Zomedica Corp. (AMEX:ZOM) Q3 2023 Earnings Call Transcript

Zomedica Corp. (AMEX:ZOM) Q3 2023 Earnings Call Transcript November 13, 2023

Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Zomedica’s Third Quarter 2023 Earnings Release and Business Update Call. I would like to remind everyone that this conference call is being recorded today, Monday, November 13th, 2023 at 4.30 PM ET. And all participants are in listen-only mode. A brief question and-answer session will follow the formal presentation. [Operator Instructions] I will now turn the call over to Elif McDonald, Investor Relations. Please go ahead Ms. McDonald.

Elif McDonald: Thank you, Ranchu, and good afternoon ladies and gentlemen. Welcome to Zomedica’s third quarter 2023 earnings results and business update call. On today’s call, you will hear from Zomedica’s CEO, Larry Heaton, and CFO, Peter Donato. Before we begin, we would like to remind everyone on this call that 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 current and potential investors to the forward-looking information and Risk Factor sections of our public filings, available on SEDAR at www.sedar.com and on EDGAR at sec.gov.

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Forward-looking statements made on this conference call represent Zomedica’s expectations as of today, November 13, 2023. Finally, we would like to remind everyone that all figures discussed on this call are in US Dollars. I will now pass the call over to Zomedica’s Chief Executive Officer, Mr. Larry Heaton. Larry?

Larry Heaton: Thank you Elif. 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 of you to the Zomedica Third Quarter 2023 earnings results and business update call. I’ll start the call by providing an update on the overall business then Peter Donato, our Chief Financial Officer, will walk you through our financial results for the quarter and provide a corporate update. After our prepared remarks, we’ll open the line and web to your questions. Earlier today, Zomedica released its financial results for the quarter ended September 30, 2023. Overall, this was a remarkable quarter. We delivered record revenues, our highest ever quarterly revenue, beating last year’s record fourth quarter, all while maintaining high margins and reducing operating cash burn.

Let me take a moment to highlight that revenues were $6.3 million, a growth of 31% over last year’s same quarter, with almost all the growth derived organically from previous acquisitions that have been fully integrated over the past year, validating that our strategic plan to acquire, integrate, and grow is working. During the third quarter, we launched our equine eACTH assay for the TRUFORMA platform. This assay enables equine veterinarians in the clinic or stall side to diagnose equine Cushing’s Disease, known clinically as pituitary pars intermedia dysfunction, PPID, and monitor positive patients as they titrate therapy initially and then for the rest of that horse’s life. Accessing such a large and underserved equine market can make a significant contribution to our diagnostic segment.

On September 5th, we announced the acquisition of Structured Monitoring Products, SMP, converting our minority interest into full ownership, giving us exclusive commercial rights to VetGuardian products. The VetGuardian platform improves the quality of care for pets in the ICU during recovery from surgery and for overnight stays in the clinic. By providing staff with real-time alerts when vital signs [indiscernible] from a pre-set range, it allows the staff to intervene in health issues more quickly, improving care. Its unique patented Doppler Technology allows the VetGuardian system to obtain vital signs in real-time without wired leaks or a harness on the pet, thus allowing the pet to rest comfortably during recovery. Much like equine eACTH, we’re pleased with the early indicators and see future upside.

Subsequent to the end of the quarter on October 5th, we announced the acquisition of Qorvo Biotechnologies LLC, a wholly owned subsidiary of Qorvo US, Inc. Focused on the development of point-of-care diagnostic solutions, leveraging their innovative bulk acoustic wave sensor technology in the development of the Omnia point-of-care diagnostic platform designed to perform assays for human patients, along with our TRUFORMA point-of-care diagnostic platform to perform assays for companion animals, which we have marketed under license prior to this acquisition. A primary focus of this acquisition will be on capturing margin improvements by assuming QBTs manufacturing systems as well as accelerating assay development for the TRUFORMA platform. This acquisition will also allow us to avoid future operating and capital expenses incurred by building R&D and manufacturing staff internally as we had planned to do as well as eliminating remaining payments including license fees, transition fees, and future royalties which would otherwise be due to Qorvo Biotech under the prior agreement.

While we also acquired the Human Health business, currently we have no plans to commercialize it. However, we will continue to explore opportunities to realize value from this asset. Strategically, we continue to actively integrate and grow what we have already acquired and we will continue to seek 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. While we’re pleased with the number and pace of acquisitions over only the last two years. We’re not going to rest on our laurels. In fact, we have a robust pipeline of deals under consideration applying our five pillars.

We’re looking for even faster top line growth opportunities without delaying our pathway to profitability. In other words, we’ll remain opportunistically acquisitive. Remembering that we have a strong liquidity position of $118 million in cash, cash equivalents and available for sale securities, we remain well-funded for the foreseeable future. Achieving our strategic priorities requires a combination of growing revenue, efficient manufacturing that produces substantial margins and investing in commercial and R&D capabilities to enable both organic growth as well as growth. On the R&D front, we plan to leverage our recent acquisition of Qorvo Biotechnologies with greater investment in new assays for our TRUFORMA platform. We’ll also continue to expand the capabilities of our TRUVIEW digital microscope platform and the usability of our VetGuardian monitoring platform while exploring new market opportunities.

The launch of equine eACTH is one example of where we’re seeing signs of early success. This is a growth driver for us going forward and an opportunity to expand product offerings within our already large equine customer base. On the heels of the equine eACTH launch, we will soon launch another set of assays for small animals. These for non-infectious GI conditions like diarrhea and vomiting. One of the top three reasons dogs are brought to the vet on an emergent basis, giving us another shot on goal in the diagnostic segment. Similarly, as we continue to build the sales organization, I’m pleased to announce that subsequent to the quarter just ended, we welcomed a new senior Vice President of sales to the team, Kevin Klass, an accomplished executive from an outstanding animal health company.

In addition, we continue to invest in sales and marketing programs, and while spending is down this quarter versus last year, we’re seeing an increase in year-to-date spending versus levels seen in 2022, when we were first building our commercial infrastructure. We’re also pleased to report that we’re continuing to see leverage developing on the G&A line as we continue our journey towards cash flow and GAAP profitability. Before I hand the call to Peter, I want to reiterate that we are very happy with what we achieved during the third quarter and look forward to building on this momentum as we continue to be very optimistic about an even stronger fourth quarter. With that I’ll hand it over to Peter for the financial review and corporate update.

After his remarks I’ll provide some closing comments.

Peter Donato: Thank you, Larry, and good afternoon, everyone. Revenues for the third quarter of 2023 came in at over $6.3 million, an increase of over $1.5 million or 31% from the third quarter of 2022 of $4.8 million. The increase was primarily due to organic growth, products that we’ve now integrated and sold for over a year within our Assisi, PulseVet, RevoSquared, and TRUFORMA product lines and the inclusion of our VetGuardian products, which were not part of the consolidated figures last year. Revenues year-to-date 2023 came in at $17.8 million, an increase of $5 million or 39% from the same period last year. This increase was primarily driven by growth in PulseVet and TRUFORMA product sales, the inclusion of full year revenues from our Assisi and RevoSquared products and once again the inclusion of VetGuardian products which were not part of the figures last year.

Consumable revenues were $4.5 million, an increase of approximately 29% over the third quarter 2022 revenues of $3.5 million. These high margin products represented recurring revenue that is generally around 70% of our sales. Capital revenues were $1.8 million, an increase of approximately 38% over the third quarter of 2022 revenues of $1.3 million. We continue to be pleased with the number of devices being put in service in the field. This is a leading indicator of future consumable revenue particularly in the small animal and mixed vet practices, which continue to be a focus area of our company. Therapeutic device segment revenues from PulseVet and Assisi product sales were $6 million, an increase of approximately 28% over the third quarter of last year.

PulseVet product sales for the third quarter of 2023 were up 21% versus the third quarter of 2022, reflecting an acceleration in consumable growth in the high margin trode business. We believe PulseVet sales will remain strong through the end of 2023. We’re already seeing the seasonal step up usually observed in the back half of our selling year and continued efforts around the development of our small animal market. We are also pleased to announce this was the best quarter ever for Assisi product sales. We are benefiting from strong demand from our retail channels, including our recently re-established relationship with Chewy. We take this result as further validation of our marketing strategies. Diagnostic segment revenues from TRUFORMA, RevoSquared, and VetGuardian product sales were $367,000, more than tripling revenues of $94,000 reported in the same quarter last year.

TRUFORMA nearly doubled revenues year-over-year driven by organic growth. We believe the growth seen within the TRUFORMA product will continue as we continue our investment in the development of additional assays, including the first assay for horses, which was launched in September and a panel of assays for non-infectious GI disease, which plan launches later this year. As Larry noted earlier, our recent acquisition of Qorvo Biotechnologies LLC should improve margins and accelerate development. We completed the acquisition of Structured Monitoring Products, SMP, giving us complete control over commercial activities and we are encouraged by the early results that included record revenue for VetGuardian products during the month of September.

We are also seeing the early results from our new TRUVIEW digital microscopy platform that we launched at the end of the second quarter. Revenue from this product is service-based and trails the actual placement of the instrument, and as such, we expect recurring revenue from these placements to increase over the coming quarters. Overall, we saw the expected sequential step-up in revenue from the first half of the year, and we expect an additional step-up in the fourth quarter. Our gross profit for the third quarter of 2023 was $4.4 million, an increase of $0.9 million, or 26%, from the third quarter of 2022. Our margins remain strong at 69%, offering 67% in the second quarter. And as I’ve stated previously, we expect margins to be around 70% for the upcoming quarters and then going higher from there.

Operating expenses were $10.3 million compared to $10.1 million for the three months ended September 30th, 2022, an increase of just $0.2 million or 2%. That compares quite favourably to our growth and revenues checking in at 31%. Research and development expense was $0.9 million compared to $1.2 million for the three months ended September 30th, 2022. That’s a decrease of $0.3 million or 25%. The decrease was primarily driven by higher research fees for assay development in the same period a year ago. Selling and marketing expense was $3.3 million compared to $3.7 million last year. That’s a decrease of $0.4 million or 11%. Although we are starting to see some leverage on the selling and marketing line, this year’s comparison in the quarter benefited from one-time charges included in last year’s quarterly number.

General and administrative expense was $6.1 million, compared to $5.2 million for the three months ended September 30th last year. That’s an increase of $0.9 million or 17%. Net loss for the three months ended September 30th, 2023 was only $0.3 million or $0.001 per share. That compares to a net loss of $5.8 million or $0.005 per share last year. Although we are starting to see many operating improvements, the overall improvement in this year’s number included many one-time benefits such as the gain from the acquisition of the SMP and the related tax benefits and we also had higher interest income this year. Turning to the balance sheet, Zomedica ended the third quarter with $118 million in cash, cash equivalents and available for sale securities.

Cash used in the third quarter was $24.4 million, but that included $21.5 million for acquisitions investments and other one-time items, leaving $2.9 million used for operating expenses. The adjusted cash in this quarter of $2.9 million shows that we continue to decrease and was lower than our historical burn, which is usually around $3 million to $4 million per quarter. As a reminder to everyone, we have zero debt. Before turning the call back over to Larry, I would like to address questions from investors, particularly related to a potential delisting of our stock by the New York Stock Exchange American. First, let me give you a timeline and actionable items mandated to our company. As disclosed in our current report on Form 8-K filed with the Securities and Exchange Commission on September 14th, 2023, we received a deficiency letter from the New York Stock Exchange American on September 12th, 2023, indicating that the company was not in compliance with the continued listing standards set forth in Section 1003(f)(v) of the Company Guide because our common shares were selling for a substantial period of time at a lower price per share which the exchange determined to be a 30-day trading average of less than $0.20 per share.

After confirming receipt of said notification the company was required to do the following. Number one, issue a press release within two days to satisfy Canadian Regulatory Requirements. We met this requirement by issuing a press release in both the US and Canada on the 13th of September. Number two, file a Form 8-K, Section 301 within four days, followed by the Canadian equivalent informing of a material event. We met this requirement the 14th of September. Number three, we then informed the exchange that we met this requirement. The exchange notated this on its website and our ticker symbol accordingly. Number 4, the final requirement was to file a remediation plan of action with the New York Stock Exchange American by the 26th of September 2023.

This report was filed confidentially on September 25th, 2023 and is not a required public disclosure. However, let me share with you some of the plans. One, as Larry noted in his prepared remarks, we continue to have rapid top-line growth both organically and through acquisition. Two, we continue to have industry-leading margins, leveraging our recent integrations to improve those margins and accelerate our pathway to profitability. Three, leverage our strong balance sheet and cash position to continue to invest in commercial and R&D activities as well as remaining opportunistically acquisitive. And four, in addition to the operational plans, we shared with the exchange potential capital structure remediation. That includes but is not limited to one, a reverse stock split, two, a share repurchase program, and three, other potential capital table restructuring.

We plan to execute on these matters as we believe that they are in the best interest of the company and its shareholders. Please keep in mind we will not automatically be delisted and six months subsequent to receiving the notice we can receive an extension or conversely the exchange could delist [indiscernible] should have failed to perform towards improving our position. While Larry and I are very optimistic about achieving our strategic and operational objectives, we are likely to recommend a reverse stock split. Not only would this action bring us back into compliance earlier, it would also allow for potential expansion of our institutional investor base by removing share price barriers that limit certain institutional participation in our stock and potential inclusion into various indexes.

We will continue to provide updates as we progress on this plan and we may be asking our shareholders soliciting their support. I will now hand the call back over to Larry for closing remarks before the Q&A session.

Larry Heaton: Thanks, Peter. Let me take a moment to further comment on Peter’s remarks around a potential reverse stock split. Our management team and I am fully aware that many of you are opposed to such a plan given the stigma associated with reverse stock splits generally. Keep in mind that many reverse stock splits are done under extreme duress because a business is underperforming and/or needs desperately to raise capital to remain solvent. While we can’t guarantee positive results of any potential reverse split. Our company has a much different profile than most companies who explore a reverse split. Our operational performance remains excellent and we have a strong balance sheet. We also want to remind you of the practicalities of a reverse split.

After such a split, while you would have less shares, your overall ownership percentage and investment dollars remain the same. And after a reverse split, the risk of delisting and the associated lack of liquidity goes away, which allows management to focus exclusively on executing the business and attracting additional investors, which could help increase our market cap over the long-term. So why consider a reverse split now when I myself have said many times that we would not pursue one until we are cash flow positive, and we are not yet at that point. Simply put, the New York Exchange notice of potential delisting has changed the game. The uncertainty around a potential delisting looming over us, not to mention an actual delisting itself that would put us in the over-the-counter markets, tend to put downward pressure on stocks.

Remember what Peter talked about earlier. If there is nothing inherent in a reverse split that automatically results in a loss of market cap. The fundamentals of the business and other macroeconomic conditions are important factors. Fundamentally, we are stronger every quarter, which we believe would otherwise lead to broader interest from institutional investors that today simply cannot buy the shares since they are under their minimum price thresholds of $1 or $3 or even $5 a share. So the scales have changed before we balanced the potential risk of a reduction in market cap value following a reverse split against a delayed opportunity to attract institutional investors and indices and came down on the side of waiting until we were cash flow positive.

But now we have to add the risk of being delisted and moving to OTC markets to that limited potential of attracting institutional investors and indices. It is because we believe that these factors would be more harmful to individual investors in Zomedica than a potential loss in market cap following a reverse split that can be mitigated by demonstrating the differences in company situations to potentially be one of the exceptions to the norm that we are actively considering this to be in the best interest of our shareholders. Now please note a reverse split has not been formally approved by our board and it’s still one of several options. So please keep an eye out for ongoing updates on the matter and please keep an open mind that the company will always work for a solution in the best interest of our shareholders.

Remember, there’s nothing inherent in a reverse split that diminishes our loyal individual investors’ abilities to hold on to their ownership of Zomedica. We appreciate each and every one of our shareholders and continue to make every effort to drive long-term value. Now let me close with why we’re here. Good news of the business. We had a very strong record-breaking third quarter. We were able to grow revenue by 31% while maintaining near 70% gross margins. We expect to see incremental sales from our recently launched products, VetGuardian and TRUVIEW and have new assays on the way for TRUFORMA. While we’re pleased with the early success of the expanded sales organization, we expect even more performance from the concerned team with new leadership and as they become more seasoned.

This coupled with efficiencies gained through the Qorvo and SMP acquisitions and the centralization of manufacturing and distribution capabilities combined to make for a bright future for Zomedica. Looking into the remainder of 2023, we’ll continue to work diligently to bring Zomedica Suite, the world-leading products, to an even greater number of veterinarians and their pet families while continuing to leverage our growing network of vet professionals using our products. So let me end our call by again thanking those that have been supportive of Zomedica, including animal health professionals and pet owners worldwide and the many shareholders of Zomedica. With that I’d be happy to open the line for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Jason Kolbert with Dawson James. Please go ahead.

Jason Kolbert: Hi, guys. Can you give me a little bit of more of a breakdown of the revenues and how they cut across the categories like TRUFORMA, PulseVet, VetGuard, Revo and maybe even the Assisi products?

Peter Donato: Yeah, generally Jason, this is Peter. Generally we don’t break out publicly what those numbers are, but we were, you know, I tried to be as precise as I could, you know, on the call. We had $6.347 million in overall revenue for the quarter, roughly —

Jason Kolbert: You don’t need to repeat what you said. You don’t want to provide the breakdown. I’m a little disappointed in that. The numbers were about $2 million below my expectation. So, and they were only incrementally up from the prior quarter, although I saw your expenses were proportionately lower. At least COGS — cost of goods was, but SG&A was not, it was higher. So this was not a good quarter. Can I understand what you’re trying to say about the stock split? You know, and I wrote this down, you said the lack of liquidity goes away. When you reverse the stock, you directly cut your liquidity. So I’m a little confused as to, you know, the reverse stock split is upsetting for sure because you guys were very emphatic that, that wasn’t going to happen and you do have the alternative of going to the OTC.

So I’m trying to understand your positioning that this is, you know, it takes a lot more for an institution to buy a stock than just the price. And so, you know, you’re cutting the liquidity as you’re trading you know low stock price for liquidity and I don’t know that that’s a good trade. I don’t understand it.

Peter Donato: You know this is Peter, Jason, you know we can talk about that. But essentially, OTC does limit liquidity, it limits participation and pretty much excludes any institutional investors, not to mention it will preclude us from joining any of the indices which would over time be a much better situation for the company. That’s how I see it. Again, you know, we’re free to disagree on that point, but that’s how I see it.

Jason Kolbert: Well I can understand that but then why were you so emphatic that you weren’t going to reverse the stock? I guess you were anticipating that you know quarterly progress would drive a higher stock price and that just didn’t happen.

Peter Donato: Yeah so I’ll let Larry speak to that. I think since I’ve been here, which is three quarters now, the position has always been to consider the reverse stock split. But we, and I’ll speak for Larry, I think at this time, thought a more opportunistic time to do it when the company was indeed cash flow positive and we could commit to you know that $40 million run rate or something that resembles that on the top line that, that would promote that cash flow profitability. So the thought Jason was the timing if we had to do it would be better if we could wait but with the letter that arrived in September I think that changed our — at least my thinking on it.

Jason Kolbert: Yeah I’m just surprised because this isn’t a surprise right you knew this letter was coming. So that’s why I’m just a little bit confounded.

Larry Heaton: Actually though, Jason, I think that — I’ll just challenge that right. I mean as we continue to post quarterly revenue growth, we continue to post significant revenue growth year-over-year, much, much higher than other animal health companies are as we continue to put forward margins.

Jason Kolbert: Well your sequential — the sequential growth is really what matters and your sequential growth was incremental.

Larry Heaton: So in the animal health industry as I’m sure you’re you know super familiar with, the first and third quarters are generally lower than second and fourth just because of the cyclical nature of visits to pets. But having said that, we still are presenting not only significant growth year-over-year, but also sequential growth. And our growth this quarter is all essentially all organic growth. So that’s not a revenue we bought. This is revenue that we grew over a year ago. We continue to put up margins of 70% at or near 70%. And so we don’t expect, I mean we expect that that’s good news for investors and frankly I think if you look at you know what our expectation would be was not that the stock price would deteriorate, that as we increase revenues and maintain high margins, made acquisitions, brought, you know, two years ago we had no products on the market now we have five product lines on the market.

And as we did all those things that the stock price would grow. So it was really, it was in fact a surprise to us that that it fell below $0.20 for more than 30 days I mean obviously we saw it coming during that period of time when it was below that. As to why now, I mean, Peter said it right, if we did not get the notice of delisting we would balance frankly the fact that our shareholders have previously rejected a reverse split. Our shareholders have made it clear to us that they would rather not have one. I think that’s based on the fact that the majority of companies lose market cap after a reverse split. Not all of them do.

Jason Kolbert: I can’t think of one that gains market cap. They all lose market cap. Nothing good — happens reverse stock split. I cannot think of one example. If you have one, I would love it, if you’d share it with me.

Larry Heaton: I don’t happen to have one, but we’ve got.

Jason Kolbert: Yeah, some of our, yeah. Right. I mean, you’re absolutely right. The vast majority are. There are some out there. I don’t know. I don’t want to.

Larry Heaton: Well, I mean, yeah, it’s like a handful. If you look at the 100 companies, you might have five or six that have not. And I’m talking about a particular point in time, six months later or three months later or whatever. But I think so there’s a risk of that, a pretty good risk. And so why not mitigate that risk by weighting to a cash flow positive? That’s what I’ve been saying all along. But now that’s not the scale. There’s the risk of a potential loss in market cap, which I do think we can mitigate by showing that we are a different company. We’re not doing a reverse split so that we can then can be authorized to issue more shares and raise more money. We have no intention of raising capital in that way.

Jason Kolbert: I understand this is you’re being forced to, but I think this was something. Well, again, I don’t need to go over the same ground. But and I would also challenge the assumption. Well, I don’t want to be too antagonistic, but in my opinion and based on my numbers in our previous conversations, this was not a good quarter. The plan for rising revenues look like it’s delayed. It’s a brutal market, agreed. It’s a very tough market right now. You have a lot of cash to weather the storm. That’s great news. You’re making smart acquisitions. That’s great news. But It would also be great, and we’ve discussed this in the past, of having a really better, more granular breakdown of the top line revenues and being really transparent with investors, putting positive spin on a reverse stock split, like saying the lack of liquidity goes away, which is, again, I wrote it down, that’s what your guy said, that’s just not true.

So I think it’s very, very important, given where you are, to just be as transparent as possible with people. But thanks for taking my questions. I appreciate it.

Larry Heaton: You’re welcome, Jason. And let me just say one last thing is, I think, we’re, it’s a semantics issue. When we’re referring to lack of liquidity, we’re talking about for our individual shareholders, not for the company. For the company, I agree with you. You reduce number of shares, liquidity over flow goes down, liquidity goes up. But with a billion shares outstanding, I think we’ll still have after reverse split, plenty of shares to be traded. What we were concerned about and what we were addressing was the lack of liquidity from our retail, individual retail shareholders. Today, if they need money, they can go and trade those shares pretty easily, but after if we go to the pink sheets or whatever then it’s going to take it’s going to be a bigger process for them and that’s really where our concern lies. Other questions?

Elif McDonald: Operator?

Operator: Thank you. We will now be taking online questions. Please go ahead.