Zomedica Corp. (AMEX:ZOM) Q1 2023 Earnings Call Transcript May 11, 2023

Operator: Good afternoon, ladies and gentlemen and welcome to Zomedica’s First Quarter of 2023 Earnings Release Call. As a reminder, this call is being recorded and all participants are in a listen-only mode. The call will be open to questions and answers following the presentation. On today’s call are Zomedica’s CEO, Larry Heaton; and CFO, Peter Donato. Before we begin, the Company would like to remind everyone that various remarks about future expectations, plans and prospects constitute forward-looking statements for purposes of safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Zomedica cautions that these forward-looking statements are subject to risks and uncertainties that may cause their actual results to differ materially from those indicated including risks described in the Company’s filings with the SEC.

Any forward-looking statements made on this conference call speak only as of today’s date, Wednesday, (sic) [Thursday] May 11, 2023. And the Company does not intend to update any of these forward-looking statements to reflect events or circumstances that may occur — that occur after today. I will not pass the call over to Zomedica’s Chief Executive Officer, Larry Heaton. Please go ahead, sir.

Larry Heaton: Thank you. I’d like to start by thanking our shareholders for their support, wishing our prospective investors and analysts and others a good afternoon, and welcome all of you to the Zomedica first quarter 2023 earnings release call. On this call, I’ll be providing an update on the business, followed by Peter Donato, our Chief Financial Officer who will walk through our financial results. After our prepared remarks, we’ll open the line to your questions. Earlier today, Zomedica released its financial results for the quarter ended March 31, 2023. As we reflect on these results, we continue to be pleased and excited with the progress the team is making, not only financially and operationally but also towards our strategic priorities.

First off financially, where our top priority is to grow revenue. The first quarter of 2023 was another busy quarter for us. Revenue for the quarter was $5.5 million, a 45% increase over the first quarter of 2022, driven by organic growth within our PulseVet and TRUFORMA platforms, and the inclusion of our Assisi and VetGuardian products, which were not part of our consolidated figures last year. While sequentially down a bit from the fourth quarter of 2022, due to the seasonality of capital sales as expected, it was a record first quarter performance, and the second highest revenue quarter for the Company TRUFORMA continued to show increased utilization and adoption, producing a 222% increase over the first quarter of 2022. We were also pleased with the 8% year-over-year growth in our PulseVet products as we continue to penetrate the small animal veterinarian market, selling 21 systems to this customer segment during the quarter.

Overall, since our acquisition of Pulse Veterinary Technologies about 18 months ago, we’ve grown the installed base of PulseVet systems, 33% to approximately 1,800 installations. This is important since the system is a razor and blade model, where the consumable trodes produce substantial revenue for the Company, averaging approximately 55% of total PulseVet revenue. Additionally, in the first quarter, we also began selling the VetGuardian zero-touch vital signs remote monitor, a novel wireless monitoring technology. We were encouraged by the market’s response to the VetGuardian offering. And on May 8th, we announced that we have exercised our option to acquire Structured Monitoring Products, the makers of the VetGuardian system, and expect to close on the acquisition subject to the completion of due diligence.

We believe this transaction will enhance Zomedica’s ability to bring the VetGuardian groundbreaking touchless monitoring products to clinics around the world. And this acquisition also furthers our efforts to improving margins as we will be transferring manufacturing to our facility in Roswell, Georgia. Margins remain strong and 70%, and we expect these to continue at around these levels, especially as we’re transitioning distribution of Assisi products from the current third party logistics provider to our global manufacturing and distribution center in Roswell, Georgia during the current quarter, and transferring VetGuardian manufacturing, as I just mentioned, to this facility once we close that transaction. Lastly, we want to continue our journey to both, positive cash flow and GAAP profitability.

And we are pleased to report that we are seeing leverage on the G&A line as we continue to invest in R&D and sales and marketing to grow commercially and through integration of acquired products. Operationally, we continue to invest considerable time and resources into developing and enhancing our internal processes and production capabilities. In the first quarter of 2023, we expanded our sales and marketing organization and related capabilities to address new product offerings and added sales territories. We further increased our manufacturing capabilities with today’s announcement via 8-K that we will be expanding our production footprint at our Georgia facility by 50%, primarily to support transitioning of the TRUFORMA production line from our partner Qorvo.

We hired industry experts, scientists, veterinarians and other personnel with extensive experience and knowledge of the companion animal field. We leveraged an improvement of our administrative capabilities, making them scalable to a business with much higher revenue and we continued expansion of marketing and the build out of the Zomedica brand, generating favorable commentary from veterinary professionals and pet parents. Strategically, we continue to look for M&A opportunities that meet our rigorous internal financial and strategic hurdles, all while adhering to our five pillars, which are improving the quality of care for the pet and the satisfaction of the pet parent, while also improving the workflow, cash flow and profitability of our veterinarian partners.

The decision to acquire structured monitoring products with its VetGuardian product line is a good example of this. Achieving our strategic priorities requires a combination of growing revenue to a substantial level, efficient manufacturing that produces substantial margins, and investing in commercial capabilities to enable growth from both, organic sources as well as through acquisition. This means that we will be increasing R&D spending over last year’s levels as we transition the development of new TRUFORMA assays from Qorvo to Zomedica. We will be both compensating Qorvo for transition services and also building the internal R&D team. We will be both compensating Qorvo for the development of assays already underway, equine eACTH and noninfectious GI, and also beginning development of the next wave of TRUFORMA form assays by our own team.

Looking ahead, our current assay development costs will be significantly lower than what we’ve been paying Qorvo historically. But for this year, we’ll see increases in overall spend for R&D versus 2022 levels. Similarly, as we continue to build the sales organization and execute marketing programs, we’ll see increases over the level seen in the first half of 2022, but expect these levels to remain fairly steady state from now, aside from expansion of the sales force itself. We are committed to achieving positive cash flow and profitability and see the steps we’re taking now as essential in hitting these objectives as expeditiously as possible. In closing, we’re very happy with what we were able to achieve during the first quarter and look forward to building on this momentum as we continue to be very optimistic about Zomedica’s future.

And with that, I’m pleased to introduce you to our new Chief Financial Officer, Peter Donato, who recently joined Zomedica and will take us through Zomedica’s first quarter 2023 financial performance and provide additional thoughts on what to expect for the rest of the year.

Peter Donato: Thank you, Larry. And good afternoon everyone. Revenue for the first quarter of 2023 was $5.5 million, an increase of $1.7 million, or 45% from the first quarter of 2022. Keep in mind that historically, revenue is sequentially down in the first quarter from the fourth quarter of the prior year, and generally increases in quarters two and three before peeking in Q4, due to our capital selling cycle, and higher utilization of those capital systems that we sold or placed earlier in the year. Also, Q4 of last year, as Larry mentioned, was the largest revenue quarter in our company’s history, making our Q1 the second best quarter on record, but the best first quarter ever. Highlights include 11% of this growth was organic, with the rest coming from the acquisition and integration of Assisi, Revo and VetGuardian product lines.

Achieving Q1 2023 sales in excess of historical averages is encouraging, given that our first quarter typically represents our lowest revenue quarter for the year and generally about 20% or less of the overall annual sales. PulseVet continues to grow organically, reflecting an 8% increase over the first quarter of last year, fueled by high margin trodes and consumables. We believe, PulseVet sales will remain strong into 2023, especially given the seasonal step-up usually observed in the back half of our selling year. This with continued efforts around development of the small animal market. TRUFORMA generated 222% increase in revenue over the first quarter of last year. This was driven by organic growth and our cortisol, TSH and TT4 assays and from our new assays launched last year, fT4 and eACTH.

We expect year-over-year growth to continue, and we continue our investment in the development of additional assays, including the first assay for horses in a panel of assays for non-infectious gastrointestinal disease that we expect to launch later this year. Assisi brought in $1.1 million of incremental revenue that was not present in the first quarter of last year. We continue to leverage our communication and marketing networks, and we expect Assisi recognition and brand awareness to increase, resulting in continued growth for the balance of 2023. We expect additional growth through the rest of 2023 from the sales of VetGuardian. As Larry mentioned, it’s a zero-touch, wireless, vital sign monitoring system, which was launched in early January, as well as our new TRUVIEW digital microscopy platform, which is expected to launch this quarter.

In general, we expect to increase in subsequent periods, the benefit from expanding our product lines and from our recent acquisitions, and the increased investment in sales, marketing, as well as the all commercialization efforts. In addition, sales will increase sequentially from the first quarter and hit their historical highs, usually in the fourth quarter. Our gross profit for the first quarter of 2023 was $3.8 million, an increase of $1.1 million or 41% from the first quarter of 2022. Margin remained strong at 70%. And we expect them to remain at or above 70%, inclusive of many of the costs and supply chain initiatives already underway within our company. Operating expenses are up $4.3 million, or 61% from the first quarter of 2022. Research and development expense for the three months ended March 31, 2023 were just over $900,000 compared to just under $400,000 for the three months ended in 2022.

That’s an increase of about a $0.5 million or 125%. The increase was primarily driven by our continued investment in our internal capabilities to develop, test and manufacture our next generation of diagnostic products. Total SG&A for the three months ended March 31, 2023 was $10.4 million. This compares to $6.7 million for the three months ended March 31, 2022. That’s an increase of $3.7 million, or 55%. The sales and marketing portion of the total $10.4 million G&A was $3.7 million or approximately 36% of the grand SG&A total. This compares to $1.4 million for the three months ended March 31, 2022 or approximately 22% of last year’s total SG&A. The increase was primarily driven by hiring 22 additional people in sales, 16 of whom are selling directly to the customer, as well as to increased spending on marketing campaigns, increased attendance at trade shows as we continue to build brand awareness and recognition of our ever expanding suite of products.

The remaining portion of the $10.4 million SG&A line relates to non-commercial general and administrative expense, and this totaled $6.7 million for the three months ended March 31, 2023. This compares to $5.3 million for the first quarter of last year, or an increase of $1.4 million, or 26%. We are pleased to report and see leverage in this cost category, even when considering that this year’s increases were primarily the result of non-recurring charges such as CFO transition costs, and other growth and integration related expenses. Operating loss for our first quarter was $7.5 million, up from $4.3 million a year ago, and $5.1 million from last year’s fourth quarter. When adjusting for onetime items associated with our Qorvo TRUFORMA related transition and our transition costs to a new Chief Financial Officer, as well as adjustments from our Revo earnout liability, our adjusted operating loss was approximately $6.9 million.

All of the operating loss variants from prior periods are attributable primarily to the significant investments in the commercial personnel infrastructure, as well as continued investments in R&D, specifically diagnostics. Net loss for the three months ended March 31, 2023 was $6.4 million or $0.007 per share, compared to a net loss of $3.9 million or $0.004 per share for last year’s first quarter. The increase in losses of about $2.5 million or 64% again was almost entirely attributable to the expanded commercial activities that we’ve been talking about. Moving to the balance sheet. Our balance sheet is strong, and we had cash, cash equivalents and available for sale securities of $147.5 million at the end of our first quarter this year, compared to $195 million as of March 31, 2022.

Our decreasing cash was primarily driven by acquisitions of Assisi and Revo platforms, Qorvo-related transition payments, and our general operating activity. Our cash burn for this quarter was approximately $3.2 million when eliminating onetime items for business development activities. This burn rate is relatively consistent with prior periods and we should see improvements in operation — burn as the year progresses, absent any one-time investments later in the year. I now hand the call back over to Larry to finish the call.

Larry Heaton: Thanks, Peter. So, we had a very strong and record-breaking first quarter. We were able to grow revenue by 45% as we continue to sell more of our established TRUFORMA and PulseVet products, while at the same time benefiting from the sales coming from our Assisi, Revo and VetGuardian acquisitions during the course of last year. With focused marketing and commercialization efforts build an ever increasing brand recognition, the launches of our VetGuardian and TRUVIEW products, and the release of new TRUFORMA assays along with expected efficiencies coming through our Qorvo, transition work, and centralization of manufacturing and distribution capabilities, we think the future is bright for Zomedica. Looking into the remainder of 2023, we’ll continue to work diligently to bring Zomedica’s suite of world leading products to an even greater number of veterinarians and their pet patients.

So, let me end our report by again thanking those that have been supportive of Zomedica, including animal health professionals and pet owners worldwide, along with the many shareholders of Zomedica stock. With that, I’d be happy to open the line for questions.

Q&A Session

Operator: [Operator Instructions] The first question comes from Jason Kolbert of Dawson James.

Operator: [Operator Instructions]

Operator: The next question comes from [indiscernible] private investor.

Operator: [Operator Instructions]

Operator: Thank you, sir. The next question comes from Douglas P. Smith of Douglas P. Smith, DDS. [Ph]

Operator: The next question comes from [indiscernible].

Operator: The next question comes from Jim Franks of Lighting. [Ph]

Operator: Thank you. Ladies and gentlemen, with no further questions in the queue, we have reached the end of the question-and-answer session. I would now like to turn the call back over to Larry Heaton for closing remarks.

Larry Heaton : Yes. Thank you very much. I appreciate those of you who attended the call today. Thank you for your time. Thank you for supportive Zomedica. Just because we have these calls once a quarter, doesn’t mean that’s the only time that we’d be happy to talk to you. Feel free to reach out via email or phone to our investor line. We’d be happy to talk to you at any point. We’ll continue to work hard to help your company grow and increase the value of your holdings. Thank you for your time. Goodbye.

Operator: Thank you. Ladies and gentlemen, that concludes today’s conference. Thank you for attending and you may now disconnect your lines.