Zomedica Corp. (AMEX:ZOM) Q4 2023 Earnings Call Transcript

Zomedica Corp. (AMEX:ZOM) Q4 2023 Earnings Call Transcript April 1, 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 thank you for standing by. Welcome to Zomedica's Fourth Quarter and Full-Year 2023 Earnings Release and Business Update Call. I would like to remind everyone that this call is being recorded today, Monday, April 1 at 4.30 PM Eastern Time. 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, Paul, and good afternoon ladies and gentlemen. Welcome to Zomedica's fourth quarter and full-year 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 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 current and potential investors to the forward-looking information and Risk Factor sections of our public filings, available on SEDAR at www.sedar.ca and on EDGAR at sec.gov. Forward-looking statements made on this conference call represent Zomedica's expectations as of today, Monday April 1, 2024. Finally, we would like to remind everyone that all figures discussed on this call are in United States Dollars. I will now pass the call over to Zomedica's Chief Executive Officer, Mr. Larry Heaton. Larry?

Larry Heaton: Thanks, Elif. I'd like to start by thanking our shareholders for your support, wishing our prospective investors and analysts and others a good afternoon, and welcome all to the Zomedica fourth quarter and full-year 2023 earnings results and business update call. I'll start by providing an update on the overall business, then our Chief Financial Officer Peter Donato will walk you through our financial results and provide a corporate update. After our prepared remarks, we'll open the line in the web to your questions. Earlier today, Zomedica released its financial results for the quarter and full-year ended December 31, 2023. Overall, this was another great quarter, topping off a remarkable year, the best year so far in Zomedica’s history.

Once again, we delivered record revenues, beating last year's record fourth quarter, while maintaining high margins and reducing operating cash burn. Let me highlight that revenue for the quarter was $7.3 million, reflecting 19% growth over the fourth quarter of 2022, almost all of which was produced from the sale of products from previous acquisitions that have been fully integrated. Validating that our strategic plan to acquire, integrate, and grow is working. Our $25.2 million in revenue for the year was up 33% over 2022, and 65% of that was from recurring consumable sales, reflecting a solid foundation of recurring revenue that grows with each addition to the installed base of our various product platforms. Earlier this year, we provided forward revenue guidance as we have reached a certain level of maturity in our business that lets us say that we expect revenues to grow to $31 million to $35 million this year, reflecting up to 40% growth year-over-year at the high end.

As you're aware, we conducted a special meeting in February to seek approval for a reverse split. Since 60% of the shares that were voted, representing 35% of our outstanding shares, were voted against the proposal, it failed. This was a very clear message to us that our shareholders want to see us regain compliance with the NYSE American price thresholds through organic growth of the share price driven by the performance of the company. We heard you loud and clear and have no plans to reintroduce a reverse split at our upcoming annual meeting. We are committed to continuing to grow revenue, maintain high margins, and achieve cash flow and cap profitability as rapidly as possible. We've shared our plans with the NYSC American and they have indicated that they will allow us to remain listed while monitoring our market-driven share price without giving us a date-certain deadline for reaching the $0.20 price threshold over a 30-day trailing average.

Now to that performance. We've been building a business and delivering record quarterly results that have exceeded our expectations. In the fourth quarter, we announced the expansion of the market opportunity for TRUFORMA with three new assays for the most commonly performed diagnostic tests for canine gastrointestinal disease. One of the top three reasons a dog is brought to the vet is vomiting and diarrhea. Knowing there is a high need for a quick diagnosis, we were pleased to offer three of the most common assays used to diagnose these cases, canine pancreatic lipase, Cobalamin and folate, with the latter two being combined in a single cartridge. We believe through these assays we can help veterinarians produce better outcomes for pets and pet parents by providing faster diagnostic solutions, while also streamlining their workflow and increasing practice cash flow and profitability.

Early in the fourth quarter, we announced the acquisition of structured monitoring products, earning our partner investment into full ownership of the VetGuardian product line. We are pleased with the early indicators and see significant future upside. In October, we acquired formal biotechnologies, QBT, 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 the TRUFORMA point-of-care diagnostic platform to perform assays for companion animals, which we had marketed previously under license prior to the acquisition. A primary focus with this acquisition will be on capturing margin improvements by assuming QBT's 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 well as eliminating remaining payments, including license fees, transition fees, and future royalties, which would be due to QBT under the previous agreement. Regarding additional M&A opportunities, we've had quite a busy past couple of years as we've made five acquisitions to build the five product platforms we are commercializing today. As we look forward, we will remain opportunistically acquisitive, but with a focus on those acquisitions that not only include products that meet our five pillars, helping veterinarians improve the quality of care for the pets; the satisfaction of the pet parents; along with improving the workflow, cash flow, and profitability of their practice, but also focusing on those that would be accreted to earnings, shortening our timeline to profitability.

With a strong liquidity position of over $100 million coming into the year, and a manageable operating cash burn rate, we remain well-funded for the foreseeable future. Before I hand the call to Peter, I want to reiterate that we're happy with what we achieved during the fourth quarter and the full-year of 2023. We look forward to building on this momentum as we continue to be confident of even stronger results in 2024. 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 Donato: Thank you, Larry, and good afternoon, everyone. Let me start by reviewing the fourth quarter and full-year 2023 financial results, providing updates and greater detail on information that we pre-released early in the first quarter. I reported back in January that I expected revenues at around $7 million for the fourth quarter of 2023. Today, I am pleased to report that the final audited numbers exceeded that figure and came in at just over $7.3 million for the quarter, an increase of nearly $1.1 million and approximately 19% over 2022's fourth quarter of $6.2 million. The increase was primarily driven by a 16% increase from our therapeutic devices segment led by PulseVet and a 144% increase in diagnostics led by TRUFORMA and other newly launched products.

Revenues for the full-year 2023 were expected to be around $25 million, and again, pleased to report came in at a record $25.2 million, an increase of nearly $6.3 million, and over 33% growth year-over-year. This growth was driven by a strong 28% increase in our therapeutic devices segment, including a full-year of the Assisi products. In addition, we generated a 252% increase in diagnostics revenue with a record performance from TRUFORMA. In the fourth quarter, consumable revenue grew to over $4 million, an increase of approximately 26% over fourth quarter 2022 revenues of $3.2 million. The $4 million in consumable revenue represented 55% of total quarterly revenue, up from 52% during 2022. Consumables revenue is a good indicator of our ability to sell capital equipment while increasing utilization from our expanding installed base.

Full-year consumable revenues were $16.4 million, an increase of approximately 41% over full-year 2022 consumable revenues of $11.6 million, with consumables representing nearly two-thirds or 65% of total revenue, up from 61% of total revenue during 2022. Fourth quarter 2023 capital revenues were $3.3 million, up 12% from the previous record fourth quarter in 2022 of nearly $3 million. Full-year capital revenues were $8.8 million, an increase of approximately 20% over the full-year 2022 capital revenue of $7.3 million. 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. Again, keep in mind that capital sales are a good leading indicator of future high margin consumables business.

Fourth quarter therapeutic devices segment revenues from PulseVet and Assisi products grew to $7 million, an increase of approximately 16% over the fourth quarter 2022 record revenues at the time of $6 million. Fourth quarter diagnostic segment revenues were about $363,000, an increase of 144% over the fourth quarter of 2022 revenues. This was driven by significant year-over-year growth in TRUFORMA sales, including newly launched assays and revenue from the VetGuardian and TRUVIEW products launched during 2023. We believe the growth seen from our TRUFORMA products will continue as we invest in the development of additional assays and market recently launched assays including the first assay from horses that were launched in September and three assays for non-infectious GI disease, including our first combination or multiplex cartridge, including two assays that launched at the end of 2023.

As Larry noted earlier, our acquisition of Qorvo Biotechnologies LLC should improve margins and accelerate development to deliver on our commitment to bring new assays to market during this year of 2024. Gross profit for the fourth quarter of 2023 was $5.1 million, compared to $4.2 million in the fourth quarter of 2022. And gross profit for the full-year 2023, up $17 million at $17.3 million, compared to about $13.5 million in 2022. Gross profit margin for the fourth quarter was 69%, that's up slightly from last year's 68%, while full-year 2023 gross profit margin was also 69%, down slightly from last year's full-year 71%. Last year meaning full-year 2022. The variance was primarily due to the integration and launch of several new products, product mix impacts associated with sales of these new offerings, and price increases of certain component parts.

Operating expenses for the fourth quarter of 2023 were $16.5 million, compared to $9.3 million in the same period of 2022, that's an increase of $7.2 million. However, nearly half for approximately $3.5 million were non-recurring charges directly attributable to acquisitions and related integration. Operating expenses for the full-year 2023 were $48.9 million, compared to $35.4 million during full-year 2022. Approximately $5.4 million represented non-recurring charges, again primarily related to acquisitions and related integration. These included professional and legal services, acquisition-related travel and separation costs, as well as many other expenses that are not expected to reoccur during this year 2024. Inducting these non-recurring one-time items, total OpEx rose by about 23%, while our sales, as mentioned, grew 33%.

This reflects an increase in operating leverage, and we expect this to continue during 2024. In the fourth quarter, R&D expense was just over $3 million at $3.1 million, compared to about $700,000 in the fourth quarter of 2022. That's up $2.4 million, but once again included non-recurring charges of about a $1.5, most of them related to the acquisition of QBT. Research and development expense for the full-year 2023, was $5.7 million, compared to the $2.6 million during 2022, that's an increase of just over $3 million, but nearly three quarters of that increase consisted once again of non-recurring one-time charges totaling $2.3 million associated with the acquisition and integration of QBT. The remaining $800,000 or so were primarily related to accelerating the development of new assays.

In the fourth quarter, sales and marketing expense was $4.3 million, compared to $3.4 million during the same period of 2022, with most of the increase being driven by increases in sales personnel and increases in marketing activities like trade shows that were expanded during 2023 to include several new product offerings, especially those launched during 2023. Selling and marketing expense was $14.1 million for the full-year 2023. This compares to just under $10 million or $9.9 million for the full-year 2022, an increase of $4.2 million or 43%. The increase in selling and marketing expenses were primarily driven by salaries associated with increased hiring related to the sales territory expansion and increases in marketing campaigns and attendance at trade shows, these continue to build brand awareness and recognition for our expanding suite of products.

There's more products in 2023. For the fourth quarter of 2023, G&A expense topped $9 million at $9.1 million as compared to $5.2 million during the fourth quarter of 2022. Within the $3.9 million increase, or about $1.9 million of non-recurring charges, one-time charges such as expenses related to the QBT acquisition and integration. This included layoff and severance charges. In addition, we incurred professional services charges increases such as technical accounting and project management fees, legal fees, tax expenses and management transition fees. The remaining $2 million of the increase was primarily driven by administrative and software costs and depreciation and amortization expenses related to our recent acquisition. Additionally, the increases reflected added cost for rent for the newly acquired and expanded facilities, increases in staffing in the administrative area to meet the growing demand in specialized areas plus ad hoc consulting fees.

G&A expense for the full-year 2023 was $29 million reflecting 115% of sales, that's down from 121% of sales that the G&A expense of $22.9 million represented back in 2022. When adjusting for one-time items, G&A falls to less than 103% of sales, demonstrating the early stages of leverage on the G&A line. Net loss for the fourth quarter was $22.4 million, and net loss for the full-year 2023 was $34.5 million, or roughly $0.035 per share, compared to a net loss of $17 million or about $0.017 per share back in 2022. The difference of $17.5 million is nearly all attributable to one-time charges, with the largest charge of $11.7 million relating to a one-time impairment charge related to the acquisition of the Assisi product line with the remaining $5.4 million and other one-time items including executive management transitions, professional service fees, and other acquisition and integration related costs.

As you can see, our net loss when adjusted for 1 timers is relatively flat with the full fiscal year 2022. That's a good accomplishment, given all the investment and activities that were required to grow our business so rapidly. Let me pause for a moment and give you some additional insight into the impairment charge we took in the fourth quarter related to the Assisi product line. While we've been very pleased with the revenue contribution to-date from our current customer base, with only one product offering for the retail consumer base, we made a decision to forego a sizable future new investment and widespread direct to consumer marketing, like TV ads necessary to attract new retail customers. In making this decision, we're able to reallocate those investment dollars to higher growth opportunities in our diagnostic segment without further delaying profitability by making these investments.

We will revisit this decision and other opportunities in the future as we get closer to profitability or add products that have future appeal for retail markets. Turning to the balance sheet, Zomedica ended the fourth quarter and full-year with $100.5 million in cash, cash equivalents and available for sale securities. Cash used in the fourth quarter was about $17.5 million and included nearly $15 million for acquisitions, investments, and one-time items, with the remaining $2.6 million used for operating expenses, which was lower than our recent operating bone, which is usually closer to $3 million per quarter. After adjusting for non-recurring one-time expenses, we used approximately $10.8 million of cash for the full-year. That averages to about $2.7 million per quarter during 2023.

This number is a good number, and well below our historical averages, which tended to be $3 million, or even as high as $4 million per quarter. As a reminder, we have zero debt. But turning to guidance, Larry already mentioned some of it, and we announced it back at our January 17 business update call that we were introducing formal forward-looking revenue guidance for the first time in company history. I will reiterate that guidance for 2024 as we expect revenue in the range of $31 million to $35 million for full-year 2024 and as Larry said that could be an increase of up to 40% over 2023 at the high-end of the range. As stated at our February investor day we expect 90% to 95% or more of the $31 million to $35 million in annual revenue guidance to be derived from the products in our therapeutic devices segment with the balance and any potential upside coming from our newer products in the diagnostics 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 similar trends in 2024 and we expect sequential increases in revenue as we progress throughout the year. Our operating expenses were approximately 194% of sales on a GAAP basis during 2023, and approximately 173% of sales when adjusted for one-time items. We do expect to improve on these figures during 2024. With all of that said, we expect to burn $12 million to $18 million of cash from operations. This includes potential CapEx during 2024 and $25 million to $35 million total cash burned before turning cash flow positive. As you can see, our cash flow balances will remain very strong with no immediate need to raise or borrow capital in the current market.

As Larry mentioned earlier, following our special meeting vote held back in February, we had discussions with the New York Stock Exchange American related to our ongoing listing on that exchange. It was agreed that Zomedica will remain listed, but at the discretion of the exchange as it continues to monitor our share price. The company will continue to evaluate curative measures. With our primary focus though, we'll be on driving continued performance of the business, so we can regain compliance with share price requirements organically. To that point, we respect our shareholders' collective decision to reject the proposal for a reverse split and as such, as Larry indicated, will not be including a reverse split proposal at the upcoming annual shareholder meeting.

As we look beyond 2024 in addition to growing the scale of our business we'll continue to focus on profitability. We had previously commented that we expect to be cash flow profitable or break even when we reach annual revenue run rates at or slightly above $40 million in revenue. However, as we work through the integrations of the acquisitions that I mentioned made during 2023, in particular the acquisition of Qorvo biotechnologies, we evaluated that we needed, what we needed to achieve our long-term targets and saw, what we saw was that more incremental investments needed to support our long-term success. Given these investments, we now expect to achieve cashflow breakeven or profitability at an annual run rate of approximately $50 million, which we expect to achieve at some point during late 2025.

For some additional context, when we acquired QBT, we not only acquired skilled personnel, a new facility and manufacturing capabilities that will allow us to reduce the cost of goods from what we had been paying QBT. We also acquired valuable finished goods, component parts, and both laboratory and manufacturing equipment. This will reduce future product and operating, as well as capital expenditures. We also eliminated a 5% perpetual royalty on future sales of TRUFORMA cartridges that were due to kick in right about now. The flip side of these positive impacts on margins and capital requirements over the coming years is that we had significant one-time expenses in the fourth quarter as we right-sized and integrated this business, and we have somewhat higher operating expenses in the short-term relative to current TRUFORMA revenue.

So when looking at the business as a whole, this was the right decision, the right thing to do, especially since we also gain control over the pace at which we can develop and launch new assays. While we understand the importance of achieving profitability, we also understand that by allocating resources to drive sustainable, industry-leading growth, we can create a business capable of sustainably generating over $100 million in revenue that is also profitable and in the long-term more valuable to our shareholders. It is important to note that our investment and growth does not apply. That will need to raise capital. Our significant liquidity gives us the ability to continue to invest without the need for further dilution or any dilution. I'll now hand the call back over to Larry for final remarks before the Q&A session.

Larry Heaton: Thanks, Peter. So that's a lot of review of how we got where we are, from less than 30 employees in 2020 to around 150 today, from no products on the market in 2020 to five product platforms ramping sales today, from no internal manufacturing in 2020 to manufacturing all of our own products today and from 0 in revenue in 2020 and to $4 million in '21 to $19 million in '22 and $25 million last year. Now let's talk about where we're headed. Of course, as Peter just mentioned, an important and our nearest term goal is to reach cash flow breakeven, positive EBITDA and GAAP profitability. Having reconfirm that, it's also important to note that we have built our infrastructure to scale the company well beyond current revenue levels and the $50 million revenue run rate needed to achieve profitability.

Becoming a profitable company with $50 million in revenue is an important milestone and unfold would put us in the top 50 animal health care companies in the country. But to truly drive value for our shareholders, our sites are set on first $50 million, then $100 million and beyond. As we build to these levels with our industry-leading margins, we expect that the market will recognize the tremendous value represented by Zomedica shares. This is why we not only acquired the rights to sell new products. We buy the technology and our companies outright, continue product development and manufacture the products ourselves and invest in the infrastructure needed to scale the business to well over $100 million in annual sales. We're incredibly excited about the future of Zomedica and its prospects as we have a strategic plan to reach these levels with our current product portfolio, with any additional acquisitions accelerating our time lines.

We expect to achieve a $50 million annual run rate by the end of next year and $100 million run rate two years after that. But for now, let's focus on 2024, which we entered from a position of strength coming as a result of the great work our team has done to position us for success. We have a number of initiatives in process to help drive growth in 2024 and beyond, which include; first, expanding our maturing sales organization. As you may have heard, we recruited a new Head of Sales, very experienced in building high-performing sales teams in the animal health industry. His leadership, combined with expanding the number of sales territories in the United States and benefiting from the extended tenure of our sales team all contributed to our high confidence in sales growth in the U.S. from our direct sales efforts.

Second, gaining leverage from distribution partners. In conjunction with our direct sales force, we have been expanding our relationships with U.S. based animal health distributors, including Covetrus, Patterson, MWI, Midwest and others, which now carry our Assisi and VetGuardian products and in select cases, our PulseVet products as well. With their 100s of sales representatives across the country who have long-standing deep relationships with veterinary practices, we expect significant growth from this channel both directly and in collaboration with our direct salespeople. Third, international expansion. We currently generate about 20% of our revenue by selling only our Assisi and PulseVet products in certain international markets. This year, we are both expanding the number of countries in which these first two products are sold and also preparing our TRUFORMA, VetGuardian and TrueView products for international launch.

Now this requires complying with some fairly straightforward labeling requirements country by country, which we are finalizing now and expect to begin the first of these launches in the first-half of this year. With respect to specific products, we're executing plans to drive their growth through a variety of initiatives. All said, we have multiple future growth drivers, including increasing the installed base, and increasing our consumable code utilization by expanding clinical indications for use. As our maturing sales representatives gain experience in the field, their rate of selling new PulseVet systems increases and collaboration with animal health distributors opens new doors for them to gain entry into new practices. Our investment in marketing activities on trade shows, Zomedica University, the social media and web-based initiatives is paying off as we are seeing an increasing number of inbound leads from small animal veterinarians.

All these factors help drive increases in our PulseVet installed base. Additionally, we support clinical research focused on expanding the ways in which veterinarians use the PulseVet system. For example, recent published peer-reviewed reports of clinical studies have reinforced PulseVet shockwave therapy as being an optimal solution for working dogs, suffering from the "virtually impossible to successfully treat" fibrotic myopathy that they encounter by extending their working life on average of 32 months. And for horses afflicted with bleeders and more recently, equine asthma, which affects approximately 14% of adult horses. Our marketing team will now execute market development plans to translate this clinical data and to increase deployment of PulseVet systems along with increased usage for these new indications.

While these 2 are significant themselves, we're also awaiting study results from the university in the United States and one in Germany, both studying the potential for PulseVet shockwave therapy to delay or even prevent the onset of osteoarthritis in dogs. While shockwaveis a great treatment option for canine OA, it would be even better to see it used prophylactically for the prevention of the condition in the first place. For TrueView, in 2024, we expect to steadily increase the installed base through the combined efforts of our marketing and sales teams. We also expect to launch into international markets and later in the year to introduce AI interpretations of scanned images providing a new source of recurring revenue to add to the monthly subscriptions and pathology interpretations currently offered.

For TRUFORMA, every time we launch a new assay, we not only provide a seamless way for our current installed base to begin to use it with no additional customer acquisition costs on our part, but we also facilitate expansion of the installed base by providing it to accounts that have a particular need for it, which, in turn, provides opportunities to cross-sell all of our previously available assays. We'll be launching several new assays in 2024, at least 4 during the course of the year for both small animals and horses. Our acquisition of QBT gives us the ability to develop them at our own pace, and we intend to accelerate new assay development in the coming quarters. For VetGuardian, we are seeing increased traction in the animal health market and see an opportunity to place not one but multiple monitors in a single practice.

As accounts gain comfort with their first monitor, many have come back for more, and we're seeing customers purchase multiple monitors from the outset. Further fueling growth will be the activities of the U.S. animal health distributors and our upcoming launch into international markets and following completion of our development projects into the equine market as well toward the end of this year. With a total addressable market for recurring annual sales of our existing products in the U.S. of well over $2 billion, currently, we have barely scratched the surface. We have lots of opportunity for growth across our product lines and are currently about the business of seizing that opportunity. So let me end our prepared remarks by again thanking those that have been supportive of Zomedica, including animal health professionals and pet parents worldwide and the many shareholders of Zomedica.

With that, I'd be happy to open the line for questions.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from [Obiata Caderi with BioNora] (ph). Please proceed with your questions.

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