON ANNOUNCES THIRD QUARTER FISCAL 2023 RESULTS

Covalon Technologies Ltd. has released its third 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 June 30, 2023, increased 39 per cent to $6.3-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 nine months of 2023 towards reaching our goals.

"Over the past year, the company has transformed its strategy to focus on growing its United States and international infection prevention and wound care business, by building technology and brand awareness with clinicians and customers. This is being accomplished through the company's portfolio of consumable medical device dressings that are sold to hospitals, long-term care facilities, clinics and home health care providers directly by the company's sales team and through distribution partners. Historically, the company has also offered services to large medical companies utilizing Covalon's medical coating technology, which represents approximately 3 per cent of the company's revenue this quarter. This portion of Covalon's business is resource intensive and is not in line with the company's focus on manufacturing and selling consumable medical devices. As a result, the company has decided to transition away from medical coating projects and instead focus its business strategy on the company's core business verticals. Contributing to the company's decision to shift away from the medical coating business is the fact that its largest development services customer has been unable to meet its internal deadlines over the past several years, which has resulted in unpredictable revenues, unpredictable staffing requirements, and significant increased costs for staff and facilities for Covalon, that has prevented Covalon from scaling its development services business. As a result of the negative impacts on Covalon, the company spent a considerable amount of effort over the past year to renegotiate with the customer so as to be fairly reimbursed by the customer. In response, the company was notified that this customer has determined to not proceed with its medical coating projects for now and, accordingly, Covalon does not anticipate continuing to derive development services revenue under the current projects.

"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 nine months of this fiscal year. Revenue for the nine months was up 54 per cent to $19.7-million compared to 2022. We continue to engage with major hospitals in the United States that are evaluating and implementing 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, and increased orders from our international channels. Even with our decision to transition away from our medical device coatings projects, we anticipate continued growth in revenue this year compared to 2022.

"Gross margins were significantly improved in the first nine 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 include expanding Covalon's in-house manufacturing, which will allow us to better serve our customers and drive growth in key markets going forward. 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 June 30, 2023, increased 13 per cent over the same period last year. Our team is executing 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 [information technology] 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 Q3 fiscal 2023 financial results will be held Wednesday, Aug. 16, 2023, at 9 a.m. ET. View, listen to and participate in the live webcast on-line.

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

• North American toll-free: 1-888-259-6580;
• Local (Toronto): 416-764-8624;
• Conference ID: 27101802.

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 also be available on the company's website under financials on the investors tab.

Q3 fiscal 2023 financial results

Total revenue for the three months ended June 30, 2023, increased 39 per cent to $6.3-million, compared with $4.5-million for the same period of the prior year.

Total revenue for the nine months ended June 30, 2023, increased 54 per cent to $19.7-million, compared with $12.8-million for the same period of the prior year.

Product revenue for the three-month period ended June 30, 2023, increased 46 per cent to $6-million, compared with $4.1-million for the same period of the prior year. Product revenue for the company increased $1.9-million compared with the prior year, due substantially to increased customer demand for the company's collagen dressing product line in the United States market.

Product revenue for the nine months ended June 30, 2023, increased 50 per cent to $17.4-million, compared with $11.6-million for the same period of the prior year. Product revenue increased $5.8-million over the prior year, due substantially to increased customer demand for collagen dressings in the U.S. market and IV Clear product lines internationally.

Development and consulting services revenue for the three-month period ended June 30, 2023, decreased to $200,000, compared with $400,000 for the same period of the prior year. During the quarter, the company engaged in six customer development projects of various sizes, with approximately three medical product companies.

Development and consulting services revenue for the nine months ended June 30, 2023, increased by 116 per cent to $2.1-million, compared with $1-million for the same period of the prior year. During the nine months ended June 30, 2023, Covalon engaged in 24 customer development projects of various sizes with approximately six medical product companies, that included the various projects under way associated with the major contract.

Licensing and royalty fees for the three months ended June 30, 2023, were $30,000, compared with $40,000 for the three months ended June 30, 2022. The timing of this revenue will vary depending on length and timing of projects, and discussions with customers.

Licensing and royalty fees for both the nine months ended June 30, 2023, and the nine months ended June 30, 2022, were $200,000, respectively.

Gross margin for the three-month period ended June 30, 2023, increased to 57 per cent, compared with 47 per cent in the same period for the prior year. During the three months ended June 30, 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 $200,000 being recorded during the three months ended June 30, 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 nine months ended June 30, 2023, increased to 58 per cent, compared with 48 per cent in the same period for the prior year. During the nine months ended June 30, 2023, the company recorded inventory provision reversals resulting in a gain of $400,000, as a result of changes in obsolescence estimates, as compared with an inventory provision expense of $1-million being recorded during the nine months ended June 30, 2023.

Operating expenses for the three months ended June 30, 2023, increased $500,000 to $4.2-million, compared with $3.7-million for the prior year's comparative period. Approximately $200,000 relates to increased sales and marketing activities, primarily due to an increase in sales and marketing staffing levels, and approximately $300,000 is primarily due to higher foreign exchange gains which occurred in the comparable period, as compared with the current period.

Operating expenses for the nine months ended June 30, 2023, increased $1.9-million to $13.1-million, compared with $11.3-million for the prior year's comparative period. Approximately $1.8-million relates to increased sales and marketing activities, primarily due to an increase in sales and marketing staffing levels.

Both net loss and net loss from continuing operations for the three months ended June 30, 2023, were $500,000, or two cents per share, compared with a net loss of $1.6-million, or six cents per share, for the three months ended June 30, 2022.

Net loss from continuing operations for the nine months ended June 30, 2023, was $1.6-million, or six cents per share, compared with a net loss of $5.2-million, or 20 cents per share, for the nine months ended June 30, 2022. Net loss from discontinued operations for the nine months ended June 30, 2023, was nil, compared with a net loss of $400,000, or two cents per share, for the nine months ended June 30, 2022. Net loss for the nine months ended June 30, 2023, was $1.6-million, or six cents per share, compared with a net loss of $5.6-million, or 22 cents per share, for the nine months ended June 30, 2022.

Adjusted gross margin for the three-month period ended June 30, 2023, was 55 per cent, compared with 53 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 gross margin for the nine months ended June 30, 2023, was 57 per cent, compared with 58 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 loss for the three months ended June 30, 2023, was $400,000, compared with an adjusted EBITDA loss of $1-million for the three months ended June 30, 2022.

Adjusted EBITDA loss for the nine months ended June 30, 2023, was $900,000, compared with an adjusted EBITDA loss of $3.5-million for the nine months ended June 30, 2022.

Statement of operations

The associated unaudited table presents Covalon's consolidated statements of operations for the three- and nine-month periods ended June 30, 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. Its 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.

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