Zomedica Corp. (AMEX:ZOM) Q1 2024 Earnings Call Transcript May 9, 2024
Zomedica Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, ladies and gentlemen, and welcome to Zomedica First Quarter 2024 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Mike Valle (ph) at ICR Westwicke. Please go ahead.
Unidentified Company Representative: Thank you, operator, and good afternoon, ladies and gentlemen. Welcome to the Zomedica’s first quarter 2024 earnings results and business update call. Joining me on today’s call are Zomedica’s Chief Executive Officer, Larry Heaton; and Chief Financial Officer, Peter Donato. Before we begin, we would like to remind everyone that on this call, we will be making various remarks about future expectations, plans and prospects that constitute forward-looking statements. These forward-looking statements are based on assumptions and there are risks that results may differ materially from those statements. As such Zomedica cannot guarantee that any forward-looking statements will materialize and you are cautioned not to place undue reliance on them.
We refer to current and – we would refer current and potential investors to the forward-looking information and Risk Factor sections of our public filings, available on SEDAR at www.sedarplus.ca and on EDGAR at sec.gov. Forward-looking statements made on this conference call represent Zomedica’s expectations as of today, Thursday, May 09, 2024. I will now pass the call over to Zomedica’s Chief Executive Officer, Larry Heaton. Larry?
Larry Heaton: Thanks, Mike. I’d like to start by thanking our shareholders for your support. Wish our prospective investors and analysts and others a good afternoon, and welcome all to the Zomedica first quarter earnings results and business update call. I’ll start today by providing an update on the overall business, then our Chief Financial Officer, Peter Donato, will walk you through our financial results. After our prepared remarks, we’ll open the phone line and the web to your questions. So just a bit earlier today, Zomedica released its financial results for the first quarter of 2024. Overall, we continued to build on the momentum we generated during our record setting 2023, which resulted in the strongest first quarter in company history.
Revenue for the quarter was $6.3 million, reflecting just over 14% growth over the first quarter of 2023, with increases in both our therapeutic device and diagnostic segments, and was a higher rate of year-over-year growth than we saw in the first quarter of 2023 from the same products, further validating our strategy to fuel growth through the expansion of our innovative product portfolio. We expect this rate of year-over-year growth to accelerate during the year. During our last earnings call, we laid out our strategic roadmap to drive growth during 2024 and beyond. And today, I’ll provide an update on the progress we’ve made on a number of those initiatives. I’ll start with our commercial organization. Late last year, we recruited a new industry veteran head of sales.
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Q&A Session
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During the first quarter, he has been taking steps to optimize our commercial strategy and tactics to drive accelerating growth through the balance of the year and beyond to ensure the long term success of our recently expanded product portfolio. With respect to our U.S. direct sales force, we continue to see the positive benefits of our maturing team with our average sales rep having now been in their role for over a year. With the increasing penetration of our products into equine and small animal veterinarian practices, we’re seeing the impact of cross selling opportunities. The trust we’ve developed with customers through their utilization of Zomedica products to date has allowed for our representatives to successfully educate veterinarians on the benefits of bringing additional Zomedica technologies into their practice, furthering our penetration within our existing customer base.
Another of our commercial initiatives is continued international expansion. We currently generate about 14% of our revenue by selling just our Assisi and PulseVet products in certain international markets. As I’ll discuss in more detail in just a minute, in the near term, we’ll be expanding our international commercialization efforts to include both VetGuardian and TRUFORMA, followed by TRUVIEW’s international launch a little later this year. Turning to an update on progress made within each of our key product lines, I’ll start with the Assisi Loop family of products. In addition to adding the Assisi Loop products to our existing PulseVet distributors and to new distributors as we establish them. We’re also launching the Assisi products into 10 in additional international markets through Amazon online channels this quarter.
Work continues on expanding this innovative and proprietary targeted pulsed electromagnetic field technology into additional products beyond our current loops, DentaLoop, Loop Lounges and Calmer Canine devices. Now for PulseVet. The primary driver of growth with PulseVet is the growth of our installed base of systems within veterinarian practices. As of the end of first quarter, we now have over 2,000 systems in active use by customers spread across all 50 states in the United States, as well as 30 countries around the world. As our maturing sales organization gains more experience in the field and our marketing efforts continue to extend their reach to small animal veterinarians, we expect to gain entree into many new practices, allowing us to continue to grow the installed base and drive increased utilization of our high margin consumables.
In support of those efforts, we’re working to develop quality research to help expand clinical indications for use. For example, during the first quarter, multiple peer-reviewed reports of clinical studies were published that reinforced PulseVet shockwave therapy as being an optimal solution for working dogs suffering from fibrotic myopathy and for horses afflicted with bleeders and more recently equine asthma. In addition, we’re awaiting eagerly the publication of multiple studies evaluating the potential of PulseVet to delay or even effectively prevent the onset of osteoarthritis in dogs. With these studies in hand, our marketing team can translate the proven benefits of PulseVet across these untapped use cases to help drive increased usage.
Now let’s turn to TRUVIEW. A key growth driver for our TRUVIEW digital cystoscopy platform is the commercial launch into international markets. To facilitate that, we’re working on securing CE Mark certification and expect that to be achieved soon. With a CE Mark in hand, we would be allowed to introduce TRUVIEW throughout the European region, significantly expanding our market opportunity outside of the U.S. Another development we’re excited about with TRUVIEW is the introduction of AI interpretations of scanned images, which we expect to launch later this year. This will complement in-office viewing of images and telepathology reports that are currently being provided by the system and will add a new source of recurring revenue to the monthly subscriptions and charges for on-demand pathology reports that are currently generating revenue.
Now we always want to put our best foot forward with customers, especially with the new product. And so we’ve limited our launch activities with TRUVIEW just a bit, pending the addition of the AI interpretation service. This has allowed us to work collaboratively with early adopting customers and we’ve incorporated several enhancements to the system as a result of customer feedback. Now turning to an update on the progress made with TRUFORMA. We continue to be encouraged by the growing adoption of TRUFORMA, as we’re seeing an uptick and increases in our installed base. Importantly, we’re seeing expansion into equine veterinary practices as we benefit from our growing portfolio penetration across both equine and small animal vet practices. In mid-March, we announced the publication of research supporting the capabilities of the TRUFORMA platform, specifically for the diagnosis of feline hyperthyroidism compared to the current gold standard assays, which are widely used by reference labs globally.
The authors of the publication concluded that our TRUFORMA assay more accurately identifies hyperthyroidism in cats than the current gold standard, thereby improving the early diagnosis of feline hyperthyroidism. Not only do these findings highlight the value of TRUFORMA’s assay in terms of its ability to deliver more accurate results and avoid misdiagnosis, it can do so in less than 20 minutes within the veterinary clinic, saving the vet a significant amount of time when attempting to make a diagnosis by eliminating the need to have samples sent out to a reference lab. These results are highly encouraging and validate the clinical and economic benefits that the platform can bring to a veterinarian’s practice. One of the core benefits of our acquisition of Qorvo Biotechnologies, the original developer of TRUFORMA was our ability to accelerate the development and commercialization of new assays and during 2024, we expect to launch at least five new assays during the course of the year for both small animals and horses.
But beyond development and commercialization of new assays, the acquisition of QBT enabled us to do a number of things to improve the platform and the value that customers can derive from it. Since you’re definitely seeing the investments we’re making reflected in our overall operating expenses and margins, I’d like to share what those investments are getting us. First, what we call our four res upgrades. As you know, we launched our first combination or multiplex cartridge, including both Cobalamin and folate assays in the fourth quarter of last year. Now this necessitated upgrading our existing TRUFORMA instruments in the field to accommodate combining up to three assays in a single cartridge. Four res stands for four resonators. Four resonators equals three for assays plus a control.
We’ve now upgraded nearly all of our existing installed base and all new placements get the new model. In addition, each of the existing cartridges required revision to work in the four res environment. This has been accomplished with cortisol, eACTH, canine pancreatic lipase, Cobalamin and folate assays with the balance of our menu being revised now. Second, leveraging the human version of the TRUFORMA instrument. When we acquired QBT, we received a significant number of Omnia instruments, which were intended for human use and are all four res (ph) capable rather than keep all of them on the shelf with the rest of the assets of the human oriented business ready for future monetization. We’re converting them into TRUFORMA instruments to meet our growing demand for placements, allowing us to save money versus manufacturing new ones from component parts.
Third, over the year updates. Each time we launch a new assay, a software update for our installed base is needed to add the capability to run the new assay and provide appropriate reference ranges and clinical support, etc. Now up to now, this has required an in person visit from our sales team with a USB stick to upgrade the software. Shortly, we expect to release over the air software and firmware update capabilities to our customers, who will then be prompted when a new software update is available on the device and we’ll be able to apply the update with the push of a button, demonstrating our dedication to accelerating delivery of highly beneficial assays on the TRUFORMA diagnostic platform. These capabilities further reduce barriers for customer adoption of newly launched assays, as well as provide efficient means for delivering timely enhancements for existing assays to customers.
With the growth of the TRUFORMA installed base and the growth of the platform menu with recent assay launches, the timing couldn’t be better for releasing this capability. Fourth, enhancements of existing assays. Since the commercial launch of the TRUFORMA diagnostic platform, we’ve learned a great deal about how our assays perform in the field. And we’re always looking for ways to make them better. While developing new assays, Zomedica’s team of specialized immunologists and microfluidics engineers have discovered optimizations that can be applied to our existing assays, including an expansion of the dynamic range. For example, we expect to launch an improvement that will extend the dynamic range for one of our most popular assays, canine cortisol during the second quarter, which will improve accuracy, precision and diagnostic utility of it and others as they are developed.
Also, we can extend the use by dating. When cartridges are first released, they have a relatively limited expiration date or continues on an ongoing basis to extend the dating, which allows for larger lot sizes to be produced, while not worrying about scrap costs, both of which contribute to improving margins. And finally, development of new assays. Of course, the most important of our efforts is in the development of new assays for cats, dogs and more recently horses. We expect to launch at least five new assays this year with two assays for horses, two for dogs and one for cats with many more in development for launch next year. With these added benefits and planned improvements to the platform and our offerings, we expect that you could see that the investments represent money well spent and we are very excited about what is to come from TRUFORMA as we move forward.
Turning now to an update on VetGuardian. During the quarter, we saw strong adoption trends for VetGuardian as more veterinarians have begun to leverage the platform’s capabilities within their practices. About a quarter of the clinics, our reps sold VetGuardians to in the first quarter, bought two or more monitors upfront. As you may recall, our myZomedica web portal can accommodate up to eight monitors at a time on a single screen. And in fact, during the first quarter, we had one customer who purchased eight monitors and a mic. (ph) Incidentally, our published total addressable market calculations use only 1 unit per customer to size the potential market. So we’re very pleased with the multiple monitor purchases as they represent market expansion.
Our progress with VetGuardian speaks to the value customers are seeing from this innovative product and points to the increasing awareness of it as a transformative technology that helps veterinarians ensure pets are safe and supervised at the clinic during the times that they are at their most vulnerable. Additionally, on Monday, we announced the achievement of a significant milestone CE Marking for VetGuardian. This certification allows the platform to be sold throughout the EU, the European Union and select other countries that use CE Marking as a sort of validation, giving veterinary professionals who are seeking an advanced solution to elevate patient care and streamline practice operations access to this innovative technology. With CE Mark in hand, we’re turning our attention to a formal international launch as we evaluate and onboard additional distribution partners in this region to help meet demand for this product, which we’re already seeing.
We’re also excited about our development projects to bring VetGuardian to the equine market. Given our deep penetration within the equine vet market with PulseVet and now with TRUFORMA, we believe our launch of an equine VetGuardian option in late 2024 will be very well received, help drive accelerated adoption by vets in 2025 and beyond, and set the stage for potential expansion of the market opportunity to horse trainers, breeders and owners. Now, as we just discussed, we have a significant number of irons in the fire as it relates to innovation within our product portfolio. We have a massive addressable market that is largely untapped and between our commercial and product development efforts have an exciting opportunity to drive growth for years to come.
Building to an annual run rate of $50 million in revenue by the end of 2025 and increasing to an annual run rate over $100 million two years after that. In addition, we continue to look for opportunities to supplement our portfolio through business development and M&A activities. Leveraging our well capitalized balance sheet will remain opportunistic, focusing on acquisitions and other business development deals to add products that meet our five pillars, improving the quality of care for the pet, the satisfaction of the pet parent, as well as enhancing the workflow, cash flow and profitability of the best practice. And importantly, would also be accretive to earnings, shortening our timeline to profitability. Let’s talk a little bit about operations.
Following our acquisition of QBT, we took steps to optimize our new Plymouth, Minnesota facility. We decreased our footprint recently within the facility by 17% by vacating one of the suites we’d acquired and no longer needed. On the investment side, we also acquired and are in the process of installing cutting edge automated robotic equipment allowing us to produce 1 million cartridges per year in a single shift, which would produce in turn tens of millions of dollars of revenue. While we invested over $4 million in this equipment, we expect this technology and facility optimization to allow us to improve margins as TRUFORMA continues to scale. Another focus area within operations is the continued protection of our robust portfolio of intellectual property, including patents and trademarks.
As announced last week, we were recently issued a number of key U.S. patents related to TRUFORMA, which brought our total Zomedica IP portfolio to 188 U.S. and international patents with 62 additional patents pending and 131 trademarks. Now we issued that press release about a week ago or so, but these numbers are already out of date, as we just learned of several additional international patents and additional trademarks issued since that release, bringing our total IP portfolio as of today to 201 issued U.S. and international patents with 61 patents pending and 133 trademarks. While the investment in IP portfolio doesn’t directly correlate to increase sales, it does protect our investment in the development of innovative solutions, which enables us to devote resources to tapping into new market opportunities without the concern of fast followers attempting to copy and leverage our technology.
Before I hand the call to Peter, I want to reiterate that we’re proud of what we accomplished during the first quarter. We’re in a great position to capitalize on the significant market opportunity that exists during the balance of this year and beyond. With that, I’ll hand it over to Peter for the financial review and corporate update. After his remarks, I’ll come back to provide some closing comments. Peter?
Peter Donato: Thanks, Larry, and good afternoon, everyone. Total revenue for the first quarter of 2024 was $6.3 million that’s a record first quarter and an increase of 14% over the prior year quarter, driven by solid growth across both segments of our business. As Larry mentioned previously, we are pleased to see the increase in growth rates year-over-year, especially, with the products that were sold in 2022, 2023 and 2024. First quarter 2024 capital revenues were $2.2 million, that’s up 30% from $1.7 million in the first quarter of 2023. We continue to be pleased with the number of devices being put in service in the field, particularly in small animal and mixed vet practices that continue to be a focus area of our company.
Keep in mind that capital sales are a good leading indicator of future high margin consumables business. It is important to note that this quarter included solid contribution from VetGuardian, which had limited sales during the first quarter of 2023. As a reminder, VetGuardian sales began with a capital purchase. On the first anniversary of that sale, a monthly recurring revenue stream for monitoring services kicks in, that will contribute to increased consumables revenue as we move further into 2024. In addition to the classic recurring revenue stream, we expect to continue to see a snowball effect on capital revenue for VetGuardian as more practices purchase a second, third or as Larry said just earlier an eighth monitor and this repeat purchasing is happening at an accelerated rate.
In the first quarter, consumables revenue grew to $4 million, that’s an increase of approximately 7% over the first quarter of 2023 revenues, which checked in at about $3.8 million. Consumable revenue represented 64% of our quarterly total revenue. For first quarter Therapeutic Device segments revenue from PulseVet and Assisi products, this grew to $5.5 million, an increase of approximately 9% over the first quarter of 2023 revenues of $5.1 million, this was driven by continued adoption and utilization of PulseVet. First quarter Diagnostic segment revenues were about $744,000, that’s an increase of 87% over the first quarter of last year. This was driven by significant year-over-year growth from VetGuardian and TRUFORMA. Within the Diagnostics segment, capital revenues grew over 200% and consumable revenue grew by more than 50%.
Gross profit for the first quarter of 2024 was $4.1 million compared to $3.8 million in the first quarter of last year. Gross profit margin for the quarter was 66% and that’s in line with previously stated guidance, which we gave a range of 65% to 70%. Adjusting for our Qorvo acquisition and other one-time items brings gross margins for the quarter to over 69%, more in line with historical levels. Operating expenses for the first quarter of this year were $14.5 million compared to $11.3 million in the same period of 2023, an increase of $3.2 million. When adjusted for one-time non-recurring charges and expenses associated with ongoing QBT operations, total operating expenses were approximately $12.6 million. And we continue to expect these operating expenses as a percentage of total revenue to decrease throughout the balance of this year.
In the first quarter, we doubled our investment in R&D with expense checking in at around $1.8 million from last year’s $900,000. While some of these increases were driven by ongoing operation and integration costs from our acquisition of QBT, I’m pleased to report that we continue to make investments across our whole product portfolio that includes CE Marking for TRUFORMA, TRUVIEW and VetGuardian products, incorporating artificial intelligence into TRUVIEW and VetGuardian products and developing new TRUFORMA assays for launch later this year. In the first quarter, sales and marketing spend was $4.1 million compared to $3.4 million during the same period of 2023. The increase was primarily due to our growing sales organization and higher trade show expenses associated with the two largest animal trade shows that are held annually in the first quarter of the year.
For the first quarter of 2024, G&A expense was $8.6 million compared to $7 million during the first quarter of 2023. The increase was almost exclusively driven by professional fees for specialized accounting, tax and audit work associated with accounting for acquisitions, including those that were made late last year. We also had additional fees associated with ongoing programs related to regaining and maintaining compliance with the New York Stock Exchange. Net loss for the first quarter was $9.2 million or $0.01 a share, compared to a net loss of $6.4 million or $0.007 per share in the first quarter of 2023. Non-GAAP EBITDA loss, which includes adjustments for stock compensation for the three months ended March 31, 2024 was $7.5 million compared to a loss of $4.1 million for the same period in 2023.
When adjusting for non-recurring items, our adjusted non-GAAP EBITDA loss was $6.2 million and when further adjusted for ongoing QBT integration and associated direct labor costs, the loss falls to approximately $5.3 million. Turning to the balance sheet. Zomedica ended the first quarter with $90.9 million in cash, cash equivalents and available for sale securities. Cash used in the first quarter was about $9.6 million and included operating expenses related to the QBT acquisition and other professional service fees, which I mentioned earlier when discussing our G&A expenses. The remaining $4.4 million was used for operating expenses during the quarter. And as a reminder, we have zero debt. Now turning to guidance. We are reiterating guidance that we’ve provided earlier this year.
We continue to expect full year revenue in the range of $31 million to $35 million. We continue to be able to reach the low end of this guidance range through the strength of our Therapeutic Devices segment, with the remainder of the growth driven by the performance of our Diagnostic segment. Please remember our business is impacted by seasonality with the first quarter being the lowest and the majority of revenues coming in the back half of the year. We expect this trend to continue throughout 2024 with sequential increases in revenue as we progress throughout the year. Beyond growing revenue, we continue to be focused on profitability. As a reminder, we expect to achieve cash flow breakeven or profitability when we reach an annual run rate of revenue at approximately $50 million.
